Position Limits for Derivatives, 3236-3493 [2020-25332]

Download as PDF 3236 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 15, 17, 19, 40, 140, 150 and 151 RIN 3038–AD99 Position Limits for Derivatives Commodity Futures Trading Commission. ACTION: Final rule. AGENCY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is adopting amendments in this final rule (‘‘Final Rule’’) to conform regulations concerning speculative position limits to the relevant Wall Street Transparency and Accountability Act of 2010 (‘‘Dodd-Frank Act’’) amendments to the Commodity Exchange Act (‘‘CEA’’). Among other regulatory amendments, the Commission is adopting: New and amended Federal spot-month limits for 25 physical commodity derivatives; amended single month and all-monthscombined limits for most of the agricultural contracts currently subject to Federal position limits; new and amended definitions for use throughout the position limits regulations, including a revised definition of ‘‘bona fide hedging transaction or position’’ and a new definition of ‘‘economically equivalent swaps’’; amended rules governing exchange-set limit levels and grants of exemptions therefrom; a new streamlined process for bona fide hedging recognitions for purposes of Federal position limits; new enumerated bona fide hedges; and amendments to certain regulatory provisions that would eliminate Form 204 while also enabling the Commission to leverage and receive cash-market reporting submitted directly to the exchanges by market participants. SUMMARY: khammond on DSKJM1Z7X2PROD with RULES2 DATES: Effective date: This Final Rule will become effective on March 15, 2021. Compliance date: Compliance dates for this Final Rule shall be as follows: • January 1, 2022 in connection with the Federal speculative position limits for the 16 non-legacy core referenced futures contracts subject to Federal position limits for the first time under this Final Rule. This compliance date also applies to any associated referenced contracts other than economically equivalent swaps. Such swaps are subject to a separate compliance date noted below. • January 1, 2022 in connection with an exchange’s requirements under § 150.5, as adopted in this Final Rule. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 • January 1, 2023 in connection with Federal speculative position limits for economically equivalent swaps, as defined under this Final Rule. • January 1, 2023 in connection with the elimination of previously-granted risk management exemptions described in § 150.3(c), as adopted in this Final Rule. FOR FURTHER INFORMATION CONTACT: Dorothy DeWitt, Director, (202) 418– 6057, ddewitt@cftc.gov; Rachel Reicher, Chief Counsel, (202) 418–6233, rreicher@cftc.gov; Steven A. Haidar, Assistant Chief Counsel, (202) 418– 5611, shaidar@cftc.gov; Aaron Brodsky, Senior Special Counsel, (202) 418–5349, abrodsky@cftc.gov; Steven Benton, Industry Economist, (202) 418–5617, sbenton@cftc.gov; Lillian Cardona, Assistant Chief Counsel, (202) 418– 5012, lcardona@cftc.gov; Jeanette Curtis, Assistant Chief Counsel, (202) 418– 5669, jcurtis@cftc.gov; Harold Hild, Policy Advisor, (202) 418–5376, hhild@ cftc.gov; Division of Market Oversight, in each case, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; Michael Ehrstein, Special Counsel, (202) 418– 5957, mehrstein@cftc.gov; Chang Jung, Special Counsel, (202) 418–5202, cjung@cftc.gov; Division of Swap Dealer and Intermediary Oversight, in each case, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; Rachel Hayes, Trial Attorney, (816) 960–7741, rhayes@cftc.gov; Division of Enforcement, Commodity Futures Trading Commission, 4900 Main Street, Suite 500, Kansas City, MO 64112; or Brigitte Weyls, Trial Attorney, (312) 596–0547, bweyls@cftc.gov; Division of Enforcement, Commodity Futures Trading Commission, 525 West Monroe Street, Suite 1100, Chicago, IL 60661. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. Introduction B. Executive Summary C. Section-by-Section Summary of Final Rule D. Effective Date and Compliance Period E. The Commission Construes CEA Section 4a(a) To Require the Commission To Make a Necessity Finding Before Establishing Position Limits for Physical Commodities Other Than Excluded Commodities F. The Commission’s Use of Certain Terminology G. Recent Volatility in the WTI Contract H. Brief Summary of Comments Received II. Final Rule A. § 150.1—Definitions PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 B. § 150.2—Federal Position Limit Levels C. § 150.3—Exemptions From Federal Position Limits D. § 150.5—Exchange-Set Position Limits and Exemptions Therefrom E. § 150.6—Scope F. § 150.8—Severability G. § 150.9—Process for Recognizing NonEnumerated Bona Fide Hedging Transactions or Positions With Respect to Federal Speculative Position Limits H. Part 19 and Related Provisions— Reporting of Cash-Market Positions I. Removal of Part 151 III. Legal Matters A. Interpretation of Statute Regarding Whether Necessity Finding Is Required for Position Limits Established Pursuant to CEA 4a(a)(2) B. Legal Standard for Necessity Finding C. Necessity Finding as to the 25 Core Referenced Futures Contracts D. Necessity Finding as to Linked Contracts E. Necessity Finding for Spot/Non-Spot Month Position Limits IV. Related Matters A. Cost-Benefit Considerations B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Antitrust Considerations I. Background A. Introduction The Commission has long established and enforced speculative position limits for futures contracts and options on futures contracts on nine agricultural commodities as authorized by the CEA.1 These nine agricultural commodity contracts, which have been subject to Federal position limits for decades, are generally referred to as the ‘‘nine legacy agricultural contracts.’’ Under this Final Rule, the Commission additionally will establish Federal speculative position limits for certain commodity derivatives contracts associated with 16 additional commodities. The Commission refers to these 16 new commodities and their associated commodity derivatives contracts throughout this release as the ‘‘non-legacy’’ contracts since they are subject to Federal position limits for the first time under this Final Rule. Accordingly, under the Final Rule, certain commodity derivatives contracts associated with 25 commodities are subject to Federal position limits. The Commission’s existing position limits regulations 2 in existing part 150 17 U.S.C. 1 et seq. CFR part 150. Part 150 of the Commission’s regulations establishes Federal position limits (that is, position limits established by the Commission) on the nine legacy agricultural contracts. The nine legacy agricultural contracts are: CBOT Corn (and Mini-Corn) (C), CBOT Oats (O), CBOT Soybeans (and Mini-Soybeans) (S), CBOT Wheat (and MiniWheat) (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), CBOT KC Hard Red Winter Wheat (KW), 2 17 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 of the Commission’s regulations include three components: First, the Commission’s existing regulations establish separate position limit levels for each of the nine legacy agricultural contracts. These Federal position limit levels set the maximum speculative positions in each of the nine legacy agricultural contracts that a person may hold in the spot month, individual month, and all-monthscombined.3 Second, the existing Federal position limits framework provides exemptions to the Federal position limit levels for positions that constitute ‘‘bona fide hedging transactions or positions’’ and for certain ‘‘spread or arbitrage’’ positions.4 Third, the Commission’s existing regulations determine which accounts and positions a person must aggregate for the purpose of determining compliance with the Federal position limit levels.5 The existing Federal speculative position limits function in parallel to exchange-set position limits and/or exchange-set position accountability required by designated contract market (‘‘DCM’’) Core Principle 5.6 As a result, the nine legacy agricultural contracts are subject to both Federal and exchange-set limits, whereas other exchange-traded futures contracts and options on futures contracts are subject only to DCM-set limits and/or position accountability. As part of the Dodd-Frank Act, Congress amended the CEA’s position limits provisions, which since 1936 have authorized the Commission (and its predecessor) to impose limits on speculative positions to prevent the harms caused by excessive speculation. As discussed below, the Commission and ICE Cotton No. 2 (CT). See 17 CFR 150.2. The Federal position limits on these agricultural contracts are referred to as ‘‘legacy’’ limits because these contracts have been subject to Federal position limits for decades. 3 See 17 CFR 150.2. 4 See 17 CFR 150.3. 5 See 17 CFR 150.4. 6 7 U.S.C. 7(d)(5); 17 CFR 38.300. Paragraph (A) of DCM Core Principle 5 provides: To reduce the potential threat of market manipulation or congestion (especially during trading in the delivery month), the board of trade shall adopt for each contract of the board of trade, as is necessary and appropriate, position limitations or position accountability for speculators. Position limits generally cannot be exceeded absent an exemption, whereas position accountability allows an exchange to establish a level at which market participants, including those participants who do not qualify for an exemption, are required to: Provide position information to the exchange prior to increasing a position above the accountability level; halt further position increases; and/or reduce positions in an orderly manner. Core Principle 6 in part 37 of the Commission’s regulations for swap execution facilities (‘‘SEFs’’) contains similar language. 17 CFR 38.600. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 interprets these amendments as, among other things, tasking the Commission with establishing such position limits as it finds are ‘‘necessary’’ for the purpose of ‘‘diminishing, eliminating, or preventing’’ excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity.7 The Commission also interprets these amendments as tasking the Commission with establishing position limits on any ‘‘economically equivalent’’ swaps.8 The Commission previously issued proposed and final rules in 2011 (‘‘2011 Final Rulemaking’’) to implement the provisions of the Dodd-Frank Act regarding position limits and the bona fide hedge definition.9 A September 28, 2012 order of the U.S. District Court for the District of Columbia vacated the 2011 Final Rulemaking, with the exception of the rule’s amendments to 17 CFR 150.2.10 Subsequently, the Commission proposed position limits regulations in 2013 (‘‘2013 Proposal’’), in June of 2016 (‘‘2016 Supplemental Proposal’’), and again in December of 2016 (‘‘2016 Reproposal’’).11 The 2016 Reproposal would have amended part 150 of the Commission’s regulations to, among other things: Establish Federal position limits for 25 physical commodity futures contracts and their linked futures contracts, options on futures contracts, and ‘‘economically equivalent’’ swaps; revise the existing exemptions from such limits, including for bona fide hedges; and establish a framework for exchanges 12 to recognize certain positions as bona fide hedges and thus exempt from position limits. To date, the Commission has not issued any final rulemaking based on the 2013 Proposal, 2016 Supplemental Proposal, or 2016 Reproposal. The 2016 Reproposal generally addressed comments received in response to the 2013 Proposal and the 2016 Supplemental Proposal. In a separate 2016 proposed rulemaking, the CFTC 7 7 U.S.C. 6a(a)(1); see infra Section III.C. (discussion of the necessity finding). 8 7 U.S.C. 6a(a)(5); see also infra Section II.B.1.iii. 9 Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011) (‘‘2011 Proposal’’); Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011) (‘‘2011 Final Rulemaking’’). 10 Int’l Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, 887 F. Supp. 2d 259 (D.D.C. 2012) (‘‘ISDA’’). 11 Position Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013) (‘‘2013 Proposal’’); Position Limits for Derivatives: Certain Exemptions and Guidance, 81 FR 38458 (June 13, 2016) (‘‘2016 Supplemental Proposal’’); and Position Limits for Derivatives, 81 FR 96704 (Dec. 30, 2016) (‘‘2016 Reproposal’’). 12 Unless indicated otherwise, the use of the term ‘‘exchanges’’ throughout this release refers to DCMs and SEFs. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 3237 also proposed, and later adopted in 2016, amendments to rules in § 150.4 of the Commission’s regulations governing aggregation of positions for purposes of compliance with Federal position limits.13 These aggregation rules currently apply only to the nine legacy agricultural contracts subject to existing Federal position limits. Going forward, these aggregation rules will apply to all commodity derivative contracts that are subject to Federal position limits under this Final Rule. The Commission published a notice of a proposed rulemaking in the Federal Register on February 27, 2020 for a new position limits proposal (‘‘2020 NPRM’’). After reconsidering the prior proposals, including reviewing the comments responding thereto, the Commission in the 2020 NPRM withdrew from further consideration the 2013 Proposal, the 2016 Supplemental Proposal, and the 2016 Reproposal.14 In the 2020 NPRM, the Commission intended to: (1) Recognize differences across commodities and contracts, including differences in commercial hedging and cash-market reporting practices; (2) focus on commodity derivative contracts that are critical to price discovery and distribution of the underlying commodities such that the burden of excessive speculation in the commodity derivative contracts may have a particularly acute impact on interstate commerce for the underling commodities; and (3) reduce duplication and inefficiency by leveraging existing expertise and processes at DCMs. The public comment period for the 2020 NPRM ended May 15, 2020,15 and 13 Aggregation of Positions, 81 FR 91454 (Dec. 16, 2016) (‘‘Final Aggregation Rulemaking’’); see 17 CFR 150.4. Under the Final Aggregation Rulemaking, unless an exemption applies, a person’s positions must be aggregated with positions for which the person controls trading or for which the person holds a 10% or greater ownership interest. The Division of Market Oversight has issued time-limited no-action relief from some of the aggregation requirements contained in that rulemaking. See CFTC Letter No. 19–19 (July 31, 2019), available at https:// www.cftc.gov/csl/19-19/download. 14 Because the earlier proposals were withdrawn in the 2020 NPRM, comments on the earlier proposals are not part of the administrative record with respect to the 2020 NPRM nor with respect to this Final Rule, except where expressly referenced herein. In the 2020 NPRM, the Commission stated that commenters to the 2016 Reproposal should resubmit comments relevant to the subject proposal; commenters who wish to reference prior comment letters should cite those prior comment letters as specifically as possible. (85 FR at 11597). Accordingly, this Final Rule will not discuss comments submitted in connection with the 2016 Reproposal unless such comments were resubmitted for the 2020 NPRM. 15 Comments were originally due by April 29, 2020. Due to the COVID–19 pandemic, the E:\FR\FM\14JAR2.SGM Continued 14JAR2 3238 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 the Commission received approximately 75 public comment letters.16 After Commission extended the deadline to May 15, 2020. 16 The Commission states ‘‘approximately 75 relevant comment letters’’ since several commenters submitted additional, or supplemental, comments. As a result, the total could change slightly depending on whether one includes these supplemental comment letters in the total. Thus, for the avoidance of doubt, the Commission uses ‘‘approximately.’’ The Commission received comments from: American Cotton Shippers Association (‘‘ACSA’’); American Feed Industry Association (‘‘AFIA’’); American Gas Association (‘‘AGA’’); AQR Capital Management, LLC (‘‘AQR’’); Archer Daniels Midland (‘‘ADM’’); AMCOT; Americans for Financial Reform (‘‘AFR’’); Arthur Dunavant Investments (‘‘Dunavant’’); ASR Group International, Inc. (‘‘ASR’’); Atlantic Cotton Association (‘‘ACA’’); Barnard, Chris (Individual); Better Markets, Inc. (‘‘Better Markets’’); Cargill, Inc. (‘‘Cargill’’); Castleton Commodities International LLC (‘‘CCI’’); Chevron USA Inc. (‘‘Chevron’’); Choice Cotton Company, Inc. (‘‘Choice Cotton’’); CHS Inc. (‘‘CHS Inc.’’) and CHS Hedging, LLC (‘‘CHS Hedging’’) (collectively, ‘‘CHS’’); Citadel; CME Group Inc. (‘‘CME Group’’); Commodity Markets Council (‘‘CMC’’); DECA Global LLC (‘‘DECA’’); East Cotton Company (‘‘East Cotton’’); Ecom Agroindustrial (‘‘Ecom’’); Edison Electric Institute (‘‘EEI’’) and Electric Power Supply Association (‘‘EPSA’’) (collectively, the ‘‘Joint Associations’’ or ‘‘EEI/EPSA’’); Futures Industry Association (‘‘FIA’’); Glencore Agriculture Limited, Glencore Agriculture B.V. (collectively, ‘‘Glencore’’); ICE Futures U.S. (‘‘IFUS’’); IMC Companies (‘‘IMC’’); Industrial Energy Consumers of America; Institute for Agriculture & Trade Policy (‘‘IATP’’); Intercontinental Exchange, Inc. (‘‘ICE’’); International Energy Credit Association (‘‘IECA’’); International Swaps and Derivatives Association, Inc. (‘‘ISDA’’); Jess Smith & Sons (‘‘Jess Smith’’); Lawson/O’Neill Global Institutional Commodity (LOGIC) Advisors (‘‘Lawson/O’Neill’’); Long Island Power Authority (‘‘LIPA’’); Louis Dreyfus Company (‘‘LDC’’); Mallory Alexander International Logistics (‘‘Mallory Alexander’’); Managed Funds Association and Alternative Investment Management Association (collectively, the ‘‘Associations’’ or ‘‘MFA/AIMA’’); Marshal, Gerald (Independent Trader); Matsen, Eric (Individual—Physical Commodity Risk Management Consultant); McMeekin Cotton LLC (‘‘McMeekin’’); Memtex Cotton Marketing, LLC (‘‘Memtex’’); Minneapolis Grain Exchange, Inc. (‘‘MGEX’’); Moody Compress & Warehouse Company (‘‘Moody Compress’’); Namoi Cotton Alliance (‘‘Namoi’’); National Cotton Council (‘‘NCC’’); National Council of Farmer Cooperatives (‘‘NCFC’’); National Council of Textile Organizations (‘‘NCTO’’); National Energy & Fuels Institute (‘‘NEFI’’); National Grain and Feed Association (‘‘NGFA’’); National Oilseed Processors Association (‘‘NOPA’’); National Rural Electric Cooperative; Association American Public Power Association; and American Public Gas Association (collectively, ‘‘NRECA’’); Natural Gas Supply Association (‘‘NGSA’’); Olam International Limited (‘‘Olam’’); Omnicotton Inc. (‘‘Omnicotton’’); Pacific Investment Management Company LLC (‘‘PIMCO’’); Parkdale Mills (‘‘Parkdale’’); Petroleum Marketers Association of America (‘‘PMAA’’); Public Citizen; Robert Rutkowski (‘‘Rutkowski’’); S. Canale Cotton Co. (‘‘Canale Cotton’’); Shell Energy North America (US), L.P. and Shell Trading (US) Company (collectively, ‘‘Shell’’); SIFMA Asset Management Group (‘‘SIFMA AMG’’); Skylar Capital Management LP (‘‘SCM’’); Southern Cotton Association (‘‘Southern Cotton’’); Southwest Ag Sourcing (‘‘SW Ag’’); Suncor Energy Marketing Inc. and Suncor Energy USA Marketing Inc. (collectively, ‘‘SEMI’’); Texas Cotton Association (‘‘Texas Cotton’’); The Coalition of Physical Energy Companies; The Commercial Energy Working VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 reviewing these public comment letters, and for the general reasons discussed in this release, the Commission is adopting the 2020 NPRM with certain modifications in this Final Rule.17 Before addressing the specifics of the Final Rule, the Commission outlines several themes underscoring the Commission’s approach in the Final Rule. First, the Commission believes that any position limits regime must take into account differences across commodities and contract types. The existing Federal position limits regulations apply only to the nine legacy agricultural contracts, all of which are physically-settled futures on agricultural commodities. Limits on these nine legacy agricultural contracts have been in place for decades, as have the Federal rules governing both the exemptions from these Federal position limits and the exchange-set position limits on the nine legacy agricultural contracts. The existing framework is largely a historical remnant of an approach that predates cash-settled futures contracts, institutional-investor interest in commodity indexes, highly liquid energy markets, and the Commission’s jurisdiction over certain swaps. Congress has tasked the Commission with establishing such limits as it finds are ‘‘necessary’’ for the purpose of preventing the burdens associated with excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of an underlying commodity; and establishing limits on swaps that are ‘‘economically equivalent’’ to any futures contracts or options on futures contracts subject to Federal position limits. An approach that is flexible enough to accommodate potential future, unpredictable developments in commercial hedging practices is well-suited for the current derivatives markets by accommodating differences in commodity types, contract specifications, hedging practices, cash-market trading practices, organizational structures of hedging participants, and liquidity profiles of individual markets. The Commission is building this flexibility into several parts of the Final Rule, including: (1) Exchange-set limits or accountability levels outside of the spot month for referenced contracts based on commodities other than the Group (‘‘CEWG’’); The Walcot Trading Company, LLC (‘‘Walcot’’); Toyo Cotton Company (‘‘Toyo’’); VLM Commodities (‘‘VLM’’); Western Cotton Shippers Association (‘‘WCSA’’); White Gold Cotton Marketing, LLC (‘‘White Gold’’). 17 The Final Rule’s regulations are discussed in detail throughout this release. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 nine legacy agricultural contracts; (2) the ability for exchanges to use more than one formula when setting their own limit levels; (3) an updated formula for Federal non-spot month position limit levels on the nine legacy agricultural contracts that is calibrated to recently observed open interest, which has generally increased over time; (4) a bona fide hedging definition that is broad enough to accommodate common commercial hedging practices, including unfixed-price transactions as well as anticipatory hedging practices, such as anticipatory merchandising; (5) a simplified process for market participants to submit a single application to obtain non-enumerated bona fide hedge recognitions for purposes of Federal and exchange-set position limits that are in line with common commercial hedging practices; (6) the elimination of a restriction for purposes of Federal position limits on holding positions during the last trading days of the spot month; and (7) broader discretion for market participants to measure risk in the manner most suitable for their businesses. Second, the Final Rule establishes position limits with respect to 16 additional commodities during the spot month, for a total of 25 core referenced futures contracts, and certain derivative contracts linked thereto, for which the Commission finds that speculative position limits are necessary.18 As described below, this necessity finding for the 25 core referenced futures contracts is based on two interrelated factors: (1) The importance of the 25 core referenced futures contracts to their respective underlying cash markets, including that they require physical delivery of the underlying commodity; and (2) the particular importance to the national economy of the commodities underlying the 25 contracts.19 Third, there is an opportunity for greater collaboration between the Commission and the exchanges within the statutorily created parallel Federal and exchange-set position limit regimes. Given the exchanges’ obligations to carry out self-regulatory responsibilities, resources, deep knowledge of their markets and trading practices, close interactions with market participants, existing programs for addressing exemption requests, and direct ability to leverage these resources to generally act more quickly than the Commission, the Commission believes that cooperation between the Commission and the exchanges on position limits should not only be continued, but enhanced. For 18 See infra Section III.C.2. 19 Id. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 example, exchanges are particularly well-positioned to: Provide the Commission with estimates of deliverable supply in connection with their commodity contracts that require physical delivery; recommend limit levels for the Commission’s consideration; and help administer the program for recognizing bona fide hedges. Further, given that the Final Rule requires exchanges to collect, and provide to the Commission upon request, cash-market information from market participants requesting recognition of bona fide hedges, the Commission is eliminating the Form 204 and part of the Form 304, which market participants with bona fide hedging positions in excess of position limits currently file each month with the Commission to demonstrate cashmarket positions justifying such overages. Under enhanced collaboration, the Commission will maintain its access to such information from the exchanges, which will result in a more efficient administrative process, VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 in part by reducing duplication of efforts. B. Executive Summary This executive summary provides an overview of the key components of the Final Rule. The summary only highlights certain aspects of the final regulations and generally uses shorthand to summarize complex topics. The executive summary is neither intended to be a comprehensive recitation of the Final Rule nor intended to supplement, modify, or replace any interpretive or other language contained herein. Section II of this release includes a more detailed and comprehensive discussion of all of the final regulations. The final regulations and related appendices and guidance follow Section IV (Related Matters) of this release. 1. Contracts Subject to Federal Speculative Position Limits Federal position limits apply to ‘‘referenced contracts,’’ which, as described in turn below, include: (i) 25 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 3239 ‘‘core referenced futures contracts’’ (i.e., the nine legacy agricultural contracts together with the new 16 non-legacy contracts); (ii) futures contracts and options on futures contracts directly or indirectly linked to a core referenced futures contract; and (iii) ‘‘economically equivalent swaps.’’ i. Core Referenced Futures Contracts Federal position limits under the Final Rule will apply to the following 25 20 physically-settled core referenced futures contracts: 20 Reference to, or discussion of, derivatives contracts listed on IFUS, the DCM and subsidiary of ICE, will be referred to herein as ‘‘ICE [Commodity] [IFUS Commodity Code]’’ (e.g., ICE Sugar No. 16 (SF)). Additionally, ‘‘CBOT’’ refers to the DCM Board of Trade of the City of Chicago, Inc.; ‘‘CME’’ refers to the DCM Chicago Mercantile Exchange, Inc.; ‘‘COMEX’’ refers to the DCM Commodity Exchange, Inc.; and ‘‘NYMEX’’ refers to the DCM New York Mercantile Exchange, Inc. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ii. Futures Contracts and Options on Futures Contracts Linked to a Core Referenced Futures Contract khammond on DSKJM1Z7X2PROD with RULES2 The term ‘‘referenced contract’’ encompasses any core referenced futures contract as well as any futures contract and any option on a futures contract that is: (1) Directly or indirectly linked to the price of a core referenced futures contract; or (2) directly or indirectly linked to the price of the same commodity underlying the applicable core referenced futures contract, for delivery at the same location as specified in that core referenced futures contract.22 The term 21 While the Final Rule includes Federal non-spot month limits only for referenced cintracts on the nine legacy agricultural contracts, the Final Rule requires exchanges to establish, consistent with Commission standards set forth in this Final Rule, exchange-set position limits and/or position accountability levels in the non-spot months for the 16 non-legacy core referenced futures contracts and for any associated referenced contracts. 22 For clarity, clause (2) is intended to encompass potential physically-settled ‘‘look-alike’’ contracts that do not directly reference a core referenced futures contract but that are nonetheless based on VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 iii. Economically Equivalent Swaps The term referenced contracts also includes economically equivalent swaps, defined as swaps with ‘‘identical material’’ contractual specifications, terms, and conditions to a referenced contract. Swaps in a commodity other than natural gas that have identical material specifications, terms, and conditions to a referenced contract are still deemed economically equivalent swaps even if they differ from the referenced contract with respect to one or more of the following: (a) Lot size specifications or notional amounts, (b) delivery dates diverging by less than one calendar day for physically-settled swaps, or (c) post-trade risk management arrangement (e.g., uncleared swaps versus cleared futures contracts). The same general definition applies to natural gas swaps, except that the definition is expanded to include swaps with delivery dates diverging from the corresponding core referenced futures contract by less than two calendar days. Instruments that are exempt from Commission jurisdiction or otherwise not deemed to be swaps under the Commission’s regulations (e.g., instruments that are excluded by the CEA’s ‘‘swap’’ definition or Commission regulations as physically-settled forward contracts) are not ‘‘economically equivalent swaps’’ even if they otherwise fall within the ‘‘economically equivalent swap’’ definition. the same commodity and delivery location as a core referenced futures contract. 2. Federal Position Limit Levels During the Spot Month ‘‘referenced contract,’’ however, explicitly excludes location basis contracts, commodity index contracts, contracts that are based on prices across a month (i.e., contracts commonly referred to as calendar month average contracts, trade month average contracts, or balance of month contracts), outright contracts that are based on a price reporting agency index price, swap guarantees, and trade options that meet certain requirements. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.000</GPH> 3240 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 below. Each spot month limit is set at or below 25% of deliverable supply, as estimated using recent data provided by the DCM listing the core referenced futures contract, and verified by the Commission. The Federal spot month PO 00000 Frm 00007 Fmt 4701 Sfmt 4725 position limits apply on a futuresequivalent basis based on the size of the unit of trading of the relevant core referenced futures contract. BILLING CODE 6351–01–P E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.001</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Federal spot month position limits apply to all 25 core referenced futures contracts and their associated referenced contracts. The Final Rule establishes the spot month position limit levels summarized in the table 3241 3242 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 23 As of October 15, 2020. Federal spot month limit for Live Cattle adopted herein features a step-down limit similar to the CME’s existing Live Cattle step-down exchange-set limit. The Federal spot month stepdown limit is: (1) 600 at the close of trading on the first business day following the first Friday of the contract month; (2) 300 at the close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 at the close of trading on the business day prior to the last two trading days of the contract month. khammond on DSKJM1Z7X2PROD with RULES2 24 The VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 25 ICE technically does not have an exchange-set spot month position limit level for ICE Sugar No. 16 (SF). However, it does have a single-month position limit level of 1,000 contracts, which effectively operates as a spot month position limit. 26 As discussed below, the NYMEX Henry Hub Natural Gas (NG) Federal spot month limit for cashsettled look-alike referenced contracts will apply on a per-exchange and per-OTC swaps market basis rather than on an aggregate basis across exchanges. 27 Currently, the cash-settled natural gas contracts are subject to an exchange-set spot month position limit level of 1,000 equivalent-sized contracts per exchange. As of publication of the Final Rule, there are three exchanges that list cash-settled natural gas PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 contracts: NYMEX, IFUS, and Nodal. As a result, a market participant may hold up to 3,000 equivalentsized cash-settled natural gas contracts under existing exchange-set limits. The exchanges also have a conditional position limit framework for natural gas contracts. This exchange-set conditional spot month position limit permits up to 5,000 cash-settled NYMEX NG equivalent-sized referenced contracts per exchange that lists such contracts, provided that the market participant does not hold positions in the physically-settled NYMEX NG referenced contract. 28 The Federal spot month limit for Light Sweet Crude Oil adopted herein features the following step-down limit: (1) 6,000 contracts as of the close E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.002</GPH> BILLING CODE 6351–01–C Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations i. Application of Federal Spot Month Limits to Commodities Other Than Natural Gas With the exception of natural gas, the Federal spot month position limit levels apply in the aggregate across exchanges and the over-the-counter (‘‘OTC’’) swap markets. During the spot month, Federal position limits apply ‘‘separately’’ to physically-settled and cash-settled referenced contracts.29 Accordingly, during the spot month, a market participant is required to aggregate its net physically-settled positions, and separately its net cash-settled positions, across exchanges and the OTC swaps markets, but may not net cash-settled referenced contracts with physicallysettled referenced contracts. ii. Application of Federal Spot Month Limits to Natural Gas For the NYMEX Henry Hub Natural Gas (‘‘NYMEX NG’’) physicallydelivered core referenced futures contract and its associated cash-settled referenced contracts, the Final Rule modifies the 2020 NPRM by providing that Federal position limits apply to NYMEX NG cash-settled referenced khammond on DSKJM1Z7X2PROD with RULES2 of trading three business days prior to the last trading day of the contract; (2) 5,000 contracts as of the close of trading two business days prior to the last trading day of the contract; and (3) 4,000 contracts as of the close of trading one business day prior to the last trading day of the contract. 29 As discussed further under Section II.B.3.vi, cash-settled NYMEX NG referenced contracts under the Final Rule are subject to per-exchange and perOTC swaps market Federal position limits. As a result, market participants are not required to aggregate their positions in natural gas referenced contracts across different exchanges and the OTC swaps markets but also may not net such positions across different exchanges or the OTC swaps market. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 contracts on a per-exchange and perOTC swaps market basis (i.e., cashsettled positions are not aggregated across different exchanges and the OTC swaps market). Specifically, a market participant may hold up to 2,000 cash-settled NYMEX NG referenced contracts (i.e., the NYMEX NG Federal spot month position limit) on each exchange that lists for trading a cash-settled NYMEX NG referenced contract as well as the OTC swap market. Currently, three exchanges (NYMEX, IFUS, and Nodal) 30 list cash-settled ‘‘look-alike’’ NYMEX NG referenced contracts. Thus, a market participant is able to hold 2,000 cash-settled NYMEX NG referenced futures contracts on each exchange, which is 6,000 cash-settled look-alike NYMEX NG referenced contracts in total. In addition, a market participant is able to hold a position of 2,000 cash-settled NYMEX NG equivalent-sized economically equivalent swaps in the OTC swaps markets for a total position of 8,000 cash-settled NYMEX NG referenced contracts across the four markets (i.e., NYMEX, IFUS, Nodal, and the OTC swaps market). As noted above, because Federal spot month position limit levels apply ‘‘separately’’ to cash-settled and physically-settled referenced contracts, a market participant further is able to hold an additional position of 2,000 physically-settled NYMEX NG referenced contracts for a total position of 10,000 NYMEX NG referenced contracts. As discussed further below, market participants may hold additional cash30 ‘‘Nodal’’ PO 00000 refers to the Nodal Exchange, LLC. Frm 00009 Fmt 4701 Sfmt 4700 3243 settled NYMEX NG referenced contracts under the Final Rule’s Federal spot month conditional position limit exemption as long as the market participant satisfies certain requirements. However, for the avoidance of doubt, the Commission notes that the per-exchange 2,000 contract Federal spot month position limit level for cash-settled NYMEX NG referenced contracts discussed above is not part of the Federal spot month conditional position limit exemption but rather constitutes the default speculative Federal spot month position limit. 3. Federal Position Limit Levels Outside of the Spot Month Under the Final Rule, Federal position limits outside of the spot month (‘‘non-spot month’’ position limits) apply only to the nine legacy agricultural contracts and their associated referenced contracts. In contrast, referenced contracts based on the 16 core referenced futures contracts subject to Federal position limits for the first time under the Final Rule are only subject to Federal position limits during the spot month, and are otherwise only subject to exchange-set limits or position accountability outside of the spot month. The following Federal non-spot month position limit levels, summarized in the table below, are set at 10% of open interest for the first 50,000 contracts, with an incremental increase of 2.5% of open interest thereafter, and apply on a futuresequivalent basis based on the size of the unit of trading of the relevant core referenced futures contract: E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 4. Exchange-Set Limits and Exemptions Therefrom i. Contracts Subject to Federal Position Limits khammond on DSKJM1Z7X2PROD with RULES2 An exchange that lists a contract subject to Federal position limits, as specified above, is required to set its own limits for such contracts at a level that is no higher than the Federal level. Exchanges may grant exemptions from their own limits to a level that exceeds the applicable Federal limit, provided the exemption is self-effectuating (e.g., an enumerated bona fide hedge or a spread that satisfies the ‘‘spread transaction’’ definition) or provided the 31 With the exception of the ICE Cotton No. 2 (CT) contract discussed below, for each of the legacy agricultural contracts, the single month limit is equal to the all-months-combined limit under the Final Rule. 32 As of October 15, 2020. 33 The single month limit for ICE Cotton No. 2 (CT) is set at 50% of the all-months-combined limit, or 5,950 contracts, as discussed more fully below. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 exemption is recognized by the Commission for purposes of Federal position limits (pursuant to an application submitted either directly to the Commission under § 150.3 or indirectly to the Commission through an exchange under § 150.9, as applicable). Exchanges may grant exemptions that are not recognized by the Final Rule; however, such exemptions must be capped at a level that is not higher than the applicable Federal position limit level. ii. Physical Commodity Contracts Not Subject to Federal Position Limits For physical commodity contracts, for which no necessity finding was supported, and which are therefore not subject to Federal position limits, an exchange is generally required to set spot month position limit levels at no greater than 25% of deliverable supply, but has flexibility to submit other approaches for review by the Commission, provided the approach results in spot month position limit PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 levels that are ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index’’ and complies with all other applicable regulations. Outside of the spot month, an exchange has additional flexibility to set either position limits or position accountability levels, provided the levels are ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ Nonexclusive Acceptable Practices are included in new Appendix F to part 150 under the Final Rule and provide several examples of formulas that the Commission has determined meet this standard, but an exchange has flexibility to develop other approaches. An exchange has flexibility to grant a variety of exemption types. Exchanges must take into account whether the exemption results in a position that is E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.003</GPH> 3244 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ‘‘not in accord with sound commercial practices’’ in the market for which the exchange is considering the application, and/or ‘‘exceed[s] an amount that may be established and liquidated in an orderly fashion in that market.’’ 5. Limits on ‘‘Pre-Existing Positions’’ As discussed above, only swaps that qualify as ‘‘economically equivalent swaps’’ are subject to Federal position limits under the Final Rule. However, economically equivalent swaps entered into in good faith prior to the Final Rule’s Effective Date, including both ‘‘Pre-Enactment Swaps,’’ which are swaps entered into prior to the DoddFrank Act whose terms have not expired, and ‘‘Transition Period Swaps,’’ which are swaps entered into between July 22, 2010 and the Final Rule’s effective date, are not subject to Federal position limits. Other preexisting positions (i.e., pre-existing positions that are futures contracts or options on futures contracts) will be subject to the Final Rule’s Federal position limits.34 Market participants may net down their post-Effective Date positions in commodity derivatives contracts with any pre-existing swaps (as long as such swaps qualify as economically equivalent swaps) for purposes of complying with non-spot month Federal position limits. In contrast, during the spot month, market participants may not apply these pre-existing swap positions to net down their positions so as to avoid rendering Federal spot month position limits ineffective. The Commission is particularly concerned about protecting the spot month in physically-delivered futures from price distortions or potential manipulation and consequent disruption of the hedging and price discovery utility of the related futures contract. 6. Legal Standards for Exemptions From Federal Position Limits khammond on DSKJM1Z7X2PROD with RULES2 i. Bona Fide Hedge Recognition A bona fide hedging transaction or position may exceed Federal position limits if the hedge position satisfies all three elements of the Final Rule’s ‘‘general’’ bona fide hedging definition. That is, (1) the position represents a substitute for transactions or positions 34 However, as discussed further below, the Commission is providing for a compliance period until January 1, 2022 for the 16 non-legacy referenced contracts that will be subject to Federal position limits for the first time under this Final Rule. Similarly, the Commission is providing for a compliance period for any economically equivalent swaps, as well as in connection with the elimination of the risk management exemption, until January 1, 2023. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 made or to be made at a later time in a physical marketing channel (‘‘temporary substitute test’’); (2) the position is economically appropriate to the reduction of price risks in the conduct and management of a commercial enterprise (‘‘economically appropriate test’’); and (3) the position arises from the potential change in value of actual or anticipated assets, liabilities, or services (‘‘change in value requirement’’). The Final Rule makes several changes to the existing bona fide hedging definition, including those described immediately below: First, the Commission is expanding the existing list of ‘‘enumerated’’ bona fide hedges to cover additional hedging practices, including adding a bona fide hedge for anticipated merchandising.35 To provide greater certainty, the list of enumerated bona fide hedges is now incorporated into the regulation. In contrast, in the 2020 NPRM, this list of enumerated bona fide hedges was proposed in the form of non-binding acceptable practices in Appendix A to part 150. While the enumerated bona fide hedges will remain listed in Appendix A under the Final Rule, Appendix A to part 150 is now explicitly incorporated into Commission regulations and is part of the regulatory text rather than acceptable practices. A person who holds a position that qualifies as a bona fide hedge and that is one of the enumerated hedges in Appendix A to part 150 is not required to request prior approval from the Commission to hold such bona fide hedge position above the Federal position limit. That is, the enumerated bona fide hedges are ‘‘self-effectuating’’ for purposes of Federal position limits. A person with an enumerated bona fide hedge position, however, would still need to request an exemption from the 35 The existing definition of ‘‘bona fide hedging transactions and positions’’ enumerates the following hedging transactions or positions: (1) Hedges of inventory and cash commodity fixedprice purchase contracts under 1.3(z)(2)(i)(A); (2) hedges of unsold anticipated production under 1.3(z)(2)(i)(B); (3) hedges of cash commodity fixedprice sales and (4) hedges of fixed price sales of their cash products and byproducts contracts under 1.3(z)(2)(ii)(A) and (B); (5) hedges of unfilled anticipated requirements under 1.3(z)(2)(ii)(C); (6) hedges of offsetting unfixed price cash commodity sales and purchases under 1.3(z)(2)(iii); and (7) cross-commodity hedges under 1.3(z)(2)(iv). The following additional hedging practices are not enumerated in the existing regulation, but are included as enumerated hedges in the Final Rule: (1) Hedges of anticipated merchandising; (2) hedges by agents; (3) hedges of anticipated royalties; (4) hedges of services; and (5) offsets of commodity trade options. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 3245 relevant exchange for any exchange-set limits.36 Second, with respect to the treatment of unfixed-price forward transactions and bona fide hedging under the Final Rule, the Commission clarifies that a commercial market participant may qualify for one of the Final Rule’s enumerated anticipatory bona fide hedges (i.e., enumerated bona fide hedges for unsold anticipated production, unfilled anticipated requirements, and anticipated merchandising) with respect to an unfixed-price forward transaction. The Commission believes that an unfixedprice forward transaction should not preclude a commercial market participant from qualifying for one of these enumerated anticipatory bona fide hedges, because such unfixed-price forward transactions do not give rise to outright price risk for a commercial market participant and do not otherwise fix an outright price. Accordingly, unfixed-price transactions do not ‘‘fill’’ or ‘‘address’’ the hedging need for which the enumerated anticipatory bona fide hedges are predicated. The Commission notes that an unfixed-price forward transaction does not itself allow a market participant to qualify for one of these enumerated anticipatory bona fide hedges, and that a market participant must still satisfy the requirements of the applicable anticipatory bona fide hedge to qualify (e.g., as an initial matter, by the commercial market participant being able to demonstrate its anticipated unsold production, anticipated unfilled requirements, and/or anticipated merchandising). Third, the Final Rule clarifies whether and when market participants may measure risk on a gross basis rather than on a net basis. Instead of only being permitted to hedge on a ‘‘net basis’’ except in a narrow set of circumstances, a market participant is also able to generally hedge positions on a ‘‘gross basis,’’ provided that the participant has done so over time in a consistent manner and is not doing so to evade Federal position limits. Among other items, the Final Rule differs from the 2020 NPRM in that the Final Rule: (1) Eliminates the requirement that exchanges document their justifications when allowing gross hedging; (2) clarifies that market participants are not required to develop written policies or procedures that set forth when gross 36 The processes for obtaining bona fide hedge recognitions and non-enumerated bona fide hedge recognitions are summarized in Section 7 below of this executive summary (Processes for Requesting Bona Fide Hedge Recognitions and Spread Exemptions). E:\FR\FM\14JAR2.SGM 14JAR2 3246 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 versus net hedging is appropriate; and (3) clarifies that gross hedging is permissible for both enumerated and non-enumerated hedges. Fourth, market participants are permitted to hold bona fide hedges in excess of Federal position limits during the last five days of the spot period (or during the time period for the spot month if less than five days). While the Final Rule does not include a Federal restriction on holding bona fide hedging positions in excess of Federal position limits during the spot period, exchanges continue to have the discretion to adopt such restrictions (commonly referred to by market participants as the ‘‘Five-Day Rule’’), or similar restrictions, for purposes of exchange-set limits. The Final Rule also includes guidance on the application of spot-period restrictions, including factors for exchanges with such restrictions to consider when determining to grant exemptions that are not subject to any such restrictions for purposes of their own limits. Finally, the Final Rule modifies the ‘‘temporary substitute test’’ to require that a bona fide hedging transaction or position in a physical commodity must always, and not just normally, be connected to the production, sale, or use of a physical cash-market commodity. Therefore, a market participant is generally no longer allowed to treat positions entered into for ‘‘risk management purposes’’ 37 as a bona fide hedge, unless the position qualifies as either: (i) An offset of a pass-through swap, where the offset reduces price risk attendant to the pass-through swap executed opposite a counterparty for whom the swap qualifies as a bona fide hedge; or (ii) a ‘‘swap offset,’’ where the offset is used by a counterparty to reduce price risk attendant to a swap that qualifies as a bona fide hedge and that was previously entered into by that counterparty. ii. Spread Exemption A transaction or position may also exceed Federal position limits if it qualifies as a ‘‘spread transaction,’’ which includes the following common types of spreads: Intra-market spreads; inter-market spreads; intra-commodity spreads; inter-commodity spreads; calendar spreads; quality differential spreads; processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads); product and by-product 37 The phrase ‘‘risk management’’ as used in this instance refers to derivatives positions, typically held by a swap dealer, used to offset a swap position, such as a commodity index swap, with another entity for which that swap is not a bona fide hedge. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 differential spreads; and futures-options spreads.38 Spread exemptions may be granted using the process described in Section 7 below of this executive summary (Processes for Requesting Bona Fide Hedge Recognitions and Spread Exemptions). iii. Financial Distress Exemption This exemption allows a market participant to exceed Federal position limits if necessary to take on the positions and associated risk of another market participant during a potential default or bankruptcy situation. This exemption is available on a case-by-case basis, depending on the facts and circumstances involved. iv. Conditional Spot Month Limit Exemption in Natural Gas As long as a market participant holds no physically-settled NYMEX NG contracts, the Final Rule allows that market participant to exceed the NYMEX NG Federal spot month position limit level of 2,000 cash-settled referenced contracts per exchange (and an additional 2,000 equivalent-sized economically equivalent OTC swaps) by holding 10,000 cash-settled NYMEX NG referenced contracts per DCM that lists cash-settled NYMEX NG referenced contracts, as well as an additional 10,000 equivalent-sized cash-settled economically equivalent NYMEX NG swaps. The Final Rule clarifies that market participants may not use a spread exemption to exceed the aforementioned conditional spot month limit for natural gas. 7. Processes for Requesting Bona Fide Hedge Recognitions and Spread Exemptions i. Self-Effectuating Enumerated Bona Fide Hedges A position that complies with the bona fide hedging definition in § 150.1 and falls within one of the enumerated bona fide hedges is self-effectuating for purposes of Federal position limits, provided the market participant separately applies to the relevant exchange for an exemption from exchange-set limits. Such market participants are no longer required to file Form 204/304 with the Commission on a monthly basis to demonstrate cashmarket positions justifying Federal position limit overages. Instead, the Commission will have access to cashmarket information that such market 38 The Final Rule expands the 2020 NPRM’s list of exempt spread transactions by also including intra-market spreads, inter-market spreads, and intra-commodity spreads. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 participants submit as part of their applications to an exchange for an exemption from exchange-set limits, typically filed on an annual basis. ii. Bona Fide Hedges That Are Not SelfEffectuating The Commission may consider adding to the list of enumerated bona fide hedges at a later time, as the Commission may find appropriate. Until that time, all bona fide hedge positions that are not enumerated in Appendix A to part 150 must be granted pursuant to one of the processes for requesting a non-enumerated bona fide hedge recognition, as explained below. A market participant seeking to exceed Federal position limits for a nonenumerated bona fide hedging transaction or position is able to choose whether to apply directly to the Commission or, alternatively, apply indirectly to the Commission through the applicable exchange using a new streamlined process. If applying directly to the Commission, the market participant must also separately apply to the relevant exchange for relief from exchange-set position limits. If applying to an exchange using the new streamlined process, a market participant may file an application with an exchange, generally at least annually, which will be valid both for purposes of Federal and exchange-set position limits. Under this streamlined process, if the exchange determines to grant a nonenumerated bona fide hedge recognition for purposes of its exchange-set position limits, the exchange must notify the Commission and the applicant simultaneously. Then, 10 business days (or two business days in the case of retroactive applications filed late due to sudden or unforeseen bona fide hedging needs) after the exchange issues such a determination, the bona fide hedge exemption may be deemed approved for purposes of Federal position limits unless the Commission (and not Commission staff) notifies the market participant otherwise. That is, after the 10 (or two) business days expire, the bona fide hedge exemption is considered approved for purposes of Federal position limits. Under the Final Rule, once the exchange notifies the Commission and the applicant of the exchange’s determination to approve the application, the applicant may, at its own risk, exceed Federal position limits during the Commission’s 10 businessday review period. If the Commission determines to deny an exemption application, the applicant will not be subject to any Federal position limits violation, provided the E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations person filed the application in good faith and brings the position into compliance with the applicable Federal position limit within a commercially reasonable amount of time, as applicable. The Final Rule also allows a market participant with sudden or unforeseen hedging needs to file a request for a bona fide hedge exemption within five business days after exceeding the Federal limit (i.e., commonly referred to as a ‘‘retroactive’’ exemption application). If the Commission denies such application, the market participant will not be subject to a Federal position limit violation, provided the market participant filed the application in good faith and brings the position into compliance with the applicable Federal position limit within a commercially reasonable amount of time, as applicable. Among other changes, market participants are no longer required to file Forms 204 or 304, as applicable, with the Commission on a monthly basis to demonstrate cash-market positions justifying position limit overages. Under the Final Rule, the Commission will instead leverage cashmarket information submitted directly to the exchanges. iii. Spread Exemptions For a referenced contract on any commodity, a spread exemption is selfeffectuating for purposes of Federal position limits, provided that (1) the position falls within one of the categories set forth in the ‘‘spread transaction’’ definition, and (2) the market participant separately applies to the applicable exchange for a spread exemption from exchange-set position limits.39 A market participant with a spread position that does not fit within the ‘‘spread transaction’’ definition with respect to any of the commodities Commission understands that certain exchanges may distinguish between the terms ‘‘spread,’’ ‘‘arbitrage,’’ and ‘‘straddle.’’ For the purposes of the Commission’s discussion and the Final Rule in general, the Commission’s use of the term ‘‘spread’’ is meant to include all of these related trading strategies, and any Commission reference to ‘‘spread’’ rather than ‘‘arbitrage’’ or ‘‘straddle’’ is not intended to suggest a substantive difference in meaning. khammond on DSKJM1Z7X2PROD with RULES2 39 The VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 subject to Federal position limits may apply directly to the Commission, and must also separately apply to the applicable exchange. 8. Compliance Date and Effective Date i. Summary The Final Rule’s effective date is March 15, 2021 (the ‘‘Effective Date’’). This means that all aspects of the Final Rule will be effective as of the Effective Date, including the new enumerated bona fide hedges (e.g., anticipated merchandising) as well as the higher Federal position limits for the nine legacy agricultural contracts. However, as discussed below, the Commission is also providing for compliance dates that extend beyond the Effective Date in connection with several of the Final Rule’s requirements. The Final Rule provides market participants with a compliance date of January 1, 2022 for purposes of compliance with the Federal position limits for the 16 non-legacy core referenced futures contracts that are subject to Federal position limits for the first time under this Final Rule. This compliance date also applies to any referenced contracts (other than economically equivalent swaps, which have a separate compliance date as discussed further below) related to these 16 non-legacy core referenced futures contracts. The Final Rule also provides exchanges with a compliance date of January 1, 2022 for purposes of establishing exchange-set position limits and provisions associated with exemptions therefrom, including certain obligations to collect cash-market information from market participants in connection with market participants’ applications for bona fide hedging exemptions to exchange-set limits, and to share the same with the Commission, consistent with the requirements under the Final Rule. Additionally, the Final Rule provides a compliance date of January 1, 2023 with respect to (i) the elimination of previously-granted risk management exemptions,40 and (ii) Federal position 40 As discussed above in Section 6 of this executive summary (Legal Standards for Exemptions from Federal Position Limits), the PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 3247 limits for economically equivalent swaps. Because the nine legacy agricultural contracts are currently subject to Federal position limits under the existing Federal framework, the Final Rule does not provide a compliance date for the new Federal position limits under the Final Rule for such contracts, or a formal phase-in period. Therefore, such limits go into effect on the Effective Date. Thus, as of the Effective Date, market participants will be able to avail themselves of the Federal position limits under the Final Rule for the nine legacy agricultural contracts, all of which are higher than the existing Federal position limits (except for CBOT Oats, which will maintain the existing Federal position limit levels). However, the Commission notes that exchange-set position limits will remain at current levels unless and until the relevant exchange submits a rule amendment pursuant to part 40 of the Commission’s regulations to amend the relevant exchange-set position limit. Furthermore, the Commission is delaying implementation of exchangeset position limits on swaps since exchanges cannot view market participants’ positions in swap positions across the various places they trade, including on competitor exchanges.41 However, after the January 1, 2023 compliance date for economically equivalent swaps (discussed above), the Commission underscores that it will enforce Federal position limits in connection with swaps. For convenience, the Commission is providing a table below identifying the Final Rule’s Effective Date and compliance dates for market participants and exchanges in connection with certain obligations. BILLING CODE 6351–01–P Commission is no longer recognizing risk management exemptions as bona fide hedges under the Final Rule. 41 In two years, the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6 with respect to swaps. E:\FR\FM\14JAR2.SGM 14JAR2 VerDate Sep<11>2014 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.004</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3248 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 C. Section-by-Section Summary of Final Rule The Commission is adopting revisions to §§ 150.1, 150.2, 150.3, 150.5, and 42As noted above, under the Final Rule the Federal position limit levels for all of the nine legacy agricultural contracts will increase, other than CBOT Oats. However, the Commission notes that exchange-set position limits will remain at current levels unless and until the relevant exchange submits a rule amendment pursuant to part 40 of the Commission’s regulations to amend the relevant exchange-set position limit. 43As discussed further in this release, the Commission will no longer recognize risk management exemptions under the Final Rule. However, positions that are entered into based on a market participant’s previously-granted risk management exemptions will be subject to an extended compliance date until January 1, 2023 with respect to Federal position limits. That is, a market participant with a previously granted risk management exemption will have a compliance date of January 1, 2023 with respect to the elimination of such risk management exemption. 44Form 204 (for all nine legacy agricultural contracts other than cotton) and Parts I and II of Form 304 (for cotton) are submitted by a market VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 150.6 and to parts 1, 15, 17, 19, 40, and 140, as well as adding §§ 150.8, 150.9, and Appendices A–G to part 150.45 Most noteworthy, the Commission is adopting the following amendments to the foregoing rule sections, each of which, along with all other changes in the Final Rule, is discussed in greater detail in Section II of this release. The following summary is not intended to provide a substantive overview of this Final Rule, but rather is intended to provide a guide to the rule sections that address each topic. For an overview of this Final Rule organized by topic participant to the Commission under the existing Federal position limits regulations in connection with Federal enumerated bona fide hedges employed by the market participants. 45 The 2020 NPRM proposed to remove and reserve part 151. It did not propose to amend current § 150.4 dealing with aggregation of positions for purposes of compliance with Federal position limits, which was amended in 2016 in a prior rulemaking. See Final Aggregation Rulemaking, 81 FR at 91454. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 (rather than by section number), please see the executive summary above. • The Commission finds that Federal speculative position limits are necessary for 25 core referenced futures contracts, and for any futures contracts and options on futures contracts linked thereto. The Commission adopts Federal position limits on physically-settled and linked cash-settled futures contracts, options on futures contracts, and ‘‘economically equivalent swaps’’ for such commodities. The 25 core referenced futures contracts include the nine ‘‘legacy’’ agricultural contracts currently subject to Federal position limits and 16 additional non-legacy contracts, which include: Seven additional agricultural contracts, four energy contracts, and five metals contracts.46 Federal spot and non-spot 46 The seven additional agricultural contracts that are subject to Federal spot month limits are: CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ–A (OJ), ICE Sugar E:\FR\FM\14JAR2.SGM Continued 14JAR2 ER14JA21.005</GPH> BILLING CODE 6351–01–C 3249 3250 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 month limits apply to the nine ‘‘legacy’’ agricultural contracts currently subject to Federal position limits,47 and only Federal spot-month limits apply to the additional 16 non-legacy contracts. Outside of the spot month, these 16 non-legacy contracts are subject to exchange-set limits and/or accountability levels if listed on an exchange. • Amendments to § 150.1 add or revise several definitions for use throughout part 150, including: New definitions of the terms ‘‘core referenced futures contract’’ (pertaining to the 25 physically-settled futures contracts explicitly listed in the regulations) and ‘‘referenced contract’’ (pertaining to futures contracts and options on futures contracts that have certain direct and/or indirect linkages to the core referenced futures contracts, and to ‘‘economically equivalent swaps’’) to be used as shorthand to refer to contracts subject to Federal position limits; an expanded ‘‘spread transaction’’ definition; and a ‘‘bona fide hedging transaction or position’’ definition that is broad enough to accommodate hedging practices in a variety of contract types, including hedging practices that may develop over time. • Amendments to § 150.2 list the 25 core referenced futures contracts which, along with any associated referenced contracts, are subject to Federal position limits; and specify the Federal spot and non-spot month position limit levels. Federal spot month position limit levels are set at or below 25 percent of estimated deliverable supply, whereas Federal non-spot month limit levels are set at 10% of open interest for the first 50,000 contracts of open interest, with No. 11 (SB), and ICE Sugar No. 16 (SF). The four energy contracts that are subject to Federal spot month limits are: NYMEX Light Sweet Crude Oil (CL), NYMEX New York Harbor ULSD Heating Oil (HO), NYMEX New York Harbor RBOB Gasoline (RB), and NYMEX Henry Hub Natural Gas (NG). The five metals contracts that are subject to Federal spot month limits are: COMEX Gold (GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL). As discussed below, any contracts for which the Commission is adopting Federal position limits only during the spot month are subject to exchangeset limits and/or accountability levels outside of the spot month. 47 The Commission currently sets and enforces speculative position limits with respect to certain enumerated agricultural products. The ‘‘enumerated’’ agricultural products refer to the list of commodities contained in the definition of ‘‘commodity’’ in CEA section 1a; 7 U.S.C. 1a. These agricultural products consist of the following nine currently traded contracts: CBOT Corn (and MiniCorn) (C), CBOT Oats (O), CBOT Soybeans (and Mini-Soybeans) (S), CBOT Wheat (and Mini-Wheat) (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX HRS Wheat (MWE), CBOT KC HRW Wheat (KW), and ICE Cotton No. 2 (CT). See 17 CFR 150.2. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 an incremental increase of 2.5% of open interest thereafter. • Amendments to § 150.3 specify the types of positions for which exemptions from Federal position limit requirements may be granted, and set forth and/or reference the processes for requesting such exemptions, including recognitions of bona fide hedges and exemptions for spread positions, financial distress positions, certain natural gas positions held during the spot month, and pre-enactment and transition period swaps. For all contracts subject to Federal position limits, bona fide hedge exemptions listed in Appendix A to part 150 as an enumerated bona fide hedge are selfeffectuating for purposes of Federal position limits. For non-enumerated bona fide hedges, market participants must submit an application either directly to the Commission under § 150.3 or indirectly through an exchange for Federal position limit purposes under new § 150.9 (discussed below). • Amendments to § 150.5 refine the process, and establish non-exclusive methodologies, by which exchanges may set exchange-level limits and grant exemptions therefrom with respect to futures and options on futures, including separate methodologies for contracts subject to Federal position limits and physical commodity derivatives not subject to Federal position limits.48 While the Commission will oversee compliance with Federal position limits on swaps, the Commission has also determined to delay the enforcement of exchange-set position limits on swaps otherwise required in amended § 150.5 because exchanges cannot view market participants’ positions in swaps across the various places they trade, including on competitor exchanges.49 • New § 150.9 establishes a streamlined process for addressing requests for bona fide hedging recognitions for purposes of Federal position limits, and leveraging exchange expertise and resources. This process will be used by market participants with 48 Rule § 150.5 addresses exchange-set position limits and exemptions therefrom, whereas § 150.3 addresses exemptions from Federal position limits, and § 150.9 addresses a streamlined process for recognizing non-enumerated bona fide hedges for purposes of Federal position limits. Exchange rules typically refer to ‘‘exemptions’’ in connection with bona fide hedging and spread positions, whereas the Commission uses the nomenclature ‘‘recognition’’ with respect to bona fide hedges, and ‘‘exemption’’ with respect to spreads. 49 With respect to exchange-set position limits on swaps, in two years the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 non-enumerated bona fide hedge positions. Under the Final Rule, market participants can provide one application for a non-enumerated bona fide hedge to a DCM or SEF, as applicable, and receive approval of such request based on the same application from both the exchange for purposes of exchange-set limits and from the Commission for purposes of Federal position limits. • New Appendix A to part 150 contains a list of enumerated bona fide hedges. Positions that comply with the bona fide hedging transaction or position definition in § 150.1 and that are enumerated in Appendix A may exceed Federal position limits to the extent that all applicable requirements in part 150 are met. Persons holding such positions enumerated in Appendix A may exceed Federal position limits without being required to request prior approval under § 150.3 or § 150.9. Positions that do not fall within any of the enumerated hedges could still potentially be recognized as bona fide hedging positions, provided the positions otherwise comply with the proposed bona fide hedging definition and all other applicable requirements, including the approval process under § 150.3 or § 150.9. • Amendments to part 19 and related provisions eliminate Form 204 (and corresponding Parts I and II of Form 304 for cotton), enabling the Commission to leverage cash-market reporting submitted directly to the exchanges under §§ 150.5 and 150.9. The Final Rule maintains Part III of Form 304, related to the cotton on-call report. D. Effective Date and Compliance Period The 2020 NPRM included proposed § 150.2(e), which provided that the Federal position limit levels for the 25 core referenced futures contracts would have a compliance date 365 days after publication of the final position limits regulations in the Federal Register. Additionally, proposed § 150.3(c) provided that previously-granted risk management exemptions shall not be effective after the Final Rule’s effective date. The Commission is removing from the Final Rule the compliance date requirements in proposed §§ 150.2(e) and 150.3(c) and instead addressing the effective and compliance dates together within this Federal Register release. The Commission is making two modifications from the 2020 NPRM relating to the effective date and compliance period of the Final Rule. First, as noted above in the executive summary, the Commission is providing a general compliance date of January 1, E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 2022 for both market participants and exchanges. In contrast, the 2020 NPRM did not provide a specific date as the compliance date but rather stated 365 days after publication in the Federal Register.50 This compliance date of January 1, 2022 applies to (i) the Federal position limits set forth in Appendix E to part 150 for only the 16 non-legacy core referenced futures contracts that are subject to Federal position limits for the first time under this Final Rule, and (ii) exchange obligations under final § 150.5. This compliance date also applies to referenced contracts for any of the 16 non-legacy core referenced futures contracts (other than economically equivalent swaps, which have a separate compliance date as discussed immediately below). In contrast, the 2020 NPRM’s compliance date applied only to market participants’ compliance with the new Federal position limit levels. However, as discussed below, the Final Rule does not provide a separate compliance date for the nine legacy agricultural contracts since they are already subject to existing Federal position limits. Second, the Commission is establishing a separate compliance date of January 1, 2023 in connection with (i) economically equivalent swaps and (ii) the elimination of previously-granted risk management exemptions (i.e., market participants may continue to rely on their previously-granted risk management exemptions until January 1, 2023). As noted above, the 2020 NPRM only had a single general compliance date and did not provide a separate compliance date for economically equivalent swaps or related to previously-granted risk management exemptions. In this section, the Commission will discuss the following related issues: (i) Compliance with Federal position limits for the nine legacy agricultural contracts; (ii) compliance by exchanges with § 150.5 under the Final Rule and market participants’ related obligation to temporarily continue providing Forms 204/304 in connection with bona fide hedges; (iii) exchanges’ voluntary implementation of § 150.9 under the 50 The Commission is adopting calendar dates for compliance to provide clarity rather than the 2020 NPRM’s approach of stating that the compliance period ends 365 days after publication in the Federal Register since the Commission believes that providing a set calendar date provides greater clarity to market participants. Based on the timing of the Final Rule, the Commission believes that the January 1, 2022 general compliance date will not reduce the compliance period compared to the 2020 NPRM’s approach and may provide slightly more time prior to the commencement of the compliance period. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Final Rule; and (iv) comments received in connection with the compliance date proposed in the 2020 NPRM. i. Compliance With Federal Position Limits for the Nine Legacy Agricultural Contracts With respect to the nine legacy agricultural contracts, the Commission is not providing a compliance date with respect to the spot month and non-spot month Federal position limit levels. Accordingly, the new Federal position limit levels under the Final Rule will become effective on the Effective Date. The nine legacy agricultural contracts are currently subject to Federal position limits and will continue to be subject under the Final Rule, which, as noted above, is increasing the Federal position limit levels for the nine legacy agricultural contracts (other than CBOT Oats, which will maintain the existing Federal position limit levels). The Commission has determined not to provide a separate compliance date for the nine legacy agricultural contracts since market participants trading in these markets already are familiar with Federal position limits and have established the necessary monitoring and compliance oversight processes, in connection with these legacy contracts. With respect to exchange-set position limits, the Final Rule does not require exchanges to increase their respective exchange-set position limit levels. Rather, the Final Rule only requires that exchange-set position limits are established at a level no higher than the corresponding Federal position limits. As a result, in response to the Final Rule, an exchange may: (1) Raise its exchange-set limits to be as high as (or lower than) the corresponding Federal position limits immediately on the Effective Date or anytime thereafter; (2) implement a phase-in period where exchange-set position limits increase from existing exchange-set levels over time; or (3) not increase the exchangeset position limit levels at all, in each case as the exchange may determine appropriate for its markets. ii. Exchange Implementation of § 150.5 and Market Participants’ Obligations To Continue Providing Forms 204 and 304, as Applicable, in Connection With Federal Enumerated Bona Fide Hedges For clarity, in connection with the nine legacy agricultural contracts, market participants may avail themselves of the new enumerated bona fide hedges (e.g., anticipatory merchandising) immediately upon the Effective Date (market participants will not need to be concerned with availing themselves of bona fide hedge PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 3251 recognitions for the 16 non-legacy contracts upon the Effective Date since these contracts will have a compliance date of January 1, 2022). To the extent that market participants seek to rely on any Federal enumerated bona fide hedges, market participants must continue to provide, as applicable, the Commission with Forms 204/304, which are otherwise eliminated by the Final Rule upon the Effective Date, until the relevant exchange that lists the applicable referenced contract implements § 150.5 under the Final Rule. As discussed below, final § 150.5 governs, among other things, exchange rules and procedures, including (i) the exchange’s collection of certain cashmarket information from market participants in connection with their bona fide hedge applications for exchange-set limits and (ii) the exchange’s sharing of related information with the Commission. As discussed further below, the Final Rule predicates the elimination of Forms 204/304 on the relevant exchange’s sharing of the information with the Commission under final § 150.5 (which provides for a new process for the exchange to share data with the Commission similar to data that the Commission previously obtained through Forms 204/304 under the Federal framework existing prior to the Final Rule).51 Exchanges must implement final § 150.5 by the Final Rule’s general compliance date of January 1, 2022. iii. Exchange Implementation of § 150.9 in Connection With the Market Participants’ Applications Through Exchanges for Non-Enumerated Bona Fide Hedges for Purposes of Federal Position Limits As discussed above, the Final Rule establishes a streamlined process for market participants to apply through exchanges for non-enumerated bona fide hedges for purposes of Federal position limits. That is, a market participant may submit a single non-enumerated bona fide hedge exemption application to an exchange for purposes of both Federal and exchange-set position limits, and the Commission will review, and make a determination based on, the application that the market participant submitted to the exchange. For clarity, the Commission notes that the Final Rule does not require exchanges to participate in such process. However, if an exchange chooses to do so, the Commission is clarifying, for 51 For further discussion of the elimination of Form 204 and Parts I and II of Form 304, see Section II.H.2, infra. E:\FR\FM\14JAR2.SGM 14JAR2 3252 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 the avoidance of doubt, that the exchange may implement this streamlined process for non-enumerated bona fide hedge applications as soon as the Effective Date, or anytime thereafter (or not at all). In response to certain concerns by market participants and exchanges, discussed immediately below, the Commission believes that, to the extent an exchange chooses to participate in this streamlined application process, the implementation of § 150.9 soon after the Effective Date may help ensure minimal disruption to market participants’ existing trading strategies as well as avoid having the potentially unfeasible situation of requiring the exchanges to process a number of non-enumerated bona fide hedge applications simultaneously at the end of the general compliance period on January 1, 2022. Furthermore, the Commission clarifies in Section II.G.3.iii that market participants with existing Commission-granted nonenumerated or anticipatory bona fide hedge recognitions in connection with the nine legacy agricultural contracts under the existing framework are not required to reapply to the Commission for a new recognition under the Final Rule. iv. Comments—Compliance Period Generally, commenters supported the proposed compliance date, noting that an adequate compliance period would afford sufficient time to make necessary business adjustments (e.g., time to build compliance systems, develop technology, train personnel, etc.).52 The Commission agrees with these observations and believes that a general compliance date of January 1, 2022, except for economically equivalent swaps and positions based on a previously-granted risk management exemption, will provide exchanges and market participants sufficient time to adjust their operations and compliance and monitoring systems. Some commenters also requested an extended compliance date (beyond the general compliance date) for economically equivalent swaps to mitigate the numerous legal, operational, and compliance challenges of implementing position limits for swaps for the first time.53 Unlike exchange-listed contracts that are currently subject to either Federal position limits or exchange-set limits, commenters noted that exchanges do not have existing compliance and 52 CME Group at 8; FIA at 2–3; ISDA at 2, 8; Shell at 4; and SIFMA AMG at 2, 9–10. 53 MFA/AIMA at 8; NCFC at 6; NGSA at 15–16; SIFMA AMG at 9–10; and Citadel at 9–10. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 monitoring resources for economically equivalent swaps from which to leverage. The Commission agrees with commenters that additional time for economically equivalent swaps is warranted, and, as discussed above, is thus delaying the compliance date for economically equivalent swaps for an additional year, until January 1, 2023. CME Group expressed concern that it may receive an influx of exemption applications at the end of the compliance period, and therefore suggested a rolling process where market participants are grandfathered into their current exemptions, permitting them to file for those exemptions on the same annual schedule.54 The Commission believes this concern is mitigated since exchanges, at their discretion, may implement final § 150.9 as soon as the Effective Date, which will allow exchanges to review non-enumerated bona fide hedge applications on a rolling basis between the Effective Date and the end of the compliance period rather than having to process a large number of applications at once. Furthermore, as noted above, market participants with existing Commissiongranted non-enumerated or anticipatory bona fide hedge recognitions are not required to reapply to the Commission for a new recognition under the Final Rule. E. The Commission Construes CEA Section 4a(a) To Require the Commission To Make a Necessity Finding Before Establishing Position Limits for Physical Commodities Other Than Excluded Commodities The Commission is required by ISDA to determine whether CEA section 4a(a)(2)(A) requires the Commission to find, before establishing a position limit, that such limit is ‘‘necessary.’’ 55 The provision states in relevant part that ‘‘the Commission shall’’ establish position limits ‘‘as appropriate’’ for futures contracts in physical commodities other than excluded commodities ‘‘[i]n accordance with the standards set forth in’’ the preexisting section 4a(a)(1).56 That preexisting provision requires the Commission to establish position limits as it ‘‘finds are necessary to diminish, eliminate, or prevent’’ certain enumerated burdens on interstate commerce.57 In the 2011 Final Rulemaking, the Commission interpreted this language as an unambiguous mandate to establish Group at 8. 887 F.Supp.2d at 281. 56 7 U.S.C. 6a(a)(2)(A). 57 7 U.S.C. 6a(a)(1). position limits without first finding that such limits are necessary, but with discretion to determine the ‘‘appropriate’’ levels for each.58 In ISDA, the U.S. District Court for the District of Columbia disagreed and held that section 4a(a)(2)(A) is ambiguous as to whether the ‘‘standards set forth in paragraph (1)’’ include the requirement of an antecedent finding that a position limit is necessary.59 The court vacated the 2011 Final Rulemaking and directed the Commission to apply its experience and expertise to resolve that ambiguity.60 The Commission has done so and determines that section 4a(a)(2)(A) should be interpreted to require that before establishing position limits, the Commission must determine that limits are necessary.61 A full legal analysis is set forth infra at Sections III.C.–E. The Commission finds that position limits are necessary for the 25 core referenced futures contracts, including certain commodity derivative contracts that are directly or indirectly linked to a core referenced futures contract. The Commission’s finding with respect to the 25 core referenced futures contracts is based on two interrelated factors: The particular importance of the 25 core referenced futures contracts to their respective underlying cash markets, including that they require physical delivery of the underlying commodity, and, the commodities’ particular importance to the national economy. Separately, the Commission finds that position limits are necessary during the spot month for all 25 core referenced futures contracts and outside of the spot month only for the nine legacy agricultural commodity contracts (in each instance including certain commodity derivative contracts that are directly or indirectly linked to a core referenced futures contract). A full discussion of the necessity findings is set forth infra at Sections III.C.–E. F. The Commission’s Use of Certain Terminology The Commission is aware that this Final Rule will likely be reviewed by a diverse range of members of the public from varied backgrounds and industries and with different levels of knowledge and experience with derivatives markets. Furthermore, even among experienced market participants, terminology may differ by industry, commodity, or exchange. The Commission also recognizes that certain 54 CME 58 76 55 ISDA, 59 ISDA, PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 FR at 71626, 71627. 887 F.Supp.2d at 279–280. 60 Id. at 281. 61 See infra Section III.B. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations terms commonly referenced by market participants may differ from the technical legal terms used in the Commission’s regulations and/or the CEA. Accordingly, unless otherwise noted, the Commission will attempt to use terms and phrases in their ordinary, plain English sense. When required, the Commission will explicitly identify technical or nuanced legal/regulatory or industry ‘‘terms of art.’’ The Commission wishes to briefly review certain terms and phrases used throughout this release below, as follows: • Bona fide hedges. The CEA uses the legal term ‘‘bona fide hedging transaction or position’’ in both the singular and plural. The Commission currently defines the term in existing § 1.3 in the plural as ‘‘bona fide hedging transactions or positions’’ while the Final Rule now incorporates the singular ‘‘bona fide hedging transaction or position.’’ The Commission understands that most market participants simply refer to ‘‘bona fide hedge(s)’’ (in both the singular and the plural). Accordingly, for short hand throughout this release, the Commission may refer to ‘‘bona fide hedges,’’ ‘‘bona fide hedge positions,’’ ‘‘bona fide hedge transactions,’’ ‘‘bona fide hedges,’’ ‘‘bona fide hedging positions,’’ and similar phrasing. These terms are meant to apply as short hand and are not intended to imply a substantive difference either with the defined legal term ‘‘bona fide hedging transaction or position’’ or with one another. Similarly, the plural term in the existing Commission regulations and the singular in the Final Rule, as discussed below, are not intended to reflect a substantive difference. • Federal position limits. The Final Rule creates a new defined term, ‘‘speculative position limit,’’ in part 150 of the Commission’s regulations to refer to the maximum position, net long or net short, that a market participant may maintain in a referenced contract. Throughout this release, the Commission will use as a general term either ‘‘position limits’’ or ‘‘Federal position limits’’ to refer to the general Federal position limits framework and related regulations, including the defined term ‘‘speculative position limit.’’ When discussing the individual ‘‘speculative position limit’’ levels for each commodity derivative contract, as opposed to the Final Rule’s general Federal regulatory framework, the Commission instead may refer to the ‘‘Federal position limit levels,’’ although all these phrases are intended to refer to VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 the same general concept. The Commission may also specifically refer to exchange-set position limits when referring to the general framework, process, or specific position limit levels established by the respective exchanges. • Exchanges. This Final Rule applies to both DCMs and SEFs. Unless otherwise distinguished, the Commission will refer to ‘‘exchanges’’ throughout this release to refer to any relevant DCM or SEF. • Cash-Settled and Physically-Settled. The Commission throughout this release refers to ‘‘cash-settled’’ and ‘‘physicallysettled’’ commodity derivative contracts. When a futures contract expires, all open futures contract positions in such contract are settled by either: (1) Physical delivery, which the Commission refers to as a ‘‘physicallysettled’’ contract, or (2) cash settlement, which the Commission refers to as a ‘‘cash-settled’’ contract, in each case depending on the contract terms set by the exchange. Deliveries on ‘‘physicallysettled’’ futures contracts are made through the exchange’s clearinghouse, and the delivery of the physical commodity must be consummated between the buyer and seller per the exchange rules and contract specifications. On the other hand, other futures contracts are ‘‘cash-settled’’ because they do not involve the transfer of physical commodity ownership and require that all open positions at expiration be settled by a transfer of cash to or from the clearinghouse based upon the final settlement price of the contracts. The Commission further notes that some market participants may instead use the terms ‘‘physical-delivery’’ contracts or ‘‘financially-settled’’ contracts instead of the Commission’s terms ‘‘physically-settled’’ contracts and ‘‘cash-settled’’ contracts, respectively. The Commission does not intend a substantive difference in meaning with the choice of its terms. • Spread Positions. The Commission views its use of the term ‘‘spread’’ to mean the same as ‘‘arbitrage’’ or ‘‘straddle’’ as those terms are used in CEA section 4a(a) and existing § 150.3(a)(3) of the Commission’s regulations. Consistent with existing regulations, the Commission’s sole use of the term ‘‘spread’’ in this Final Rule is intended to also capture arbitrage or straddle strategies referred to in CEA section 4a(a) and existing § 150.3(a)(3), and referring to ‘‘spread’’ rather than ‘‘arbitrage’’ or ‘‘straddle’’ is not intended to be a substantive difference. The Commission notes that certain exchanges may distinguish between PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 3253 ‘‘spread’’ and ‘‘arbitrage’’ positions for purposes of exchange exemptions, but the Commission does not make that distinction here for purposes of its ‘‘spread transaction’’ definition as used in this release. • Unfixed Price Forward Transactions. Throughout this release, the Commission will use as general terms either ‘‘unfixed price forward transactions,’’ ‘‘unfixed price transactions,’’ ‘‘unfixed price forward contracts,’’ and/or ‘‘unfixed price contracts’’ to refer to transactions that are either purchases or sales of a cash commodity where the purchase or sales price, as applicable, is determined based on the settlement price of a benchmark, such as the settlement price of a commodity derivative contract on a certain date (e.g., the price on the settlement date of a core referenced futures contract) or other index price (e.g., a spot index price). Market participants may also refer to unfixed price transactions as ‘‘floating price’’ transactions, and the Commission does not intend a substantive difference in meaning with the choice of these terms. G. Recent Volatility in the WTI Contract Several commenters noted the volatility in the NYMEX Light Sweet Crude Oil (CL) contract, also known as the West Texas Intermediate crude oil contract (‘‘WTI contract’’), that occurred in April 2020 (subsequent to the issuance of the 2020 NPRM) in their comments to the 2020 NPRM. Some commenters suggested that the volatility may have been caused, in part, by excessive speculation 62 or highly leveraged traders,63 or both. Better Markets suggested that a combination of passive exchange-traded funds,64 the use of trading-at-settlement (‘‘TAS’’) orders,65 automated trading,66 and, according to Better Markets, a lack of ‘‘meaningful position limits,’’ 67 may have contributed to the volatility. Other commenters suggested that this event could have been mitigated through additional liquidity provided by financial end users during the critical 62 PMAA at 2. at 3–4. 64 Better Markets at 9. 65 Better Markets at 13. A TAS order is an order that is placed during the trading session but is executed at the settlement price (or with a small price range around the settlement price). Trading at Settlement (TAS), https://www.cmegroup.com/ trading/trading-at-settlement.html (last visited Aug. 29, 2020); TRADE AT SETTLEMENT (TAS) FREQUENTLY ASKED QUESTIONS July 2020, https://www.theice.com/publicdocs/futures_us/ TAS_FAQ.pdf (last visited Aug. 29, 2020). 66 Better Markets at 14–17. 67 Better Markets at 10. 63 NEFI E:\FR\FM\14JAR2.SGM 14JAR2 3254 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations time period, among other measures.68 Commenters also pointed to the event to bolster arguments for and against Commission deference to exchanges in implementing position limits.69 A few commenters requested that the Commission refrain from finalizing the rule until it better understands this event and other issues.70 The Commission has been closely examining the circumstances surrounding the volatility in the WTI contract since it occurred in April 2020. The Commission will continue to analyze the events of April 2020 to evaluate whether any changes to the position limits regulations may be warranted in light of the circumstances surrounding the volatility in the WTI contract. Any proposed changes that the Commission finds may be warranted would be subject to public comment pursuant to the requirements of the Administrative Procedure Act. H. Brief Summary of Comments Received khammond on DSKJM1Z7X2PROD with RULES2 As stated previously, the Commission received approximately 75 relevant comment letters in response to the 2020 NPRM.71 Though several commenters did not support the Commission adopting the 2020 NPRM and requested its withdrawal,72 most of the 75 comments received generally supported the 2020 NPRM, or supported specific elements of the 2020 NPRM. However, many of these commenters suggested 68 AQR at 5–7 (‘‘The inability of position limits themselves to eliminate the unpredictability of commodity futures markets highlights the importance of existing Commission and exchange oversight of these markets and the dangers of overreliance on a single regulatory tool to address market dynamics for which it may not have been designed . . . [W]e encourage the Commission to consider not only concerns around potential manipulation, but also the potential unintended consequences of such limits and the need for liquidity during sensitive time periods for commodity futures markets.’’); SCM at 2–3 (‘‘This liquidity, provided by financial trading firms and hedge funds . . ., is essential to balance, check and smooth the otherwise uncontrollable trading that can occur when only commercial firms and unsophisticated trading participants are active in a market.’’). 69 IATP suggested that the event demonstrates the problems of Commission deference to DCMs’ ‘‘experience and capacity’’ on many of the provisions in the 2020 NPRM. See IATP at 18. Conversely, SEMI stated that a final rule should not be overly restrictive in response to the recent market conditions in WTI oil markets, given that it is the exchanges that ‘‘have the expertise, experience and existing tools to effectively manage the orderly expiration of futures contracts that are in the spot month under such circumstances.’’ SEMI at 13. 70 AFR at 3; Rutkowski at 2; IATP at 2–3. 71 See supra, n.16. 72 E.g. AFR; Better Markets; IATP; Eric Matsen; NEFI; Public Citizen; Robert Rutkowski; SCM; and VLM. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 modifications to portions of the 2020 NPRM, which are discussed in the relevant sections discussing the Final Rule below. In addition, several commenters requested Commission action beyond the scope of the 2020 NPRM, also discussed in the relevant sections below. II. Final Rule A. § 150.1—Definitions Definitions relevant to the existing position limits regime currently appear in both §§ 1.3 and 150.1 of the Commission’s regulations.73 The Commission proposed to update and supplement the definitions in § 150.1, including moving a revised definition of ‘‘bona fide hedging transactions and positions’’ from § 1.3 into § 150.1. The proposed changes were intended, among other things, to conform the definitions to certain of the Dodd-Frank Act amendments to the CEA.74 Each proposed defined term is discussed in alphabetical order below. 1. ‘‘Bona Fide Hedging Transaction or Position’’ i. Background—Bona Fide Hedging Transaction or Position Under CEA section 4a(c)(1), position limits shall not apply to transactions or positions that are shown to be bona fide hedging transactions or positions, as such terms shall be defined by the Commission.75 The Dodd-Frank Act directed the Commission, for purposes of implementing CEA section 4a(a)(2), to adopt a bona fide hedging definition consistent with CEA section 4a(c)(2).76 The existing definition of ‘‘bona fide hedging transactions and positions,’’ which first appeared in § 1.3 of the Commission’s regulations in the 1970s,77 is inconsistent, in certain ways 73 17 CFR 1.3 and 150.1, respectively. addition to the amendments described below, the Commission proposed to re-order the defined terms so that they appear in alphabetical order, rather than in a lettered list, so that terms can be more quickly located. Moving forward, any new defined terms would be inserted in alphabetical order, as recommended by the Office of the Federal Register. See Document Drafting Handbook, Office of the Federal Register, National Archives and Records Administration, 2–31 (Revision 5, Oct. 2, 2017) (stating, ‘‘[i]n sections or paragraphs containing only definitions, we recommend that you do not use paragraph designations if you list the terms in alphabetical order. Begin the definition paragraph with the term that you are defining.’’). 75 7 U.S.C. 6a(c)(1). 76 7 U.S.C. 6a(c)(2). 77 See, e.g., Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748 (Aug. 24, 1977). Previously, the Secretary of Agriculture, pursuant to section 404 of the Commodity Futures Trading Commission Act of 1974 (Pub. L. 93–463), promulgated a definition of bona fide hedging transactions and positions. Hedging Definition, 74 In PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 described below, with the revised statutory definition in CEA section 4a(c)(2). Accordingly, and for the reasons outlined below, the Commission proposed to remove the existing bona fide hedging definition from § 1.3 and replace it with a revised bona fide hedging definition that would appear alongside all of the other position limits related definitions in proposed § 150.1.78 This definition would be applied in determining whether a position in a commodity derivative contract is a bona fide hedge that may exceed Federal position limits set forth in § 150.2. This section of the release discusses the bona fide hedging definition and the substantive standards for bona fide hedges. The process for granting bona fide hedge recognitions is discussed later in this release in connection with §§ 150.3 and 150.9.79 The discussion in this section is organized as follows: i. This background section discussion; Reports, and Conforming Amendments, 40 FR 11560 (Mar. 12, 1975). That definition, largely reflecting the statutory definition previously in effect, remained in effect until the newlyestablished Commission defined that term. Id. 78 In a 2018 rulemaking, the Commission amended § 1.3 to replace the sub-paragraphs that had for years been identified with an alphabetic designation for each defined term with an alphabetized list. See Definitions, 83 FR 7979 (Feb. 23, 2018). The bona fide hedging definition, therefore, is now a paragraph, located in alphabetical order, in § 1.3, rather than in § 1.3(z). Accordingly, for purposes of clarity and ease of discussion, when discussing the Commission’s existing version of the bona fide hedging definition, this release will refer to the bona fide hedging definition in § 1.3. Further, the version of § 1.3 that appears in the Code of Federal Regulations applies only to excluded commodities and is not the version of the bona fide hedging definition currently in effect. The version currently in effect, the substance of which remains as it was amended in 1987, applies to all commodities, not just to excluded commodities. See Revision of Federal Speculative Position Limits, 52 FR 38914 (Oct. 20, 1987). While the 2011 Final Rulemaking amended the § 1.3 bona fide hedging definition to apply only to excluded commodities, that rulemaking was vacated, as noted previously, by a September 28, 2012 order of the U.S. District Court for the District of Columbia, with the exception of the rule’s amendments to 17 CFR 150.2. Although the 2011 Final Rulemaking was vacated, the 2011 version of the bona fide hedging definition in § 1.3, which applied only to excluded commodities, has not yet been formally removed from the Code of Federal Regulations. The currently-in-effect version of the Commission’s bona fide hedging definition thus does not currently appear in the Code of Federal Regulations. The closest to a ‘‘current’’ version of the definition is the 2010 version of § 1.3, which, while substantively current, still includes the ‘‘(z)’’ denomination that was removed in 2018. The Commission proposed to address the need to formally remove the incorrect version of the bona fide hedging definition as part of the 2020 NPRM. 79 See infra Section II.C. (discussing § 150.3) and Section II.G. (discussing § 150.9). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ii. An overview of the existing ‘‘general’’ elements of the bona fide hedging definition and the specific ‘‘enumerated’’ bona fide hedges listed in the existing bona fide hedge definition; iii. A discussion of each of the elements of the existing ‘‘general’’ bona fide hedging definition, including the (a) temporary substitute test (and the related elimination of the risk management exemption), (b) economically appropriate test, (c) change in value requirement, (d) incidental test, and (e) orderly trading requirement; iv. The treatment of unfixed-price transactions under the Final Rule; v. A discussion of each enumerated bona fide hedge in the Final Rule; vi. A discussion of the elimination of the Five-Day Rule; vii. A discussion of the guidance on measuring risk (i.e., gross versus net hedging); viii. A discussion of the Final Rule’s implementation of the CEA’s statutory pass-through swap and pass-through swap offset provisions; and ix. A discussion of the form, location, and organization of the enumerated bona fide hedges. khammond on DSKJM1Z7X2PROD with RULES2 ii. Overview of the Commission’s Existing Bona Fide Hedging Definition in § 1.3 Paragraph (1) of the existing bona fide hedging definition in Commission regulation § 1.3 contains what is currently labeled the ‘‘general definition’’ of bona fide hedging. This ‘‘general’’ bona fide hedging definition comprises five key elements which require that in order for a position to be deemed a bona fide hedge for Federal position limits, the position must: • ‘‘normally’’ represent a substitute for transactions to be made or positions to be taken at a later time in a physical marketing channel (‘‘temporary substitute test’’); • be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise (‘‘economically appropriate test’’); • arise from the potential change in value of (1) assets which a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising, (2) liabilities which a person owns or anticipates incurring, or (3) services which a person provides, purchases, or anticipates providing or purchasing (‘‘change in value requirement’’); • have a purpose to offset price risks incidental to commercial cash or spot operations (‘‘incidental test’’); and VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 • be established and liquidated in an orderly manner (‘‘orderly trading requirement’’).80 As discussed more fully below, the Dodd-Frank Act’s amendments to the CEA included the first three factors in the amended CEA, but did not include the last two factors. Additionally, paragraph (2) of the bona fide hedging definition in existing § 1.3 currently sets forth a non-exclusive list of seven total enumerated bona fide hedges, contained in four general bona fide hedging transaction categories, that comply with the general bona fide hedging definition in paragraph (1). These bona fide hedge categories that are explicitly listed in existing § 1.3’s bona fide hedging definition are generally referred to as the ‘‘enumerated’’ bona fide hedges, a term the Commission uses throughout in this release. Market participants thus need not seek approval from the Commission of such positions as bona fide hedges prior to exceeding limits for such positions. Rather, market participants must simply report any such positions on the monthly Form 204 (or Form 304 for cotton), as required by part 19 of the Commission’s existing regulations.81 The seven existing enumerated hedges fall into the following four categories: (1) Sales of futures contracts to hedge (i) ownership or fixed-price cash commodity purchases and (ii) unsold anticipated production; (2) purchases of futures contracts to hedge (i) fixed-price cash commodity sales of the same commodity, (ii) fixed-price sales of the cash commodity’s cash products and by-products, and (iii) unfilled anticipated requirements; (3) offsetting sales and purchases of futures contracts to hedge offsetting unfixedprice cash commodity sales and purchases; and (4) cross-commodity hedges.82 As discussed further below, market participants may not use either the existing enumerated bona fide hedges for unsold anticipated production or unfilled anticipated requirements to hedge more than twelve-months’ unsold production or unfilled requirements, respectively (the ‘‘twelve-month restriction’’). Further, the existing enumerated bona fide hedges for unsold production and for offsetting sales and purchases of unfixed price transactions do not apply during the five last trading days. Similarly, the existing enumerated bona fide hedge for unfilled anticipated requirements has a modified version of the Five-Day Rule and provides that 80 17 CFR 1.3. CFR part 19. 82 17 CFR 1.3. 81 17 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 3255 during the ‘‘five last trading days’’ a market participant may not maintain a position that exceeds the market participant’s unfilled anticipated requirement for ‘‘that month and for the next succeeding month.’’ Paragraph (3) of the current bona fide hedging definition states that the Commission may recognize ‘‘nonenumerated’’ bona fide hedging transactions and positions pursuant to a specific request by a market participant using the process described in § 1.47 of the Commission’s regulations.83 iii. Amended Bona Fide Hedge Definition for Physical Commodities in § 150.1; ‘‘General’’ Elements of the Bona Fide Hedge Definition Under the Final Rule The Commission is adopting the proposed general elements currently found in the bona fide hedging definition in § 1.3 that conform to the revised statutory bona fide hedging definition in CEA section 4a(c)(2), as amended by the Dodd-Frank Act, and is eliminating the general elements that do not conform.84 In particular, the Commission is adopting updated versions of the temporary substitute test, economically appropriate test, and change in value requirements that are described below, and eliminating the incidental test and orderly trading requirement, which are not included in the revised statutory text. Each of these changes is discussed in more detail below.85 a. Temporary Substitute Test (1) Background—Temporary Substitute Test The language of the temporary substitute test in the Commission’s existing bona fide hedging definition is inconsistent with the language of the temporary substitute test that appears in the CEA, as amended by the Dodd-Frank Act. Specifically, the Commission’s existing regulatory definition currently provides that a bona fide hedging 83 Id. 84 The Commission is also making a nonsubstantive change to the introductory language of § 150.3 by referring in the proviso to ‘‘such person’s transactions or positions.’’ The Commission views this as a clarifying edit, and does not intend a substantive difference in meaning with the choice of these terms. 85 Bona fide hedge recognition is determined based on the particular circumstances of a position or transaction and is not conferred on the basis of the involved market participant alone. Accordingly, while a particular position may qualify as a bona fide hedge for a given market participant, another position held by that same participant may not. Similarly, if a participant holds positions that are recognized as bona fide hedges, and holds other positions that are speculative, only the speculative positions would be subject to position limits. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3256 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations position normally represents a substitute for transactions to be made or positions to be taken at a later time in a physical marketing channel.86 Prior to the enactment of the Dodd-Frank Act, the temporary substitute test in section 4a(c)(2)(A)(i) of the CEA also contained the word ‘‘normally,’’ so that the Commission’s existing bona fide hedging definition mirrored the previous section 4a(c)(2)(A)(i) of the CEA prior to the Dodd-Frank Act. The word ‘‘normally’’ acted as a qualifier for the instances in which a position must be a temporary substitute for transactions or positions made at a later time in a physical marketing channel. However, the Dodd-Frank Act removed that qualifier by deleting the word ‘‘normally’’ from the temporary substitute test in CEA section 4a(c)(2)(A)(i).87 In a 1987 interpretation, the Commission stated that, among other things, the inclusion of the word ‘‘normally’’ in connection with the preDodd-Frank-Act version of the temporary substitute language indicated that the bona fide hedging definition should not be construed to apply only to firms using futures to reduce their exposures to risks in the cash market.88 Instead, the 1987 interpretation took the view that to qualify as a bona fide hedge, a transaction in the futures market did not necessarily need to be a temporary substitute for a later transaction in the cash market.89 In other words, that interpretation took the view that a futures position could still qualify as a bona fide hedging position even if it was not in connection with the production, sale, or use of a physical commodity. Commission staff has previously granted so-called ‘‘risk management exemptions’’ on such grounds. In connection with physical commodities, the phrase ‘‘risk management exemption’’ has historically been used by Commission staff to refer to nonenumerated bona fide hedge recognitions granted under § 1.47 to allow swap dealers and others to hold agricultural futures positions in excess of Federal position limits in order to offset their positions in commodity index swaps or related exposure.90 Risk management exemptions were granted outside of the spot month, and the related swap exposure that was being offset (i.e., hedged by the futures or options position entered into based on the risk management exemption) was typically opposite an institutional investor for which the swap was not a bona fide hedge. 86 17 CFR 1.3. As noted earlier in this release, the currently-in-effect version of the Commission’s bona fide hedging definition does not currently appear in the current Code of Federal Regulations. The closest to a ‘‘current’’ version of the definition is the 2010 version of § 1.3, which, while substantively current, still includes the ‘‘(z)’’ denomination that was removed in 2018. The Commission proposed to address the need to formally remove the incorrect version of the bona fide hedging definition as part of the 2020 NPRM. See supra n.74. 87 7 U.S.C. 6a(c)(2)(A)(i). 88 See Clarification of Certain Aspects of the Hedging Definition, 52 FR 27195, 27196 (July 20, 1987). 89 Id. 90 As described below, due to differences in statutory language, the phrase ‘‘risk management exemption’’ often has a broader meaning in connection with excluded commodities than with physical commodities. See infra Section II.A.1.x. (discussing proposed pass-through language). 91 85 FR at 11596. 92 7 U.S.C. 6a(c)(2)(B). 93 See final § 150.3(c). See also infra Section II.A.1.x.b. (discussing proposed pass-through language). Excluded commodities, as described in further detail below, are not subject to the statutory bona fide hedging definition. Accordingly, the statutory restrictions on risk management exemptions that apply to physical commodities subject to Federal position limits do not apply to excluded commodities. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (2) Summary of the 2020 NPRM— Temporary Substitute Test As described above, the Dodd-Frank Act clearly and unambiguously removed the word ‘‘normally’’ from the temporary substitute test in CEA section 4a(c)(2)(A)(i), as amended by the DoddFrank Act. As such, in the 2020 NPRM, the Commission interpreted the DoddFrank Act’s removal of the word ‘‘normally’’ as reflecting Congressional statutory direction that a bona fide hedging position in physical commodities must always (and not just ‘‘normally’’) be in connection with the production, sale, or use of a physical cash-market commodity.91 The Commission interpreted this change to signal that the Commission should cease to recognize ‘‘risk management’’ positions as bona fide hedges for physical commodities, unless the positions satisfy the pass-through swap/ swap offset requirements in section 4a(c)(2)(B) of the CEA, further discussed below.92 In order to implement that statutory change, the Commission: (1) Proposed a narrower bona fide hedging definition for physical commodities in proposed § 150.1 that did not include the word ‘‘normally’’ currently found in the temporary substitute regulatory language in paragraph (1) of the existing § 1.3 bona fide hedging definition; and (2) proposed to eliminate all previouslygranted risk management exemptions that did not otherwise qualify for passthrough treatment.93 Under the 2020 NPRM, any such previously-granted risk PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 management exemption would generally no longer apply 365 days after publication of final position limits rules in the Federal Register.94 (3) Summary of the Commission Determination—Temporary Substitute Test As proposed, the Final Rule eliminates the word ‘‘normally’’ from the Commission’s temporary substitute test and eliminates the risk management exemption for contracts subject to Federal position limits. However, as described below, the Final Rule is extending the compliance date for existing risk management exemption holders. (4) Comments—Temporary Substitute Test Commenters were divided regarding the proposed elimination of the risk management exemptions. Some public interest groups and the agricultural industry supported the proposed removal of the word ‘‘normally’’ and/or the accompanying rescission of risk management exemptions.95 These commenters argued that risk management positions are harmful to the market and can adversely impact price dynamics.96 Commenters from the financial industry, ICE, and MGEX opposed the proposed removal of ‘‘normally’’ and/or the proposed elimination of the risk management exemption.97 These commenters contended that the elimination of the risk management 94 See infra Section II.A.1.iii.a(5) (discussing of revoking existing risk management exemptions). 95 AMCOT at 1; Ecom at 1; White Gold at 1–2; Walcot at 2; East Cotton at 2; CMC at 11 (stating that the increased limits and allowances for passthrough exemptions will limit any potential loss of liquidity); NCFC at 7 (noting that it supports the elimination in light of the increased limits); NGFA at 3; LDC at 2; PMAA at 4; ACSA at 2, 4; IMC at 2; Mallory at 1; McMeekin at 1–2; Memtex at 2; Omnicotton at 2; NCC at 1; S Canale Cotton at 2; Texas Cotton at 2; SW Ag at 2; Jess Smith at 2; Choice Cotton at 1; Olam at 1–2; Better Markets at 4, 51–54 (agreeing with the proposed interpretation that the Dodd-Frank Act requires the change and stating that the elimination of the risk management exemption may mean very little in light of the increased limits); ACA at 2; Moody Compress at 2; Toyo at 2; and DECA at 1. 96 See, e.g., Mallory Alexander at 1; DECA at 1; Ecom at 2; Southern Cotton at 2; Canale Cotton at 2; ACA at 2; IMC at 2; Olam at 1–2; Moody Compress at 1; SW Ag at 2; East Cotton at 2; Toyo at 2; Jess Smith at 2; McMeekin at 1–2; Omnicotton at 2; Texas Cotton at 2; Walcot at 2; White Gold at 1–2; and PMAA at 3–4 (arguing that risk management positions have the potential to create significant volatility); Better Markets at 9, 17 (noting the distortive effects of risk management positions). 97 ICE at 5–8 (noting that risk management positions are non-speculative and arguing that the pass-through provision is not an adequate substitute for such positions); FIA at 10, 21–24; ISDA at 6; PIMCO at 5–6; SIFMA AMG at 8; MGEX at 2. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations exemption will harm the market, including by reducing liquidity,98 and that even though Congress removed ‘‘normally’’ from the statute, Congress did not use the term ‘‘always.’’ 99 One commenter opposed to the ban claimed that the European Commission is considering revising MiFID II 100 to address a ‘‘failure to include an appropriate hedge exemption for financial risks.’’ 101 Finally, several commenters noted that even if the Commission finalizes the ban as proposed, the Commission should: (i) Revoke the exemptions gradually so as to avoid disruption; 102 (ii) clarify that the Commission maintains the authority under CEA section 4a(a)(7) to grant risk management exemptions in the future; 103 and (iii) allow exchanges to grant risk management exemptions.104 khammond on DSKJM1Z7X2PROD with RULES2 (5) Discussion of Final Rule— Temporary Substitute Test The Commission is eliminating the word ‘‘normally’’ from the Commission’s temporary substitute test and eliminating the existing risk management exemption for contracts subject to Federal position limits as proposed. However, as described below, the Commission is extending the 98 FIA at 23–24 (contending that the 2020 NPRM may harm pension funds and create a bifurcated liquidity pool since dealers may need to move their hedges from physically-settled to financially-settled contracts earlier than they would otherwise); ISDA at 6, 11; PIMCO at 5–6; and ICE at 5–6. 99 ISDA at 6; FIA at 21–22; and ICE at 5, 8. 100 According to the European Securities and Market Authority, ‘‘MiFID is the Markets in Financial Instruments Directive (2004/39/EC). It has been applicable across the European Union since November 2007. It is a cornerstone of the EU’s regulation of financial markets seeking to improve their competitiveness by creating a single market for investment services and activities and to ensure a high degree of harmonised protection for investors in financial instruments.’’ MiFID sets out: conduct of business and organisational requirements for investment firms; authorisation requirements for regulated markets; regulatory reporting to avoid market abuse; trade transparency obligation for shares; and rules on the admission of financial instruments to trading.’’ ‘‘On 20 October 2011, the European Commission adopted a legislative proposal for the revision of MiFID which took the form of a revised Directive and a new Regulation. After more than two years of debate, the Directive on Markets in Financial Instruments repealing Directive 2004/39/EC and the Regulation on Markets in Financial Instruments, commonly referred to as MiFID II and MiFIR, were adopted by the European Parliament and the Council of the European Union. They were published in the EU Official Journal on 12 June 2014.’’ European Securities and Market Authority website at https://www.esma.europa.eu/policyrules/mifid-ii-and-mifir. 101 SIFMA AMG at 8. 102 ISDA at 7. 103 ICE at 6; FIA at 3, 22, 24; ISDA at 6–7; and IECA at 12. 104 FIA at 3, 22; ISDA at 6–7; and ICE at 5–6. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 compliance date by which positions based on existing risk management exemptions must be reduced to levels that comply with the applicable Federal position limits. While the Commission appreciates commenter concerns regarding the elimination of the risk management exemption, the Commission interprets the Dodd-Frank Act’s removal of the word ‘‘normally’’ from the CEA’s statutory temporary substitute test as signaling Congressional intent to reverse the flexibility afforded by the presence of the word ‘‘normally’’ prior to the DoddFrank Act. As such, even were the Commission inclined to retain the status quo of risk management exemptions, the Commission’s statutory interpretation prevents it from doing so. Further, retaining such exemptions for swap intermediaries, without regard to the purpose of their counterparties’ swaps, would not only be inconsistent with the post-Dodd-Frank Act version of the temporary substitute test, but would also be inconsistent with the statutory restrictions on pass-through swap offsets. In particular, the statutory passthrough provision requires that the swap position being offset qualify as a bona fide hedging position.105 Many risk management exemptions have been used to offset swap positions that would not qualify as bona fide hedging positions. In response to the comment regarding a potential expansion of MiFID II to accommodate activity akin to risk management exemptions, the Commission believes that the European Commission’s stated posture does not appear to contemplate a blanket exemption for financial risks as suggested by the commenter. Instead, the European Commission’s approach appears to be largely consistent with the narrower pass-through approach adopted by the Commission in this Final Rule.106 105 See 7 U.S.C. 6a(c)(2)(B)(i) (was executed opposite a counterparty for which the transaction would qualify as a bona fide hedging transaction). The pass-through swap offset language in the Final Rule’s bona fide hedging definition is discussed in greater detail below. 106 See MiFID II Review report on position limits and position management (April 1, 2020), available at https://www.esma.europa.eu/sites/default/files/ library/esma70-156-2311_mifid_ii_review_report_ position_limits.pdf. The exemption under consideration for financial counterparties appears to be in line with the Final Rule’s pass-through provision, in that the ‘‘exemption would apply to the positions held by that financial counterparty that are objectively measurable as reducing risks directly related to the commercial activities of the non-financial entities of the group . . . . this hedging exemption should not be considered as an additional exemption to the position limit regime but rather as a ‘transfer’ to the financial counterparty of the group of the hedging exemption PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 3257 The Commission is, however, making several changes and clarifications to address commenter concerns: First, the Commission is extending the compliance date by which risk management exemption holders must reduce their risk management exemption positions to comply with Federal position limits under the Final Rule to January 1, 2023.107 This provides approximately two years beyond the Effective Date for the nine legacy agricultural contracts.108 The Commission believes that this will provide sufficient time for existing positions to roll off and/or be replaced with positions that conform with the Federal position limits adopted in this Final Rule, without adversely affecting market liquidity. Second, including pass-through swaps and pass-through swap offsets within the definition of a bona fide hedge will mitigate some of the potential impact resulting from the rescission of the risk management exemption. The Final Rule’s passthrough provisions should help address certain of the hedging needs of persons seeking to offset the risk from swap books, allowing for sufficient liquidity in the marketplace for both bona fide hedgers and their counterparties. Third, although the Commission will no longer recognize risk management positions as bona fide hedges under this Final Rule, the Commission maintains other authorities, including the authority under CEA section 4a(a)(7), to exempt risk management positions from Federal position limits. Finally, consistent with existing industry practice, exchanges may continue to recognize risk management positions for contracts that are not subject to Federal position limits, including for excluded commodities. b. Economically Appropriate Test (1) Background—Economically Appropriate Test The statutory and regulatory bona fide hedging definitions in section 4a(c)(2)(A)(ii) of the CEA and in existing § 1.3 of the Commission’s regulations both provide that a bona fide hedging position must be economically otherwise available to the commercial entities of the group.’’ Id. at 32–33. 107 For clarity, a risk management exemption holder may enter into new positions based on, and in accordance with, its previously-granted risk management exemption, during this compliance period, until January 1, 2023. 108 For further discussion of the Final Rule’s compliance and effective dates, see Section I.D. Both existing risk management exemptions, as discussed herein, and swap positions, will be subject to the extended compliance data to January 1, 2023. E:\FR\FM\14JAR2.SGM 14JAR2 3258 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations appropriate to the reduction of risks in the conduct and management of a commercial enterprise.109 The Commission has, when defining bona fide hedging, historically focused on transactions that offset price risk.110 (2) Summary of the 2020 NPRM— Economically Appropriate Test In the 2020 NPRM, the Commission proposed to amend the economically appropriate prong of the bona fide hedge definition with one clarification: Consistent with the Commission’s longstanding practice regarding what types of risk may be offset by bona fide hedging positions in excess of Federal position limits,111 the Commission made explicit in the proposed bona fide hedging definition that the word ‘‘risks’’ refers to, and is limited to, ‘‘price risk.’’ This proposed clarification did not reflect a change in policy, as the Commission has a longstanding policy that hedges of non-price risk alone cannot be recognized as bona fide hedges.112 As stated in the 2020 NPRM, the Commission clarified its view that risk must be limited to price risk for purposes of the economically appropriate test due to the difficulty that the Commission or exchanges may face in objectively evaluating whether a particular derivatives position is economically appropriate to the reduction of non-price risks. For example, the Commission or an exchange’s staff can objectively evaluate whether a particular derivatives position is an economically appropriate hedge of a price risk arising from an underlying cash-market transaction, including by assessing the correlations between the risk and the derivatives position. It would be more difficult, if not impossible, to objectively determine 109 7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3. example, in promulgating existing § 1.3, the Commission explained that a bona fide hedging position must, among other things, be economically appropriate to risk reduction, such risks must arise from operation of a commercial enterprise, and the price fluctuations of the futures contracts used in the transaction must be substantially related to fluctuations of the cash-market value of the assets, liabilities or services being hedged. Bona Fide Hedging Transactions or Positions, 42 FR 14832, 14833 (Mar. 16, 1977) (emphasis added). ‘‘Value’’ is generally understood to mean price times quantity. The Dodd-Frank Act added CEA section 4a(c)(2), which copied the economically appropriate test from the Commission’s definition in § 1.3. See also 78 FR at 75702, 75703 (stating that the core of the Commission’s approach to defining bona fide hedging over the years has focused on transactions that offset a recognized physical price risk). 111 See, e.g., 78 FR at 75709, 75710. 112 See supra n.109 for further discussion on the Commission’s longstanding policy regarding ‘‘price’’ risk. khammond on DSKJM1Z7X2PROD with RULES2 110 For VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 whether an offset of non-price risk is economically appropriate for the underlying risk. Finally, the Commission requested comment on whether price risk is attributable to a variety of factors, including political and weather risk, and could therefore allow hedging political, weather, or other risks, or whether price risk is something narrower in the application of bona fide hedging.113 (3) Summary of the Commission Determination—Economically Appropriate Test The Commission is adopting the economically appropriate prong of the bona fide hedge definition as proposed. However, as discussed below, the Commission is clarifying in response to commenter requests that while the Commission is explicitly limiting ‘‘risks’’ to ‘‘price risks’’ as used in the economically appropriate test, the Commission recognizes that price risk can be informed and impacted by various other types of non-price risk. (4) Comments—Economically Appropriate Test The Commission received comments from market participants seeking greater clarity with respect to the Commission’s proposed reference to ‘‘price risk’’ in the context of applying the ‘‘economically appropriate’’ test in the bona fide hedging definition. Many commenters stated that the economically appropriate test should include offsets of non-price risk.114 Other commenters stated that a variety of non-price risk factors (i) actually affect price risk and therefore are objective,115 or (ii) are simply another form of price risk and therefore should be permitted.116 For example, ADM stated that when market participants discuss ‘‘risks’’ such as political, weather, delivery, transportation, and more, they are discussing the impact these factors may have on the price.117 Hence the risk 113 85 FR at 11622. at 2; NGSA at 5–6; CHS at 3; NCFC at 2; FIA at 10–11; CMC at 3; LDC at 2; ICE at 4; IFUS at Exhibit 1 RFC (6). 115 FIA at 10–11 (Stating that, ‘‘[T]he Commission should recognize that the statutory definition of a bona fide hedging position encompasses the reduction of all risks that affect the value of a cashmarket position, including time risk, location risk, quality risk, execution and logistics risk, counterparty credit risk, weather risk, sovereign risk, government policy risk (e.g., an embargo), and any other risks that affect price. These are objective, rather than subjective, risks that commercial enterprises incur on a regular basis in connection with their businesses as producers, processors, merchants handling, and users of commodities that underlie the core referenced futures contracts’’). 116 ADM at 5. 117 Id. 114 MGEX PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 being hedged is price risk as influenced by these factors.118 Other commenters stated that market participants should have the flexibility to measure risk in the manner most suitable for their business.119 In addition, commenters also stated they were not opposed to ‘‘price risk’’ so long as the Commission clarified that price risk is not static or an absolute objective measure, and consequently that the term ‘‘price risks’’ incorporates a commercial hedger’s independent assessment of price risk.120 In contrast, Better Markets supported the 2020 NPRM’s rationale to permit only ‘‘price risk.’’ 121 Better Markets also suggested that the Commission clarify that the term ‘‘commercial enterprise’’ refers to ‘‘solely [a] transaction or position that would be directly and demonstrably risk reducing to ‘cash or spot operations’ for physical commodities underlying the contracts’’ to be hedged.122 Finally, ICE, MGEX, and FIA requested that if the Commission adopts the proposed economically appropriate prong, the Commission should permit market participants to use the nonenumerated bona fide hedge process to receive recognition of bona fide hedges of non-price risk on a case-by-case basis.123 (5) Discussion of the Final Rule—The Bona Fide Hedging Definition’s ‘‘Economically Appropriate Test’’ The Commission is adopting the economically appropriate prong of the bona fide hedging definition as proposed, codifying existing practice, as well as existing § 1.3’s treatment of price risk, by making it explicit in the rule text that the word ‘‘risks’’ refers to, and is limited to, ‘‘price risk.’’ The Commission emphasizes that the Final Rule is not intended to represent a change to the Commission’s existing interpretation of the economically appropriate prong of bona fide hedging, but rather is maintaining the application of the economically appropriate test in connection with bona fide hedges on the nine legacy agricultural contracts to the 16 new non-legacy core referenced futures contracts. In promulgating existing § 1.3, the Commission explained that a bona fide hedging position must, among other things, ‘‘be economically appropriate to risk reduction, such risks must arise from operation of a commercial 118 ADM at 5. at 2. 120 CMC at 3. 121 Better Markets at 52–53. 122 Better Markets at 53. 123 MGEX at 2; FIA at 11. 119 LDC E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 enterprise, and the price fluctuations of the futures contracts used in the transaction must be substantially related to fluctuations of the cash-market value of the assets, liabilities or services being hedged.’’ 124 (emphasis added). Consistent with this longstanding policy of the Commission to recognize hedges of price risk of an underlying commodity position as bona fide hedges (and consistent with the Commission’s existing application of bona fide hedging to the nine legacy agricultural contracts under the existing Federal position limit regulations), the Commission is also clarifying further below that price risk can be informed and impacted by various other types of risks. As the Commission stated in the 2020 NPRM and continues to believe, for any given non-price risk, such as geopolitical turmoil, weather, or counterparty credit risks, there could be multiple commodities, directions, and contract months which a particular market participant may subjectively view as an economically appropriate offset for that non-price risk. Moreover, multiple market participants faced with the same non-price risk might take different views on which offset is the most effective.125 A system of allowing for bona fide hedges based solely by reference to such non-price risks would be difficult to administer on a pragmatic and consistently fair basis. Further, it also would be difficult to evaluate whether a particular commodity derivative contract would be the proper offset as a bona fide hedge, as defined in this Final Rule, to a potential non-price risk, or would remove exposure to the potential change in value to the market participant’s cash positions resulting from the non-price risk. Thus, hedging solely to protect against changes in value of non-price risks would fall outside the category of a bona fide hedge which offsets the ‘‘price risk’’ of an underlying commodity cash position. However, the Commission agrees with commenters who stated that market participants form independent economic assessments of how different possible events might create potential 124 Bona Fide Hedging Transactions or Positions, 42 FR 14832, 14833 (Mar. 16, 1977) (emphasis added). ‘‘Value’’ is generally understood to mean price times quantity. The Dodd-Frank Act added CEA section 4a(c)(2), which copied the economically appropriate test from the Commission’s definition in § 1.3. See also 78 FR at 75702, 75703 (stating that the ‘‘core of the Commission’s approach to defining bona fide hedging over the years has focused on transactions that offset a recognized physical price risk’’). 125 85 FR at 11606. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 risk exposures for their business.126 Such risks that create or impact the price risk of underlying cash commodities may include, but are not limited to, geopolitical turmoil, weather, or counterparty credit risks. The Commission recognizes that these risks can create price risks and understands that firms may manage these potential risks to their businesses differently and in the manner most suitable for their business. As noted above, by limiting the economically appropriate prong to price risk, the Commission is reiterating its historical practice, which has applied well to the legacy agricultural contracts for decades, to recognize hedges of price risk of an underlying commodity position as bona fide hedges while acknowledging that price risk may itself be impacted by non-price risks. The foregoing discussion of price risk is limited to the question of whether a position in a referenced contract meets the economically appropriate test to satisfy the bona fide hedge requirements. Market participants may thus continue to manage non-price risks in a variety of ways, which may include participation in the futures markets or exposure to other financial products. In fact, market participants may decide to use futures contracts that are not subject to Federal position limits (e.g., location basis contracts), if they determine such contracts will help them manage nonprice risks faced by their businesses.127 For example, a market participant seeking to manage risk, including nonprice risk, with positions in contracts that are not referenced contracts, such as freight or weather derivatives, would not be subject to Federal speculative position limits and thus would not need to comply with the economically appropriate test in connection with such positions in non-referenced contracts. To satisfy the economically appropriate test, a position must ultimately offset the price risk of an underlying cash commodity.128 Nonprice risk may also be a consideration in hedging decisions, but cannot be a substitute for price risk associated with 126 CMC at 3. enumerated cross-commodity hedge provision adopted herein and discussed below offers may also offer additional flexibility to those market participants using referenced contracts to manage risk, by allowing market participants to hedge price risk associated with a particular commodity using a derivative contract based on a different commodity, assuming all applicable requirements of the cross-commodity enumerated bona fide hedge are met. 128 This view is consistent with the spirit of Better Market’s comment suggesting a focus on reducing risks associated with a cash-market position in a physical commodity. See Better Markets at 53. 127 The PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 3259 the cash commodity underlying the derivatives position. The foregoing view precludes the Commission from adopting commenter suggestions to permit market participants to use the non-enumerated hedge process to receive recognition of hedges of nonprice risk on a case-by-case basis because, while the Commission acknowledges that price risk can be informed and impacted by non-price risk, price risk is required to satisfy the economically appropriate test. c. Change in Value Requirement (1) Background—Change in Value Requirement CEA section 4a(c)(2)(A)(iii) and existing § 1.3 include the ‘‘change in value requirement,’’ which provides that the bona fide hedging position must arise from the potential change in the value of: (I) Assets that a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising; (II) liabilities that a person owns or anticipates incurring; or (III) services that a person provides, purchases, or anticipates providing or purchasing.129 (2) Summary of the 2020 NPRM— Change in Value Requirement The Commission proposed to retain the substance of the change in value requirement in existing § 1.3, with some non-substantive technical modifications, including modifications to correct a typographical error.130 Aside from the typographical error, the proposed § 150.1 change in value requirement mirrors the Dodd-Frank Act’s change in value requirement in CEA section 4a(c)(2)(A)(iii). (3) Summary of the Commission Determination—Change in Value Requirement For the same reasons set out in the 2020 NPRM, the Commission is adopting the change in value 129 7 U.S.C. 6a(c)(2)(A)(iii), 17 CFR 1.3. Commission proposed to replace the phrase ‘‘liabilities which a person owns,’’ which appears in the statute erroneously, with ‘‘liabilities which a person owes,’’ which the Commission believed was the intended wording (emphasis added). The Commission interpreted the word ‘‘owns’’ to be a typographical error. A person may owe on a liability, and may anticipate incurring a liability. If a person ‘‘owns’’ a liability, such as a debt instrument issued by another, then such person owns an asset. The fact that assets are included in CEA section 4a(c)(2)(A)(iii)(I) further reinforces the Commission’s interpretation that the reference to ‘‘owns’’ means ‘‘owes.’’ The Commission also proposed several other nonsubstantive modifications in sentence structure to improve clarity. 130 The E:\FR\FM\14JAR2.SGM 14JAR2 3260 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations requirement of the bona fide hedge definition as proposed. provisions are important for preventing market disruption.134 (4) Comments—Change in Value Requirement No specific comments on the change in value requirement were received. (5) Discussion of the Final Rule— Incidental Test and Orderly Trading Requirement The Commission is eliminating the incidental test and orderly trading requirement from the bona fide hedge definition as proposed. As noted above, neither the incidental test nor orderly trading requirement is part of the CEA’s current statutory definition of bona fide hedge. The Commission views the incidental test as redundant because the Commission proposed to maintain both (1) the change in value requirement (as noted above, the reference to ‘‘value’’ in the change in value requirement is generally understood to mean price per unit times quantity of units) as well as (2) the economically appropriate test (which includes the concept of the offset of price risks in the conduct and management of, i.e., incidental to, a commercial enterprise). In response to IATP and Better Markets, the Commission does not view the orderly trading requirement as needed to prevent market disruption. The statutory bona fide hedging definition does not include an orderly trading requirement,135 and the meaning of ‘‘orderly trading’’ is unclear in the context of the OTC swap market and in the context of permitted off-exchange transactions, such as exchange for physicals. The elimination of the orderly trading requirement does not diminish an exchange’s obligation to prohibit any disruptive trading practices, including a case where an exchange believes that a bona fide hedge position may result in disorderly trading. Further, in eliminating the orderly trading requirement from the definition in the regulations, the Commission is not amending or modifying interpretations of any other related requirements, including any of the anti-disruptive trading prohibitions in CEA section 4c(a)(5),136 or any other statutory or regulatory provisions. Taken together, the retention of the updated temporary substitute test, economically appropriate test, and change in value requirement, coupled with the elimination of the incidental test and orderly trading requirement, d. Incidental Test and Orderly Trading Requirement (1) Background—Incidental Test and Orderly Trading Requirement Two general requirements contained in the existing § 1.3 definition of bona fide hedging position include: (I) The incidental test and (II) the orderly trading requirement. For a position to be recognized as a bona fide hedging position, the incidental test requires that the purpose is to offset price risks incidental to commercial cash, spot, or forward operations. Under the orderly trading requirement, such position is established and liquidated in an orderly manner in accordance with sound commercial practices. Notably, Congress in the Dodd-Frank Act did not include the incidental test or the orderly trading requirement in the statutory bona fide hedging definition in CEA section 4a(c)(2).131 (2) Summary of the 2020 NPRM— Incidental Test and Orderly Trading Requirement While the Commission proposed to maintain the substance of the three core elements of the existing bona fide hedging definition described above, with some modifications, the Commission also proposed to eliminate two elements contained in the existing § 1.3 definition: The incidental test and orderly trading requirement that currently appear in paragraph (1)(iii) of the § 1.3 bona fide hedging definition.132 khammond on DSKJM1Z7X2PROD with RULES2 (3) Summary of the Commission Determination—Incidental Test and Orderly Trading Requirement The Commission is eliminating the incidental test and orderly trading requirement from the bona fide hedge definition as proposed. (4) Comments—Incidental Test and Orderly Trading Requirement NGSA supported elimination of the incidental test and orderly trading requirement, claiming that the changes will facilitate hedging,133 while IATP and Better Markets opposed the removal of these provisions, contending that the 131 7 U.S.C. 6a(c)(2). CFR 1.3. 133 NGSA at 4. 132 17 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 134 IATP at 14–15; Better Markets at 53. orderly trading requirement was added as a part of the regulatory definition of bona fide hedging in 1975; see Hedging Definition, Reports, and Conforming Amendments, 40 FR 11560 (Mar. 12, 1975). Prior to 1974, the orderly trading requirement was found in the statutory definition of bona fide hedging position; changes to the CEA in 1974 removed the statutory definition from CEA section 4a(3). 136 7 U.S.C. 6c(a)(5). 135 The PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 should reduce uncertainty by eliminating provisions that do not appear in the statute, and by clarifying the language of the remaining provisions. By reducing uncertainty surrounding some parts of the bona fide hedging definition for physical commodities, the Commission anticipates that, as described in greater detail elsewhere in this release, it would be easier going forward for the Commission, exchanges, and market participants to address whether novel trading practices or strategies may qualify as bona fide hedges. iv. Treatment of Unfixed Price Transactions Under the Final Rule a. Background and Summary of Commission Determination—Treatment of Unfixed Price Transactions The Commission has a long history of recognizing fixed-price commitments as the basis for a bona fide hedge.137 While the existing bona fide hedging definition in § 1.3 includes one enumerated hedge that explicitly mentions ‘‘unfixed’’ prices,138 the availability of this hedge is limited to circumstances where a market participant has both an unfixedprice purchase and an unfixed-price sale on hand, precluding a market participant with only an unfixed-price purchase or an unfixed-price sale from qualifying for this particular enumerated hedge. Further, the extent to which the other existing enumerated hedges apply to unfixed-price commitments is ambiguous from the plain reading of the text of the existing bona fide hedging definition. However, Commission staff have previously considered the extent to which market participants with unfixedprice commitments may qualify for an enumerated hedge. Commission staff issued interpretive letter 12–07 in 2012 (‘‘Staff Letter No. 12–07’’) in response to a narrow question submitted by a market participant regarding qualifying for the existing enumerated unfilled anticipated requirements bona fide hedge 139 while entering into ‘‘unfixed137 See, e.g., paragraphs (2)(i)(A) and (2)(ii)(A) of existing § 1.3. 138 See paragraph (2)(iii) of existing § 1.3 (Offsetting sales and purchases for future delivery on a contract market which do not exceed in quantity that amount of the same cash commodity which has been bought and sold at unfixed prices basis different delivery months of the contract market) 139 Paragraph (2)(ii)(C) of existing § 1.3 provides in relevant part that the bona fide hedging definition includes purchases which do not exceed in quantity Twelve months’ unfilled anticipated requirements of the same cash commodity for processing, manufacturing, or feeding by the same person. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 price transactions.’’ 140 In that interpretive letter, staff clarified that a commercial entity may qualify for the existing enumerated bona fide hedge for unfilled anticipated requirements even if the commercial entity has entered into long-term, unfixed-price supply or requirements contracts because, as staff explained, the unfixed-price purchase contract does not ‘‘fill’’ the commercial entity’s anticipated requirements.141 As explained in Staff Letter No. 12–07, the price risk of such ‘‘unfilled’’ anticipated requirements is not offset by the unfixed-price forward contract because the price risk remains with the commercial entity, even though the entity has contractually assured a supply of the commodity.142 Instead, the price risk continues until the unfixed-price contract’s price is fixed.143 Once the price is fixed on the supply contract, the commercial entity no longer has price risk, and its derivative position, to the extent the position is above an applicable position limit, and unless the market participant qualifies for another exemption (as discussed below), must be liquidated in an orderly manner in accordance with sound commercial practices.144 As discussed below, the Commission is affirming this narrow interpretation for the Final Rule—that commercial entities that enter into unfixed-price transactions may continue to qualify for the enumerated bona fide hedge for unfilled anticipated requirements—and the Commission is adopting this rationale to also apply to: (1) The existing enumerated bona fide hedge for unsold anticipated production; 145 and (2) the new enumerated bona fide hedge for anticipated merchandising.146 In other words, under this Final Rule, a commercial market participant in the physical marketing channel that enters into an unfixed-price transaction may qualify for one of these enumerated anticipatory bona fide hedges, as long as the commercial market participant otherwise satisfies all applicable 140 CFTC Staff Letter 12–07, issued August 16, 2012, https://www.cftc.gov/LawRegulation/ CFTCStaffLetters/letters.htm, title search ‘‘12–07.’’ 141 CFTC Staff Letter 12–07 at 1. 142 CFTC Staff Letter 12–07 at 1–2. In the 2016 Reproposal, the Commission affirmed staff’s interpretation articulated in Staff Letter No. 12–07. See 81 FR at 96750. 143 CFTC Staff Letter 12–07 at 2. 144 Id. at 2–3. 145 For further discussion regarding the enumerated bona fide hedge for ‘‘unsold anticipated production,’’ see Section II.A.1.vi.d. 146 For further discussion regarding the new enumerated bona fide hedge for ‘‘anticipated merchandising,’’ see Section II.A.1.vi.f. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 requirements for such anticipatory bona fide hedge. For this section of the release, the Commission will refer to the enumerated bona fide hedges for anticipated unfilled requirements, anticipated unsold production, and anticipated merchandising, collectively, as the ‘‘anticipatory bona fide hedges.’’ Additionally, by using the term ‘‘unfixed-price transaction,’’ the Commission means a forward contract (i.e., a firm commitment) at an open price or at a price to be determined at a later date (for example, by reference to an index based on the settlement price of a corresponding futures contract). The Commission discusses the 2020 NPRM’s general treatment of unfixed price transactions below, followed by a summary of comments and the Commission’s determination on the issue of unfixed-price transactions generally. A more detailed discussion of each specific enumerated hedge, including the three anticipatory bona fide hedges, appears further below. b. Summary of the 2020 NPRM— Treatment of Unfixed Price Transactions Like the bona fide hedging definition in existing § 1.3, the proposed bona fide hedging definition in § 150.1 of the 2020 NPRM included one enumerated hedge addressing unfixed-price transactions, which required offsetting unfixed-price purchase and sale transactions.147 Aside from that one enumerated bona fide hedge, the other proposed bona fide hedges did not specify whether a market participant with an unfixed-price transaction could qualify for a bona fide hedge exemption, including any of the proposed anticipatory bona fide hedges. However, the 2020 NPRM did preliminarily and indirectly address previous queries on the matter of unfixed-price transactions. In particular, the 2020 NPRM addressed a petition for exemptive relief submitted in response to the 2011 Final Rule. In that petition, the Working Group of Commercial Energy Firms (which has since reconstituted itself as the Commercial Energy Working Group, or ‘‘CEWG’’) requested exemptive relief for transactions that are described by 10 examples set forth therein as bona fide 147 See proposed paragraph (a)(2) of Appendix A to part 150. Like the existing enumerated hedge in paragraph (2)(iii) of § 1.3, this proposed enumerated hedge was limited to circumstances where a market participant has both an unfixed-price purchase and an unfixed-price sale in hand. This specific proposed enumerated bona fide hedge, along with all other proposed enumerated hedges, is described in detail further below. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 3261 hedging transactions (‘‘BFH Petition’’).148 In the 2020 NPRM, the Commission preliminarily determined that commodity derivative positions described in two examples related to unfixed-price transactions did not fit within any of the proposed enumerated hedges. Specifically, the Commission preliminarily determined that the positions described in examples #3 (unpriced physical purchase or sale commitments) and #7 (scenario 2) (use of physical delivery referenced contracts to hedge physical transactions using calendar month average pricing) of the BFH Petition did not fit within any of the proposed enumerated bona fide hedges, but that market participants could apply for a non-enumerated exemption.149 The Commission requested comment on the extent to which the proposed enumerated bona fide hedges should encompass the types of positions discussed in examples #3 (unpriced physical purchase or sale commitments) and #7 (scenario 2) (use of physical delivery reference contracts to hedge physical transactions using calendar month averaging pricing) of the CEWG’s BFH Petition.150 c. Comments—Treatment of Unfixed Price Transactions In response to the 2020 NPRM, many commenters requested the Commission either clarify or make explicit that the proposed bona fide hedge definition would apply to commodity derivatives contracts used to hedge exposure to price risk arising from unfixed-price transactions.151 148 The Working Group BFH Petition is available at https://www.cftc.gov/stellent/groups/public/ @rulesandproducts/documents/ifdocs/ wgbfhpetition012012.pdf. In the 2013 Proposal, the Commission provided that the transactions contemplated under the working group’s examples Nos. 1, 2, 6, 7 (scenario 1), and 8 would be permitted under the proposed definition of bona fide hedging. In the 2020 NPRM, the Commission preliminarily determined that transactions described in four additional CEWG examples would comply with the proposed expanded bona fide hedging definition in the 2020 NPRM: examples #4 (Binding, Irrevocable Bids or Offers), #5 (Timing of Hedging Physical Transactions), #9 (Holding a cross-commodity hedge using a physical delivery contract into the spot month) and #10 (Holding a cross-commodity hedge using a physical delivery contract to meet unfilled anticipated requirements). 149 85 FR at 11612. 150 85 FR at 11622. 151 See, e.g., Ecom at 1; ACA at 2; CEWG at 22– 24; Chevron at 11; CME Group at 8–9; DECA at 2; East Cotton at 2; Gerald Marshall at 2; IFUS at 5– 7; IMC at 2; Jess Smith at 2; LDC at 2; Mallory Alexander at 2; McMeekin at 2; Memtex at 2; Moody Compress 1; NCC at 1; NGFA at 7; Olam at 2; Omnicotton at 2; Canale Cotton at 2; Shell at 7; Southern Cotton at 2; Suncor at 7; SW Ag at 2; Toyo E:\FR\FM\14JAR2.SGM Continued 14JAR2 3262 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Several commenters provided various examples in support of their requests that the Commission recognize that unfixed price transactions may serve as the basis for an enumerated bona fide hedge position for purposes of Federal position limits.152 Comments on the treatment of unfixed price transactions often were submitted in connection with discussions on the scope of the proposed enumerated bona fide hedge for anticipated merchandising. As discussed further below, under the Final Rule’s enumerated anticipated merchandising bona fide hedge section, many commenters requested the Commission clarify whether the proposed enumerated hedge for anticipated merchandising could be used to manage price risk arising from unfixed-price physical commodity transactions. With regards to CEWG’s BFH Petition example #3 (unpriced physical purchase or sale commitments), many commenters disagreed with the Commission’s preliminary determination in the 2020 NPRM that this type of transaction would not qualify for an enumerated bona fide hedge. Generally, commenters expressed the view that unfixed-price transactions for physical commodities are a common and standard market practice. The CEWG indicated that unfixed physical purchase or sale commitments are routinely conducted in numerous markets and commodities on a daily basis.153 Similar to the BFH Petition’s example #3 (unpriced physical purchase or sale commitments), ACSA provided examples intended to demonstrate that merchants are exposed to calendar spread and supply price risk because they typically fulfill sales contracts by selling a commodity for future delivery in advance of purchasing the commodity needed to fulfill the sale.154 ACSA, along with other commenters,155 stated that unfixed-price transactions for the purchase or sale of the physical commodities are common, where a at 2; Texas Cotton at 2; Walcot at 2; White Gold at 2. 152 CMC at 4; FIA at 16; ICE at 4–5; ACSA at 6– 7; ADM at 3; CME Group at 8–9; CEWG at 19–21. 153 CEWG at 20 (also providing a similar example as it submitted in the original petition which included Example #3 (unpriced physical purchase and sale commitments)). 154 ACSA at 12–14; Several commenters concurred with ACSA regarding exposure to calendar spread. Mallory Alexander at 2; DECA at 2; CMC at 4; IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2; Walcot at 2. 155 ACSA at 4–7; CMC at 4; Mallory Alexander at 2; DECA at 2; IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2; Walcot at 2. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 market participant buys the commodity at a price that is based on (i.e., is ‘‘indexed’’ to) the settlement price of the nearby (or spot) futures month contract and later sells the commodity at a price that is indexed to the deferred month futures contract. ACSA and other commenters indicated that merchants do this to ‘‘effectively bridge the gap between timing mismatches of supply and demand in the global marketplace.’’ 156 Related to the BFH Petition example #7 (scenario 2) (use of physical delivery reference contracts to hedge physical transactions using calendar month averaging pricing ‘‘CMA’’), commenters requested that the Commission clarify that hedges of underlying physical transactions that utilize CMA pricing structures fall within the enumerated bona fide hedge for anticipated merchandising.157 Chevron requested the Commission clarify that commercial firms that price commercial transactions to purchase or sell physical crude oil or natural gas using a CMA pricing structure (whether they are solely merchants or conduct merchant activities as part of an integrated energy company), should receive bona fide hedge treatment for their commodity derivative contract positions that offset the risks arising from those CMA priced purchases or sales.158 Similarly, other commenters asked for clarification regarding whether the existing enumerated bona fide hedge for unfilled anticipated requirement extends to scenarios that involve unfixed-price contracts that many electric generators enter into to address their anticipated supply requirements.159 These commenters asked for clarification that unfixed-price purchase commitments do not ‘‘fill’’ an anticipated requirement such that the market participant would be able to still qualify for the enumerated unfilled anticipated requirement bona fide hedge.160 d. Discussion of Final Rule—Treatment of Unfixed Price Transactions As discussed above, the Commission is affirming and broadening the application of the interpretation articulated in Staff Letter No. 12–07. As a result, commercial market participants in the physical marketing channel that 156 ACSA at 5. at 2; IMC at 2; Mallory Alexander at 2; Walcot at 2; White Gold at 2; Olam at 2; LDC at 1; Canale at 2; Moody Compress at 1; Gerald Marshall at 2; SW Ag at 2; DECA at 2; Chevron at 12; Suncor at 11; CEWG at 21. 158 Chevron at 11. 159 EPSA at 5; IECA at 8. 160 Id. 157 MGEX PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 enter into unfixed price transactions may qualify for bona fide hedge treatment under the enumerated bona fide hedges for anticipatory merchandising, anticipated unsold production, or anticipated unfilled requirements because, as discussed below, unfixed price transactions do not give rise to outright price risk and do not otherwise fix an outright price.161 Consistent with Staff Letter No. 12– 07, commercial market participants in the physical marketing channel that enter into unfixed-price transactions may continue to qualify for the enumerated bona fide hedge for unfilled anticipated requirements for those unfixed price transactions. Further, the Commission is broadening this rationale to additionally include the existing enumerated bona fide hedge for ‘‘unsold anticipated production’’ 162 and the new enumerated bona fide hedge for anticipated merchandising.163 A commercial market participant that enters into an unfixed-price transaction may qualify for one of these enumerated anticipatory bona fide hedges as long as the commercial entity otherwise satisfies all requirements for such anticipatory bona fide hedge, including demonstrating its anticipated need in the physical marketing channel related to either its unsold production, unfilled requirements, and/or merchandising, as applicable.164 Under this Final Rule, the Commission is clarifying that a commercial market participant may still qualify for an enumerated anticipatory bona fide hedge for an anticipated need, based on a good-faith expectation of that need, even if the market participant has entered into an unfixed-price transaction, since the Commission does not deem the unfixed-price transaction to ‘‘fill’’ or ‘‘address’’ the anticipated need. This rationale is predicated on the fact that an unfixed-price commitment does not offset the price risk associated with an anticipated need (i.e., 161 As a result, based on this rationale, a commercial market participant that has an unfixedprice commitment is treated the same as a commercial market participant that has no unfixedprice commitment for purposes of determining whether one qualifies for these enumerated anticipatory bona fide hedges. 162 For further discussion regarding the enumerated bona fide hedge for ‘‘unsold anticipated production,’’ see Section II.A.1.vi.d. 163 For further discussion regarding the new enumerated bona fide hedge for ‘‘anticipated merchandising,’’ see Section II.A.1.vi.f. 164 As such, merely entering into an unfixed-price transaction is not alone sufficient to demonstrate compliance with one of the enumerated anticipatory bona fide hedges. The specific requirements associated with each enumerated bona fide hedge, including each anticipatory bona fide hedge, are described in detail further below. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations anticipated unsold production, anticipated unfilled requirements, and/ or anticipated merchandising, as applicable). This is because unfixedprice transactions do not give rise to outright price risk and therefore do not alter the outright price risks faced by a commercial market participant, even though the market participant has contractually assured either a supply of the commodity (in the case of anticipated unfilled requirements), the sale of its output (in the case of anticipated unsold production), or the purchase or sale of the commodity to be merchandised (in the case of anticipated merchandising).165 In other words, a trader with an unfixed-price commitment still has price risk related to its anticipated need until the price is fixed. Once the price has become fixed, the market participant may no longer avail itself of the enumerated anticipatory bona fide hedge, but may potentially avail itself of another enumerated bona fide hedge, (such as the bona fide hedges for fixedprice purchase contracts or for fixedprice sales contracts, as applicable), provided all applicable requirements of such other enumerated bona fide hedges are satisfied. Under the Final Rule, a commercial market participant must continue to be able to demonstrate an anticipated need related to unsold production, unfilled requirements, and/or merchandising. Accordingly, the Commission determines that the commercial market participant engaged in unfixed-price transactions in the BFH Petition’s example #3 (unpriced physical purchase or sale commitments) and example #7 (scenario 2) (use of physical delivery referenced contracts to hedge physical transactions using calendar month average pricing) can qualify for one of the enumerated anticipatory bona fide hedges under the Final Rule to the extent the market participant otherwise complies with the applicable conditions of the relevant enumerated anticipatory bona fide hedge in connection with the market participant’s commercial activities. For clarity, the Commission also underscores that under the Commission’s existing portfolio hedging policy, market participants, including vertically-integrated firms (i.e., those firms that may qualify as more than one of a producer; processor, manufacturer, or utility; and/or merchandiser), may continue to manage their price risks by utilizing more than one enumerated bona fide hedge (including more than one anticipatory bona fide hedge). The Commission recognizes that there are many ways in which market participants both structure their organizations and engage in commercial hedging practices. As such, market participants may manage the price risk from their various commercial activities by utilizing multiple enumerated bona fide hedge exemptions in the manner that is most suitable to their particular circumstances. Nevertheless, for illustrative purposes, the Commission provides a general example of how market participants may utilize the enumerated anticipatory bona fide hedges in connection with their unfixed price transactions: For example, Producer X has the physical capacity to produce 100,000 barrels of physical WTI crude oil on an annual basis. Producer X agrees to sell 80,000 barrels of WTI crude oil to Merchandiser Y via a floating/unfixedprice contract in which the delivery will be priced at the NYMEX March 2020 WTI crude oil futures final settlement price. Producer X still does not have a buyer for its remaining 20,000 barrels, but anticipates selling all of its production, as it has in previous years. Under this scenario, Producer X may utilize the enumerated unsold anticipated production enumerated hedge to offset the price risk from its unsold production, which includes both the 80,000 barrels of oil sold to Merchandiser Y at an unfixed price, as well as the unsold 20,000 barrels.166 On the other hand, Merchandiser Y may utilize the enumerated hedge for anticipated merchandising to hedge its anticipated merchandising transactions, which include the 80,000 barrels it purchased from Producer X at an unfixed price. Because Merchandiser Y has a history of merchandising more than 80,000 barrels a year, and it anticipates merchandising more than 80,000 barrels in the next twelve months, Merchandiser Y’s anticipated merchandising hedge may include the 80,000 barrels it purchased from Producer X at an unfixed price and its remaining anticipated twelve-months’ merchandising. Separately, assuming Merchandiser Y also has crude oil it purchased at a fixed price in a storage tank, Merchandiser Y may also utilize the enumerated hedge for inventory and 165 Consistent with the existing Federal position limits framework, under the Final Rule, commercial market participants may not qualify for any anticipatory bona fide hedge merely to offset risks associated with non-commercial (i.e., financial) activities. 166 In the case where Producer X fixes the price of its sale before delivery, while it no longer holds an anticipatory hedge, Producer X may qualify for the enumerated hedge for fixed price sales, assuming all applicable requirements for that hedge are satisfied. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 3263 cash-commodity fixed-price purchase contracts to hedge the price risk from those fixed price purchases of crude oil. In response to commenters requesting that the Commission create a new enumerated bona fide hedge for unfixed-price transactions, the Commission does not believe that this is necessary because, as described above, commercial market participants may qualify for the enumerated anticipatory bona fide hedges while also entering into unfixed-price transactions. Further, the Commission believes that it is not suitable to create a new enumerated bona fide hedge expressly covering all unfixed price transactions to accomplish the same since there is an inherent difficulty in evaluating the propriety of a hedge of an unfixed price obligation with a fixed-price futures contract as there is basis risk until the unfixed price obligation is fixed. Given differences among markets, creating a new enumerated bona fide hedge for any unfixed price transaction could, under certain circumstances, harm market integrity, enable potential market manipulation, and/or allow excessive speculation by potentially affording bona fide hedging treatment for speculative transactions. For example, assume a market participant enters into an unfixed-price sales contract (e.g., priced at a fixed differential to a deferred month futures contract), and immediately enters into a calendar month spread to reduce the risk of the fixed basis moving adversely. It may not be economically appropriate to recognize as bona fide a long futures position in the spot (or nearby) month and a short futures position in a deferred calendar month matching the market participant’s cash delivery obligation, in the event the spot (or nearby) month price is higher than the deferred contract month price (referred to as backwardation, and characteristic of a spot cash market with supply shortages), because such a calendar month futures spread would lock in a loss. A position locking in a loss generally is not economically appropriate to the reduction of risk, as it increases risk by generating a loss, and such a transaction may be indicative of an attempt—or at the very least provides inappropriate incentives—to manipulate the spot (or nearby) futures price.167 Finally, the Commission emphasizes that to the extent that a market participant does not qualify for an enumerated anticipatory bona fide hedge in connection with an unfixedprice transaction, the market participant 167 See E:\FR\FM\14JAR2.SGM 81 FR at 96750. 14JAR2 3264 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations could still avail itself of the process under §§ 150.3 and 150.9 for requesting approval of non-enumerated bona fide hedges. v. The Enumerated Bona Fide Hedge Exemptions, Generally khammond on DSKJM1Z7X2PROD with RULES2 a. Background—Bona Fide Hedge Exemptions, Generally As discussed earlier in this release, the list of bona fide hedges explicitly contained in paragraph (2) of the existing bona fide hedging definition in § 1.3 of the Commission’s regulations lists (or ‘‘enumerates’’) seven bona fide hedges, which are generally referred to as the ‘‘enumerated bona fide hedges,’’ in four general categories. These four existing categories of enumerated hedges include: (1) Sales of futures contracts to hedge (i) ownership or fixed-price cash commodity purchases and (ii) unsold anticipated production; (2) purchases of futures contracts to hedge (i) fixed-price cash commodity sales and (ii) unfilled anticipated requirements; (3) offsetting sales and purchases of futures contracts to hedge offsetting unfixed-price cash commodity sales and purchases; and (4) crosscommodity hedges.168 The list of enumerated bona fide hedges found in paragraph (2) of the existing bona fide hedging definition was developed at a time when only agricultural commodities were subject to Federal position limits, and has not been updated since 1987.169 The Commission believes, as discussed further below, that such list is too narrow to reflect common commercial hedging practices, including for metal and energy contracts. Numerous market and regulatory developments have taken place since 1987, including, among other things, increased futures trading in the metals and energy markets, the development of the swaps markets, and the shift in trading from pits to electronic platforms. In addition, the Commodity Futures Modernization Act of 2000 170 and the Dodd-Frank Act introduced various regulatory reforms, including the enactment of position limits core principles.171 The Commission thus proposed in the 2020 NPRM to update its bona fide hedging definition to better conform to the current state of the law and to better reflect market developments over time. 168 17 CFR 1.3. 169 See Revision of Federal Speculative Position Limits, 52 FR 38914 (Oct. 20, 1987). 170 Commodity Futures Modernization Act of 2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, 2000). 171 See 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 b. Summary of the 2020 NPRM—Bona Fide Hedge Exemptions, Generally So as not to reduce any of the clarity provided by the existing list of enumerated bona fide hedges, the Commission proposed to maintain the existing enumerated bona fide hedges, with some modifications, and to expand this list. The existing definition of ‘‘bona fide hedging transactions and positions’’ enumerates the following hedging transactions: a. Hedges of inventory and cash commodity fixed-price purchase contracts; b. hedges of cash commodity fixedprice sales c. hedges of the cash commodity’s cash products and byproducts; d. hedges of offsetting unfixed price cash commodity sales and purchases e. hedges of unsold anticipated production; f. hedges of unfilled anticipated requirements; and g. cross-commodity hedges. The following additional hedging practices are not enumerated in the existing regulation, but were included in the 2020 NPRM as additional enumerated bona fide hedges: a. Hedges by agents; b. short hedges of anticipated mineral royalties; c. hedges of anticipated services; d. offsets of commodity trade option; and e. hedges of anticipated merchandising. The Commission also proposed the elimination, for purposes of Federal position limits, of both the Five-Day Rule and the twelve-month restriction. However, under the 2020 NPRM, exchanges would be able to establish their own five-day rule and/or twelvemonth restriction, as applicable for any or all of their respective referenced contracts. c. Commission Determination—Bona Fide Hedge Exemptions, Generally First, the Commission is adopting the proposed expanded list of enumerated bona fide hedges, with the modifications described, as applicable, in the discussions of the relevant bona fide hedges below. Second, the Commission is adopting, as proposed, the elimination of both the existing Five-Day Rule and the twelve-month restriction.172 The comments received, 172 As discussed further below, the Final Rule eliminates the existing twelve-month restriction with respect to the anticipatory unsold production and the anticipated unfilled requirements bona fide hedges. However, the new anticipated PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 and the Commission’s corresponding responses, in connection with these changes are discussed further below in the corresponding section discussing the applicable enumerated bona fide hedge. With respect to the treatment of the enumerated bona fide hedges under the Final Rule, the Commission notes that positions in referenced contracts subject to Federal position limits that meet any of the enumerated bona fide hedges will, for purposes of Federal position limits, be deemed to meet the bona fide hedging definition in CEA section 4a(c)(2)(A), as well as the Commission’s bona fide hedging definition in § 150.1 under the Final Rule. As a result, enumerated bona fide hedges are selfeffectuating for purposes of Federal position limits, provided the market participant separately requests an exemption from the applicable exchange-set limit established pursuant to § 150.5(a).173 The enumerated hedges are each described below, followed by a discussion of the Five-Day Rule. When first proposed, the Commission viewed the enumerated bona fide hedges as conforming to the general definition of bona fide hedging ‘‘without further consideration as to the particulars of the case.’’ 174 Similarly, the list of enumerated bona fide hedges under the Final Rule reflects categories of bona fide hedges for which the Commission has determined, based on experience over time, that no case-by-case determination or review of additional details by the Commission is needed to determine that the position or transaction is a bona fide hedge. This Final Rule does not foreclose the recognition of other hedging practices as bona fide hedges, as discussed below. While the enumerated bona fide hedges adopted herein are selfeffectuating for purposes of Federal position limits,175 the Commission and the exchanges will continue to exercise close oversight over such positions to confirm that market participants’ claimed exemptions are consistent with their cash-market activity. In particular, because all contracts subject to Federal position limits are also subject to exchange-set limits, all traders seeking to exceed Federal position limits must request an exemption from the relevant exchange for purposes of the exchange merchandising bona fide hedge would be subject to its own twelve-month restriction. 173 For further discussion of the exchange exemption process, see Section II.D.3.i.b. 174 Bona Fide Hedging Transactions or Positions, 42 FR 14832 (Mar. 16, 1977). 175 See infra Section II.C. (discussing § 150.3) and Section II.G. (discussing § 150.9). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 position limit, regardless of whether the position falls within one of the enumerated hedges. In other words, enumerated bona fide hedge exemptions that are self-effectuating for purposes of Federal position limits are not selfeffectuating for purposes of exchangeset position limits. Exchanges have well-established programs for granting exemptions, including, in some cases, experience granting exemptions for anticipatory merchandising for certain traders in markets not currently subject to Federal position limits. As discussed in greater detail below, § 150.5 as adopted herein helps ensure that such programs conform to standards established by the Commission.176 The Commission expects exchanges will continue to be thoughtful and deliberate in granting exemptions, including anticipatory exemptions. The Commission predicates this expectation on its decades of experience working together with the relevant exchanges and observations generally of the applicable exchangetraded futures markets. The Commission and the exchanges also have a variety of other tools designed to help prevent misuse of selfeffectuating bona fide hedge exemptions. For example, market participants who apply to an exchange as required pursuant to § 150.5 under the Final Rule are subject to the Commission’s false statements authority, which carries substantial penalties under both the CEA and Federal criminal statutes. Similarly, the Commission currently employs—and will continue to use under the Final Rule—surveillance tools, special call authority, rule enforcement reviews, and other formal and informal avenues for obtaining additional information from exchanges and market participants in order to distinguish between true bona fide hedging needs and speculative trading masquerading as a bona fide hedge. While positions that fall within the enumerated bona fide hedges, each discussed in further detail below, are the type of positions that comply with the bona fide hedging definition, the 176 See infra Section II.D. For example, § 150.5 requires, among other things, that: Exemption applications filed with an exchange include sufficient information to enable the exchange and the Commission to determine whether the exchange may grant the exemption, including an indication of whether the position qualifies as an enumerated hedge for purposes of Federal limits and a description of the applicant’s activity in the underlying cash markets; and the exchange provides the Commission with a monthly report showing the disposition of all exemption applications, including cash-market information justifying the exemption. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Commission recognizes that there may be other positions or hedging strategies that are not ‘‘enumerated’’ that similarly could satisfy the bona fide hedge definition.177 These ‘‘non-enumerated’’ bona fide hedges may be granted today under existing §§ 1.47 and 1.48, and the Commission can continue to recognize non-enumerated bona fide hedges under the Final Rule. For further discussion of the recognition of non-enumerated bona fide hedges, see infra Sections II.C. and II.G. With the exception of risk management positions previously recognized as bona fide hedges, and assuming all regulatory requirements continue to be satisfied, market participants’ existing bona fide hedging recognitions under existing Federal position limits are grandfathered upon the Final Rule’s Effective Date (i.e., bona fide hedge exemptions that are currently recognized for purposes of Federal position limits, other than risk management positions, will continue to be recognized under the Final Rule). Last, before describing each individual enumerated hedge, the Commission also notes that it is adopting certain non-substantive, technical changes, and such changes are intended only to provide clarifications. For example, the Commission is making a technical change to the bona fide hedging definition by adopting the term in the singular tense in order to conform to the phrasing in CEA section 4a(c)(2).178 The Commission is also reordering the enumerated bona fide hedges to place related enumerated bona fide hedges closer together. vi. Enumerated Bona Fide Hedge Exemptions for Physical Commodities This Final Rule adopts the list of enumerated bona fide hedge exemptions as proposed in the 2020 NPRM, with certain amendments discussed below.179 177 See infra Section II.G. (discussing § 150.9). existing definition in § 1.3 of the Commission’s regulations is in the plural: ‘‘bona fide hedging transactions and positions.’’ The 2020 NPRM’s proposed definition was similarly plural. 179 Appendix A to part 150 lists the following enumerated bona fide hedges: (a)(1) Hedges of Inventory and Cash Commodity Fixed-Price Purchase Contracts; (a)(2) Hedges of Cash Commodity Fixed-Price Sales Contracts; (a)(3) Hedges of Offsetting Unfixed Price Cash Commodity Sales and Purchases; (a)(4) Hedges of Unsold Anticipated Production; (a)(5) Hedges of Unfilled Anticipated Requirements; (a)(6) Hedges of Anticipated Merchandising; (a)(7) Hedges by Agents; (a)(8) Short Hedges of Anticipated Mineral Royalties; (a)(9) Hedges of Anticipated Services; (a)(10) Offsets of Commodity Trade Options; (a)(11) Cross-Commodity Hedges. As previously mentioned, the Commission has also reorganized the order of the list of enumerated hedges. The Final Rule reorders Appendix A so that the bona 178 The PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 3265 a. Hedges of Inventory and Cash Commodity Fixed-Price Purchase Contracts (1) Background—Inventory and Cash Commodity Fixed-Price Purchase Contracts Inventory and fixed-price cash commodity purchase contracts have long served as the basis for a bona fide hedging position.180 This bona fide hedge is enumerated in paragraph (2)(i)(A) of the existing bona fide hedging definition in § 1.3, and recognizes as a bona fide hedge sales of any commodity for future delivery on a contract market which do not exceed in quantity ownership (i.e., inventory) or fixed-price purchase of the same commodity by the same person. Since 2011, the Commission has included hedges of inventory and cash commodity fixed-price purchase contracts in each of its position limits rulemakings, with minor proposed modifications to improve clarity.181 (2) Summary of the 2020 NPRM— Inventory and Cash Commodity FixedPrice Purchase Contracts This proposed enumerated bona fide hedge recognized that a commercial enterprise is exposed to price risk if it has obtained inventory in the normal course of business or has entered into a fixed-price spot or forward purchase contract calling for delivery in the physical marketing channel of a cashmarket commodity (or a combination of the two), and has not offset that price risk exposure (e.g., that the market price of the inventory could decrease). In connection with the proposed enumerated hedge, any such inventory, or a fixed-price purchase contract, must be on hand, as opposed to a non-fixed purchase contract or an anticipated purchase. An appropriate hedge to offset the price risk arising from inventory or a fixed-price purchase contract under the 2020 NPRM would be to establish a short position in a commodity derivative contract. The Commission also stated in the 2020 NPRM that an exchange may require such short position holders to demonstrate the ability to deliver against the short fide hedges are listed by hedges of purchases, sales, anticipated activities, or other new types of hedges. 180 See, e.g., 7 U.S.C. 6(a)(3) (1970). That statutory definition of bona fide hedging included sales of, or short positions in, any commodity for future delivery on or subject to the rules of any contract market made or held by such person to the extent that such sales or short positions are offset in quantity by the ownership or purchase of the same cash commodity by the same person. 181 81 FR at 96964; 78 FR at 75713; 76 FR at 11609. E:\FR\FM\14JAR2.SGM 14JAR2 3266 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations position in order to demonstrate a legitimate purpose for holding a position deep into the spot month.182 (2) Summary of the 2020 NPRM—Cash Commodity Fixed-Price Sales Contracts (3) Summary of the Commission Determination—Inventory and Cash Commodity Fixed-Price Purchase Contracts The Commission is adopting the enumerated bona fide hedge of inventory and cash commodity fixedprice purchase contracts as proposed. (4) Comments—Inventory and Cash Commodity Fixed-Price Purchase Contracts Aside from ASR, which expressed support for this enumerated hedge, the Commission did not receive any other specific comments on this enumerated hedge.183 b. Hedges of Cash Commodity FixedPrice Sales Contracts (1) Background—Cash Commodity Fixed-Price Sales Contracts Fixed-price cash commodity sales have long served as the basis for a bona fide hedging position.184 This bona fide hedge is enumerated in paragraphs (2)(ii)(A) and (B) of the existing bona fide hedging definition in § 1.3. This enumerated bona fide hedge recognizes as a bona fide hedging transaction or position hedges against purchases of any commodity for future delivery on a contract market which do not exceed in quantity: (A) The fixed price sale of the same cash commodity by the same person; and (B) the quantity equivalent of fixed-price sales of the cash products and by-products of such commodity by the same person. Since 2011, the Commission has included hedges of cash commodity fixed-price sales contracts in its position limits rulemakings, with no substantive modifications.185 khammond on DSKJM1Z7X2PROD with RULES2 182 85 FR at 11609–11610. For example, it would not appear to be economically appropriate to hold a short position in the spot month of a commodity derivative contract against fixed-price purchase contracts that provide for deferred delivery in comparison to the delivery period for the spot month commodity derivative contract. This is because the commodity under the cash contract would not be available for delivery on the commodity derivative contract. 183 ASR at 2. 184 See, e.g., 7 U.S.C. 6a(3) (1970). That statutory definition of bona fide hedging includes purchases of, or long positions in, any commodity for future delivery on or subject to the rules of any contract market made or held by such person to the extent that such purchases or long positions are offset by sales of the same cash commodity by the same person. 185 81 FR at 96964; 78 FR at 75824; 76 FR at 71689. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 This proposed enumerated bona fide hedge made minor modifications to the existing bona fide hedge, and recognized that a commercial enterprise is exposed to price risk if it has entered into a spot or forward fixed-price sales contract calling for delivery in the physical marketing channel of a cashmarket commodity, and has not offset that price risk exposure (i.e., that the market price of a commodity might be higher than the price of its fixed-price sales contract for that commodity). Under the 2020 NPRM, an appropriate hedge of a fixed-price sales contract would be to establish a long position in a commodity derivative contract to offset such price risk.186 (3) Summary of the Commission Determination—Cash Commodity Fixed-Price Sales Contracts The Commission is adopting the enumerated hedge for hedges of cash commodity fixed-price sales contracts as proposed. (4) Comments—Cash Commodity FixedPrice Sales Contracts Aside from ASR, which expressed support for this enumerated hedge, the Commission did not receive any other specific comments on this enumerated hedge.187 c. Hedges of Offsetting Unfixed Price Cash Commodity Sales and Purchases (1) Background—Offsetting Unfixed Price Cash Commodity Sales and Purchases Hedges of offsetting unfixed price cash commodity sales and purchases is currently enumerated in paragraph (2)(iii) of the existing bona fide hedging definition in § 1.3 and is subject to the Five-Day Rule. This enumerated hedge is the only existing enumerated hedge that expressly recognizes hedging the price risk arising from cash commodity unfixed-price transactions. This enumerated bona fide hedge allows a market participant to use commodity derivatives in excess of Federal position limits to offset an unfixed-price cash commodity purchase coupled with an unfixed-price cash commodity sale. Specifically, this enumerated bona fide hedge allows for ‘‘offsetting sales and purchases’’ for future delivery on a contract market which do not exceed in quantity that amount of the same cash commodity which has been bought and sold by the 186 85 FR at 11610. at 2. 187 ASR PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 same person at unfixed prices basis different delivery months of the contract market. While not part of the original regulatory bona fide hedge definition, the Commission adopted this enumerated bona fide hedge in 1987 to ‘‘remove any doubt’’ that certain cotton and soybean crush inter-month spreads were covered under the Commission’s bona fide hedge definition.188 Since 2011, the Commission has included this enumerated bona fide hedge in each of its position limits rulemakings.189 (2) Summary of the 2020 NPRM— Offsetting Unfixed Price Cash Commodity Sales and Purchases The Commission proposed to maintain this bona fide hedge, with a few modifications. The 2020 NPRM proposed to expand the existing bona fide hedge, which currently requires the offsetting purchase and sale to be at basis to different delivery months of the same commodity derivative contract, to additionally permit hedges of offsetting unfixed sales and unfixed purchases for different commodity derivative contracts in the same commodity (e.g., Brent/WTI), regardless of whether the contracts are in the same delivery month. This proposed change would permit the cash commodity to be bought and sold at unfixed prices at a basis to different commodity derivative contracts in the same commodity, even if the commodity derivative contracts were in the same calendar month (i.e., buy Brent in January; sell WTI in January).190 The Commission proposed this change to allow a commercial enterprise to enter into the described derivatives transactions to reduce the risk arising from either (or both) a location differential or a time differential in unfixed-price purchase and sale contracts in the same cash commodity.191 188 The Commission stated when it proposed this enumerated bona fide hedge, in particular, a cotton merchant may contract to purchase and sell cotton in the cash market in relation to the futures price in different delivery months for cotton, i.e., a basis purchase and a basis sale. Prior to the time when the price is fixed for each leg of such a cash position, the merchant is subject to a variation in the two futures contracts utilized for price basing. This variation can be offset by purchasing the future on which the sales were based and selling the future on which the purchases were based. Revision of Federal Speculative Position Limits, 51 FR 31648, 31650 (Sept. 4, 1986). 189 81 FR at 96964; 78 FR at 75714; 76 FR at 71689. 190 85 FR at 11608. 191 Id. In the case of reducing the risk of a location differential, and where each of the underlying transactions in separate derivative contracts may be in the same contract month, a position in a basis contract would not be subject to position limits, as E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations There were minimal comments on the proposed amendments to this hedge. IFUS explicitly supported the allowance of hedges against cash positions in the same delivery month.193 CMC and ACSA requested that the Commission modify the language of this enumerated bona fide hedge to include ‘‘offsetting sales or purchases.’’194 CMC and FIA stated that because merchants often sell commodities well in advance of purchasing them, such merchants are exposed to the exact same calendar spread price risk as merchants that have executed both unfixed price legs of a transaction, because any futures market calendar spread convergence or divergence will ‘‘affect both scenarios in exactly the same manner.’’195 These commenters contended that changing the language of the enumerated hedge from ‘‘and’’ to ‘‘or’’ would allow merchants to hedge against this exposure.196 In addition, because this is the only existing enumerated hedge that expressly recognizes hedging for unfixed price transactions, several commenters cited to this hedge when requesting that the Commission explicitly endorse that commercial transactions with unfixed-prices may serve as the basis for, and satisfy, the bona fide hedging definition.197 (5) Discussion of Final Rule—Offsetting Unfixed Price Cash Commodity Sales and Purchases The Commission is adopting the enumerated bona fide hedge for offsetting unfixed price cash commodity sales and purchases as proposed. The Commission considered the comments requesting the Commission to change this bona fide hedge’s language from referring to offsetting unfixed-price purchase ‘‘and’’ sale transactions (which requires both an unfixed purchase price transaction and an unfixed sale price transaction) to instead refer to unfixed-price purchase ‘‘or’’ sales transactions (which would require only either a single unfixedprice purchase transaction or an unfixed-price sale transaction) to facilitate hedging calendar spread price risk for those market participants that have executed only one leg of an unfixed-price physical transaction (i.e., only a physical purchase or a physical sale). The Commission continues to believe that the enumerated bona fide hedge for offsetting unfixed price cash commodity sales and purchases should continue to require both an unfixed-price cash commodity purchase and an offsetting unfixed-price cash commodity sale. For this particular bona fide hedge, absent either the unfixed-price purchase leg or the unfixed-price sale leg (or absent both legs), it would be less clear, and require a facts and circumstances analysis, to determine how the transaction could be classified as a bona fide hedge, that is, a transaction that reduces price risk.198 Under the Final Rule, a single-sided unfixed price physical transaction (i.e., a physical transaction involving an unfixed price purchase or an unfixed price sale, but not both) cannot be offset with derivatives in excess of position limits using this particular enumerated bona fide hedge. However, a market participant with an unfixed price purchase in the absence of an unfixedprice sale, or vice versa, could potentially qualify for one or more of the enumerated anticipatory bona fide hedges.199 Additionally, depending on discussed in connection with paragraph (3) of the proposed definition of ‘‘referenced contract.’’ 192 For example, in the case of a calendar spread, having both the unfixed-price sale and purchase in hand would set the timeframe for the calendar month spread being used as the hedge. 193 IFUS at 4. 194 CMC at 4; ACSA at 6. 195 CMC at 4; FIA at 16. 196 Id. 197 The Commission’s determination on the treatment of unfixed-price transactions under this Final Rule is in Section II.A.1.iv. 198 The contemplated derivative positions will offset the risk that the difference in the expected delivery prices of the two unfixed-price cash contracts in the same commodity will change between the time the hedging transaction is entered and the time of fixing of the prices on the purchase and sales cash contracts. Therefore, the contemplated derivative positions are economically appropriate to the reduction of risk. 199 Specifically, as discussed above, because the Commission does not view an unfixed-price commitment as filling, or satisfying, an anticipated need, market participants with unfixed-price commitments may qualify for an enumerated To be eligible for this enumerated hedge, both an unfixed-price cash commodity purchase ‘‘and’’ an offsetting unfixed-price cash commodity sale would have to be in hand, because having both the unfixed-price sale and purchase in hand would allow for an objective evaluation of the hedge.192 (3) Summary of the Commission Determination—Offsetting Unfixed Price Cash Commodity Sales and Purchases The Commission is adopting the enumerated bona fide hedge for offsetting unfixed price cash commodity sales and purchases as proposed. khammond on DSKJM1Z7X2PROD with RULES2 (4) Comments—Offsetting Unfixed Price Cash Commodity Sales and Purchases VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 3267 the facts and circumstances, a singlesided unfixed price contract could potentially be the basis for a nonenumerated bona fide hedge. While the Commission acknowledges concerns from commenters that market participants that have executed only one leg of a physical transaction (i.e., only an unfixed-price purchase or an unfixed-price sale) may need to hedge calendar spread price risk, the Commission believes the Final Rule offers several avenues for hedging such risks.200 For example, under the offsetting unfixed price cash commodity sales and purchases enumerated bona fide hedge, upon fixing the price of, or taking delivery on, the purchase contract, the owner of the cash commodity no longer has offsetting unfixed priced transactions, but may continue to hold the short derivative leg of the spread as a hedge against that fixed-price purchase or as inventory under the enumerated hedge for fixed price transactions. Alternatively, under this Final Rule, if the market participant fixes the price the sales contract first, he or she may continue to hold the long derivative leg of the spread by qualifying for bona fide hedge treatment for that long position under another enumerated bona fide hedge. For example, a market participant who otherwise meets all applicable requirements of one of the anticipatory bona fide hedges may qualify for such hedge(s) regardless of whether the market participant holds an unfixed-price purchase transaction. d. Hedges of Unsold Anticipated Production (1) Background—Unsold Anticipated Production Unsold anticipated production has long served as the basis for an enumerated bona fide hedging position.201 This bona fide hedge is currently enumerated in paragraph (2)(i)(B) of the bona fide hedging definition in existing § 1.3, and is subject to the Five-Day Rule. This anticipatory bona fide hedge, provided the market participant meets all applicable requirements and conditions. See Section II.A.1.iv. 200 The Final Rule also expands the ‘‘spread transaction’’ definition, so a market participant with an unfixed price purchase or sale may also qualify for a calendar spread exemption, for example, with one leg in the spot month. For further discussion of the Final Rule’s treatment of spread transactions, see Section II.A.20. 201 See 7 U.S.C. 6a(3)(A) (1940). That statutory definition of bona fide hedging, enacted in 1936, included the amount of such commodity such person is raising, or in good faith intends or expects to raise, within the next twelve months, on land (in the United States or its Territories) which such person owns or leases. E:\FR\FM\14JAR2.SGM 14JAR2 3268 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations existing enumerated bona fide hedge includes hedges against the sales of any commodity for future delivery on a contract market which does not exceed in quantity twelve months’ unsold anticipated production of the same commodity by the same person. The bona fide hedge of unsold anticipated production is one of two existing enumerated anticipatory bona fide hedges currently included in § 1.3, the other being unfilled anticipated requirements (discussed further below). The unsold anticipated production bona fide hedge allows a market participant who anticipates production, but who has not yet produced anything, to enter into a short derivatives position in excess of Federal position limits to hedge the price risk arising from that anticipated production. Since 2011, the Commission has included hedges of unsold anticipated production in each of its position limits rulemakings, with some modifications.202 The regulatory text for this existing enumerated bona fide hedge is silent about whether it applies to unsold anticipated production that is contracted to be sold under an unfixed-price transaction. (2) Summary of the 2020 NPRM— Unsold Anticipated Production The Commission proposed to maintain the existing enumerated bona fide hedge of unsold anticipated production, with modifications as follows. First, the Commission proposed to remove the twelve-month restriction.203 Second, consistent with the treatment for the other anticipatory bona fide hedges under the 2020 NPRM, the Commission proposed to eliminate the existing restrictions during the last five days of trading (i.e., eliminate the ‘‘Five-Day Rule’’).204 (3) Summary of the Commission Determination—Unsold Anticipated Production The Commission is adopting the enumerated bona fide hedge of unsold anticipated production as proposed. khammond on DSKJM1Z7X2PROD with RULES2 (4) Comments—Unsold Anticipated Production Several commenters, including ASR, ADM, and ICE, supported eliminating the twelve-month restriction.205 ASR, for example, noted that the lifecycle of 202 81 FR at 96964; 78 FR at 75714; 76 FR at 71689. 203 85 FR at 11608. 204 For further discussion of the Five-Day rule, see Section II.A.1.viii, Elimination of Federal Restriction Prohibiting Holding a Bona Fide Hedge Exemption During Last Five Trading Days, the ‘‘Five-Day Rule,’’ below. 205 ASR at 2; ADM at 2; ICE at 2; IECA at 2; and IFUS at 2. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 sugarcane extends beyond a twelvemonth period.206 Conversely, Better Markets and IATP opposed the elimination of the twelvemonth restriction.207 IATP stated that commercial market participants such as storage facilities should instead use insurance policies to manage their risks.208 Further, IATP stated that if the Commission extends the duration up to 24 months, the Commission should retain discretion to require market participants to demonstrate a production level proportionate to the amount in excess of the Federal position limit throughout the duration of the bona fide hedge exemption.209 (5) Discussion of Final Rule—Unsold Anticipated Production The Commission is adopting the enumerated bona fide hedge of unsold anticipated production as proposed. This enumerated bona fide hedge allows a market participant who anticipates production, but who has not yet produced anything, to enter into a short derivatives position in excess of Federal position limits to hedge the anticipated unsold production.210 The Commission clarifies, as discussed above under Section II.A.1.iv., that the enumerated bona fide hedge for unsold production is available to a market participant who satisfies all applicable requirements regardless of whether the market participant has entered into an unfixed-price sales transaction in connection with its anticipated unsold production. However, acquiring an unfixed-price sales contract alone is not a basis for qualifying for this bona fide hedge. Rather, under the Final Rule, entering into an unfixed-price sales transaction will not prevent a market participant from qualifying for the unsold anticipated production bona fide hedge. As the Commission explains above, an unfixed-price sales commitment does not address the bona fide hedging need related to anticipated unsold production because the market participant’s price risk to its anticipated production has not been fixed (i.e., the unfixed-price sales contract may fall below the cost of production). In other words, a producer 206 ASR at 2. at 15–17; Better Markets at 57–58. 208 IATP at 15–17. 209 Id. 210 Once a market participant finishes its production, the market participant will no longer qualify for this enumerated bona fide hedge since its production is no longer anticipatory. Instead, its completed production is now part of its inventory. However, the enumerated bona fide hedge for inventory and cash commodity fixed-price purchase contracts (discussed below) would become available to the market participant. 207 IATP PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 with an unfixed-price sales commitment for its production still has an anticipated need related to its price risk until the price of the commitment is fixed. However, once the market participant enters into a fixed-price sales contract, the market participant no longer has price risk that needs to be hedged (i.e., its short futures contract is no longer necessary as a hedge for its anticipated production). Accordingly, the market participant that enters into the fixed-price transaction no longer has an anticipated need to hedge the price risk associated with its unsold production (i.e., the anticipated production is deemed to be ‘‘sold’’ by fixed-price sales transaction) and would not qualify for this anticipated unsold production bona fide hedge. Consequently, if the market participant no longer qualifies for the unsold anticipated production bona fide hedging recognition (e.g., it has entered into a fixed-price sales contract), its derivative position, to the extent the position is above an applicable position limit, must be reduced in an orderly manner in accordance with sound commercial practices. However, if the market participant entered into a fixedprice transaction, while it could not continue to qualify for the unsold anticipated production bona fide hedge, the market participant may be able to qualify for the enumerated bona fide hedge for cash commodity fixed-price sales contracts, assuming all applicable requirements are met.211 While the Commission acknowledges the comments from Better Markets and IATP opposing the removal of the twelve-month restriction, the Commission believes that this twelvemonth restriction may be unsuitable in connection with additional core referenced futures contracts with the underlying agricultural and energy commodities that would be subject to Federal position limits for the first time under this Final Rule since these nonlegacy commodities may have longer growth and/or production cycles than the nine legacy agricultural contracts. The existing twelve-month restriction may thus be unnecessarily short in comparison to the expected life of investment in production facilities. While this enumerated bona fide hedge for unsold production does not have an associated twelve-month restriction under the Final Rule, the Commission notes that because all bona fide hedges must be economically appropriate to the 211 For further discussion of the enumerated bona fide hedge for cash commodity fixed-price sales contracts, see Section II.A.1.vi.b. E:\FR\FM\14JAR2.SGM 14JAR2 3269 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations reduction of price risk pursuant to the CEA, a market participant may only qualify for this enumerated bona fide hedge for anticipated unsold production to the extent the market participant has a good faith anticipation of legitimate anticipated unsold production giving rise to such price risk. Further, additional provisions finalized herein under the Final Rule will help ensure that all bona fide hedges, including bona fide hedges of unsold anticipated requirements, comport with the CEA and the Commission’s regulations, and are objectively verifiable and free from abuse.212 e. Hedges of Unfilled Anticipated Requirements (1) Background—Unfilled Anticipated Requirements khammond on DSKJM1Z7X2PROD with RULES2 The existing bona fide hedge for unfilled anticipated requirements is currently enumerated in paragraph (2)(ii)(C) of the existing bona fide hedging definition in § 1.3. This bona fide hedge includes hedges against purchases of any commodity for future delivery on a contract market which do not exceed in quantity twelve months’ unfilled anticipated requirements of the same cash commodity for processing, manufacturing, or feeding by the same person. Consistent with the existing enumerated bona fide hedge for anticipated unsold production, as discussed above, the existing bona fide hedge for unfilled anticipated requirements is similarly subject to the twelve-month restriction as well as a less-restrictive version of the ‘‘Five-Day Rule.’’ With respect to the Five-Day Rule, under existing § 1.3, the unfilled anticipated requirements bona fide hedge provides that the size of a market participant’s position held ‘‘in the five last trading days’’ must not exceed the person’s unfilled anticipated requirements of the same cash commodity for that month and for the next succeeding month.213 However, the regulatory text in existing § 1.3 is silent about whether the bona fide hedge applies to unfilled anticipated requirements that are contracted to be supplied under an 212 See infra §§ 150.5 and 150.9 (reporting and recordkeeping obligations); Appendix B to part 150. 213 This is essentially a less-restrictive version of the five-day rule, allowing a participant to hold a position during the end of the spot period if economically appropriate, but only up to two months’ worth of anticipated requirements. The two-month quantity limitation has long-appeared in existing § 1.3 as a measure to prevent the sourcing of massive quantities of the underlying in a short period. 17 CFR 1.3. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 unfixed-price transaction or whether such unfixed-price supply transaction would ‘‘fill’’ the anticipated requirements. As discussed above, staff previously has addressed this question through Staff Letter No. 12–07, in which staff clarified that a commercial entity may qualify for the existing enumerated bona fide hedge for unfilled anticipated requirements even if the commercial entity has entered into long-term, unfixed-price supply or requirements contracts because, as staff explained, the unfixed-price purchase contract does not ‘‘fill’’ the commercial entity’s anticipated requirements.214 As explained in Staff Letter No. 12–07, the price risk of such ‘‘unfilled’’ anticipated requirements is not offset by the unfixed-price forward contract because the price risk remains with the commercial entity, even though the entity has contractually assured a supply of the commodity. Staff Letter No. 12–07 had the practical effect of affirming that market participants with firm commitments at unfixed prices may still be able to avail themselves of this enumerated anticipatory hedge for unfilled requirements. new provision, however, the commodity is not for use by the same person—that is, the utility—but rather the commodity is for anticipated use by the utility to fulfill its obligation to serve retail customers. Finally, consistent with the treatment for the other anticipatory bona fide hedges under the 2020 NPRM, the Commission proposed to eliminate the existing restrictions during the last five last days of trading. (2) Summary of the 2020 NPRM— Unfilled Anticipated Requirements The Commission proposed several amendments to the unfilled anticipated requirements bona fide hedge. First, the Commission proposed to remove the twelve-month restriction because the Commission recognized that market participants may have a legitimate commercial need to hedge unfilled anticipated requirements for a period longer than twelve months.215 Second, the Commission proposed to remove from the regulatory text the agricultural-specific term ‘‘feeding,’’ and to replace that word with a reference to ‘‘use by that person.’’ Third, recognizing that utilities are not the entities who ‘‘use’’ the commodity, the Commission also proposed to add as a permissible hedge the unfilled anticipated requirements for the contract’s underlying cash commodity for the resale by a utility to meet the anticipated demand of its customers. This proposed provision is analogous to the existing unfilled anticipated requirements provision ‘‘for processing, manufacturing or use by the same person[.]’’ 216 Under this proposed (i) Elimination of Requirement to Hedge Only Twelve Months’ Quantity of Unfilled Anticipated Requirements 214 CFTC Letter No. 12–07, Interpretation, Request for guidance regarding meaning of ‘‘unfilled anticipated requirements’’ for purposes of bona fide hedging under the Commission’s position limits rules (Aug. 16, 2012). 215 See, e.g., 85 FR at 11610. 216 17 CFR 1.3. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 (3) Summary of the Commission Determination—Unfilled Anticipated Requirements The Commission is adopting the unfilled anticipated requirements enumerated bona fide hedge as proposed. (4) Comments—Unfilled Anticipated Requirements Commenters supported continuing to include this bona fide hedge as part of the Commission’s amended suite of enumerated anticipatory bona fide hedges.217 As described below, commenters also requested the Commission clarify certain aspects of the proposed version. Only a small group of commenters directly commented on the elimination of the twelve-month restriction. ICE, IFUS, IECA, AGA, ADM and NOPA supported eliminating the twelve-month restriction,218 with ADM stating that there may be times this anticipatory hedge is needed for ‘‘commercial purposes beyond twelve-months.’’ 219 In contrast, Better Markets opposed the removal of the restriction, stating that such removal would make the hedge less reasonably verifiable and open the hedge to potential abuse.220 (a) Discussion of Final Rule—TwelveMonth Restriction After considering public comments, the Commission has determined that the commercial need to hedge unfilled anticipated requirements for a period longer than twelve months, along with the Commission’s experience in overseeing exemptions 221 under this 217 e.g., AGA at 6–7; ADM at 2; CEWG at 4; EEI and EPSA jointly at 5; IECA at 2; NOPA at 2; NGSA at 3. 218 AGA at 6–7, ADM at 2, NOPA at 2, IFUS at 2, ICE at 2, and IECA at 2. 219 ADM at 2. 220 Better Markets at 58–59. 221 The Commission and its predecessor agency, the Commodity Exchange Authority, has decades of E:\FR\FM\14JAR2.SGM Continued 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3270 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations enumerated bona fide hedge, suggest in favor of eliminating the twelve-month restriction. While the Commission acknowledges the comments from Better Markets opposing the removal of the twelve-month restriction, the Commission notes that, a twelve-month limitation in connection with this particular enumerated bona fide hedge may be unsuitable in connection with commodities other than the nine legacy agricultural commodities. For example, a processor or utility relying on the unfilled anticipated requirements bona fide hedge has a physical limit on processing, or energy generation, respectively, which should generally result in relatively predictable levels of activity that will not vary much year to year. Further, additional provisions finalized herein will help ensure that all bona fide hedges, including hedges of unfilled anticipated requirements, comport with the CEA and the Commission’s regulations, and are reasonably verifiable and free from abuse. For example, under § 150.5(a)(2)(ii)(A), finalized herein, all market participants seeking a bona fide hedge exemption for referenced contracts subject to Federal position limits, including those market participants with enumerated bona fide hedges that are self-effectuating for purposes of Federal position limits, must still file an application to the exchange requesting an exemption from the applicable exchange-set position limits prior to exceeding the exchangeset limits. The application for an exemption from exchange-set limits must include information the exchange needs to determine, and the Commission can use that information to independently determine, whether the facts and circumstances support the exchange granting such an exemption. The market participant must include a description of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the position for which the application is submitted, including, but not limited to, information regarding the offsetting cash positions.222 The exchange is required to take into account whether the exemption would result in positions that would not be in accord with sound commercial practices and whether the position would exceed an amount that may be established and liquidated in an orderly fashion.223 Accordingly, if hedging more than twelve months’ expertise in granting bona fide exemptions. See 21 FR 6913 (Sep 13, 1956). 222 150.5(a)(2)(ii)(A). 223 150.5(a)(2)(ii)(G). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 quantity of unfilled anticipated requirements would not be in accord with sound commercial practices, or would exceed an amount that may be established and liquidated in an orderly fashion, the exchange would be prohibited from granting the exemption. Even in the absence of a Federal twelve-month restriction, when administering exchange-set limits, exchanges may, as they do today, implement a variety of restrictions and limitations on position size to maintain orderly markets and to fulfill their regulatory obligations. As described in further detail below, the Commission is finalizing guidance in paragraph (b) of Appendix B to part 150 to help exchanges determine when any such restrictions during the spot month might be appropriate, and when such restrictions may not be needed. For example, consistent with the guidance in Appendix B to part 150, paragraph (b), an exchange may consider adopting rules to require that during the lesser of the last five days of trading (or such time period for the spot month), such positions must not exceed the person’s unfilled anticipated requirements of the underlying cash commodity for that month and for the next succeeding month.224 Depending on the specific facts and circumstances, and particular market dynamics, any such quantity limitation may prevent the use of long futures to source large quantities of the underlying cash commodity. The Commission may be able to determine that an exchange’s adoption of a twomonth limitation would allow for an amount of activity that is economically appropriate and in line with common commercial hedging practices, without jeopardizing any statutory objectives. (ii) Scope of Unfilled Anticipated Requirements and Unfixed-Price Transactions Commenters questioned the extent to which anticipated requirements may be considered to be ‘‘filled’’ by unfixedprice purchase supply contracts under the proposed enumerated bona fide hedge for unfilled anticipated requirements. COPE, IECA, EPSA and EEI requested clarification on whether this enumerated hedge covers anticipated requirements ‘‘filled’’ by an 224 This is essentially a less-restrictive version of the Five-Day rule, allowing a participant to hold a position during the end of the spot period if economically appropriate, but only up to two months’ worth of anticipated requirements. The two-month quantity limitation has long-appeared in existing § 1.3 as a measure to prevent the sourcing of massive quantities of the underlying in a short time period. 17 CFR 1.3. PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 unfixed-price purchase contract common to many electric generators.225 IECA recommended the Commission should either (i) adopt a broad definition of the word ‘‘unfilled’’ that would include anticipated requirements that are ‘‘filled’’ by unfixed-price transactions, or (ii) expand this bona fide hedge to include both ‘‘unfilled’’ and ‘‘unpriced’’ 226 anticipated requirements.227 AGA also requested clarification 228 regarding the 2020 NPRM’s statement that this bona fide hedge would recognize a position where a utility is ‘‘required or encouraged’’ by its public utility commission to hedge.229 AGA noted that while the ‘‘required or encouraged’’ language is not in the proposed regulatory text, clarification of the scope for the exemption would result in more certainty for those utilities in states where the public utility commission may not directly address or require hedging activities, but instead may allow or permit hedging for the potential benefits to customers.230 (a) Discussion of Final Rule—Scope of Unfilled Anticipated Requirements Regarding the requests for clarification on the scope of the term ‘‘unfilled’’ in this enumerated hedge, the Commission clarifies that anticipated ‘‘unfilled’’ requirements are not ‘‘filled’’ by unfixed-price transactions. Accordingly, a market participant with a purchase or sale of a physical commodity, entered into at an unfixed price, may continue to avail itself of this anticipatory hedge even though the participant has entered into a firm, albeit unfixed-price, commitment, and provided all applicable requirements are satisfied.231 As discussed above under Section II.A.1.iv., the Commission adopts the interpretation of Staff Letter No. 12– 07.232 That is, commercial entities that 225 COPE at 6; IECA at 7–8; EPSA and EEI jointly at 5. 226 The Commission recognizes that market participants may utilize different nomenclature to refer to unfixed-price contracts. For example, some commenters may refer to these contracts as ‘‘unpriced’’ contracts, while others may refer to these physical contracts as being at an unfixed spot index price. See FIA at 17, 31; COPE at 6. 227 IECA at 7–8. 228 AGA at 6–7. 229 See 7 U.S.C. 6a(c)(2)(A)(iii); 85 FR at 11610 (‘‘This would recognize a bona fide hedging position where a utility is required or encouraged by its public utility commission to hedge’’). 230 AGA at 6–7. 231 The Commission clarifies that unfixed-price contracts include physical fuel agreements for power production for security of supply that are priced at an unfixed spot index price. 232 CFTC Staff Letter No. 12–07. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations enter into unfixed-price transactions may continue to qualify for the enumerated bona fide hedge for unfilled anticipated requirements as long as the commercial entity otherwise satisfies the criteria for this hedge. This rationale is predicated on the fact that an unfixedprice purchase commitment does not fill an anticipated requirement in that the market participant’s price risk to the input has not been fixed. The Commission continues to believe that unfilled anticipated requirements are those anticipated inputs that are estimated in good faith and that have not been filled. As such, an anticipated requirement may be filled by fixed-price purchase commitments, holdings of commodity inventory, or unsold anticipated production of the market participant.233 Unfixed-price transactions, however, do not fill an anticipated requirement. Under this anticipatory hedge, once the price is fixed on a supply contract, the market participant holding the anticipatory hedge position must, to the extent the position is above an applicable Federal position limit, liquidate the position in an orderly manner in accordance with sound commercial practices. Nevertheless, subject to the specific facts and circumstances, the market participant at that point may have established the basis for a different bona fide hedge exemption to offset the price risk arising from its fixed price exposure. Finally, the Commission agrees with the commenters’ request for clarification that a utility qualifies for the unfilled anticipated requirements enumerated hedge even if the utility is not ‘‘required or encouraged’’ by its public utility commission to hedge. khammond on DSKJM1Z7X2PROD with RULES2 f. Hedges of Anticipated Merchandising (1) Background—Anticipated Merchandising The existing bona fide hedge definition in § 1.3 includes enumerated bona fide hedges that recognize offsets of certain anticipated activities,234 but does not currently include an enumerated bona fide hedge for anticipated merchandising. While the Commission’s 2011 Final Rule included an enumerated hedge for anticipated merchandising, it was a narrow hedge focused on the leasing of storage capacity,235 and that rulemaking was ultimately vacated. 233 81 FR at 96752. e.g., §§ 1.3(z)(2)(i)(B) (unsold anticipated production) and 1.3(z)(2)(ii)(C) (unfilled anticipated requirements). 235 The 2011 Final Rule was the first time the Commission recognized that in some 234 See, VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3271 (2) Summary of the 2020 NPRM— Anticipated Merchandising (4) Comments—Anticipated Merchandising The Commission proposed a new enumerated bona fide hedge for anticipated merchandising. The proposed anticipated merchandising hedge recognized long or short positions in commodity derivative contracts that offset the anticipated change in value of the underlying commodity that a person anticipates purchasing or selling.236 While the proposed enumerated anticipated merchandising bona fide hedge would operate as a selfeffectuating bona fide hedge, the proposed bona fide hedge was subject to the following conditions: (1) The position offsets the anticipated change in value of the underlying commodity that a person anticipates purchasing or selling; (2) the position does not exceed in quantity twelve months’ of current or anticipated purchase or sale requirements of the same cash commodity that is anticipated to be purchased or sold; (3) the person holding the position is a merchant handling the underlying commodity that is subject to the anticipated merchandising hedge; (4) that such merchant is entering into the position solely for purposes related to its merchandising business; and (5) the person has a demonstrated history of buying and selling the underlying commodity for its merchandising business.237 (i) Generally A majority of commenters strongly supported the addition of an enumerated bona fide hedge for anticipatory merchandising.238 In particular, market participants from the energy industry strongly supported the inclusion of this enumerated hedge, subject to certain clarifications described in detail further below.239 On the other hand, Better Markets indicated that the enumerated anticipatory bona fide hedges generally, and particularly the enumerated hedge for anticipatory merchandising, pose a regulatory avoidance risk.240 Better Markets expressed concern that market participants could attempt to claim an underlying risk is anticipated in a cash commodity in order to justify positions in referenced contracts that exceed Federal position limits.241 In addition to expressing support for the inclusion of this enumerated bona fide hedge, most commenters also requested clarity or guidance on the scope of the proposed anticipated merchandising bona fide hedge. For example, CMC stated that the Commission must be clear with the exchanges and the end-user community about what activity is included in the enumerated anticipated merchandising bona fide hedge.242 Similarly, Cargill and NGFA supported the addition of the enumerated anticipated merchandising bona fide hedge, but urged the Commission to provide more clarity on how the enumerated bona fide hedge would be applied.243 Cargill and NGFA also requested that the Commission address language that appeared in footnote 105 of the 2020 NPRM,244 (3) Summary of the Commission Determination—Anticipated Merchandising The Commission is adopting the anticipated merchandising enumerated hedge as proposed, and makes certain clarifications below to respond to specific questions from commenters summarized below. The Commission recognizes that anticipated merchandising is a hedging practice commonly used by some commodity market participants, and that merchandisers play an important role in the physical supply chain. The Commission also recognizes that the derivative transactions utilized by commercial participants to manage such merchandising activity are beneficial to price discovery. circumstances, a market participant that owns or leases an asset in the form of storage capacity could establish positions to reduce the risk associated with returns anticipated from owning or leasing that capacity. In those narrow circumstances, the Commission found that those transactions satisfied the statutory definition of a bona fide hedging transaction. 236 85 FR at 11727. 237 Id. PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 238 AGA at 1, 8; AFR at 2; Cargill at 4–6; NGSA at 2, 4; CMC at 4–5, 7–8; ADM at 3; NCFC at 2– 4; Chevron at 2, 5; Suncor at 3, 5; IFUS at 2 (Exhibit 1 RFC 4); ICEA at 2; NGFA at 4, 7; CCI at 7–9; ASR at 2; FIA at 16; CEWG at 14. 239 AGA at 8; AFR at 2; Cargill at 5–6; NGSA at 4; CMC at 5, 7; ADM at 3; NCFC at 3–4; Chevron at 5; Suncor at 5; IFUS at Exhibit 1 RFC 4; ICEA at 2; NGFA at 7; CCI at 7–9. 240 Better Markets at 3, 59–60 (stating that ‘‘. . . an identical conceptual avoidance risk continues to exist across all of these anticipatory hedges— namely, that firms may claim an underlying risk is anticipated in order to justify positions well over the speculative limits in Referenced Contracts’’). 241 Id. 242 CMC at 5 (stating that n.105 of the 2020 NPRM casts a significant shadow of uncertainty and that if the Commission believes limits are necessary, it must be clear with the exchanges and the end-user community about what activities are enumerated). 243 Cargill at 5–6; NGFA at 7. 244 85 FR at 11612. Footnote 105 from the 2020 NPRM provided: ‘‘Similarly, other examples of anticipatory merchandising that have been E:\FR\FM\14JAR2.SGM Continued 14JAR2 3272 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations which implied that certain storage hedges and hedges of assets owned or anticipated to be owned would be evaluated through the non-enumerated bona fide hedge process, rather than as a self-effectuating enumerated anticipated merchandising bona fide hedge.245 (ii) Requirements for Anticipated Merchandising (a) Requirement to Hedge Only Twelve Months’ Worth of Anticipated Requirements Although many public comments addressed the new anticipated merchandising bona fide hedge, only a few commenters opposed the proposed requirement to limit this hedge to only twelve months’ worth of current or anticipated purchase or sale requirements of the same cash commodity that is anticipated to be purchased or sold. FIA opposed the twelve-month restriction, stating that CEA section 4a(c)(2) does not tie the validity of a bona fide hedge to the duration of the commercial requirement being hedged.246 FIA also provided an example pointing out that market participants often need hedges of anticipated purchases or sales longer than twelve months, such as when a merchant has a reasonable expectation of anticipated sales beyond a twelvemonth quantity.247 Similarly, ADM stated that anticipatory merchandising transactions should be considered similar to ‘‘hedges of anticipated requirements’’ and therefore not subject to the twelvemonth restriction.248 khammond on DSKJM1Z7X2PROD with RULES2 (b) Discussion of Final Rule—TwelveMonth Restriction After considering the comments on the requirement to hedge only twelve months’ worth of anticipated requirements, the Commission is adopting the twelve-month restriction as proposed. The Commission continues to believe that, as stated in the 2020 NPRM, this requirement is intended to ensure that merchants are hedging their legitimate anticipated merchandising described to the Commission in response to request for comment on proposed rulemakings on position limits (i.e., the storage hedge and hedges of assets owned or anticipated to be owned) would be the type of transactions that market participants may seek through one of the proposed processes for requesting a non-enumerated bona fide hedge recognition.’’ 245 Cargill at 5–6; NGFA at 7. 246 FIA at 16–17. 247 Id. 248 ADM at 3. The 2020 Proposal would remove the existing 12-month restriction applicable to the existing enumerated hedge for unfilled anticipated requirements. See 85 FR at 11610. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 exposure to the value change of the underlying commodity, while calibrating the anticipated need within a reasonable timeframe and subject to the limitations in physical commodity markets, such as annual production or processing capacity.249 A twelve-month restriction for anticipated merchandising is suitable in connection with contracts that are based on anticipated activity on yet-to-be established cash positions due to the uncertainty of forecasting such activity and, all else being equal, the increased risk of excessive speculation on the price of a commodity the longer the time period before the actual need arises. Regarding FIA’s comment opposing the twelve-month restriction based on FIA’s interpretation of CEA section 4a(c)(2), the Commission is comfortable that hedging twelve months’ or less of current or anticipated purchase or sale requirements of the same cash commodity that is anticipated to be purchased or sold is consistent with the CEA section 4a(c)(2)(A)(ii) requirement that bona fide hedges be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise.250 However, hedging more than twelve months’ anticipated purchase or sale requirements could in some cases be inconsistent with that statutory requirement. Accordingly, bona fide hedges involving more than twelve months’ worth of anticipated requirements for anticipated merchandising are best evaluated on a case-by-case basis under the nonenumerated process adopted herein. The Commission understands that commercial firms may seek to manage the price risk of more than twelve months’ anticipated merchandising activities; where such situations arise, the Commission believes a nonenumerated bona fide hedge could be appropriate. The Commission also considered comments that stated that the Commission should treat the proposed anticipated merchandising bona fide hedge similar to the other anticipatory bona fide hedges adopted herein (i.e., the enumerated bona fide hedges for unsold anticipated production and unfilled anticipated requirements), which are no longer subject to the twelve-month restriction.251 However, the Commission believes that the enumerated bona fide hedge for anticipated merchandising, which is a 249 85 FR at 11611. 7 U.S.C. 6a(c)(2)(A)(ii). 251 ADM at 3. 250 See PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 new enumerated bona fide hedge, is distinguishable from the enumerated bona fide hedges for unsold anticipated production and unfilled anticipated requirements, which both have been part of the Federal position limits framework for decades. In particular, the Commission has determined that a twelve-month restriction is unnecessary for bona fide hedges of unfilled anticipated requirements and unsold anticipated production in part because anticipated production and requirements, unlike merchandising, are linked and subject to inherent physical limits. For example, a processor has a physical limit on production capacity to support claims of anticipated unsold production. Likewise, a manufacturer, processor or utility has a physical limit on manufacturing, processing, or energy generation, respectively, for similar reasons to tie any claim of anticipated requirements. In each case, anticipated production or requirements generally should result in relatively predictable levels of activity that will not vary much year to year. In contrast, the amount a given market participant could claim to anticipate merchandising is potentially unlimited and less connected to physical production capacity.252 (iii) Request for Clarification—Meaning of ‘‘Merchant’’ Comments from energy market participants requested that the Commission clarify the meaning of the term ‘‘merchant’’ as such term is used in the regulatory text of the proposed anticipated merchandising hedge.253 Specifically, market participants from the energy industry expressed concern about whether the Commission would construe the term ‘‘merchant’’ such that only entities that are solely merchants, and not engaged in other business activities, would qualify for the anticipated merchandising bona fide hedge.254 These commenters explained that large energy companies with 252 To verify market participants’ bona fide hedging needs, the Final Rule’s recordkeeping requirements require persons availing themselves of enumerated bona fide hedge recognitions to maintain complete books and records concerning all relevant information on their anticipated requirements, production, and merchandising activities. See 17 CFR 150.3(d)(1). Furthermore, the Commission notes that as part of the exemption application process under final § 150.5, persons seeking exemptions from exchange-set position limits are required to include a description of its activities in the cash markets and swap markets for the commodity underlying the position for which the application is submitted. 253 CMC at 5; Shell at 8; Chevron at 5–6; Suncor at 5–6; CEWG at 15–16. 254 Shell at 8; Chevron at 5–6; Suncor at 5–6; CEWG at 15–16. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 vertically integrated corporate structures typically have several legal entities that perform individual business functions, including merchandising.255 As such, these commenters requested the Commission clarify that integrated energy companies routinely engaged in merchandising activities, as well as other activities such as production, processing, marketing and power generation, may utilize the enumerated hedge for anticipated merchandising in addition to other bona fide hedges.256 (a) Discussion of Final Rule—Meaning of ‘‘Merchant’’ The Commission is adopting the term ‘‘merchant’’ in the final anticipated merchandising bona fide hedge as proposed, but clarifies here the intended meaning of that term. In particular, the Commission is clarifying that the term ‘‘merchant’’ in the anticipated merchandising enumerated bona fide hedge is not limited to those entities exclusively engaged in the business of merchandising. Instead, the term ‘‘merchant’’ may include physical commodity market participants that, in addition to offering or entering into transactions solely for purposes related to their merchandising business, may otherwise also be a producer, processor, or commercial user of the commodity that underlies the anticipated merchandising transaction. The Commission’s use of the term ‘‘merchant’’ is intended to capture commercial market participants who participate in the physical commodity market, and does not exclude such participants simply because they have a vertically integrated corporate structure. That is, energy, agricultural, or metal companies in the physical commodity market with vertically-integrated or complex corporate structures are not excluded as merchants, so long as they otherwise satisfy all applicable requirements related to the anticipated merchandising bona fide hedge. The condition requiring the person to be a merchant to qualify for this enumerated hedge is consistent with the Commission’s longstanding practice of providing commercial market participants relief from certain regulatory requirements as a way of reducing regulatory compliance obligations that would otherwise burden a commercial market participant’s physical commodity business. The Commission has taken a similar approach under the trade option exemption by exempting the physically 255 Id. 257 Trade Options, Final Rule, 81 FR 14966 (March 21, 2016). 256 Id. VerDate Sep<11>2014 delivered commodity options purchased by commercial users of the commodities underlying the options. Under the trade option relief, the Commission recognized that commercial market participants needed relief by generally exempting qualifying commodity options from the swap requirements of the CEA and the Commission’s regulations.257 Unlike in the trade option requirements, there is no requirement under the anticipated merchandising enumerated bona fide hedge that both counterparties qualify as merchants. The anticipated merchandising enumerated bona fide hedge, however, is intended to generally benefit the same type of market participants as the trade option exemption, that is, commercial market participants who participate in the physical commodity market for the underlying commodity being merchandised. As such, the text of the anticipated merchandising enumerated bona fide hedge excludes a party who is not entering into the anticipated merchandising activity solely for commercial purposes related to its merchandising business, but instead, to speculate on the price of the underlying commodity. For example, noncommercial market participants who employ various arbitrage strategies, including sometimes trading arbitrage positions in cash commodity markets to speculate on the price of the underlying commodity, and those market participants with highly leveraged derivatives portfolios of non-physical commodities, would not qualify as merchants. Finally, the Commission has determined that it is not necessary to amend the regulatory text’s reference to merchant to expressly include producers or processors. As clarified above, a producer and a processor may qualify for the anticipated merchandising bona fide hedge as a merchant if a part of their business involves merchandising. Furthermore, such entities that are also producers or processors may otherwise rely on the enumerated anticipated unsold anticipated production or unfilled anticipated requirements bona fide hedges, where applicable. Thus, the Commission is providing these market participants with ample flexibility to manage the price risks arising from their anticipated merchandising activity using an expanded suite of anticipatory bona fide hedges. 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 3273 (iv) Requirement for a History of Merchandising The Commission did not receive any specific comments on the proposed requirement to demonstrate a history of merchandising activity. (a) Discussion of Final Rule—History of Merchandising Requirement The Commission is adopting the requirement to demonstrate a history of merchandising as proposed. Such demonstrated history must include a history of making and taking delivery of the underlying commodity, and a demonstrated ability to store and move the underlying commodity.258 A merchandiser that lacks the requisite history of anticipated merchandising activity could still potentially receive bona fide hedge recognition under the non-enumerated process, so long as the merchandiser can otherwise demonstrate compliance with the bona fide hedging definition and other applicable requirements, including demonstrating activities in the physical marketing channel, including, for example, arrangements to take or make delivery of the underlying commodity.259 (v) Scope of Anticipated Merchandising Activity In response to comments from the exchanges and market participants, the Commission is providing further clarity on the scope of the enumerated anticipated merchandising bona fide hedge. The Commission discusses below certain non-exclusive types of activities that are covered by the enumerated anticipated merchandising bona fide hedge. (a) Request for Clarification—UnfixedPrice Contracts and Enumerated Anticipated Merchandising Hedge Commenters requested clarification on whether the enumerated bona fide hedge for anticipated merchandising may be used to manage price risk arising from unfixed-price physical commodity transactions. Specifically, several commenters requested clarification on whether a firm may use the anticipated merchandising bona fide hedge to manage the risk associated with a single-sided unfixed purchase or sale at a moment when the same firm does not have an offsetting sale or purchase.260 In 258 85 FR at 11611. 259 Id. 260 NCFC at 3–4; CMC at 4; IFUS at 4–5; NGSA at 6 (requesting the Commission unambiguously recognize hedges of index-price risk (not just fixedprice risk), noting that exchanges currently recognize these types of hedges). E:\FR\FM\14JAR2.SGM 14JAR2 3274 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations addition to commercial market participants, ICE and CME Group also requested that the Commission recognize single-sided hedges of unfixed-price purchases or sales. Similar to energy market participants, ICE noted that pricing physical energy commodity transactions at unfixed prices is a common pricing mechanism in the energy markets.261 CME Group provided a hypothetical example of a single-side floating or unfixed-price purchase or sale to demonstrate that derivatives positions entered into to effectuate that single-sided unfixedprice purchase or sale would reduce the price risk arising for each counterparty.262 Some commenters requested the Commission clarify that market participants can utilize the enumerated anticipatory merchandising hedge to manage the price risks arising from unfixed-price transactions.263 Other commenters suggested the Commission could create a new enumerated bona fide hedge category solely to recognize hedges of unfixedprice transactions.264 (1) Discussion of Final Rule—UnfixedPrice Contracts and Enumerated Anticipated Merchandising Hedge As discussed above under Section II.A.1.iv., the Commission is clarifying that market participants that enter into unfixed-price transactions may still be able to qualify for the enumerated bona fide hedge for anticipated merchandising. In other words, a commercial entity that enters into an unfixed-price transaction may qualify for an anticipated merchandising bona fide hedge as long as the market participant satisfies the other requirements, discussed above and below, of the final anticipated merchandising bona fide hedge (e.g., qualifies as a merchant, demonstrates a history of merchandising and satisfies the twelve-month restriction). This rationale is predicated on the fact that an unfixed-price transaction does not address a merchant’s anticipated merchandising need in that the merchant’s price risk to the merchandise has not been fixed. Accordingly, a merchant may use the anticipated merchandising hedge to khammond on DSKJM1Z7X2PROD with RULES2 261 ICE at 4. Group at 8. 263 CEWG at 19; CMC at 8; Shell at 7–8; ACSA at 6; ICE at 5; CME Group at 8; Ecom at 1; Southern Cotton at 2; Canale Cotton at 2; Moody Compress at 1; IMC at 2; Mallory Alexander at 2; ACA at 2; East Cotton at 2; Jess Smith at 2; Olam at 2; McMeekin at 2; Memtex at 2; Omnicotton at 2; Toyo at 2; Texas Cotton at 2; NCC at 1; Walcot at 2; White Gold at 2. 264 ACSA at 6–7; NCC at 2. 262 CME VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 manage the risk associated with a single sided unfixed purchase or sale at a moment when the same firm does not have an offsetting sale or purchase. The Commission’s treatment of unfixedprice transactions is discussed in more detail in Section II.A.1.iv.265 While the Commission understands market participants’ desire for a standalone exemption for unfixed-price transactions, the Commission finds that such an exemption is unnecessary. The Commission notes that the modified and expanded suite of enumerated bona fide hedges, including enumerated anticipatory bona fide hedges, adequately facilitates the hedging needs of qualified commercial market participants. Finally, the Commission believes that the enumerated anticipated merchandising bona fide hedge provides for ample flexibility for hedging. Similar to the enumerated unfilled anticipated requirements and unsold production bona fide hedges, this bona fide hedge may be used even when the merchant simply anticipates purchasing or selling the commodity, and even when the merchant may have yet to enter into an unfixed-price transaction, as long as the merchant has a good faith belief that it will enter into the anticipated merchandising transaction. (b) Analysis of Examples Preliminarily Recognized as Hedges of Anticipated Merchandising in the 2020 NPRM As discussed earlier in this release, in the 2020 NPRM, the Commission addressed several requests that had been submitted in CEWG’s BFH Petition in response to the 2011 Final Rule, to obtain exemptive relief for several transactions described by CEWG as bona fide hedging positions. In the 2020 NPRM, the Commission preliminarily determined that two CEWG BFH Petition examples complied with the proposed hedge of anticipated merchandising: Example #4 (Binding, Irrevocable Bids or Offers); and example #5 (Timing of Hedging Physical Transactions).266 On the other hand, as discussed in Section II.A.1.iv., the Commission preliminarily determined in the 2020 NPRM that the positions described in the CEWG’s BFH Petition examples #3 (unpriced physical purchase or sale commitments) and #7 (scenario 2) (use of physical delivery referenced contracts to hedge physical transactions using calendar month average pricing) did not 265 See Section II.A.1.iv, addressing the treatment of unfixed price transactions. 266 85 FR at 11611. PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 satisfy any of the proposed enumerated hedges.267 (1) Comments—Examples Preliminarily Recognized as Hedges of Anticipated Merchandising in the 2020 NPRM The Commission received comments supporting the Commission’s preliminary determination in the 2020 NPRM that CEWG’s BFH Petition example #4 (Binding, Irrevocable Bids or Offers) 268 and example #5 (Timing of Hedging Physical Transactions) are permitted under the 2020 NPRM’s proposed enumerated hedge for anticipated merchandising.269 The public comments related to examples #3 and #7 (scenario 2) are discussed in the preamble at Section II.A.1.iv., addressing the treatment of unfixed price transactions. (2) Discussion of Final Rule—Examples Preliminarily Recognized as Hedges of Anticipated Merchandising in the 2020 NPRM The Commission has considered the public’s response to its preliminary determination that several of the CEWG BFH Petition examples fit within the 2020 NPRM. The Commission determines in this Final Rule that BFH Petition example #4 (Binding, Irrevocable Bids or Offers) and example #5 (Timing of Hedging Physical Transactions) comply with the enumerated hedge for anticipated merchandising, so long as all applicable conditions are met. In accordance with the Commission’s treatment of unfixed-price transactions under this Final Rule, discussed in Section II.A.1.iv., the Commission has determined that BFH Petition examples #3 and #7 (scenario 2) are also permitted under the Final Rule, so long as the position or transaction complies with the applicable conditions of the enumerated anticipatory hedge. (c) Anticipated Merchandising Includes Hedges of Anticipated Storage and Assets Owned or Anticipated To Be Owned Several commenters requested the Commission clarify the scope of the proposed anticipated merchandising bona fide hedge in light of the Commission’s observation in footnote 105 of the 2020 NPRM.270 That footnote stated that certain hedges of storage and 267 85 FR at 11611–11612. at 16. FIA supported the Commission’s preliminary determination that Examples #4 (Binding, Irrevocable Bids or Offers) and #5 (Timing of Hedging Physical Transactions) fit within the newly proposed anticipatory merchandising hedge. 269 CEWG at 19. 270 Cargill at 5; CMC at 5; NGFA at 7. 268 FIA E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations hedges of assets owned or anticipated to be owned would not be within the scope of the proposed anticipated merchandising enumerated bona fide hedge.271 However, the plain language of the proposed anticipatory merchandising bona fide hedge appeared to be broad enough to cover such activity. Commenters were thus unsure whether the proposed enumerated anticipated merchandising hedge would apply to storage transactions and to hedges of assets owned or anticipated to be owned. Most commenters from the energy industry requested the Commission allow for anticipated storage positions to be considered as falling within the enumerated hedge exemption for anticipated merchandising, contending that such hedges are recognized as bona fide hedge exemptions by the exchanges.272 Chevron and Castleton requested that the Final Rule clarify that hedges of storage may qualify for the enumerated bona fide hedge for anticipated merchandising if applicable conditions are met.273 In the alternative, Chevron requested the Commission identify and clarify that storage hedges of this nature qualify for another enumerated exemption, notably the enumerated bona fide hedge for unfilled anticipated requirements.274 Citadel similarly requested recognition of offsetting positions related to anticipated changes in the value of the underlying commodity to be stored in facilities on lease, and up to the full storage capacity on lease, rather than 271 85 FR at 11612 n.105. at 7; CHS at 4 (requesting to include a winter storage hedge in the list of enumerated hedges); FIA at 16, 31 (requesting to include a storage hedge as a separate enumerated BFH); Shell at 7–8 (stating that assets used for the transport and storage of energy are a critical part of the energy value chain, including fuel storage tanks and pipeline assets as examples where time spreads or location basis spreads are used to lock-in the values of the assets. This commenter stated that with respect to such infrastructure assets, the Commission should clarify that the use of the hedges of anticipated storage or other physical assets is the type of risk activity that falls within the enumerated BFH for anticipated merchandising); Chevron at 9–11 (requesting that a final rule clarify that hedges of storage may qualify for the enumerated BFH for anticipated merchandising if applicable conditions are met. In the alternative, Chevron requests the Commission identify and clarify that storage hedges of this nature qualify for another enumerated exemption, notably the enumerated BFH for unfilled anticipated requirements); Suncor at 9–10 (requesting that a final rule clarify that hedges of storage may qualify for the enumerated BFH for anticipated merchandising if applicable conditions are met); CCI at 7–9; and CEWG at 16–19 (requesting that the Commission clarify that the enumerated BFH for anticipatory merchandising applies to hedges of storage). 273 Chevron at 5; CCI at 8–9. 274 Chevron at 11. khammond on DSKJM1Z7X2PROD with RULES2 272 NGSA VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 only the currently utilized level of leased capacity.275 Citadel argued that storage facilities owned, but not those leased, by the merchant would be covered by the proposed anticipated merchandising enumerated bona fide hedge, and that such different treatment depending on whether the facility was owned or leased did not make sense.276 (1) Discussion of Final Rule— Anticipated Merchandising Includes Hedges of Anticipated Storage and Assets Owned or Anticipated To Be Owned In response to public comments, the Commission determines that both hedges of storage and hedges of assets owned or anticipated to be owned can potentially qualify for the enumerated hedge for anticipated merchandising if the applicable conditions are met. In footnote 105 of the 2020 NPRM, the Commission observed that market participants could use the nonenumerated process (rather than a selfeffectuating enumerated hedge) to receive bona fide hedge recognition for storage hedges and hedges of assets owned or anticipated to be owned.277 This observation was predicated on the Commission’s recognition that different commodities have different storage roles, manners, and procedures. For example, the use of some storage facilities is not exclusive to a specific commodity and not all storage is necessarily tied to anticipated merchandising activity. As such, the Commission believed that an analysis of facts and circumstances under the nonenumerated bona fide hedge process would facilitate a determination on whether to recognize hedges of storage or assets owned or anticipated to be owned under the proposed enumerated anticipated merchandising hedge. The Commission has considered comments with respect to the appropriate treatment of storage transactions and hedges of assets owned or anticipated to be owned under the Commission’s anticipated merchandising enumerated hedge. The Commission agrees that commercial market participants may utilize storage hedges or hedges of assets owned or anticipated to be owned as risk reducing practices.278 The Commission believes that such risk reducing hedges may be recognized as anticipated merchandising bona fide hedges, if all the applicable conditions of the anticipated merchandising hedge are 275 Citadel at 9. 276 Id. 277 85 FR at 11612. at 16. 278 CEWG PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 3275 satisfied. The Commission clarifies that commercial market participants in the physical marketing channel that utilize storage hedges or hedges of assets owned or anticipated to be owned may continue to qualify for the anticipated merchandising enumerated bona fide hedge, whether the commercial market participant owns or leases the storage or asset, so long as the all other applicable requirements for the bona fide hedge are satisfied. g. Hedges by Agents (1) Background—Hedges by Agents Existing § 1.3(z)(3) includes certain hedges by agents as an example of a potential non-enumerated bona fide hedge.279 Since 2011, the Commission has included an enumerated hedge for hedges by agents in each of its position limits rulemakings.280 Under the existing non-enumerated hedge process, the Commission has recognized non-enumerated bona fide hedges for parties acting as agents who had the responsibility to trade cash commodities on behalf of another party for which such positions qualified as bona fide hedging positions. Such agents could obtain bona fide hedge treatment to offset, on a long or short basis, the risks arising from those underlying cash positions. For example, this hedge has been recognized in circumstances where a party traded or managed a farmer’s, producer’s, or a government entity’s inventory in the party’s capacity as agent. In such circumstances, the agent providing services in the physical marketing channel, such as a commercial firm, did not take ownership of the commodity and was eligible as an agent for an exemption to hedge the risks associated with such cash positions. (2) Summary of the 2020 NPRM— Hedges by Agents The Commission proposed to include hedges by agents as an enumerated hedge. The proposed hedge would grant an enumerated hedge to an agent who (1) did not own or was not contracted to sell or purchase the offsetting cash commodity at a fixed price, (2) was responsible for merchandising the cash positions being offset, and (3) had a 279 17 CFR 1.3(z)(3) (‘‘Such transactions and positions may include, but are not limited to, purchases or sales for future delivery on any contract market by an agent who does not own or who has not contracted to sell or purchase the offsetting cash commodity at a fixed price, provided That the person is responsible for the merchandising of the cash position which is being offset.’’). 280 81 FR at 96964; 78 FR at 75714; 76 FR at 71689. E:\FR\FM\14JAR2.SGM 14JAR2 3276 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations contractual agreement with the person who (i) owned the commodity or (ii) held cash-market positions being offset. The proposed hedge of agents would substantively adopt the Commission’s existing practice under the nonenumerated process in existing § 1.3(z)(3).281 The Commission, however, proposed to include hedges of agents in the list of enumerated hedges because it preliminarily determined this was a common hedging practice and that positions which satisfy the requirements of this enumerated hedge conformed to the general definition of bona fide hedging without further consideration as to the particulars of the case.282 (3) Summary of the Commission Determination—Hedges by Agents The Commission is adopting the enumerated bona fide hedge for hedges by agents as proposed. (4) Comments—Hedges by Agents The Commission received several comments supporting recognition of the hedge by agents, particularly as included in an expanded list of enumerated hedges.283 ASR identified hedges of agents as a type of hedge that is of particular importance to them because it is used daily within its business.284 The Commission did not receive any comments opposed to the enumerated hedge for hedges by agents. khammond on DSKJM1Z7X2PROD with RULES2 (5) Discussion of Final Rule—Hedges by Agents The Commission recognizes that agents provide important services in the physical marketing channel across different commodity markets. For example, in the agricultural sector, this enumerated hedge will accommodate a common hedging practice in the cotton industry. This hedge will be particularly useful in connection with cotton equities purchased by a cotton merchant from a producer, which is commonly done under the U.S. Department of Agriculture’s loan program to facilitate marketing tools for cotton producers. Another example of when the enumerated hedge by agents adopted herein will apply is for those agents who are in the business of merchandising (selling) the cash grain owned by multiple warehouse operators and forwarding the merchandising 281 For example, the Commission proposed to replace the phrase ‘‘offsetting cash commodity’’ with ‘‘contract’s underlying cash commodity’’ to use language that is consistent with the other proposed enumerated hedges. 282 85 FR at 11610. 283 FIA at 16; IECA at 2; and ASR at 2. 284 ASR at 2. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 revenues back to the warehouse operators less the agent’s fees. Such agents that satisfy the requirements of this enumerated hedge, such as not owning any cash commodity but being responsible for merchandising the cash grain positions of the warehouse operators pursuant to contractual agreements, will be able to hedge the price risks arising from their merchandising activity under those agreements as a bona fide hedge by agents. h. Short Hedges of Anticipated Mineral Royalties (1) Background—Anticipated Mineral Royalties The Commission’s existing bona fide hedging definition does not include an enumerated hedge for anticipated mineral royalties. Since 2011, the Commission has, however, included such a bona fide hedge in each of its position limits rulemakings.285 While the Commission’s 2011 Final Rule initially recognized the hedging of anticipated royalties generally, each proposal since then, including the latest 2020 NPRM, has proposed that this exemption apply to: (i) Short positions (ii) that arise from production (iii) in the context of mineral extraction. (2) Summary of the 2020 NPRM— Anticipated Mineral Royalties The Commission proposed a new enumerated bona fide hedge for short hedges of anticipated mineral royalties that are not currently enumerated in existing § 1.3. The proposed provision would permit an owner of rights to a future mineral royalty to lock in the price of anticipated mineral production by entering into a short position in a commodity derivative contract to offset the anticipated change in value of the mineral royalty rights that were owned by that person and arose out of the production of a mineral commodity (e.g., oil and gas).286 The owner of the 285 81 FR at 96964; 78 FR at 75715; 76 FR at 71689. In the 2011 Final Rule, the Commission recognized anticipatory royalty transactions as a bona fide hedge, provided the following conditions were met: (1) The royalty or services contract arose out of the production, manufacturing, processing, use, or transportation of the commodity underlying the Referenced Contract; (2) The hedge’s value was ‘‘substantially related’’ to anticipated receipts or payments from a royalty or services contract; and (3) No such position was maintained in any physical-delivery Referenced Contract during the last five days of trading of the Core Referenced Futures Contract in an agricultural or metal commodity or during the spot month for other physical-delivery contracts. 286 85 FR at 11608–11609. A short position fixes the price of the anticipated receipts, removing exposure to change in value of the person’s share of the production revenue. A person who has issued PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 rights to the future mineral royalty could be a producer, or, for example, could also be a bank that holds the relevant royalty rights and that is financing, for example, a drilling well operation for a producer. The Commission preliminarily believed that this represents a common hedging practice, and that positions that satisfied the requirements of this enumerated bona fide hedge conformed to the general definition of bona fide hedging without further consideration as to the particulars of the case.287 The Commission proposed to limit this enumerated bona fide hedge only to mineral royalties, noting that while royalties have been paid for use of land in agricultural production, the Commission did not receive any evidence of a need for a bona fide hedge recognition from owners of agricultural production royalties.288 The Commission requested comment on whether and why such an exemption might be needed for owners of agricultural production or other royalties.289 (3) Summary of the Commission Determination—Anticipated Mineral Royalties For the reasons discussed in the NPRM, the Commission is adopting the enumerated hedge for anticipated mineral royalties as proposed. (4) Comments—Anticipated Mineral Royalties The Commission did not receive any comments either opposing the addition of an enumerated bona fide hedge for anticipated mineral royalties or requesting modifications to the hedge as proposed. Further, no commenters requested extending the enumerated hedge to other types of royalties other than mineral royalties. Several commenters expressed support for the new enumerated hedge.290 i. Hedges of Anticipated Services (1) Background—Anticipated Services The Commission’s existing bona fide hedging definition does not include an enumerated hedge of anticipated services. Since 2011, however, the a royalty, in contrast, has, by definition, agreed to make a payment in exchange for value received or to be received (e.g., the right to extract a mineral). Upon extraction of a mineral and sale at the prevailing cash-market price, the issuer of a royalty remits part of the proceeds in satisfaction of the royalty agreement. The issuer of a royalty, therefore, does not have price risk arising from that royalty agreement. 287 85 FR at 11609. 288 Id. 289 Id. 290 FIA at 16; IECA at 2. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Commission has included an enumerated bona fide hedge exemption for hedges of anticipated services in each of its position limits rulemakings.291 Further, in 1977, the Commission noted that the existence of futures markets for both source and product commodities, such as soybeans, soybean oil, and soybean meal, affords business firms increased opportunities to hedge the value of services.292 (2) Summary of the 2020 NPRM— Anticipated Services The Commission proposed a new enumerated bona fide hedge for anticipated services, not currently enumerated in existing § 1.3. The proposed provision would recognize as a bona fide hedge a long or short derivative contract position used to hedge the anticipated change in value of receipts or payments due or expected to be due under an executed contract for services arising out of the production, manufacturing, processing, use, or transportation of the commodity underlying the commodity derivative contract.293 (3) Summary of the Commission Determination—Anticipated Services The Commission is adopting the enumerated bona fide hedge for anticipated services as proposed. khammond on DSKJM1Z7X2PROD with RULES2 (4) Comments—Anticipated Services The Commission received four comments on the proposed enumerated anticipated services bona fide hedge. ASR and FIA expressed support for its inclusion as a new enumerated bona fide hedge.294 In contrast, IATP and Better Markets urged the Commission to exclude this hedge from the list of enumerated bona fide hedges.295 IATP stated that the anticipated services bona fide hedge is ‘‘presumably connected to hedges of anticipated production’’ and that, as a result, it views the enumerated hedge as ‘‘more vulnerable to deliverable supply estimate disruption.’’ 296 IATP also contended that, absent a stronger argument for inclusion of this enumerated bona fide hedge aside from ‘‘such exemptions are granted by exchanges,’’ the proposed bona fide hedge of anticipated services merits greater Commission review before being included as an enumerated 291 81 FR at 96810; 78 FR at 75715. See 76 FR at 71646. 292 42 FR 14832, 14833 (Mar. 16, 1977). 293 85 FR at 11609. 294 ASR at 2; FIA at 16. 295 IATP at 17; Better Markets at 58. 296 IATP at 17. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 bona fide hedge.297 Better Markets stated that the definition was too vague, and that absent a time limitation, the hedge could be used as a loophole for speculation.298 (5) Discussion of the Final Rule— Anticipated Services The Commission is adopting the enumerated bona fide hedge for anticipated services as proposed. In response to IATP, the Commission believes that hedging of anticipated services may be useful to commercial market participants in a variety of commonly-occurring scenarios. For example, one scenario may be when a contract for services involves the production of a commodity such as a risk service agreement to drill an oil well between two companies where the risk service agreement between the parties provides that a portion of the revenue receipts to one of the counterparties depends on the value of the oil produced. To reduce the risk of lower anticipated revenues resulting from an anticipated lower price of oil, the company may enter into a short position in the NYMEX Light Sweet Crude Oil referenced contract. Under this enumerated bona fide hedge of services, such a short position fixes the price at the entry price to the commodity derivative contract. For any decrease in price of the commodity that is the subject of the executed contract for services, the expected receipts from the contract for services would decline in value, but the short commodity derivative contract position would increase in value—offsetting the price risk from the expected receipts under contract for services. On the other hand, this enumerated hedge of anticipated services may also be utilized when a contract for services involves a contract where one of the counterparties is responsible for the cost of the commodity used to provide the service. Such a scenario may occur when a city contracts with a firm to provide waste management services. The contract requires that the trucks used to transport the solid waste use natural gas as a power source. According to the contract, the city would pay for the cost of the natural gas used to transport the solid waste by the waste disposal company. In the event that natural gas prices rise, the city’s waste transport expenses would rise. To mitigate this risk, the city establishes a long position in the NYMEX natural gas referenced contract that is equivalent to 297 Id. 298 Better PO 00000 Markets at 58. Frm 00043 Fmt 4701 Sfmt 4700 3277 the expected use of natural gas over the life of the service contract. In this case, the long position fixes the exit price of the commodity derivative contract. For any increase in the commodity that is the subject of the executed contract for services, the payment due or expected to be due would increase in value, but the long commodity derivative contract would decrease in value—offsetting the price risk from the payments under the contract for services. Under both of these examples, the transactions meet the general requirements for a bona fide hedging transaction and the specific provisions for hedges of anticipated services. Regarding comments contending that deliverable supply estimates are more vulnerable to disruption under this hedge, the Commission does not believe that bona fide hedges for anticipated services will impact actual deliverable supplies. This is because this bona fide hedge allows a market participant to hedge the anticipated change in value of receipts or payments due or expected to be due under an executed contract for services, and is not an alternative means of procuring or selling the underlying commodity. In addition, the Commission will continue to have sufficient access to position and cash-market data to verify all exemptions granted. The reporting and recordkeeping obligations under §§ 150.5 and 150.9 will require exchanges to submit justifications, amendments, and other necessary information to the Commission on a monthly basis. As such, exchanges and the Commission will have visibility into the amount of demand there is for a commodity in the spot month via the delivery notices. In the rare event that an exchange observes an imbalance, it has the ability under its rules to require the trader to reduce its positions. Finally, the Commission notes that a time limitation is unnecessary because, among other things, when administering exchange-set limits, under the Final Rule, exchanges may rely on the Commission’s guidance in Appendix B to part 150 to protect price convergence and ensure an orderly spot period. Under the guidance in Appendix B adopted herein, an exchange may adopt rules to impose a restriction on holding a position in a physically delivered referenced contract during the lesser of either the last five days of trading or the time period for the spot month in order to limit such positions to only those that are economically appropriate for that person’s specific anticipated or real needs. E:\FR\FM\14JAR2.SGM 14JAR2 3278 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations j. Offsets of Commodity Trade Options (1) Background—Offsets of Commodity Trade Options Commodity trade options are not subject to Federal position limits under existing regulations.299 Generally, a commodity trade option is a physicallydelivered commodity option purchased by commercial users of the commodities underlying the options. In the 2016 trade options final rule, the Commission stated that Federal position limits should not apply to trade options.300 Further, in that trade options final rule, the Commission indicated it would address the applicability of position limits to trade options in the context of any final rulemaking on position limits.301 (2) Summary of the 2020 NPRM— Offsets of Commodity Trade Options The Commission proposed a new enumerated hedge for offsets of commodity trade options not currently enumerated in § 1.3. Under the 2020 NPRM, a qualifying commodity trade option under § 32.3 302 would be treated as a cash position, on a futuresequivalent basis,303 and serve as the basis for a bona fide hedge position. khammond on DSKJM1Z7X2PROD with RULES2 299 See 17 CFR 32.3(c). 300 Trade Options, 81 FR at 14966, 14971 (Mar. 21, 2016). Under the trade options final rule, trade options are generally exempted from the rules otherwise applicable to swaps, subject to the conditions enumerated in § 32.3. For example, trade options do not factor into the determination of whether a market participant is an SD or MSP; trade options are exempt from the rules on mandatory clearing; and trade options are exempt from the rules related to real-time reporting of swaps transactions. 301 Id. 302 17 CFR 32.3. In order to qualify for the trade option exemption, § 32.3 requires, among other things, that: (1) The offeror is either (i) an eligible contract participant, as defined in section 1a(18) of the Act, or (ii) offering or entering into the commodity trade option solely for purposes related to its business as a ‘‘producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of the’’ trade option; and (2) the offeree is offered or entering into the commodity trade option solely for purposes related to its business as ‘‘a producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of the commodity’’ trade option. 303 It may not be possible to compute a futuresequivalent basis for a trade option that does not have a fixed strike price. As discussed in the Section II.A.1.iv., under the Commission’s existing portfolio hedging policy, market participants may manage their price risks by utilizing more than one enumerated bona fide hedge (including a commodity trade option hedge and other anticipatory bona fide hedges, if necessary based on the market participant’s applicable facts and circumstances). For example, a commodity trade option with a fixed strike price may be converted to a futures-equivalent basis, and, on that futuresequivalent basis, deemed a cash commodity sale contract, in the case of a short call option or long put option, or a cash commodity purchase contract, in the case of a long call option or short put option. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Treating qualifying commodity trade options as cash positions, either as a cash commodity purchase or sales contract, would allow the Commission to extend the existing enumerated hedge exemptions for cash positions to the offsets of commodity trade options. That is, the offsets of qualifying commodity trade options would be treated like the enumerated hedges for cash commodity fixed-price purchase contracts or hedges of cash commodity fixed-price sales contracts.304 (3) Summary of the Commission Determination—Offsets of Commodity Trade Options The Commission continues to believe that Federal position limits should not apply to trade options. Thus, the Commission is adopting the enumerated bona fide hedge for offsets of commodity trade options as proposed, with a few clarifying, non-substantive technical edits in the regulatory text. (4) Comments—Offsets of Commodity Trade Options The Commission did not receive any comments opposing the addition of an enumerated hedge for offsets of commodity trade options. The Commission received comments generally supporting the bona fide hedge for offsets of commodity trade options, particularly as included in an expanded list of enumerated bona fide hedges.305 NGSA stated that defining bona fide hedging in a way that recognizes that trade options, adjusted on a futures-equivalent basis, constitute cash commodity purchase or sale contracts that underlie bona fide hedge positions should ‘‘facilitate hedging rather than restrict it.’’ 306 k. Cross-Commodity Hedges (1) Background—Cross-Commodity Hedges The Commission has long recognized cross-commodity bona fide hedging under paragraph (2)(iv) of the bona fide hedging definition in existing § 1.3, which has allowed cross-commodity bona fide hedging in connection with all of the enumerated bona fide hedges included in the existing bona fide hedge definition.307 The existing enumerated crosscommodity bona fide hedge recognizes that risk from some cash commodity price exposures can be practically and effectively managed through commodity 304 85 FR at 11610. at 1; CCI at 2; CEWG at 4; Chevron at 3; Suncor at 3; FIA at 16; and NGSA at 4. 306 NGSA at 4. 307 42 FR 14832, 14834 (March 16, 1977). 305 IECA PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 derivative contracts on a related commodity. As such, positions in any of the existing enumerated bona fide hedges may be offset by a cash position held in a different commodity than the commodity underlying the futures contract. The existing cross-commodity enumerated hedge, however, is subject to two conditions. First, the fluctuations in value of the position in the futures contract must be ‘‘substantially related’’ to the fluctuations in value of the actual or anticipated cash position. Second, under the cross-commodity enumerated bona fide hedge exemption, a position may not be held in excess of the Federal position limit during the last five trading days for that futures contract. Cross-commodity hedging also allows market participants to hedge the price exposure arising from the products and byproducts of a commodity where there is no futures contract for those products or byproducts, but there is a futures contract for the source commodity of those products or byproducts. Since 2011, the Commission has included an enumerated cross-commodity bona fide hedge in each of its position limits rulemakings.308 (2) Summary of the 2020 NPRM—CrossCommodity Hedges The Commission proposed to include cross-commodity hedges as an enumerated bona fide hedge, and to expand the application of this bona fide hedge such that it could be used to establish compliance with: (1) Each of the proposed enumerated bona fide hedges listed in Appendix A to part 150 except for unfilled anticipated requirements and anticipated merchandising, which were excluded from the regulatory text of the crosscommodity enumerated hedge; 309 and (2) the proposed pass-through provisions under paragraph (2) of the proposed bona fide hedging definition discussed further below; provided, in each case, that the position satisfied each element of the relevant enumerated bona fide hedge.310 In addition, the 308 81 FR at 96752–96753; 78 FR at 75716; 76 FR at 71689. 309 Specifically, the 2020 NPRM allowed for cross-commodity hedging for any of the following proposed enumerated hedges: (i) Hedges of unsold anticipated production, (ii) hedges of offsetting unfixed-price cash commodity sales and purchases, (iii) hedges of anticipated mineral royalties, (iv) hedges of anticipated services, (v) hedges of inventory and cash commodity fixed-price purchase contracts, (vi) hedges of cash commodity fixed-price sales contracts, (vii) hedges by agents, and (viii) offsets of commodity trade options. 310 85 FR at 11609. For example, an airline that wishes to hedge the price of jet fuel may enter into a swap with a swap dealer. In order to remain flat, the swap dealer may offset that swap with a futures E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Commission also proposed to eliminate the Five-Day Rule in connection with the proposed cross-commodity bona fide hedge (i.e., the 2020 NPRM eliminated the restriction from holding a position in excess of the Federal position limit under the enumerated cross-commodity bona fide hedge during the last five days of trading). The proposed cross-commodity enumerated bona fide hedge was conditioned on the existence of a ‘‘substantial relationship’’ between the commodity derivative contract and the related cash commodity position. Specifically, the fluctuations in value of the position in the commodity derivative contract, that is, of the underlying cash commodity of that derivative contract, were required to be ‘‘substantially related’’ 311 to the fluctuations in value of the actual or anticipated cash commodity position or pass-through swap.312 This was intended to be a qualitative analysis, rather than quantitative. For example, the 2020 NPRM stated that there is a substantial relationship between grain sorghum, which is used as a food grain for humans or as animal feedstock, and the corn referenced contracts. Because there is not a futures contract for grain sorghum grown in the United States listed on a U.S. DCM,313 corn represents a substantially related commodity to grain sorghum in the United States.314 The 2020 NPRM noted that, in contrast, there did not appear to be a reasonable commercial relationship between a physical commodity, say copper, and a broad-based stock price index, such as the S&P 500 Index, because these commodities were not reasonable substitutes for each other in that they had very different pricing position, for example, in ULSD. Subsequently, the airline may also offset the swap exposure using ULSD futures. In this example, under the passthrough swap language of proposed § 150.1, the airline would be acting as a bona fide hedging swap counterparty and the swap dealer would be acting as a pass-through swap counterparty. In this example, provided each element of the enumerated hedge in paragraph (a)(5) of Appendix A, the passthrough swap provision in § 150.1, and all other regulatory requirements are satisfied, the airline and swap dealer could each exceed limits in ULSD futures to offset their respective swap exposures to jet fuel. See infra Section II.A.1.c.v. (discussion of proposed pass-through language). 311 See 85 FR at 11726–11727. 312 85 FR at 11609. 313 This remains true at the publication of this rulemaking. 314 85 FR at 11609. Grain sorghum was previously listed for trading on the Kansas City Board of Trade and Chicago Mercantile Exchange, but because of liquidity issues, grain buyers continued to use the more liquid corn futures contract, which suggests that the basis risk between corn futures and cash sorghum could be successfully managed with the corn futures contract. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 drivers.315 That is, the price of a physical commodity is based on supply and demand, whereas the stock price index is based on various individual stock prices for different companies.316 The 2020 NPRM also preliminarily determined that CEWG BFH Petition example #9 (Holding a cross-commodity hedge using a physical delivery contract into the spot month) and example #10 (Holding a cross-commodity hedge using a physical delivery contract to meet unfilled anticipated requirements) were permitted as cross-commodity enumerated hedges.317 (3) Summary of the Commission Determination—Cross-Commodity Hedges The Commission is finalizing the cross-commodity enumerated bona fide hedge largely as proposed, with amendments to expand the ability to use cross-commodity hedges. (4) Comments—Cross-Commodity Hedges Commenters generally supported the proposed cross-commodity enumerated bona fide hedge, and a few commenters explicitly supported the Commission’s decision not to propose a quantitative test requirement for the proposed enumerated cross-commodity bona fide hedge.318 Better Markets stated that it views some cross-commodity hedges as ‘‘appropriate, normal, and legitimate market practices,’’ but claimed that there is a potential for abuse if the bona fide hedge exemption requires less than a ‘‘demonstrable price relationship’’ between the two commodities.319 ICE recommended that the Commission include a non-exclusive list of commonly-used cross-commodity hedges that satisfy the ‘‘substantially related’’ requirement, which ICE believes should include the natural gas core referenced futures contract and its linked referenced contracts as bona fide hedges of electricity price exposure, and vice versa.320 The majority of energy market participants commented on a separate item: That the express language of proposed paragraph (a)(5) of Appendix B to part 150, which sets forth the proposed cross-commodity bona fide hedge, inappropriately failed to cover 315 85 FR at 11609. 3279 bona fide hedges for unfilled anticipated requirements and anticipated merchandising.321 Chevron, Suncor, CCI, and the CEWG requested that the Commission revise the proposed crosscommodity enumerated bona fide hedge to specifically clarify that enumerated bona fide hedges for unfilled anticipated requirements and anticipated merchandising may be utilized as crosscommodity bona fide hedges in energy markets.322 IECA also requested that the cross-commodity enumerated hedge include bona fide hedges of anticipated requirements, which would capture bona fide hedges of anticipated requirements commonly used by many electric utilities that enter into heat-rate transactions.323 Suncor and Chevron highlighted an internal inconsistency in the 2020 NPRM. These commenters pointed out that while the 2020 NPRM preliminarily determined that CEWG BFH Petition Example #10 (Holding a crosscommodity hedge using a physical delivery contract to meet unfilled anticipated requirements) satisfies the proposed cross-commodity hedge, the proposed cross-commodity hedge excluded unfilled anticipated requirements.324 (5) Discussion of Final Rule—CrossCommodity Hedges The Commission is finalizing the cross-commodity enumerated bona fide hedge largely as proposed, with amendments to expand the ability to use cross-commodity hedges. Specifically, the Commission is amending the express language of the crosscommodity enumerated hedge in Appendix B to include the enumerated hedges of unfilled anticipated requirements and hedges of anticipated merchandising so that the crosscommodity provision applies to all enumerated hedges adopted herein. The 2020 NPRM excluded the enumerated bona fide hedges for unfilled anticipated requirements and for anticipated merchandising from the crosscommodity provision. As a result, any internal inconsistency related to example #10 has been resolved. Separately, as stated in the 2020 NPRM, the Commission reaffirms that the requirement that the value fluctuations of the commodity derivatives contract used to hedge and the value fluctuations of the commodity 316 Id. 317 85 FR at 11611. at 2; NGSA at 3–4; NOPA at 2; and ICE at 7. Prior position limits proposals included a quantitative test, whereas the 2020 NPRM included a qualitative ‘‘substantially related’’ requirement. 319 Better Markets at 58. 320 ICE at 7. 318 ADM PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 321 Chevron at 8–9; Suncor at 6–8; NOPA 2; CCI at 5–9; CEWG at 10–14; NGSA at 4; ICE at 2, 4; Shell at 7–8; ADM at 2; and IECA at 8. 322 Chevron at 8; Suncor at 8; NOPA at 2; CCI at 5–7; CEWG at 10–14; NGSA at 4; and IECA at 8. 323 IECA at 7–8. 324 Chevron at 7; Suncor at 7. E:\FR\FM\14JAR2.SGM 14JAR2 3280 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations cash position being hedged must be ‘‘substantially related’’ is an important factor in determining whether a crosscommodity hedge satisfies the requirements to be a bona fide hedge. Accordingly, the Commission believes that the ‘‘substantially related’’ requirement sufficiently ties derivative and cash positions between two different, but comparable, commodities that have a reasonable commercial relationship as a result of their ability to serve as reasonable substitutes for each other, due to, for example, similar pricing drivers. The Commission agrees with commenters who stated that market participants use cross-commodity hedging to manage their price risk, particularly when a cash commodity is not necessarily deliverable under the terms of any derivative contract or the cash-market transactions are not in the same commodity underlying the futures contract. For example, an airline that uses a predictable volume of jet fuel every month may cross hedge its anticipated jet fuel requirements with the ultralow sulfur diesel (‘‘ULSD’’) heating oil commodity derivative contract because there are no physically-settled jet fuel commodity derivative contracts available. The value fluctuations in jet fuel are substantially related to the value fluctuations in the ULSD ‘‘HO’’ futures contract. The Commission believes that a determination of whether commodities are ‘‘substantially related’’ for purposes of the cross-commodity bona fide hedge depends on a facts and circumstances analysis and that the relationship between the two is not static, as it may change over time depending on market factors. Accordingly, the Commission’s position is not to publish a list of crosscommodity hedges satisfying the ‘‘substantially related’’ requirement at this time. vii. Location and Regulatory Treatment of the Enumerated Bona Fide Hedges a. Background—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges khammond on DSKJM1Z7X2PROD with RULES2 As noted above, the existing enumerated bona fide hedges are explicitly incorporated in the regulatory bona fide hedging definition in § 1.3 of the Commission’s regulations. b. Summary of the 2020 NPRM— Location and Regulatory Treatment of the Enumerated Bona Fide Hedges In the 2020 NPRM, the Commission proposed to move the expanded list of the enumerated bona fide hedges from the bona fide hedging definition in VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 regulation § 1.3 to the proposed acceptable practices in Appendix A to part 150. The Commission stated that the list of enumerated bona fide hedges should appear as acceptable practices in an appendix, rather than as regulations in the regulatory bona fide hedging definition, because each enumerated bona fide hedge represents just one way, but not the only way, to satisfy the proposed bona fide hedging definition and § 150.3(a)(1).325 The Commission requested comment on whether the list of enumerated hedges should be included in the regulatory text or in an appendix as acceptable practices.326 c. Summary of the Commission Determination—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges The Commission has determined to incorporate the enumerated bona fide hedges as part of the regulatory text. While the Final Rule will maintain the enumerated bona fide hedges in Appendix A to part 150, Appendix A will be incorporated into final § 150.3, and therefore under the Final Rule the enumerated bona fide hedges in Appendix A will be deemed to be part of the regulatory text rather than treated as acceptable practices. d. Comments—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges FIA and MGEX supported moving the list of enumerated bona fide hedges to the rule text.327 FIA stated that ‘‘including the list in the regulatory text would provide market participants greater regulatory certainty by making it clear that it could not be amended absent notice and comment rulemaking.’’ 328 On the other hand, CMC and the Joint Associations (i.e., EEI and EPSA) preferred keeping the enumerated hedges in Appendix A to part 150. CMC stated its understanding that an amendment to either Appendix A or the rule text would require the same formal rulemaking procedures.329 The Joint Associations based their support of Appendix A because it allows for ‘‘for flexibility’’ in their view.330 325 As discussed below, proposed § 150.3(a)(1) would allow a person to exceed position limits for bona fide hedging transactions or positions, as defined in proposed § 150.1. 326 85 FR at 11622. 327 MGEX at 2; FIA at 15–16. 328 FIA at 16. 329 CMC at 6. 330 EEI/EPSA at 5. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 e. Discussion of Final Rule—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges Under the Final Rule, the enumerated bona fide hedges are incorporated as part of the regulatory text. While the Final Rule will maintain the enumerated bona fide hedges in Appendix A to part 150, Appendix A will be incorporated in final § 150.3 as positions that are deemed to be bona fide hedges that are self-effectuating for purposes of Federal position limits. In other words, while the Final Rule will maintain the enumerated bona fide hedges in Appendix A, Appendix A will be deemed to be part of the regulatory text rather than treated as acceptable practices as the Commission proposed in the 2020 NPRM. The Commission agrees that including the enumerated bona fide hedges as part of the regulations, rather than as acceptable practices, provides market participants with greater regulatory certainty. To reflect that Appendix A to part 150 is part of the regulatory text, the Commission is amending the introductory language to the Appendix to remove any references to acceptable practices. In addition, while not a substantive change, the Commission has also reordered the list of enumerated hedges. The Final Rule reorders Appendix A so that the bona fide hedges are listed by hedges of purchases, sales, anticipated activities, or other new types of hedges. Finally, the cross-commodity hedge, which applies to all the enumerated hedges in the appendix, is listed last. viii. Elimination of Federal Restriction Prohibiting Holding a Bona Fide Hedge Exemption During Last Five Trading Days, the ‘‘Five-Day Rule;’’ Proposed Guidance in Appendix B, Paragraph (b) a. Background—Elimination of the ‘‘Five-Day Rule;’’ Proposed Guidance in Appendix B, Paragraph (b) Some of the existing enumerated bona fide hedge exemptions in § 1.3 include a restriction on the market participant holding a commodity derivative contract position in excess of Federal position limits during the last five days of trading (generally referred to as the ‘‘Five-Day Rule’’). The restriction limits the applicability of exemptions during the last five days of trading because for many agricultural commodity derivative contracts, those last five days of trading coincide with the physical-delivery process. The practical effect of the FiveDay Rule is a winnowing of the universe of market participants who maintain large positions throughout the last five days of trading to only those market E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 participants who actually intend to make or take delivery at the end of the spot period. Narrowing the universe of market participants in this way helps ensure an orderly trading environment and maintains the integrity of the physical-delivery process for those market participants who rely on price convergence between the cash and futures markets during the last days of trading. When the Commission adopted the Five-Day Rule, it believed that, as a general matter, there was little commercial need to maintain a large position that exceeds position limits during or through the last five days of trading.331 b. Summary of the 2020 NPRM— Elimination of the ‘‘Five-Day Rule;’’ Proposed Guidance in Appendix B, Paragraph (b) The Commission proposed to eliminate the restriction on holding a bona fide hedge exemption during the last five days of trading from all the enumerated hedges to which such fiveday rule restriction applies under existing § 1.3.332 Instead, under proposed § 150.5(a)(2)(ii)(D), exchanges could apply a restriction against holding positions under a bona fide hedge in excess of limits during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract, or otherwise limit the size of such position. The exchanges would thus have the ability and discretion, but not an obligation, to apply a five-day rule or similar restriction to exemptions on any contracts subject to Federal position limits, regardless of whether such contracts have been subject to Federal position limits before. The 2020 NPRM also included guidance for exchanges on factors to consider when applying a restriction against holding physically delivered futures contracts into the spot month. The proposed guidance set forth in Appendix B, paragraph (b) provided that a position held during the spot period may still qualify as a bona fide hedging position, provided that: (1) The position complies with the bona fide hedging transaction or position definition; and (2) there is an economically appropriate need to maintain such position in excess of 331 Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 1977). 332 The existing enumerated hedges limited by the Five-Day rule are as follows: Unsold anticipated production, unfilled anticipated requirements, offsetting sales and purchases, and crosscommodity hedges. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Federal speculative position limits during the spot period, and that need relates to the purchase or sale of a cash commodity.333 In addition, the guidance provided several factors the exchange should weigh when evaluating whether a person wishing to exceed Federal position limits should be able to do so during the spot period. For example, whether the person: (1) Intends to make or take delivery during that period; (2) provided materials to the exchange supporting the waiver of the Five-Day Rule; (3) demonstrated supporting cashmarket exposure in-hand that is verified by the exchange; (4) demonstrated that, for short positions, the delivery is feasible, meaning that the person has the ability to deliver against the short position; 334 and (5) demonstrated that, for long positions, the delivery is feasible, meaning that the person has the ability to take delivery at levels that are economically appropriate.335 c. Summary of the Commission Determination—Elimination of the ‘‘Five-Day Rule;’’ Proposed Guidance in Appendix B, Paragraph (b) The Commission is finalizing the proposal to eliminate the restriction on holding a bona fide hedge exemption during the last five days of trading from all the enumerated hedges to which such Five-Day Rule restriction applies under existing § 1.3. Additionally, the Commission has carefully considered the various comments regarding the proposed guidance in Appendix B, paragraph (b) and has determined to finalize the guidance, subject to several amendments and clarifications. The Commission discusses and addresses comments on the proposed elimination of the Five-Day Rule immediately below, followed by a discussion of comments on the proposed guidance further below. 333 For example, an economically appropriate need for soybeans would mean obtaining soybeans from a reasonable source (considering the marketplace) that is the least expensive, at or near the location required for the purchaser, and that such sourcing does not cause market disruptions or prices to spike. 334 That is, the person has inventory on-hand in a deliverable location and in a condition in which the commodity can be used upon delivery and that it represents the best sale for that inventory. 335 That is, the delivery comports with the person’s demonstrated need for the commodity, and the contract is the cheapest source for that commodity. PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 3281 d. Comments—Elimination of the ‘‘FiveDay Rule;’’ Proposed Guidance in Appendix B, Paragraph (b) (1) Elimination of the ‘‘Five-Day Rule’’ Several public interest commenters opposed the elimination of the Five-Day Rule.336 IATP viewed allowing the exchanges to impose a five-day rule or similar restriction as relegating the Commission’s function to merely monitoring ‘‘DCM decisions and their consequences for market participants and the public after the fact.’’ 337 Conversely, commercial market participants and exchanges generally supported the proposal to eliminate the Five-Day Rule and instead afford the exchanges the discretion whether to impose restrictions on holding physically-delivered contracts.338 (i) Discussion of the Final Rule— Elimination of the ‘‘Five-Day Rule’’ The Commission is finalizing the proposal to eliminate the restriction on holding a bona fide hedge exemption during the last five days of trading from all the enumerated hedges to which such Five-Day Rule restriction applies under existing § 1.3. In place of the ‘‘Five-Day Rule,’’ the Commission is finalizing proposed § 150.5(a)(2)(ii)(D), which provides that an exchange may grant exemptions, subject to terms, conditions, or restrictions against holding large positions in physically delivered futures contracts, as a bona fide hedge in excess of limits during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract, or otherwise limit the size of such position under that exemption. For the legacy agricultural contracts, the Five-Day Rule has been an important way to help ensure that futures and cash-market prices converge. Price convergence helps protect the integrity of the price discovery function and facilitates an orderly delivery process, which overlaps with the last days of trading. As stated in the 2020 NPRM, however, a strict five-day rule may be inappropriate and unnecessary, as the Commission expands its Federal position limits beyond the nine legacy agricultural contracts.339 336 IATP at 17–18; Better Markets at 61 (contending that if the CFTC does eliminate the Five-Day rule, it should at least formalize the proposed guidance in the rule text). 337 IATP at 18. 338 ADM at 3; Cargill at 8; CCI at 2, 9; CEWG at 4, 24; Chevron at 3, 9; CMC at 5; CME Group at 9; ICE at 2, 8; IFUS at 2; FIA at 3; NGFA at 9; NGSA at 2; Shell at 3; Suncor at 3, 12. 339 85 FR at 11612. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3282 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations In particular, while the Commission continues to believe that the justifications described above for the existing Five-Day Rule remain valid for contracts subject to Federal position limits, the exchanges—subject to Commission oversight—are better positioned to decide whether to apply a restriction, such as the Five-Day Rule, in connection with exemptions to their own exchange-set limits, or whether to apply other tools that may be equally effective. This Final Rule affords exchanges with the discretion to apply, and when appropriate, grant exemptions subject to terms, conditions or limitations like the Five-Day Rule (or similar restrictions) for purposes of their own exchange-set limits. Allowing for such discretion when granting exemptions will afford exchanges flexibility to quickly impose, modify, or waive any such limitation as circumstances dictate. While a strict Five-Day Rule may be inappropriate in certain circumstances, including when applied to energy contracts that typically have a shorter spot period than agricultural contracts,340 the flexible approach adopted herein may allow for the development and implementation of additional solutions other than a FiveDay Rule that protect convergence, while minimizing the impact on market participants. This approach allows exchanges to design and tailor a variety of limitations to protect convergence during the spot period. For example, in certain circumstances, a smaller quantity restriction, rather than a complete restriction on holding positions in excess of limits during the spot period, may be effective at protecting convergence. Similarly, exchanges currently utilize other tools to achieve similar policy goals, such as by requiring market participants to ‘‘step down’’ the levels of their exemptions as they approach the spot period, or by establishing exchange-set speculative position limits that include a similar step-down feature. Since § 150.5(a) as adopted herein would require that any exchange-set limits for contracts subject to Federal position limits must be less than or equal to the Federal limit, any exchange application of the Five-Day Rule, or a similar restriction, would have the same effect as if administered by the Commission for purposes of Federal speculative position limits, but could be administered by the exchange in a more tailored and efficient manner. 340 Energy contracts typically have a three-day spot period, whereas the spot period for agricultural contracts is typically two weeks. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 In response to commenters who stated this approach would relegate the Commission’s functions to merely monitoring the DCMs’ decisions after the fact, the Commission points out that regardless of whether there is a Federal Five-Day Rule, the Commission will continue to exercise oversight over exchanges before, during, and after exchange action relating to position limits. For example, all exchange rules, including those establishing/modifying exchange-set position limits, accountability levels, step downs, and five-day rules and similar restrictions, must be submitted to the Commission in advance pursuant to part 40 of the Commission’s regulations. Additionally, any exemption granted by an exchange from its own position limits must meet standards established by the Commission in § 150.5(a)(ii)(C) of this Final Rule, including considering whether the requested exemption would result in positions that would not be in accord with sound commercial practices and/or would exceed an amount that may be established and liquidated in an orderly fashion. Further, any waiver of an exchange five-day rule or similar restriction should consider the Appendix B guidance adopted herein. Additionally, the Commission will continue to leverage its own market surveillance and oversight functions to ensure that exchanges continue to comply with their legal obligations, including with respect to Core Principles 2, 3, 4, and 5, among others.341 Finally, under § 150.3(b)(6) finalized herein, the Commission continues to have the authority to revoke any bona fide hedge exemption. (2) Proposed Guidance in Appendix B, Paragraph (b) There were several comments on the proposed guidance in Appendix B, paragraph (b) regarding the circumstances when an exchange may grant waivers from any exchange-set five-day rule or similar restriction. A few commenters requested that the Commission eliminate the proposed guidance altogether.342 IFUS stated that the proposed guidance is unnecessary and should be removed, contending that the guidance ‘‘reflects many of the considerations currently taken by [e]xchange staff when reviewing exemptions and spot month positions.’’ 343 CME Group expressed a similar view, stating that in lieu of the proposed guidance, ‘‘the Commission 341 7 U.S.C. 7B–3(f)(4)(B); 7 U.S.C. 7B–3(f)(2); 7 U.S.C. 7B–3(f)(3); 7 U.S.C. 7B–3(f)(5). 342 CMC at 5; CME Group at 9; IFUS at 10. 343 IFUS at 3. PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 should allow exchanges to continue to rely on their established market surveillance expertise and regular interactions to make decisions around exemptions.’’ 344 Most commercial market participants and Better Markets,345 however, did not request to eliminate the proposed guidance in Appendix B, paragraph (b), but instead requested certain changes or clarifications. These commenters focused on whether the guidance: (i) Only applies to physically-settled contracts expressly designated by an exchange as subject to a five-day rule or similar restriction; 346 and (ii) is too prescriptive by imposing new documentation requirements on exchanges.347 CME Group requested clarification on whether the proposed guidance applies to all exemptions or only those exemptions previously subject to a five-day rule.348 Several energy market participants requested the Commission expressly clarify that the restrictions or guidance do not apply to markets for energy commodity derivatives.349 Alternatively, these energy market participants stated that if the Commission declined to include in a final rule an express prohibition on the application of the Five-Day Rule to energy commodity derivative contracts, the Commission should clarify that an exchange is not bound to apply the waiver guidance to any physicallysettled referenced contract that has not been expressly designated as subject to the Five-Day Rule.350 (i) Discussion of Final Rule—Appendix B, Paragraph (b) The Commission has carefully considered the various comments regarding the guidance in Appendix B, paragraph (b) and has determined to finalize the guidance, subject to several amendments and clarifications, discussed below. The Commission is not persuaded by requests to eliminate the guidance based on arguments that exchanges have current market surveillance practices or procedures to review the appropriateness of an exemption during the relevant referenced contract’s spot period. The Commission continues to believe that the justifications described above for the existing Five-Day Rule 344 CME Group at 9. Markets supported the proposed guidance. Better Markets at 46–48. 346 Chevron at 13–14; Suncor at 13–14; CCI at 9– 10; CEWG at 25–26. 347 CME Group at 9. 348 Id. 349 Chevron at 13. 350 Chevron at 13; Suncor at 14; CCI at 9–10; CEWG at 25–26. 345 Better E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations remain valid. The Commission has determined, however, that with an expanded list of contracts subject to Federal position limits, it is best to provide the exchanges additional discretion when granting exemptions to protect their markets using tools other than a Five-Day Rule, and to supplement that discretion with guidance highlighting the importance of the spot month to ensure price convergence and an orderly delivery process. For certain referenced contract markets, rather than imposing a complete restriction on holding positions in excess of limits during the spot period, an exchange may, when appropriate, grant an exemption which allows exceeding the position limit by a small increment. Such approach would be an effective way of protecting convergence while still maintaining orderly trading. Similarly, exchanges currently utilize other tools in administering their position limits. For example, CME and CBOT establish certain exchange-set speculative position limits that include a ‘‘step down’’ feature so that the permitted position limit level is lower each day as the contract nears its last trading days. Further, when granting position limit exemptions, exchanges may grant such exemptions subject to a ‘‘step down’’ level restriction as well. The Commission expects that exchanges would closely scrutinize any participant who requests recognition during the last five days of the spot period or in the time period for the spot month. The Commission clarifies that any exchange, for the purposes of exchangeset position limits, that elects to grant an exemption subject to terms, conditions, or limitations, that restrict the size of a position during the time period for the spot month of a physically-settled contract under § 150.5(a)(2)(ii)(H) may do so on any referenced contract subject to Federal position limits under the Final Rule, not just the nine legacy agricultural contracts. As such, the Commission clarifies for the avoidance of doubt that exemptions in energy contracts may be subject to an exchange’s restriction aimed to monitor the spot period for that energy contract. Since price convergence and an orderly trading environment serve as a deterrent or mitigate certain types of market manipulation schemes such as corners and squeezes, the guidance is intended to include a non-exclusive list of considerations the Commission expects the exchanges to consider when determining whether to allow a position in excess of limits throughout the spot month. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Regarding various comments contending that the proposed guidance was too prescriptive, the Commission reiterates the appendix is not intended to be used as a mandatory checklist. Further, the Commission is finalizing various amendments to Appendix B, paragraph b, to respond to commenters’ requests. First, the Commission is amending the introductory paragraph of the guidance to clarify that under § 150.5(a)(2)(ii)(H) as finalized herein, exchanges may impose restrictions on bona fide hedge exemptions in the spot month. This discretion does not require any express designation by the exchange. Second, the Commission is modifying the proposed guidance to clarify that the guidance may be used when considering either an enumerated or nonenumerated bona fide hedge exemption. Third, the Commission clarifies here that the guidance imposes no additional reporting requirements on market participants as the factors described in the guidance apply simply to the exchanges’ evaluation of the specific contract market when considering whether an exemption shall be granted subject to any condition or limitation in the spot month. Fourth, the Commission is eliminating the proposed factor which would have required a market participant to provide materials to the exchange supporting a classification of the position as a bona fide hedge. The Commission notes that the exchange application requirements already require market participants to provide relevant cash-market information. In addition, the Commission is amending language throughout the guidance to clarify that exchanges have flexibility when considering applying the guidance. For example, the Commission is removing proposed language that would have required the exchange to verify the market participant’s cashmarket exposure. The Commission is comfortable removing this language because the cash-market information is already required as part of the exemption application process described elsewhere in this release.351 Finally, the Commission is making technical edits to clarify that any delivery under a physical delivery contract is economically appropriate and the ‘‘most economical’’ source for that commodity. 351 See PO 00000 Sections II.D. and II.G. Frm 00049 Fmt 4701 Sfmt 4700 3283 ix. Guidance on Measuring Risk a. Background—Measuring Risk In prior proposals, the Commission discussed the issue of whether to recognize as bona fide both ‘‘gross hedging’’ and ‘‘net hedging.’’ 352 While the Commission has previously expressed a willingness to consider gross hedging in certain limited circumstances, such proposals reflected the Commission’s longstanding preference for net hedging.353 That preference, although not stated explicitly in prior releases, has been underpinned by a concern that unfettered recognition of gross hedging could potentially allow for the cherry picking of positions in a manner that subverts the position limits rules.354 b. Summary of the 2020 NPRM— Measuring Risk The Commission recognized in the 2020 NPRM that additional flexibility to hedge on a gross basis may be warranted given that there are myriad ways in which organizations, particularly those not currently subject to Federal position limits, are structured and engage in commercial hedging practices.355 For example, in the energy space, it is common for market participants to use multi-line business strategies where risks are managed by trading desk or business line rather than on a global basis. Accordingly, in an effort to clarify its view on this issue, the Commission proposed guidance on gross hedging positions in paragraph (a) to Appendix B. The proposed guidance provided flexibility for a person to measure risk either on a net or gross basis, provided that: (A) The manner in which the person measures risk is consistent over time and follows the person’s regular, historical practice (meaning the person 352 81 FR at 96747–96747. 81 FR at 96747 (stating that gross hedging was economically appropriate in circumstances where ‘‘net cash positions do not necessarily measure total risk exposure due to differences in the timing of cash commitments, the location of stocks, and differences in grades or the types of cash commodity.’’) See also Bona Fide Hedging Transactions or Positions, 42 FR at 14832, 14834 (Mar. 16, 1977) and Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 1977). 354 For example, using gross hedging, a market participant could potentially point to a large long cash position as justification for a bona fide hedge, even though the participant, or an entity with which the participant is required to aggregate, has an equally large short cash position. The presence of such offsetting cash positions would result in the participant having no net price risk to hedge. Instead, the participant created price risk exposure to the commodity by establishing the derivative position. 355 See 85 FR at 11613. 353 See E:\FR\FM\14JAR2.SGM 14JAR2 3284 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations is not switching between net hedging and gross hedging on a selective basis simply to justify an increase in the size of the person’s derivatives positions); (B) the person is not measuring risk on a gross basis to evade the limits set forth in proposed § 150.2 and/or the aggregation rules currently set forth in § 150.4; (C) the person is able to demonstrate (A) and (B) above to the Commission and/or an exchange upon request; and (D) an exchange that recognizes a particular gross hedging position as a bona fide hedge pursuant to proposed § 150.9 documents the justifications for doing so and maintains records of such justifications in accordance with proposed § 150.9(d). c. Summary of the Commission Determination—Measuring Risk The Commission is adopting the proposed guidance with modifications and clarifications to address commenter concerns. d. Comments—Measuring Risk While Better Markets expressed concern that gross hedging could be used to conduct an ‘‘end-run’’ around position limits,356 many other commenters expressed support for flexibility to hedge on a net or gross basis.357 Multiple commenters who expressed support for such flexibility also requested discrete changes to the proposed guidance and/or associated preamble, including: (i) Elimination of the requirement that exchanges document their justifications when allowing gross hedging; 358 (ii) clarification that gross hedging is permissible for both enumerated and non-enumerated hedges; 359 and (iii) clarification that market participants do not need to develop procedures setting forth when gross vs. net hedging is appropriate.360 Finally, IFUS requested that the Commission eliminate the proposed guidance on the grounds that the guidance reflects considerations currently taken by exchange staff when reviewing exemptions.361 e. Discussion of Final Rule—Measuring Risk The Commission continues to believe that the guidance on gross hedging is important because it will allow market khammond on DSKJM1Z7X2PROD with RULES2 356 Better Markets at 60. at 2; LDC at 2; NGSA at 3; COPE at 3; Chevron at 4; Suncor at 4. 358 MGEX at 3; FIA at 14; CEWG at 4. 359 Chevron at 4–5; Suncor at 4–5; CCI at 4–5; CEWG at 7–10. 360 FIA at 14–15 (stating that risk managers decide on a case-by-case basis whether to hedge on a net or gross basis). 361 IFUS at 3. 357 ASR VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 participants to measure risk in the manner most suited to their particular circumstances, while preventing the use of gross hedging to subvert the Federal position limits regime.362 First, the Commission is eliminating proposed prong (D) of the guidance, which provided that an exchange that recognizes a gross position as a nonenumerated bona fide hedge pursuant to § 150.9 documents the justifications for doing so. Prong (D) is unnecessary given that the Commission and exchanges have other tools for accessing such information. In particular, prong (C) of the guidance allows the Commission and exchanges to request, on an asneeded basis, information about the manner in which market participants are measuring risk.363 To ensure the Commission and exchanges have access to sufficient information in light of the removal of prong (D), the Commission is expanding prong (C) to require that a person also demonstrate, upon request by the Commission or an exchange, justifications for measuring risk on a gross basis. Additionally, the proposed prong (D) reference to the nonenumerated process in § 150.9 may have created confusion regarding the applicability of the proposed gross hedging guidance to enumerated hedges. Thus, the Commission is also revising the introductory language of the guidance to clarify that the guidance applies equally to enumerated and nonenumerated bona fide hedges. 362 The guidance will help ensure the integrity of the position limits regime for the reasons discussed below in response to comments from Better Markets. The Commission thus disagrees with IFUS that the guidance is unnecessary, but agrees with IFUS that the proposed guidance reflects considerations currently taken by exchange staff. In particular, the guidance is consistent in many ways with the manner in which exchanges require their participants to measure and report risk, which is consistent with the Commission’s requirements with respect to the reporting of risk. For example, under § 17.00(d), futures commission merchants (‘‘FCMs’’), clearing members, and foreign brokers are required to report certain reportable net positions, while under § 17.00(e), such entities may report gross positions in certain circumstances, including if the positions are reported to an exchange or the clearinghouse on a gross basis. 17 CFR 17.00. The Commission’s understanding is that certain exchanges generally prefer, but do not require, their participants to report positions on a net basis. For those participants that elect to report positions on a gross basis, such exchanges require such participants to continue reporting that way, particularly through the spot period. Such consistency is a strong indicator that the participant is not measuring risk on a gross basis simply to evade regulatory requirements. 363 Additionally, market participants seeking exemptions remain subject to a variety of recordkeeping requirements, including Commission regulation § 1.31, and the Commission will receive information about all exchange-granted exemptions, including cash-market information, via the monthly spreadsheet submission required by § 150.5(a)(4). PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 Second, the Commission is clarifying that the guidance does not require market participants to develop written policies or procedures setting forth when gross or net hedging is appropriate. However, having such policies or procedures may help market participants demonstrate compliance with prongs (A), (B), and (C) of the guidance as finalized herein. Finally, the Commission believes the concerns regarding subversion of position limits raised by Better Markets are already addressed by a combination of the guardrails in prongs (A)–(C) of the guidance as well as other Commission provisions, including some finalized herein. First, to receive recognition as a bona fide hedge, a position must comply with the bona fide hedging definition, regardless of whether the underlying risk is measured on a net or gross basis. A market participant thus may not use gross hedging to receive bona fide hedge treatment for a speculative position,364 and measuring risk on a gross basis to willfully circumvent or evade speculative position limits would potentially run afoul of the § 150.2(i)(2) anti-evasion provision finalized herein. Similarly, market participants must comply with the Commission’s aggregation requirements regardless of whether the participants are measuring risk on a net or gross basis.365 Second, concerns about cherrypicking are addressed by the guidance. By focusing on consistency and historical practice with respect to the manner in which a person measures risk, the guidance enables market participants to measure risk on a gross basis when dictated by the nature of the exposure,366 but not simply when 364 The introductory language to the guidance provides in relevant part that a person’s ‘‘gross hedging positions may be deemed in compliance . . . provided that all applicable regulatory requirements are met, including that the position is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise and otherwise satisfies the bona fide hedging definition . . .’’ 365 Under § 150.4, unless an exemption applies, a person’s positions must be aggregated with positions for which the person controls trading or for which the person holds a 10% or greater ownership interest. Commission Regulation § 150.4(b) sets forth several permissible exemptions from aggregation. See Final Rule, Aggregation of Positions, 81 FR 91454, (December 16, 2016). 366 The Commission continues to believe that a gross hedge may be a bona fide hedge in circumstances where net cash positions do not necessarily measure total risk exposure due to differences in the timing of cash commitments, the location of stocks, and differences in grades or types of the cash commodity. See, e.g., Bona Fide Hedging Transactions or Positions, 42 FR at 14834. However, the Commission clarifies that these may not be the only circumstances in which gross hedging may be recognized as bona fide. Like the analysis of whether a particular position satisfies E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations utilizing gross hedging will yield a larger exposure than net hedging or will otherwise subvert Federal position limit or aggregation requirements. Use of gross or net hedging that is inconsistent with an entity’s historical practice, or a change from gross to net hedging (or vice versa), could be an indication that an entity is seeking to evade position limits regulations.367 Third, all market participants seeking to exceed Federal position limits must request hedge exemptions at the exchange level, regardless of whether they are measuring risk on a gross or net basis, and regardless of whether they are seeking an enumerated or nonenumerated exemption at the Federal level. Under the Final Rule, the exchanges would have an opportunity to confirm whether such participants’ use of gross hedging is consistent with the proposed guidance, including by reviewing detailed position information. The Commission will also have access to such information through a variety of means, including: Records maintained by market participants pursuant to Commission regulation § 1.31; the monthly spreadsheets that exchanges must submit to the Commission under § 150.5(a)(4) summarizing exchangegranted exemptions and related cashmarket information; and the ability for the Commission to request such information directly from a market participant pursuant to prong (C) of the gross hedging guidance. x. Pass-Through Swap and PassThrough Swap Offset Provisions khammond on DSKJM1Z7X2PROD with RULES2 a. Background—Pass-Through Swap and Pass-Through Swap Offset As the Commission has noted above, CEA section 4a(c)(2)(B) 368 contemplates bona fide hedges that by themselves do not meet the criteria of CEA section 4a(c)(2)(A), but that are used to offset the swap exposure of a market participant (e.g., a dealer) to the extent that the swap exposure does satisfy CEA section 4a(c)(2)(A) for such market participant’s counterparty (e.g., a commercial end user).369 The the proposed bona fide hedge definition, the analysis of whether gross hedging may be utilized would involve a case-by-case determination made by the Commission and/or by an exchange using its expertise and knowledge of its participants. 367 If an entity’s (including a vertically-integrated entity’s) practice is to switch between net and gross hedging based on particular circumstances, and those circumstances do not involve evading position limits or aggregation requirements, then such switching would not run afoul of prong (A). See Section II.B.9. (discussing anti-evasion). 368 7 U.S.C. 6a(c)(2)(B). 369 CEA section 4a(c)(2)(B)(i) recognizes as a bona fide hedging position a position that reduces risks attendant to a position resulting from a swap that VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Commission believes that, in affording bona fide hedging recognition for such offsets, Congress in CEA section 4a(c)(2)(B) intended to: (1) Encourage the provision of liquidity to commercial entities that are hedging physical commodity price risk in a manner consistent with the bona fide hedging definition; and (2) only recognize risk management positions as bona fide hedges when such positions are opposite a bona fide hedging swap counterparty.370 The Commission has proposed a pass-through swap provision in each of its position limits rulemakings since 2011. b. Summary of the 2020 NPRM—PassThrough Swap and Pass-Through Swap Offset The Commission proposed to implement the statutory pass-through swap provision in paragraph (2) of the bona fide hedging definition for physical commodities in proposed § 150.1. Proposed paragraph (2)(i) of the 2020 NPRM’s bona fide hedging definition addressed a situation where: (a) A particular swap qualifies as a bona fide hedge by satisfying the temporary substitute test, the economically appropriate test, and the change in value requirement under proposed paragraph (1) of the bona fide hedging definition for one of the counterparties (the ‘‘bona fide hedging swap counterparty’’), but not for the other counterparty; and (b) the bona fide hedge treatment ‘‘passes through’’ from the bona fide hedging swap counterparty to the other counterparty (the ‘‘pass-through swap counterparty’’). The pass-through swap counterparty could be an entity that provides liquidity to the bona fide hedging swap counterparty (such as a swap dealer or a non-dealer that offers swaps). Under the 2020 NPRM, the passthrough of the bona fide hedge treatment from the bona fide hedging swap counterparty to the pass-through swap counterparty was contingent on: (1) The pass-through swap counterparty’s ability to demonstrate upon request from the Commission and/ or from an exchange that the passwas executed opposite a counterparty for which the transaction would qualify as a bona fide hedging transaction pursuant to’’ 4a(c)(2)(A). 7 U.S.C. 6a(c)(2)(B)(i). CEA section 4a(c)(2)(B)(ii) further recognizes as a bona fide hedging position a position that ‘‘reduce risks attendant to a position resulting from a swap that meets the requirements of 4a(c)(2)(A). 7 U.S.C. 6a(c)(2)(B)(ii). 370 As described above, the Commission interprets the revised statutory temporary substitute test as limiting the Commission’s authority to recognize risk management positions as bona fide hedges unless the position is used to offset exposure opposite a bona fide hedging swap counterparty. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 3285 through swap is a bona fide hedge; 371 and (2) the pass-through swap counterparty entering into a futures, option on a futures, or swap position in the ‘‘same physical commodity’’ as the pass-through swap to offset and reduce the price risk attendant to the passthrough swap. If the two conditions above were satisfied, then the bona fides of the bona fide hedging swap counterparty ‘‘pass through’’ to the pass-through swap counterparty for purposes of recognizing as a bona fide hedge any futures position, option on futures position, or swap position entered into by the passthrough swap counterparty to offset the pass-through swap (i.e., to offset and reduce the risks of the swap opposite the bona fide hedging swap counterparty). The pass-through swap counterparty could thus exceed Federal position limits for both: (1) The swap opposite the bona fide hedging swap counterparty, if applicable; and (2) an offsetting futures position, option on a futures position, or swap position in the same physical commodity, even though any such offsetting position on its own would not qualify as a bona fide hedge for the pass-through swap counterparty under proposed paragraph (1) of the bona fide hedging transaction or position definition. The Commission clarified that once the original bona fide pass-through swap is settled, positions held under the pass-through swap provision must be liquidated in an orderly manner in accordance with sound commercial practices. Further, under proposed § 150.3(d)(2), a passthrough swap counterparty would be required to maintain any representation it relied on regarding the bona fide hedge status of the swap for at least two years. Proposed paragraph (2)(ii) of the bona fide hedging definition addressed a situation where a market participant who qualifies as a bona fide hedging swap counterparty (i.e., a counterparty with a position in a previously-entered into swap that qualified, at the time the 371 While the 2020 NPRM’s proposed paragraph (2)(i) of the bona fide hedging definition in § 150.1 required the pass-through swap counterparty to be able to demonstrate the bona fides of the passthrough swap upon request, the 2020 NPRM did not prescribe the manner by which the pass-through swap counterparty obtains the information needed to support such a demonstration. The 2020 NPRM noted that the pass-through swap counterparty could base such a demonstration on a representation made by the bona fide hedging swap counterparty, and such determination may be made at the time when the parties enter into the swap, or at some later point. The 2020 NPRM also stated that for the bona fides to pass-through as described above, the swap position need only qualify as a bona fide hedging position at the time the swap was entered into. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3286 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations swap was entered into, as a bona fide hedge under paragraph (1)) seeks, at some later time, to offset that bona fide hedge swap position using a futures position, option on a futures position, or a swap in excess of Federal position limits. Such step might be taken, for example, to respond to a change in the bona fide hedging swap counterparty’s risk exposure in the underlying commodity.372 Proposed paragraph (2)(ii) would allow such a bona fide hedging swap counterparty to use a futures position, option on a futures position, or a swap in excess of Federal position limits to offset the price risk of the previously-entered into swap, even though the offsetting position itself does not qualify for that participant as a bona fide hedge under paragraph (1). The proposed pass-through exemption under paragraph (2) of the bona fide hedging or transaction definition would only apply to the passthrough swap counterparty’s offset of the bona fide hedging swap, and/or to the bona fide hedging swap counterparty’s offset of its bona fide hedging swap. Any further offset would not be eligible for a pass-through exemption under paragraph (2) unless the offsetting position itself meets paragraph (1) of the proposed bona fide hedging definition. The Commission stated in the 2020 NPRM that it believes the pass-through swap provision may help mitigate some of the potential impact resulting from the removal of the ‘‘risk management’’ exemptions that are currently in effect.373 a bona fide hedging pass-through swap. Instead, under the Final Rule, in order for a pass-through swap counterparty to treat a pass-through swap offset as a bona fide hedge, the pass-through swap counterparty must receive from the bona fide hedging swap counterparty a written representation that the passthrough swap qualifies as a bona fide hedge. Under the Final Rule, the Commission is also amending the proposed regulatory text to add that the pass-through swap counterparty may rely in good faith on such written representation(s) made by the bona fide hedging swap counterparty, unless the pass-through swap counterparty has information that would cause a reasonable person to question the accuracy of the representation. Second, the Commission is adopting a revised paragraph (i)(B) of the bona fide hedging transaction or position definition in § 150.1 to delete the language in the pass-through swap provision that requires the offset to be in the ‘‘same physical commodity’’ as the pass-through swap. c. Summary of the Commission Determination—Pass-Through Swap and Pass-Through Swap Offset; Related Recordkeeping Requirement; CrossCommodity Hedging Under the PassThrough Swap Provision The Commission is finalizing the pass-through swap and pass-through swap offset provision of the ‘‘bona fide hedging transaction or position’’ definition largely as proposed, with certain amendments in response to commenters’ requests discussed below: First, the Commission is amending the 2020 NPRM’s proposed provision that would have required that the passthrough swap counterparty demonstrate upon request that its offsetting position is attendant to a position resulting from (1) Application of Pass-Through Swap Offset to Affiliates Commenters generally supported amending the bona fide hedge definition in accordance with the statutory language in CEA section 4a(c)(2)(B) to include a pass-through swap and passthrough swap offset.374 Some commenters requested clarification on the application of the pass-through swap offset exemption to corporate affiliates. For example, Shell stated that an overly strict interpretation of ‘‘passthrough swap counterparty’’ may limit the application of the pass-through swap offset exemption to only one entity within a corporate structure, and such entity may not be the affiliate entity used by the firm for its marketfacing activities or to execute transactions with exchanges to manage portfolios and position limits on an aggregated basis.375 NGSA similarly 372 Examples of a change in the bona fide hedging swap counterparty’s cash-market price risk could include a change in the amount of the commodity that the hedger will be able to deliver due to drought, or conversely, higher than expected yield due to growing conditions. 373 See supra Section II.A.1.iii.a. (discussion of the temporary substitute test). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 d. Comments—Application of PassThrough Swap Offset to Affiliates; Recordkeeping; Cross-Commodity Hedging Under the Pass-Through Swap Provision Comments generally fell into three categories, each discussed in turn below: (1) Application of pass-through swap offsets to affiliates; (2) passthrough recordkeeping requirements; and (3) pass through swaps and crosscommodity hedging. 374 CEWG at 4; CMC at 5–6; FIA at 3; ICE at 6– 7; ISDA at 12–13; and Shell at 2, 4–5. 375 Shell at 4. PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 requested that the Commission’s interpretation of a pass-through swap counterparty apply to affiliates who may pass through their bona fide hedge position exemption to a market-facing, ‘‘treasury-affiliate’’ subsidiary within a corporate structure.376 (i) Discussion of Final Rule— Application of Pass-Through Swap Offset to Affiliates The Commission clarifies that within a group of entities that aggregates its positions under § 150.4 377 (such as an aggregated corporate group), any entity that is part of the aggregated group may avail itself of the pass-through swap offset exemption. For example, the passthrough swap offset provision extends to market-facing affiliates that are part of an aggregated group pursuant to § 150.4, such as treasury affiliate subsidiaries that firms commonly use to manage market-facing activities and portfolios. In such circumstances, recognition of a secondary pass-through swap transaction would not be necessary among an aggregated group because an aggregated group is treated as one person for purposes of Federal position limits. Separately, in response to commenter requests to allow secondary pass throughs (i.e., the further ‘‘passthrough’’ of a pass-through exemption from one entity to another), the Commission clarifies that outside the context of an aggregated group, additional positions entered into as an offset of a pass-through swap would not be eligible for a pass-through exemption under paragraph (2) of the bona fide hedging definition unless the offsetting position itself meets the bona fide hedging definition. Accordingly, the bona fides of a transaction will not extend to a third-party through the passthrough swap counterparty. For instance, if Producer A enters into an OTC swap with Swap Dealer B, and the OTC swap qualifies as a bona fide hedge for Producer A, then Swap Dealer B could be eligible for a pass-through exemption to offset that swap in the futures market. However, if Swap Dealer B offsets its swap opposite Producer A using an OTC swap with Swap Dealer C, Swap Dealer C would not be eligible for a pass-through exemption. (2) Pass-Through Swap Provision and Recordkeeping Commenters raised concerns with the 2020 NPRM’s requirements that the pass-through swap counterparty 376 NGSA at 8. 377 Aggregation 16, 2016). E:\FR\FM\14JAR2.SGM 14JAR2 of Positions, 81 FR 91454 (Dec. Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations document, and upon request, demonstrate the bona fides of the passthrough swap.378 Commenters also requested that the Commission clarify the nature of the required documentation,379 and/or eliminate the required demonstration/documentation altogether, provided that the passthrough swap counterparty has a legitimate, good-faith belief the swap is a bona fide hedge.380 khammond on DSKJM1Z7X2PROD with RULES2 (i) Discussion of Final Rule—PassThrough Swap Provision and Recordkeeping The Commission is amending the 2020 NPRM’s proposed provision that would have required that the passthrough swap counterparty demonstrate upon request that its offsetting position is attendant to a position resulting from a bona fide hedging pass-through swap. For the Final Rule, the Commission is amending the pass-through swap provision’s regulatory text to clarify that in order for a pass-through swap counterparty to treat a pass-through swap as a bona fide hedge, the passthrough swap counterparty must receive from the bona fide hedging swap counterparty a written representation that the pass-through swap qualifies as a bona fide hedge. The Commission is further amending the regulatory text to add that the pass-through swap counterparty may rely in good faith on such written representation(s) made by the bona fide hedging swap counterparty, unless the pass-through swap counterparty has information that would cause a reasonable person to question the accuracy of the representation. The Commission is adding the written representation requirement to enable to Commission to verify that only market participants with bona fide hedge exemptions are able to pass-through those exemptions to their swap counterparties. The Commission agrees with commenters who stated that the bona fide hedging counterparty is the suitable party to determine the bona fide hedging status of the pass-through swap. This is because the bona fide hedging status is determined based upon the bona fide hedging counterparty’s confidential, proprietary information. The Commission clarifies that the Commission is not requiring the bona fide hedging counterparty to share the proprietary, confidential information 378 Cargill at 10; FIA at 11–12; CMC at 5; Shell at 6–7; ICE at 6–7; and ISDA at 11–12. 379 ICE at 6–7; Shell at 6. 380 Cargill at 10; CMC at 5; FIA at 11–12; and ISDA at 11–12. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 upon which it is basing its determination with its counterparties. Similar to the 2020 NPRM, this Final Rule does not prescribe the form or manner by which the pass-through swap counterparty obtains the written representation. The Commission recognizes that the bona fide hedging counterparty may make such representations on a relationship basis through counterparty relationship documentation (e.g., through ISDA documentation or other forms of documentation as agreed upon by the parties) or on a transaction basis (e.g., through trade confirmations or in other forms as agreed upon by the parties).381 For example, if agreed to by the counterparties, the pass-through swap counterparty may rely on a written representation made by the bona fide hedging swap counterparty that an original pass-through swap and any subsequent pass-through swaps entered into by and between the bona fide hedging swap counterparty and the pass-through swap counterparty are bona fide hedges, unless the bona fide hedging swap counterparty provides written notice to the pass-through swap counterparty that a particular swap is not a bona fide hedge. The Commission believes providing market participants with flexibility recognizes counterparties’ ongoing relationships, while enabling the Commission to verify that the pass-through swap offset reduces the risks of a bona fide hedging swap. The Commission considered comments requesting the elimination of the pass-through swap provision recordkeeping requirement in § 150.3(d) based on arguments that requiring this recordkeeping was not practical. The Commission is not persuaded by those arguments as the recordkeeping requirements assist the Commission in verifying that the pass-through swap provision is only being utilized to offset risks arising from bona fide hedges. Accordingly, the Commission is finalizing the proposed pass-through swap recordkeeping requirement in § 150.3(d), subject to certain conforming changes to reflect amendments to the pass-through swap paragraph of the bona fide hedging definition. Since not all swaps entered into by a commercial entity would qualify as a bona fide hedge, the Commission 381 The Commission believes that allowing market participants to determine the form and manner of how they will document the written representation by the bona fide hedging counterparty and allowing the pass-through swap counterparty to rely on such representation addresses NRECA’s comments on the pass-through swap provision recordkeeping obligations. NRECA at 23. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 3287 declines commenters’ requests that a pass-through swap counterparty may reasonably rely solely upon the fact that the counterparty is a commercial end user and, absent an agreement between the counterparties, that the swap appears to be consistent with hedges entered into by end users in the same line of business. (3) Comments—Pass-Through Swap Provision and Cross-Commodity Hedging Commenters requested amending paragraph (i)(B) of the proposed bona fide hedge definition to permit the passthrough swap provision to apply to cross-commodity hedges by eliminating the proposed requirement that the passthrough swap offset must be in the ‘‘same physical commodity’’ as the passthrough swap.382 (i) Discussion of Final Rule—PassThrough Swap Provision and CrossCommodity Hedging The Commission is adopting a revised paragraph (i)(B) of the bona fide hedging transaction or position definition in § 150.1 to delete the language in the pass-through swap provision that requires the offset to be in the ‘‘same physical commodity’’ as the passthrough swap. The Commission’s enumerated cross-commodity bona fide hedge adopted herein thus applies to all the enumerated hedges, as well as to the pass-through swap provision in the bona fide hedge definition. The revised regulatory text confirms the Commission’s intent to allow a passthrough swap counterparty to utilize the pass-through swap offset exemption when the offset itself is a crosscommodity hedge of the underlying pass-through swap, provided that such cross-commodity hedge meets all applicable requirements, including being substantially related to the commodity being offset. 2. ‘‘Commodity Derivative Contract’’ i. Summary of the 2020 NPRM— Commodity Derivative Contract The Commission proposed to create the defined term ‘‘commodity derivative contract’’ for use throughout part 150 of the Commission’s regulations as shorthand for any futures contract, option on a futures contract, or swap in a commodity (other than a security futures product as defined in CEA section 1a(45)). 382 FIA at 13 (quoting 85 FR at 11614); Shell at 5 (quoting 85 FR at 11614). E:\FR\FM\14JAR2.SGM 14JAR2 3288 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ii. Comments and Summary of the Commission Determination— Commodity Derivative Contract No commenter addressed the proposed definition of ‘‘commodity derivative contract.’’ The Commission is adopting the definition as proposed, with some non-substantive technical modifications. These technical changes include the Final Rule’s reference to ‘‘futures contract’’ rather than merely ‘‘futures,’’ and ‘‘swap’’ rather than ‘‘swap contract’’ to conform to other uses in final § 150.1.383 3. ‘‘Core Referenced Futures Contract’’ i. Summary of the 2020 NPRM—Core Referenced Futures Contract The Commission proposed to create the term ‘‘core referenced futures contract’’ as a short-hand phrase to refer to the futures contracts listed in proposed § 150.2(d) to which the Federal position limit rules would apply.384 As per the ‘‘referenced contract’’ definition described below, position limits would also apply to any contract that is directly or indirectly linked to, or that has certain pricing relationships with, a core referenced futures contract. ii. Comments and Summary of the Commission Determination—Core Referenced Futures Contract No commenter addressed the proposed definition of ‘‘core referenced futures contract.’’ The Commission is adopting the definition as proposed. 4. ‘‘Economically Equivalent Swap’’ khammond on DSKJM1Z7X2PROD with RULES2 i. Background—Economically Equivalent Swap The Commission’s existing regulations do not currently subject swaps to Federal position limits. Similarly, the Commission is unaware of any exchange-set limits for swaps on any of the 25 core referenced futures contracts. Pursuant to CEA section 4a(a)(5), when the Commission imposes 383 The Commission notes that these technical changes are to conform more closely to CEA section 4a(a), which refers to ‘‘contracts of sale of such commodity for future delivery’’ (7 U.S.C. 6a(a)(1) (emphasis added)), ‘‘contracts of sale for future delivery’’ (7 U.S.C. 6a(a)(2)(A) (emphasis added)), or similar phraseology. Accordingly, the Commission is making the technical change to refer to ‘‘futures contracts’’ rather than merely ‘‘futures’’ in order to more closely conform to the CEA’s terms. Similarly, CEA section 4a(a)(6) and section 1a(47) both refer to ‘‘swap’’ but not ’’ swap contract,’’ and so the Commission is making a similar conforming change. 384 The selection of the proposed core referenced futures contracts is explained below in the discussions of § 150.2 at Section II.B. and the necessity finding infra at Section III.C. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 position limits on futures and options on futures pursuant to CEA section 4a(a)(2), the Commission also must develop limits ‘‘concurrently’’ and establish limits ‘‘simultaneously’’ for ‘‘economically equivalent’’ swaps ‘‘as appropriate.’’ 385 As the statute does not define the term ‘‘economically equivalent,’’ the Commission must apply its expertise in construing such term, and, as discussed further below, must do so consistent with the policy goals articulated by Congress, including in CEA sections 4a(a)(2)(C) and 4a(a)(3). ii. Summary of the 2020 NPRM— Economically Equivalent Swap The 2020 NPRM proposed a new term, ‘‘economically equivalent swap.’’ Under the 2020 NPRM, a swap would be deemed an ‘‘economically equivalent swap’’ with respect to a referenced contract so long as the swap shared identical ‘‘material’’ contractual specifications, terms, and conditions with the referenced contract, and provided that any differences between the swap and referenced contract with respect to the following would be disregarded: (i) Lot size or notional amount; (ii) for a swap and relevant referenced contract that are both physically-settled, delivery dates diverging by less than one calendar day, except for a physically-settled natural gas swap which could diverge by less than two calendar days; and (iii) posttrade risk management arrangements. Because the proposed ‘‘economically equivalent swap’’ definition referred to ‘‘referenced contracts,’’ under the 2020 NPRM’s approach a swap could be deemed to be ‘‘economically equivalent’’ to not just a core referenced futures contract, but also to any cashsettled look alike futures contract or option on a futures contract.386 385 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA section 4a(a)(4) separately authorizes, but does not require, the Commission to impose Federal position limits on swaps that meet certain statutory criteria qualifying them as ‘‘significant price discovery function’’ swaps. 7 U.S.C. 6a(a)(4). The Commission reiterates, for the avoidance of doubt, that the definitions of ‘‘economically equivalent’’ in CEA section 4a(a)(5) and ‘‘significant price discovery function’’ in CEA section 4a(a)(4) are separate concepts and that contracts can be economically equivalent without serving a significant price discovery function. See 81 FR at 96736 (the Commission noting that certain commenters may have been confusing the two definitions). 386 As discussed under the ‘‘referenced contract’’ definition, the term ‘‘referenced contract’’ includes core referenced futures contracts, linked cashsettled futures contracts, and options thereon. For further discussion, see Section II.A.16. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 iii. Comments and Discussion of Final Rule—Economically Equivalent Swap a. The Inclusion of Certain Swaps Within the Federal Position Limits Framework Many commenters generally supported the proposed definition.387 However, other commenters argued that swaps should not be subject to Federal position limits at all 388 or that subjecting swaps to position limits would increase costs without commensurate benefits.389 Nevertheless, several of these same commenters that stated that swaps should not be subject to Federal position limits also generally supported the proposed ‘‘economically equivalent swap’’ definition to the extent the Commission determined to include swaps within Federal position limits.390 Similarly, IATP stated that it was unclear why swaps are part of the 2020 NPRM given the Commission’s limited information on the swaps market.391 In response to these comments, as an initial matter, the Commission emphasizes that Congress has determined, through the Dodd-Frank Act’s amendments to CEA section 4a(a)(5), that the Commission must develop Federal position limits for economically equivalent swaps ‘‘concurrently,’’ and must establish such limits ‘‘simultaneously,’’ with the Federal position limits for futures and options on futures. Accordingly, the Commission has determined that, as a legal matter, a swap that qualifies as ‘‘economically equivalent’’ to any referenced contract must be included within the Federal position limits framework. While it did not oppose the proposed definition, NCFC expressed a similar concern with respect to the costs that the proposed definition could impose on commercial end users and small- and mid-sized FCMs. To mitigate these costs, NCFC suggested that any swap that qualifies for an exception to the Commission’s clearing requirement under existing § 50.50 of the Commission’s regulations should not be deemed to be an ‘‘economically equivalent swap.’’ According to NCFC, such ‘‘swap contracts already must meet the test ‘to hedge or mitigate commercial 387 E.g., AQR at 10; FIA at 2–3; NCFC at 5; Suncor at 2; SIFMA AMG at 7; ISDA at 5; Chevron at 2; CEWG at 3; Citadel at 6. 388 SIFMA AMG at 6–8; IATP at 19. 389 CHS at 4–5; NCFC at 5; SIFMA AMG at 6–7; and ISDA at 5. 390 Chevron at 2; FIA at 2, 3, 5; MFA/AIMA at 3; SIFMA AMG at 7; Suncor at 2; AQR at 10–11; COPE at 3; Better Markets at 4; 31; NCFC at 5; ISDA at 5; CEWG at 3; and Citadel at 6. 391 IATP at 19. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations risk,’ and are ‘not used for a purpose that is in the nature of speculation, investing, or trading,’’’ pursuant to § 50.50.392 The Commission understands NCFC’s concern, but believes NCFC’s alternative is unnecessary for two reasons. First, to the extent a swap described by NCFC would ‘‘hedge or mitigate commercial risk,’’ such swap likely would qualify for an enumerated bona fide hedge under the Final Rule and therefore would not contribute to a commercial end-user’s net position for Federal position limits purposes.393 Second, commodity swaps are not required to be cleared under the Commission’s existing regulations, so determining whether the end-user clearing exemption applies is not necessarily a helpful proxy in determining whether a swap is ‘‘economically equivalent’’ for purposes of CEA section 4a(a)(5). b. Statutory Basis for the Commission’s ‘‘Economically Equivalent Swap’’ Definition In promulgating the Federal position limits framework, Congress instructed the Commission to consider several factors. First, CEA section 4a(a)(3)(B) requires the Commission when establishing Federal position limits, to the maximum extent practicable, in its discretion, to: (i) Diminish, eliminate, or prevent excessive speculation; (ii) deter and prevent market manipulation, squeezes, and corners; (iii) ensure sufficient market liquidity for bona fide hedgers; and (iv) ensure that the price discovery function of the underlying market is not disrupted. Second, CEA section 4a(a)(2)(C) requires the Commission to strive to ensure that any limits imposed by the Commission will not cause price discovery in a commodity subject to Federal position limits to shift to trading in foreign markets. Accordingly, any definition of ‘‘economically equivalent swap’’ must consider these statutory objectives. The Commission also recognizes that swaps may include customized (i.e., ‘‘bespoke’’) terms and are largely negotiated bilaterally and traded offexchange (i.e., OTC). In contrast, futures contracts have standardized terms and are generally exchange-traded or khammond on DSKJM1Z7X2PROD with RULES2 392 NCFC at 5–6. the extent an FCM would not be able to qualify for a bona fide hedge, the Commission believes that excepting such swaps for purely financial firms would functionally have the same effect as maintaining the risk-management exemption, which Congress, through the DoddFrank Act’s amendments to the CEA, has directed the Commission to eliminate. See Section IV.A.4.ii.a(1) (discussing elimination of the risk management exemption). 393 To VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 otherwise traded subject to the rules of an exchange. As explained further below, due to these differences between swaps and exchange-traded futures and related options, the Commission has preliminarily determined that Congress’s underlying policy goals in CEA section 4a(a)(2)(C) and (3)(B) are best achieved by adopting a narrow definition of ‘‘economically equivalent swap,’’ compared to the broader definition of ‘‘referenced contract.’’ 394 The ‘‘referenced contract’’ definition adopted in § 150.1 will include ‘‘economically equivalent swaps,’’ meaning any economically equivalent swap is subject to Federal position limits. Thus, a swap that is deemed economically equivalent would be required to be added to, and could be netted against, as applicable, an entity’s other referenced contracts in the same commodity for the purpose of determining one’s aggregate positions for Federal position limits.395 Any swap that is not deemed economically equivalent is not a referenced contract, and thus could not be netted with referenced contracts nor required to be aggregated with any referenced contract for Federal position limits purposes. The Commission has determined that the ‘‘economically equivalent swap’’ definition adopted herein supports the statutory objectives in CEA section 4a(a)(3)(B)(i) and (ii) by helping to prevent excessive speculation and market manipulation, including corners and squeezes, respectively, by: (1) Focusing on swaps that are the most economically equivalent in every significant way to the futures contracts and options on futures contracts for which the Commission deems position limits to be necessary; 396 and (2) limiting the ability of speculators to obtain excessive positions through 394 The definition of ‘‘referenced contract’’ adopted herein will incorporate cash-settled lookalike futures contracts and related options that are either (i) directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of that particular core referenced futures contract; or (ii) directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of the same commodity underlying that particular core referenced futures contract for delivery at the same location or locations as specified in that particular core referenced futures contract. See infra Section II.A.16. (definition of ‘‘referenced contract’’). The definition of ‘‘economically equivalent swap’’ adopted herein is a type of ‘‘referenced contract,’’ but, as discussed herein, the ‘‘economically equivalent swap’’ definition includes a relatively narrower class of swaps compared to other types of ‘‘referenced contracts,’’ such as look-alike futures and options on futures contracts, for the reasons discussed below. 395 See infra Section II.B.10. (discussion of netting). 396 See infra Section III. (necessity finding). PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 3289 netting. Any swap that meets the economically equivalent swap definition offers identical risk sensitivity to its associated referenced contract with respect to the underlying commodity, and thus could be used to effect a manipulation, benefit from a manipulation, or otherwise potentially distort prices in the same or similar manner as the associated futures contract or option on the futures contract. The Commission further has determined that the relatively narrow definition supports the statutory objective in CEA section 4a(a)(2)(C) by not causing price discovery to shift to trading in foreign markets.397 c. The Definition Balances Competing Statutory Goals and Is Neither Too Broad Nor Too Narrow Several commenters argued that the proposed ‘‘economically equivalent swap’’ definition was too narrow and would therefore allow market participants to avoid Federal position limits.398 In particular, CME Group and Better Markets requested the general ‘‘referenced contract’’ definition that applies to futures and options on futures also apply to swaps.399 The Commission agrees with these commenters’ general concerns that the ‘‘economically equivalent swap’’ definition should not allow market participants to avoid Federal position limits. In fact, the Commission believes that the approach adopted in this Final Rule achieves that goal better than the approach proposed by Better Markets and CME Group, first and foremost by preventing parties from using netting of swaps to create large positions in the futures market. The Final Rule’s definition, compared to the relatively broader ‘‘referenced contract’’ definition that applies to futures and options on futures, better prevents inappropriate netting of market participants’ positions and advances Congress’s underlying policy goals in 397 For clarity, a swap may be eligible for treatment under the pass-through swap provision as either a pass-through swap or a pass-through swap offset, discussed above under the bona fide hedge definition, and not necessarily be deemed to be an ‘‘economically equivalent swap’’ since the passthrough swap provision focuses on whether the swap serves as a bona fide hedge to one of the counterparties. Similarly, status as an economically equivalent swap is not dispositive for treatment under the pass-through swap provision. 398 CME Group at 3; NEFI at 3; Better Markets at 31–33 (generally arguing that the ‘‘economically equivalent swap’’ and ‘‘referenced contract’’ definitions should be consistent to prevent loopholes). 399 CME Group at 3–4; Better Markets at 33–34 (arguing that excluding penultimate swaps creates a technical delineation that is largely divorced from the economic realities relating to physical commodities underlying both contracts). E:\FR\FM\14JAR2.SGM 14JAR2 3290 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 CEA section 4a(a)(2)(C) and (3)(B) for the following three reasons. First, as the Commission stated above, it believes that a narrow ‘‘economically equivalent swap’’ definition that focuses on swaps with identical material terms and conditions reduces the ability of market participants to structure tangentially-related (i.e., non-identical) swaps simply to net down large, speculative positions in excess of Federal position limits in futures or options on futures. Because referenced contracts in the same commodity are generally netted,400 and because OTC swaps are bilaterally negotiated and customizable, market participants could structure swaps that do not necessarily offer identical risk or economic exposure or sensitivity simply to net down large positions in other referenced contracts. This is less of a concern with exchange-traded futures and related options, which are subject to exchange rules and oversight, and which have standardized terms, meaning they cannot be structured simply to net down large speculative positions in core referenced futures contracts. The Commission recognizes as reasonable the concerns of CME Group and Better Markets that a relatively narrow ‘‘economically equivalent swap’’ definition, compared to a broader definition, could enable market participants to build excessive speculative risk exposure on one side of the market through OTC swap transactions. As discussed herein, the Commission is equally concerned that a broader definition similarly would permit a market participant to acquire a large position in a core referenced futures contract through inappropriate netting.401 However, the Commission 400 See Section II.B.10. (discussing the application of netting). 401 For example, a broader economically equivalent swap definition would allow a market participant to hold a long position in a physicallysettled futures contract that exceeds the applicable Federal position limit levels by netting down with an ‘‘offsetting’’ short OTC swap, even if the swap has a different material term than the futures contract. That is, the ‘‘offsetting’’ short swap could have different delivery location(s), delivery date(s), quality differential(s), or even a different underlying commodity (depending on how broad the definition would be) than the physically-settled futures contract. Such an ‘‘offsetting’’ short swap would allow the market participant to more profitably engage in—and therefore more likely to successfully effect—a corner or squeeze in two respects. First, the ‘‘offsetting’’ short swap would allow the market participant to obtain a larger long futures position, thus creating a more dominant position on the long side of the market. Second, the ‘‘offsetting’’ short swap would allow the market participant to more easily ‘‘dispose’’ of or ‘‘bury the corpse’’ at smaller expense by enabling the market participant to deliver the underlying physical commodity, which the market participant received pursuant to its long physically-settled futures positions, under more VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 believes that a broader ‘‘economically equivalent swap’’ definition as advocated by these commenters also would be more likely to lead to the additional harms discussed below. Accordingly, while the Commission shares the same ultimate concerns as CME Group and Better Markets with respect to protecting market integrity, the Commission has determined that the relatively narrow definition concurrently protects market integrity while also better supporting the statutory directives in CEA sections 4a(a)(2)(C) and 4a(a)(3)(B) as discussed below. Second, the Commission believes that the Final Rule’s definition addresses statutory objectives by focusing Federal position limits on those swaps that pose the greatest threat for facilitating corners and squeezes. That is, the Final rule addresses those swaps with similar delivery dates and identical material economic terms to futures and options on futures subject to Federal position limits while also minimizing market impact and liquidity for bona fide hedgers for other positions and transactions. For example, if the Commission were to adopt a broader economically equivalent swap definition that included delivery dates that diverge by one or more calendar days, perhaps by several days or weeks, a liquidity provider (including a market maker or a speculator) with a large portfolio of swaps may be more likely to be constrained by the applicable position limits and therefore may have incentive either to minimize its swaps activity or move its swaps activity to foreign jurisdictions, resulting in reduced liquidity. If there were many similarly situated market participants, the market for such swaps could become less liquid, which in turn could harm liquidity for bona fide hedgers. As a result, the Commission has determined that the relatively narrow scope of the Final Rule’s definition reasonably balances the factors in CEA section 4a(a)(3)(B)(ii) and (iii) by decreasing the possibility of illiquid markets for bona fide hedgers on the one hand while, on the other hand, focusing on the prevention of market manipulation during the most sensitive period of the spot month. Third, the ‘‘economically equivalent swap’’ definition helps prevent profitable circumstances compared to the terms specified in the futures contract. For example, the ‘‘offsetting’’ short swap could allow the market participant to deliver the commodity (i.e., ‘‘dispose of’’ or ‘‘bury the corpse’’) at a different, more profitable (or at least for less of a loss) delivery location and/or wait for more favorable delivery dates with more favorable prices. PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 regulatory arbitrage as required by CEA section 4a(a)(2)(C) and additionally will strengthen international comity. For example, if the Commission instead adopted a broader definition, U.S.-based swaps activity could potentially migrate to other jurisdictions with a narrower definition, such as the European Union (‘‘EU’’). In this regard, the Final Rule’s definition is similar in certain ways to the EU definition for OTC contracts that are ‘‘economically equivalent’’ to commodity derivatives traded on an EU trading venue.402 The Commission’s ‘‘economically equivalent swap’’ definition thus furthers the statutory 402 See EU Commission Delegated Regulation (EU) 2017/591, 2017 O.J. (L 87). The applicable EU regulations define an OTC derivative to be ‘‘economically equivalent’’ when it has ‘‘identical contractual specifications, terms and conditions, excluding different lot size specifications, delivery dates diverging by less than one calendar day and different post trade risk management arrangements.’’ While the Final Rule’s ‘‘economically equivalent swap’’ definition is similar, the Final Rule’s definition requires ‘‘identical material’’ terms rather than merely ‘‘identical’’ terms. Further, the Final Rule’s definition excludes different ‘‘lot size specifications or notional amounts’’ rather than referencing only ‘‘lot size’’ since swaps terminology usually refers to ‘‘notional amounts’’ rather than to ‘‘lot sizes.’’ The Commission notes that SIFMA AMG argued in its comment letter that the Commission should adopt the economically equivalent swap definition proposed by the EU. See SIFMA AMG at 7. However, while the Commission’s definition will be similar to the EU’s definition, to the extent that the Commission’s definition differs from the EU’s by requiring ‘‘material identical’’ rather than merely ‘‘identical’’ terms, the Commission discusses its reasoning below. Both the Commission’s definition and the applicable EU regulation are intended to prevent harmful netting. See European Securities and Markets Authority, Draft Regulatory Technical Standards on Methodology for Calculation and the Application of Position Limits for Commodity Derivatives Traded on Trading Venues and Economically Equivalent OTC Contracts, ESMA/ 2016/668 at 10 (May 2, 2016), available at https:// www.esma.europa.eu/sites/default/files/library/ 2016-668_opinion_on_draft_rts_21.pdf (‘‘[D]rafting the [economically equivalent OTC swap] definition in too wide a fashion carries an even higher risk of enabling circumvention of position limits by creating an ability to net off positions taken in onvenue contracts against only roughly similar OTC positions.’’). The applicable EU regulator, the European Securities and Markets Authority (‘‘ESMA’’), released a ‘‘consultation paper’’ discussing the status of the existing EU position limits regime and specific comments received from market participants. According to ESMA, no commenter, with one exception, supported changing the definition of an economically equivalent swap (referred to as an ‘‘economically equivalent OTC contract’’ or ‘‘EEOTC’’). ESMA further noted that for some respondents, ‘‘the mere fact that very few EEOTC contracts have been identified is no evidence that the regime is overly restrictive.’’ See European Securities and Markets Authority, Consultation Paper MiFID Review Report on Position Limits and Position Management Draft Technical Advice on Weekly Position Reports, ESMA70–156–1484 at 46, Question 15 (Nov. 5, 2019), available at https://www.esma.europa.eu/ document/ consultation-paper-position-limits. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations goals set forth in CEA section 4a(a)(2)(C), which requires the Commission to strive to ensure that any Federal position limits are ‘‘comparable’’ to foreign exchanges and will not cause ‘‘price discovery . . . to shift to trading’’ on foreign exchanges.403 Further, market participants trading in both U.S. and EU markets should find the Commission’s and the EU’s respective definitions to be familiar, which may help reduce compliance costs for those market participants that already have systems and personnel in place to identify and monitor such swaps. Each element of the Final Rule’s definition, including the exclusions from the definition, and related comments, is discussed below. d. Scope of Identical Material Terms Under the Final Rule’s definition, only ‘‘material’’ contractual specifications, terms, and conditions are relevant to the analysis of whether a particular swap qualifies as an economically equivalent swap. The definition thus does not require that a swap be identical in all respects to a referenced contract in order to be deemed ‘‘economically equivalent’’ to that referenced contract. Under the Final Rule, ‘‘material’’ specifications, terms, and conditions are limited to those provisions that drive the economic value of a swap, including with respect to pricing and risk. Examples of ‘‘material’’ provisions include, for example: The underlying commodity, including commodity reference price and grade differentials; maturity or termination dates; settlement type (i.e., cash-settled versus physically-settled); and, as applicable for physically delivered swaps, delivery specifications, including commodity quality standards and delivery locations.404 In addition, a swap that either references another referenced contract, or incorporates by reference the other referenced contract’s terms, is deemed to share identical terms with the 403 7 U.S.C. 6a(a)(2)(C). developing its definition of an ‘‘economically equivalent swap,’’ the Commission, based on its experience, has determined that for a swap to be ‘‘economically equivalent’’ to a futures or option on a futures contract, the material contractual specifications, terms, and conditions must be identical. In making this determination, the Commission took into account, in regards to the economics of swaps, how a swap and a corresponding futures contract or option on a futures contract react to certain market factors and movements, the pricing variables used in calculating each instrument, the sensitivities of those variables, the ability of a market participant to gain the same type of exposures, and how the exposures move to changes in market conditions. khammond on DSKJM1Z7X2PROD with RULES2 404 In VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 referenced contract and therefore qualifies as an economically equivalent swap.405 Any change in the material terms of such a swap, however, could render the swap no longer economically equivalent for Federal position limits purposes. The Commission recognizes that the material swap terms noted above are essential to determining the pricing and risk profile for swaps. However, there may be other contractual terms that also may be important for the counterparties in determining the pricing and transaction risks, but that are not necessarily ‘‘material’’ for purposes of position limits. For example, as discussed below, certain other terms, such as clearing arrangements or governing law, may not be material for the purpose of determining economic equivalence for Federal position limits, but may nonetheless affect pricing and risk or otherwise be important to the counterparties. Accordingly, the Commission generally considers those swap contractual terms, provisions, or terminology (e.g., ISDA terms and definitions) that are unique to swaps (whether standardized or bespoke) not to be material for purposes of determining whether a swap is economically equivalent to a particular referenced contract, even though such terms may be important when negotiating the swap or contribute to the valuation and/or the counterparties’ risk analysis. For example, the following swap provisions or terms are generally unique to swaps and/or otherwise not material, and therefore are not to be dispositive for determining whether a swap is economically equivalent: Designating business day or holiday conventions; day count (e.g., 360 or actual); calculation agent; dispute resolution mechanisms; choice of law; or representations and warranties.406 405 For example, a cash-settled swap that either settles to the pricing of a corresponding cash-settled referenced contract, or incorporates by reference the terms of such referenced contract, would be deemed to be economically equivalent to the referenced contract. 406 Commodity swaps, which generally are traded OTC, are less standardized compared to exchangetraded futures and therefore must include these provisions in an ISDA master agreement between counterparties. While certain provisions, for example choice of law, dispute resolution mechanisms, or the general representations made in an ISDA master agreement, may be important considerations for the counterparties, the Commission would not deem such provisions material for purposes of determining economic equivalence under the Federal position limits framework for the same reason the Commission would not deem a core referenced futures contract and a look-alike referenced contract to be economically different, even though the look-alike contract may be traded on a different exchange with PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 3291 Because the Commission considers settlement type to be a material ‘‘contractual specification, term, or condition,’’ a cash-settled swap could only be deemed to be economically equivalent to a cash-settled referenced contract, and a physically-settled swap could only be deemed to be economically equivalent to a physicallysettled referenced contract. However, a cash-settled swap that initially did not qualify as ‘‘economically equivalent’’ due to no corresponding cash-settled referenced contract (i.e., no cash-settled look-alike futures contract) could subsequently become an ‘‘economically equivalent swap’’ if a cash-settled futures contract market were to develop. Commenters had various views on the treatment of cash-settled and physicallysettled swaps. First, certain commenters requested the Commission exclude physically-settled swaps from Federal position limits 407 or at least clarify the class of instruments that would be deemed to be physically-settled swaps.408 Second, other commenters requested the opposite—that the Commission instead exclude cashsettled swaps from Federal position limits.409 Third, Better Markets argued that differentiating between cash-settled and physically-settled swaps by including settlement type as a material term would ‘‘incentivize[ ] speculative liquidity formation away from more liquid, more transparent, and more restrictive futures exchanges and to the swaps markets.’’ 410 i. Treatment of Physically-Settled Swaps Under the Final Rule Several commenters requested that the Commission exclude physicallysettled swaps from Federal position limits,411 or at least clarify the scope of physically-settled swaps that would be subject to Federal position limits.412 However, the Commission has determined that doing so is inconsistent with the statutory goals in CEA section different contractual representations, governing law, holidays, dispute resolution processes, or other provisions unique to the exchanges. Similarly, with respect to day counts, a swap could designate a day count that is different than the day count used in a referenced contract but adjust relevant swap economic terms (e.g., relevant rates or payments, fees, basis, etc.) to achieve the same economic exposure as the referenced contract. In such a case, the Commission would not find such differences to be material for purposes of determining the swap to be economically equivalent for Federal position limits purposes. 407 COPE at 4–5. 408 ICEA at 3–5; NRECA at 19–20, 27. 409 SIFMA AMG at 7; PIMCO at 3; and ISDA at 5. 410 Better Markets at 32. 411 COPE at 4–5. 412 IECA at 3–5; NRECA at 1, 28. E:\FR\FM\14JAR2.SGM 14JAR2 3292 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 4a(a)(3)(B), especially the mandates to deter corners and squeezes and to ensure sufficient market liquidity for bona fide hedgers enumerated in CEA section 4a(a)(3)(B)(ii) and (iii), respectively. For example, excluding physically-settled swaps could potentially incentivize liquidity to move from physically-settled core referenced futures contracts to physically-settled swaps, which could both harm market liquidity for bona fide hedgers and also enable potential manipulators to accumulate large directional positions in physically-settled contracts to effect a corner and squeeze more easily. The Commission also received several comments requesting clarification regarding the Commission’s use of the term ‘‘physically-settled’’ swaps in the 2020 NPRM’s discussion of the definition. First, COPE opined that since the 2020 NPRM excluded trade options from the ‘‘referenced contract’’ definition, as a result, only cash-settled swaps would be deemed to be ‘‘economically equivalent swaps’’ for purposes of Federal position limits. The Commission confirms that under the Final Rule, any swap that qualifies as a trade option under § 32.3 is ipso facto not subject to Federal position limits.413 However, the Commission does not believe this means that only cash-settled swaps could be deemed ‘‘economically equivalent swaps.’’ For example, it is possible that a physically-settled swap may not qualify as a trade option, and if it were to otherwise satisfy the ‘‘economically equivalent swap’’ definition, it therefore would be subject to Federal position limits. Second, IECA and NRECA requested the Commission clarify what it means when using language referring to a ‘‘physically-settled swap,’’ and suggested the Commission instead refer to a ‘‘swap that allows for physical settlement or delivery.’’ 414 IECA stated that ‘‘using this term in place of the term ‘physically-settled swaps’ in the Commission’s proposed rulemaking will help to avoid confusion and misinterpretation in the future.’’ 415 While the Commission is adopting the ‘‘economically equivalent swap’’ definition as proposed (which includes the reference to ‘‘delivery date’’), the 413 As discussed under Section II.A.16., the ‘‘referenced contract’’ definition explicitly excludes any ‘‘trade options that meets the requirements of § 32.3’’ of the Commission’s regulations. Accordingly, a ‘‘trade option’’ is not subject to Federal position limits under the Final Rule, even if the trade option otherwise would satisfy the ‘‘economically equivalent swap’’ definition. 414 IECA at 3–5; NRECA at 1, 28. 415 IECA at 5. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Commission agrees with IECA’s statement and confirms that when the Commission refers to ‘‘physicallysettled swaps’’ for the purpose of this definition, the Commission means a ‘‘swap that allows for physical settlement or delivery.’’ The Commission agrees with IECA that referring to ‘‘swaps that allow for physical settlement or delivery’’ does not alter the Commission’s intended meaning and may avoid confusion and misinterpretation.416 However, the Commission will continue to refer to ‘‘physically-settled swaps’’ in this preamble discussion because the Commission believes that changing the term for discussion purposes herein, compared to the 2020 NPRM’s preamble discussion, could raise additional confusion. Further, the Commission distinguishes between ‘‘cash-settled’’ and ‘‘physically-settled’’ referenced contracts throughout this preamble discussion, and using different terms to refer to swaps also could increase confusion. IECA was concerned that the term ‘‘physically-settled swap’’ could suggest that the Commission was seeking to regulate a commodity for deferred delivery as a swap, which is otherwise excluded from the ‘‘swap’’ definition under CEA section 1a(47)(B)(ii). The Commission confirms that neither the use of ‘‘delivery dates’’ in the definition adopted herein nor the Commission’s use of the term ‘‘physically-settled swaps’’ for the purposes of this preamble discussion is intended to capture instruments that are excluded from the Commission’s jurisdiction either by statute (e.g., the CEA’s statutory exclusion of the sale of a nonfinancial commodity for deferred shipment or delivery that is intended to be physically-settled) 417 or otherwise not deemed to be swaps pursuant to the Commission’s rules and regulations, interpretations, exemption orders, or other guidance.418 NRECA additionally requested the Commission clarify that the ‘‘economically equivalent swap’’ definition does not include any ‘‘customary commercial agreement, contract or transaction entered into as part of operations (so long as it is entered into off-facility and not 416 IECA at 4–5. CEA section 1a(47)(B)(ii). 418 See NRECA at 18–19. For clarity, and as requested by NRECA, the Commission notes that these ‘‘rules and regulations’’ include the Commission’s trade option rule in § 32.3 as well as the Commission’s forward contract exclusion (i.e., the Brent forward exclusion) in 55 FR 39188–92 and 77 FR 48,208, 48,246 (August 13, 2012). 417 See PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 involving a financial intermediary).’’ 419 As noted, to the extent such customary commercial agreement, contract, or transaction is exempt or excluded from either treatment as, or from the definition of, a ‘‘swap’’ by either statute or by the Commission’s rules and regulations, interpretations, exemption orders, or other guidance, the Commission does not deem it to be an economically equivalent swap or otherwise subject to Federal position limits under the Final Rule.420 ii. Treatment of Cash-Settled Swaps Under the Final Rule The Commission also received several comments discussing the treatment of cash-settled swaps under the proposed ‘‘economically equivalent swap’’ definition. Several financial industry commenters argued that the Final Rule should include only physically-settled swaps and should exclude cash-settled swaps, contending that cash-settled swaps do not affect price discovery or contribute to manipulation.421 The Commission disagrees with the commenters’ request to exclude cashsettled swaps from the final definition, as doing so could incentivize liquidity to move from cash-settled referenced contracts to cash-settled OTC swaps, potentially harming the liquidity in the futures markets, including liquidity for bona fide hedgers. At the very least, the Commission does not want to preference OTC cash-settled swaps at the expense of corresponding exchangetraded cash-settled futures or options on futures contracts. In contrast, Better Markets objected to the proposed definition because, according to Better Markets, under the 2020 NPRM cash-settled swaps would not be able to qualify as economically equivalent to a physically-settled core referenced futures contract.422 As Better Markets commented, distinguishing between cash-settled and physicallysettled swaps and futures contracts by 419 NRECA at 16–20. example, the Commission’s swap definition excludes certain capacity contracts and peaking supply contracts that qualify as forward contracts with ‘‘embedded volumetric optionality.’’ See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48,246. Since such instruments are excluded from the Commission’s regulatory ‘‘swap’’ definition, they ipso facto will not be deemed to be ‘‘economically equivalent swaps’’ for purposes of Federal position limits. 421 SIFMA AMG at 7; PIMCO at 3; and ISDA at 5 (PIMCO and ISDA each believe neither cashsettled swaps nor cash-settled futures should be subject to position limits). 422 Better Markets at 32 (stating that cash-settled swaps would be ‘‘essentially excluded from Federal position limits). 420 For E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations deeming settlement type (i.e., cashsettled vs. physically-settled settlement) to be a material term would ‘‘incentivize[ ] speculative liquidity formation away from more liquid, more transparent, and more restrictive futures exchanges and to the swaps markets.’’ 423 The Commission believes Better Markets’ concern is mitigated since under the Final Rule, cash-settled swaps are subject to Federal position limits only if there is a corresponding (i.e., ‘‘economically equivalent’’) cash-settled futures contract or option on a futures contract.424 That is, cash-settled swaps are not subject to Federal position limits if there are no corresponding cashsettled futures contracts or options on a futures contract. In these situations, if no corresponding futures contract or option thereon exists, then there is no liquidity formation in cash-settled futures and options on futures contracts with which a cash-settled swap would be competing for liquidity in the first place. FIA argued that cash-settled swaps should be subject to a separate spotmonth limit.425 However, as discussed in II.A.16.ii.a., the Commission has determined that FIA’s request to establish separate Federal position limits for cash-settled swaps is not, as a default rule, consistent with the statutory goals in CEA section 4a(a)(3)(B). In particular, separate position limits for cash-settled swaps would make it easier for potential manipulators to engage in market manipulation, such as ‘‘banging’’ or ‘‘marking’’ the close, by effectively permitting higher Federal position limits in cash-settled referenced contracts. For example, a market participant would be able to double its cash-settled positions by maintaining positions in both cash-settled futures and cash-settled economically equivalent swaps since positions in each class would not be required to be aggregated for purposes of Federal position limits. Furthermore, the Commission is concerned that class limits could impair liquidity in futures contracts or swaps, as the case may be. For example, a market participant (including a market maker or speculator) with a large portfolio of swaps (or futures contracts) near a particular class limit would be assumed to have a strong preference for executing futures contracts (or swaps) transactions in order to maintain a swaps (or futures contracts) position below the class limit. If there were many similarly situated market participants, the market for such swaps (or futures contracts) could become less liquid. The absence of class limits should decrease the possibility of illiquid markets for referenced contracts subject to Federal position limits. Because economically equivalent swaps and the corresponding futures contracts and option on futures contracts are close substitutes for each other, the absence of class limits should allow greater integration between the economically equivalent swaps and corresponding futures and options markets for referenced contracts and should also provide market participants with more flexibility whether hedging, providing liquidity or market making, or speculating. e. Exclusions From the Definition of ‘‘Economically Equivalent Swap’’ As noted above, the Final Rule’s definition provides that differences in lot size or notional amount, delivery dates diverging by less than one calendar day (or less than two calendar days for natural gas), or post-trade risk management arrangements do not disqualify a swap from being deemed ‘‘economically equivalent’’ to a particular referenced contract. i. Delivery Dates Diverging by Less Than One Calendar Day The definition as it applies to commodities (other than natural gas) encompasses swaps with delivery dates that diverge by less than one calendar day from that of a referenced contract.426 As a result, a swap with a delivery date that differs from that of a referenced contract by one calendar day or more is not deemed economically equivalent under the Final Rule, and such swaps are not required to be added to, nor permitted to be netted against, any referenced contract when calculating compliance with Federal position limits.427 For example, these include contracts commonly referred to as ‘‘penultimate’’ contracts, which settle on the trading day immediately preceding the final trading day of the corresponding core referenced futures contract. 423 Id. 424 The Commission notes that a swap could be deemed to be ‘‘economically equivalent’’ to any referenced contract, including cash-settled lookalikes, and that the ‘‘economically equivalent swap’’ definition is not limited to core referenced futures contracts. 425 FIA at 7–8. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 426 This aspect of the proposed definition would be irrelevant for cash-settled swaps since ‘‘delivery date’’ applies only to physically-settled swaps. 427 A swap as so described that is not ‘‘economically equivalent’’ would not be subject to a Federal speculative position limit under the Final Rule. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 3293 In response to the definition’s proposed exclusion of physically-settled penultimate swaps, Better Markets argued, among other things, that excluding penultimate swaps ‘‘creates technical delineations that are largely divorced from the economic realities relating to physical commodities underlying both contracts.’’ 428 In response, the Commission recognizes that while a penultimate contract may be significantly correlated to its corresponding spot-month contract, a penultimate contract does not necessarily offer identical economic or risk exposure to the spot-month contract, and depending on the underlying commodity and market conditions, a market participant may open itself up to material basis risk by moving from the spot-month contract to a penultimate contract.429 Accordingly, the Commission has determined that it is not appropriate ex ante to permit market participants to net such penultimate swap positions (other than natural gas) against their core referenced futures contract positions since such positions do not necessarily reflect equivalent economic or risk exposure. However, the Commission underscores that under the Final Rule, a penultimate swap still could be deemed economically equivalent to the extent that another penultimate referenced contract exists (assuming the swap and other referenced contract share identical material terms and the swap otherwise satisfies the economically equivalent swap definition). For example, if a core referenced futures contract has a corresponding penultimate futures contract that qualifies as a referenced contract, then a penultimate swap could be deemed economically equivalent to the penultimate futures contract. In such cases, the penultimate swap would be an economically equivalent swap subject to Federal position limits. The Commission acknowledges that liquidity could shift from the core referenced futures contract to penultimate swaps in cases where there are no corresponding penultimate futures contracts or options contracts (and therefore the swap would not be deemed to be an economically equivalent swap), but the Commission 428 Better Markets at 32. discussed under Sections II.A.16.iii.a(2)(iii) and II.B.3.vi.c, the Final Rule includes penultimate look-alike futures contracts and options on futures contracts as ‘‘referenced contracts.’’ Since futures contracts and options on futures contracts are standardized and exchange-traded, the Commission is less concerned about the potential for manipulation or evasion through inappropriate netting in this context. 429 As E:\FR\FM\14JAR2.SGM 14JAR2 3294 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations believes that this concern is mitigated for two reasons. First, basis risk may exist between the penultimate swap and the referenced contract, and so the Commission believes that a market participant is less likely to hold a penultimate swap the greater the economic difference compared to the corresponding referenced contract. Second, the absence of penultimate futures contracts or options contracts may indicate lack of appropriate penultimate liquidity to hedge or offset one’s penultimate swap position and therefore may militate against entering into penultimate swaps. However, as discussed below, these reasons do not necessarily apply to penultimate swaps for natural gas. khammond on DSKJM1Z7X2PROD with RULES2 ii. Post-Trade Risk Management The Commission is specifically excluding differences in post-trade risk management arrangements, such as clearing or margin, in determining whether a swap is economically equivalent. As noted above, many commodity swaps are traded OTC and may be uncleared or cleared at a different clearing house than the corresponding referenced contract.430 Moreover, since the core referenced futures contracts, along with futures and options on futures contracts in general, are traded on DCMs with vertically integrated clearing houses, as a practical matter, it is unlikely that OTC commodity swaps, which historically have been uncleared, would share identical post-trade clearing house or other post-trade risk management arrangements with their associated core referenced futures contracts. However, to the extent an OTC commodity swap does share the same clearing arrangements as a corresponding referenced contract, the Commission does not want to incentivize the switching of cleared swap contracts to non-cleared status for the sake of avoiding Federal position limits. Therefore, if differences in post-trade risk management arrangements were sufficient to exclude a swap from economic equivalence to a core referenced futures contract, then such an exclusion could otherwise render ineffective the Commission’s statutory 430 Similar to the Commission’s understanding of ‘‘material’’ terms, the Commission construes ‘‘posttrade risk management arrangements’’ to include various provisions included in standard swap agreements, including, for example: Margin or collateral requirements, including with respect to initial or variation margin; whether a swap is cleared, uncleared, or cleared at a different clearing house than the applicable referenced contract; close-out, netting, and related provisions; and different default or termination events and conditions. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 directive under CEA section 4a(a)(5) to include economically equivalent swaps within the Federal position limits framework. Accordingly, the Commission has determined that differences in post-trade risk management arrangements should not prevent a swap from qualifying as economically equivalent with an otherwise materially identical referenced contract.431 iii. Lot Size or Notional Amount The last exclusion clarifies that differences in lot size or notional amount do not prevent a swap from being deemed economically equivalent to its corresponding referenced contract. The Commission’s use of ‘‘lot size’’ and ‘‘notional amount’’ refer to the same general concept. Futures terminology usually employs ‘‘lot size,’’ and swap terminology usually employs ‘‘notional amount.’’ Accordingly, the Commission is using both terms to convey the same general meaning, and in this context does not mean to suggest a substantive difference between the two terms. f. Economically Equivalent Natural Gas Swaps Market dynamics in natural gas are unique in several respects including, among other things, that ICE and NYMEX both list high volume contracts, whereas liquidity in other commodities tends to pool at a single DCM. As expiration approaches for natural gas contracts, volume tends to shift from the NYMEX NG core referenced futures contract that is physically-settled, to an ICE look-alike contract that is cash settled. This trend reflects certain market participants’ desire for exposure to natural gas prices without having to make or take delivery.432 NYMEX and 431 In addition, CEWG asked for clarification that the Commission would not extend certain preamble language in the 2020 NPRM addressing the exclusion of post-trade risk management arrangements from consideration when determining whether a swap is economically equivalent to support a finding that such swaps are actually offexchange futures contracts rather than swaps. CEWG at 31. The Commission confirms that excluding post-trade risk management arrangements from the determination that a swap is economically equivalent does not extend to supporting a finding that such swaps are actually off-exchange futures contracts rather than swaps. 432 In part to address historical concerns over the potential for manipulation of physically-settled natural gas contracts during the spot month in order to benefit positions in cash-settled natural gas contracts, the Commission discusses later in this release that the Final Rule will allow for a higher ‘‘conditional’’ spot month limit in cash-settled natural gas referenced contracts under the condition that market participants seeking to utilize such conditional limit exit any positions in physicallysettled natural gas referenced contracts. See infra Section II.C.2.e. (proposed conditional spot month limit exemption for natural gas). PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 ICE also list several ‘‘penultimate’’ cashsettled referenced contracts that use the price of the physically-settled NYMEX contract as a reference price for cash settlement on the day before trading in the physically-settled NYMEX contract terminates.433 In order to recognize the existing natural gas markets, which include active and vibrant markets in penultimate natural gas contracts, the Final Rule includes a slightly broader economically equivalent swap definition for natural gas so that physically-settled swaps with delivery dates that diverge by less than two calendar days from an associated referenced contract could still be deemed economically equivalent and would be subject to Federal position limits. The Commission intends for this provision to prevent and disincentivize manipulation and regulatory arbitrage and to prevent volume from shifting away from the NYMEX NG core referenced futures contract to penultimate natural gas contract futures and/or penultimate swap markets in order to avoid Federal position limits. As noted above, the Commission is adopting a relatively narrow ‘‘economically equivalent swap’’ definition in order to prevent market participants from inappropriately netting positions in referenced contracts against swap positions further out on the curve. The Commission acknowledges that liquidity could shift to penultimate swaps as a result but believes that, with the exception of natural gas, this concern is mitigated since there may be basis risk between the penultimate swap and the referenced contract and lack of liquidity to specifically hedge or offset one’s penultimate swap position. However, compared to other contracts, the Commission believes that natural gas has a relatively liquid penultimate futures market that enables a market participant to hedge or set-off its penultimate swap position. The Commission believes that without the exception to the economically equivalent swap definition for natural gas swaps, liquidity otherwise could be incentivized to shift from the NYMEX NG core referenced futures contract to penultimate natural gas swaps in order to avoid Federal position limits. CME Group stated in its comment letter that that these concerns also may apply to other energy core referenced 433 Such penultimate contracts include: ICE’s Henry Financial Penultimate Fixed Price Futures (PHH) and options on Henry Penultimate Fixed Price (PHE), and NYMEX’s Henry Hub Natural Gas Penultimate Financial Futures (NPG). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 futures contracts.434 As a result, the Commission intends to observe the behavior in these other markets in response to the Final Rule, but the Commission understands that the natural gas markets are likely the most sensitive to these concerns based on the size of the corresponding natural gas penultimate market. As a result, the Commission is adopting the proposed exception for natural gas, but emphasizes that it will continue to observe the other energy markets in order to determine the proper course of action with respect to those markets. g. Determination of Economic Equivalence The Commission is unable to publish a list of swaps it deems to be economically equivalent swaps because any such determination would involve a facts and circumstances analysis, and because most physical commodity swaps are created bilaterally between counterparties and traded OTC. Absent a requirement that market participants identify their economically equivalent swaps to the Commission on a regular basis, the Commission believes that market participants are best positioned to determine whether particular swaps share identical material terms with referenced contracts and would therefore qualify as ‘‘economically equivalent’’ for purposes of Federal position limits. However, the Commission understands that for certain bespoke swaps it may be unclear whether the facts and circumstances demonstrate whether the swap qualifies as ‘‘economically equivalent’’ with respect to a referenced contract. MFA/AIMA requested that the Commission facilitate compliance by providing clearer guidance on terms that would be deemed material for determining which swaps are ‘‘economically equivalent.’’ 435 Similarly, NCFC requested that the Commission adopt a ‘‘safe harbor’’ under which ‘‘demonstrable good faith compliance with respect to inadvertent violations would not serve as the basis for an enforcement action.’’ 436 In response, the Commission emphasizes that under the Final Rule, a market participant will have the discretion to make such determination as long as the market participant makes a reasonable, good faith effort in reaching such determination. The Commission will not pursue any enforcement action for violating Federal position limits against such market participant with respect to 434 CME Group at 4. at 9. 436 NCFC at 6. 435 MFA/AIMA VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 such swaps positions as long as the market participant (i) performed the necessary due diligence and is able to provide sufficient evidence, if requested, to support its reasonable, good faith determination that the swap is or is not an economically equivalent swap and (ii) comes into compliance with the applicable Federal position limits within a commercially reasonable time, as determined by the Commission in consultation with the market participant, and if applicable, any relevant exchange.437 The Commission anticipates that this should provide a greater level of certainty to provide market participants with the comfort they need to enter into swap positions, in contrast to the alternative in which market participants would be required to first submit swaps to the Commission staff and wait for feedback before entering into swaps.438 While the Commission will primarily rely on market participants to initially determine whether their swaps meet the proposed ‘‘economically equivalent swap’’ definition, the Commission is adopting paragraph (3) to the ‘‘economically equivalent swap’’ definition to clarify that the Commission may determine on its own initiative that any swap or class of swaps satisfies, or does not satisfy, the economically equivalent definition with respect to any referenced contract or class of referenced contracts. The Commission believes that this provision will provide the ability to offer clarity to the marketplace in cases where uncertainty exists as to whether certain swaps would qualify (or would not qualify) as ‘‘economically equivalent,’’ 437 As noted below, the Commission reserves the authority under the Final Rule to determine that a particular swap or class of swaps either is or is not ‘‘economically equivalent’’ regardless of a market participant’s determination. See infra Section II.A.4.iii.g. (discussion of commission determination of economic equivalence). As long as the market participant made its determination, prior to such Commission determination, using reasonable, good faith efforts, the Commission would not take any enforcement action for violating the Commission’s position limits regulations if the Commission’s determination subsequently differs from the determination of the market participant and the market participant comes into compliance with the applicable Federal position limits within a commercially reasonable time, as determined by the Commission in consultation with the market participant, and if applicable, any relevant exchange. 438 As discussed under Section II.A.16. (definition of ‘‘referenced contract’’), the Commission is including a list of futures contracts and options on futures contracts that qualify as referenced contracts because such contracts are standardized and published by exchanges. In contrast, since swaps are largely bilaterally negotiated and OTC traded, a swap could have multiple permutations and any published list of economically equivalent swaps would be unhelpful or incomplete. PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 3295 and therefore would be (or would not be) subject to Federal position limits. Similarly, where market participants hold divergent views as to whether certain swaps qualify as ‘‘economically equivalent,’’ the Commission can ensure that all market participants treat OTC swaps with identical material terms similarly, and serve as a backstop in case market participants fail to properly treat economically equivalent swaps as such. As noted above, the Commission will not take any enforcement action with respect to violating the Commission’s position limits regulations if the Commission disagrees with a market participant’s determination as long as the market participant is able to provide sufficient support to show that it made a reasonable, good faith effort in applying its discretion.439 Better Markets encouraged the release of additional guidance, suggesting that the Commission should delegate its authority to the DMO Director to issue guidance with respect to specific types of terms and conditions, and noting that the proposed process for the Commission to provide clarification is cumbersome.440 The Commission does not believe such delegation is necessary since Commission staff will continue to have the ability to offer informal guidance as well as formal no-action relief or interpretive guidance as needed. Better Markets also suggested that in order to ensure market participants conduct proper diligence, the Commission should clarify and codify that a swap dealer must include an appendix in its reasonably-designed policies and procedures under existing § 23.601 that identifies swaps ‘‘in any manner’’ referencing commodities subject to Federal position limits, regardless of whether the entity deems the swap to be ‘‘economically equivalent.’’ 441 In contrast, ISDA believed the obligations in § 23.601 impose costs that are overly burdensome and are not commensurate with benefits.442 ISDA stated that further guidance is necessary, but noted that even if further guidance is provided, the regime would still impose unnecessary burdens on swap dealers.443 ISDA requested the Commission consider including further 439 See supra Section II.A.4. (discussing market participants’ discretion in determining whether a swap is economically equivalent). 440 Better Markets at 34. 441 Better Markets at 34. 442 ISDA at 10. 443 Id. E:\FR\FM\14JAR2.SGM 14JAR2 3296 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations clarification and/or interim relief for swap dealers.444 At this time, the Commission does not believe it is necessary to provide further detail with respect to § 23.601 because, as discussed above, the Commission will defer to a market participant’s determination as long as the market participant is able to provide sufficient support to show that it made a reasonable, good faith effort in applying its discretion.445 h. Phased Implementation of Federal and Exchange-Set Limits on Swaps As discussed under Section I.D., the Final Rule generally gives market participants until January 1, 2022 to comply with Federal position limits for the 16 non-legacy referenced contracts that are subject to Federal position limits for the first time under the Final Rule, and the Final Rule provides an extra year to comply with respect to economically equivalent swaps (January 1, 2023). After such compliance period, economically equivalent swaps will be subject to Federal position limits. In general, commenters supported a phasein for such swaps.446 As discussed further under Section II.D.4.i, final § 150.5 requires exchanges to establish and enforce exchange-set limits for any referenced contract, which includes economically equivalent swaps. The Commission has determined to permit exchanges to delay enforcing their respective exchange-set position limits on economically equivalent swaps at this time. Specifically, with respect to exchange-set position limits on swaps, the Commission notes that in two years (which generally coincides with the compliance date for economically equivalent swaps), the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6 with respect to economically equivalent swaps. However, after the swap compliance date (January 1, 2023), the Commission underscores that it will enforce Federal position limits in connection with OTC swaps. In response to the Commission’s proposal to allow exchanges to delay enforcing exchange-set position limits khammond on DSKJM1Z7X2PROD with RULES2 444 Id. 445 See supra Section II.A.4. (discussing market participants’ discretion in determining whether a swap is economically equivalent). 446 MFA/AIMA at 8 (requesting an additional 6– 12 months phase-in); SIFMA AMG at 9 (requesting an additional 6–12 months); Citadel at 9 (requesting an additional 6 months); and NGSA at 15–16 (requesting a general phase-in in order ‘‘to avoid the risk of harm to market recovery and to facilitate efficiency in market participant implementation’’). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 on swaps, IATP opined that the Commission’s decision to ‘‘[d]elay compliance with position limit requirement [sic] to avoid imposing costs on market participants makes it appear that the Commission is serving as a swap dealer booster, although swaps dealers are amply resourced to provide the necessary data to the exchanges and to the Commission. The Commission is bending over backward to avoid requiring swaps market participants from paying the costs of exchange trading.’’ 447 However, the Commission stated in the same section of the 2020 NPRM that it would enforce Federal position limits on swaps even though it would not require exchanges to enforce position limits on swaps until the Commission determines that exchanges have had the opportunity to access swaps data and establish appropriate swaps oversight infrastructure.448 Additionally, the Commission notes that physical commodity swaps are not subject to the Commission’s trade execution mandate to trade on exchanges, and the Commission understands that most physical commodity swaps are traded OTC rather than on exchanges. Accordingly, the Commission’s rationale for delaying the requirement that exchanges enforce position limits for swaps is based on exchanges’ existing capabilities and lack of insight into the OTC swaps markets, rather than for swap dealers who will remain subject to Federal position limits and Commission oversight.449 i. Cross-Border Application Several commenters opined that the Commission should address the crossborder application of the Final Rule, including in connection with OTC swaps.450 447 IATP at 20. 2020 NPRM stated, ‘‘Nonetheless, the Commission’s preliminary determination to permit exchanges to delay implementing Federal position limits on swaps could incentivize market participants to leave the futures markets and instead transact in economically-equivalent swaps, which could reduce liquidity in the futures and related options markets, although the Commission recognizes that this concern should be mitigated by the reality that the Commission would still oversee and enforce Federal position limits on economically equivalent swaps.’’ (emphasis added). 85 FR at 11680. 449 The Commission also notes that IATP quotes from the cost-benefits considerations section of the 2020 NPRM, and thus the Commission’s focus on benefits and costs to exchanges and market participants in the excerpt quoted by IATP. 450 FIA at 27–28; ISDA at 11; CHS at 6 (‘‘CHS believes that global organizations should be in a position to better understand the Commission’s approach with respect to the cross–border application of the rules to referenced contract positions. In CHS’s view, the proposal does not 448 The PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 In response, the Commission makes three observations. First, as discussed above regarding the treatment of physically-settled swaps, if a swap is otherwise excluded from the Commission’s jurisdiction either by statute or pursuant to the Commission’s rules and regulations, interpretations, exemption orders, or other guidance, then the swap is not subject to Federal position limits. Accordingly, while related, this determination is distinct from the Final Rule’s position limits framework. Second, the Final Rule provides a compliance period for economically equivalent swaps until January 1, 2023. Accordingly, the Commission and its staff expect to continue to discuss the status of OTC swaps with market participants during this compliance period and provide additional feedback as necessary based on the individual facts and circumstances. Third, to a certain extent, some of the comments are more related to the position limit aggregation rules in existing § 150.4, which was finalized in 2016.451 Moreover, the 2020 NPRM did not discuss cross-border application, which is therefore beyond the scope of this rulemaking. 5. ‘‘Eligible Affiliate’’ i. Summary of the 2020 NPRM—Eligible Affiliate The Commission proposed to create the new defined term ‘‘eligible affiliate’’ to be used in proposed § 150.2(k). As discussed further in connection with § 150.2, an entity that qualifies as an ‘‘eligible affiliate’’ would be permitted to voluntarily aggregate its positions, even though it is eligible for an exemption from aggregation under § 150.4(b).452 ii. Comments and Summary of the Commission Determination—Eligible Affiliate The Commission received no comments on this definition and is adopting it as proposed with certain technical changes. The Commission is making these technical changes to clarify the antecedent to the use of ‘‘its’’ and ‘‘such entity’’ in the definition. The Commission expects these changes will clarify the definition, but do not represent a substantive change in the meaning. address whether and how global companies must aggregate referenced contract positions of affiliates around the world. As part of the retooling of the position limit regime, CHS urges the Commission to address such an application’’). 451 For further discussion related to the position limits aggregation rules, see Section II.B.11. 452 See Section II.B.11. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 6. ‘‘Eligible Entity’’ iii. Discussion of Final Rule—Entity i. Summary of the 2020 NPRM—Eligible Entity The Commission declines to adopt the commenters’ suggestion to carve ‘‘individuals’’ out of the proposed definition of ‘‘entity’’ or to otherwise differentiate between ‘‘person(s)’’ and ‘‘entity(ies)’’ for purposes of part 150 of the Final Rule. The proposed definition of ‘‘entity’’ expressly included ‘‘individuals’’ and neither commenter explained why individuals should be excluded from the definition and why the CEA’s statutory definition of ‘‘person’’ is inappropriate. Accordingly, the Commission is adopting the definition of ‘‘entity’’ as proposed. The Commission adopted a revised ‘‘eligible entity’’ definition in the 2016 Final Aggregation Rulemaking.453 The Commission proposed no further amendments to this definition, but is including the revised definition in this Final Rule given that the definitions for part 150 are set forth or restated in § 150.1, thus ensuring that all defined terms are included. As noted above, the Commission also proposed a nonsubstantive change to remove the lettering from this and other definitions that appear lettered in existing § 150.1, and to list the definitions in alphabetical order. 7. ‘‘Entity’’ i. Summary of the 2020 NPRM—Entity The Commission proposed defining ‘‘entity’’ to mean ‘‘a ‘person’ as defined in section 1a of the Act.’’ 454 The term ‘‘entity,’’ not defined in existing § 150.1, is used throughout proposed part 150 of the Commission’s regulations. ii. Comments—Entity khammond on DSKJM1Z7X2PROD with RULES2 The Commission received two comments that recommended clarification of the proposed definition of ‘‘entity.’’ 455 FIA and MGEX contended the proposed definition of ‘‘entity’’ should not cross-reference the definition of ‘‘person’’ in section 1a of the CEA because the CEA defines ‘‘person’’ to include individuals (i.e., natural persons), as well as entities.456 MGEX argued that the definition of ‘‘entity’’ should not apply to individuals.457 FIA stated that, for purposes of the 2020 NPRM, it is unclear whether the cross-reference to the definition of ‘‘person’’ in section 1a of the CEA is meant to be limited to non-natural persons.458 If so, FIA recommended that the Commission amend the definition of ‘‘entity’’ to refer only to the non-natural persons listed in the definition of ‘‘person’’ under section 1a of the CEA.459 Further, FIA suggested that provisions in part 150 that are applicable to both natural and nonnatural persons should refer to ‘‘persons’’ and those that apply to only non-natural persons should refer to ‘‘entity.’’ 460 453 See 17 CFR 150.1(d). U.S.C. 1a(38). 455 FIA at 26; MGEX at 2. 456 Id. 457 MGEX at 2. 458 FIA at 26. 459 Id. 460 Id. 454 7 VerDate Sep<11>2014 03:06 Jan 14, 2021 8. ‘‘Excluded Commodity’’ i. Summary of the 2020 NPRM— Excluded Commodity The phrase ‘‘excluded commodity’’ is defined in CEA section 1a(19), but is not defined or used in existing part 150 of the Commission’s regulations. The Commission proposed including a definition of ‘‘excluded commodity’’ in part 150 that references that term as defined in CEA section 1a(19).461 ii. Comments and Summary of the Commission Determination—Excluded Commodity No commenter addressed the proposed definition of ‘‘excluded commodity.’’ The Commission is adopting the definition as proposed. 9. ‘‘Futures-Equivalent’’ i. Background—Futures-Equivalent The phrase ‘‘futures-equivalent’’ is currently defined in existing § 150.1(f) and is used throughout existing part 150 of the Commission’s regulations to describe the method for converting a position in an option on a futures contract to an economically equivalent amount in a futures contract. The DoddFrank Act amendments to CEA section 4a, in part, direct the Commission to apply aggregate Federal position limits to physical commodity futures contracts and to swap contracts that are economically equivalent to such physical commodity futures contracts. ii. Summary of the 2020 NPRM— Futures-Equivalent In order to aggregate positions in futures, options 462 on futures, and swaps for purposes of calculating compliance with the Federal position limits set forth in the 2020 NPRM, the Commission proposed adjusting 461 7 U.S.C. 1a(19). stated in this definition, the term ‘‘option’’ includes an option on a futures contract and an option that is a swap. 3297 position sizes to an equivalent position based on the size of the unit of trading of the relevant core referenced futures contract. The phrase ‘‘futuresequivalent’’ is used for that purpose throughout the 2020 NPRM, including in connection with the ‘‘referenced contract’’ definition in proposed § 150.1. The Commission also proposed broadening the existing ‘‘futuresequivalent’’ definition to include references to the proposed new term ‘‘core referenced futures contracts.’’ Additionally, with respect to options, the proposed ‘‘futures-equivalent’’ definition also provided that a participant that exceeds Federal position limits as a result of an option assignment would be allowed a one-day grace period to liquidate the excess position. iii. Commission Determination— Futures-Equivalent The Commission is adopting the proposed definition of ‘‘futuresequivalent’’ with one substantive modification: In addition to the 2020 NPRM’s grace period in connection with position limit overages dues to option assignments, under the Final Rule, the one-day grace period would also extend to an option position that exceeds Federal position limits as a result of certain changes in the option’s exposure to price changes of the underlying referenced contract, as long as the applicable option contract does not exceed such position limits under the previous business day’s exposure to the underlying referenced contract. This grace period does not apply on the last day of the spot month for the corresponding core referenced futures contract. As discussed further below, the Final Rule also includes several technical changes, including referring to an option’s ‘‘exposure’’ to price changes of the underlying referenced contract and eliminating references to an option’s ‘‘risk factors’’ and ‘‘delta coefficient.’’ As discussed below, the Commission believes these changes will add flexibility in assessing exposure to price changes of an option to the underlying futures contract and are not intended to reflect a substantive difference. iv. Comments—Futures-Equivalent Several commenters supported the proposed definition, including the onebusiness-day grace period related to position limit overages due to options assignments.463 In addition to 462 As Jkt 253001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 463 MFA/AIMA at 11; CME Group at 14; FIA at 26; and IFUS Exhibit 1 RFC 23. E:\FR\FM\14JAR2.SGM 14JAR2 3298 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations supporting the proposed definition, CME Group and ICE both supported expanding the proposed definition’s one business day grace period to include Federal position limit overages resulting from changes in the option’s delta coefficient, noting that such a change is consistent with their respective exchange rules.464 However, CME Group noted that exercising an in-themoney option that results in a position over the position limit should be treated as a violation if the futures-equivalent position was over the position limit based on both the previous and current day’s delta.465 FIA sought clarification from the Commission on certain aspects of the proposed definition. FIA stated that it is unclear how a spread contract that qualifies as a referenced contract would be converted to a futures-equivalent position.466 FIA also requested the Commission clarify which calculation method applies to swaps and options that are swaps.467 khammond on DSKJM1Z7X2PROD with RULES2 v. Discussion of Final Rule—FuturesEquivalent The Commission agrees with CME Group and ICE that the one-businessday grace period also should apply to position overages in connection with changes in the current day’s option’s exposure to price changes of the underlying referenced contract (e.g., option delta coefficient). The Commission understands that providing a one business day grace period for these situations is consistent with existing market practice. Further, consistent with CME Group’s comment, a market participant will not have a grace period if the market participant’s position also exceeded Federal position limits based on the previous day’s exposure (including option delta coefficient). To alleviate concerns about 464 CME Group MRAN 1907–5 states that ‘‘[i]f a position exceeds position limits as a result of an option assignment, the person who owns or controls such position shall be allowed one business day to liquidate the excess position without being considered in violation of the limits. Additionally, if, at the close of trading, a position that includes options exceeds position limits when evaluated using the delta factors as of that day’s close of trading, but does not exceed the limits when evaluated using the previous day’s delta factors, then the position shall not constitute a position limit violation.’’ See CME Group Market Regulation Advisory Notice RA1907–5 (Aug. 2, 2019), available at: https://www.cmegroup.com/ content/dam/cmegroup/notices/market-regulation/ 2019/08/RA1907-5.pdf; IFUS Rule 6.13(a) similarly provides persons one business day to bring into position limits compliance any position that exceeds limits due to changes in the deltas of the options, or as the result of an option assignment. 465 CME Group at 14. 466 FIA at 7. 467 FIA at 6–7. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 delivery and to help prevent corners and squeezes, this one-day grace period does not apply on the last trading day of the spot month of the option’s corresponding core referenced futures contract. Additionally, the Commission is eliminating references to an option’s ‘‘risk factor’’ and ‘‘delta co-efficient’’ and instead referring to an option’s ‘‘exposure’’ to price changes of the underlying referenced contract. The Commission understands that the term ‘‘exposure’’ in the present context is more commonly used by market participants. Accordingly, the Commission believes that the reference to an option’s ‘‘exposure’’ to price changes of the underlying referenced contract is the technically correct term to use over ‘‘risk factor’’ or ‘‘delta coefficient,’’ which are used in the existing ‘‘futures-equivalent’’ definition. However, the Commission’s use of ‘‘exposure’’ here is meant to encompass the concepts of ‘‘risk factor’’ and ‘‘delta co-efficient.’’ As a result, the Commission believes that this change provides flexibility, and is consistent with existing market practice and understanding, in assessing the exposure of an option to the price movement of futures contract and is not intended to reflect a substantive change. Additional technical changes include the Final Rule’s reference to ‘‘futures contract’’ rather than merely ‘‘futures’’ and ‘‘entity’’ rather than ‘‘participant’’ since the former terms conform to other uses in final § 150.1. The Final Rule also makes several technical changes in connection with the use of ‘‘computed’’ in the definition, and these changes are meant to clarify the meaning rather than imply a substantive change. With respect to FIA’s request for clarification regarding how a spread contract that qualifies as a referenced contract would be converted to a futures-equivalent position, the Commission recognizes the inherent challenge with converting a spread contract that qualifies as a referenced contract to a futures-equivalent position.468 The Commission expects that a market participant will adjust such a spread contract to a futuresequivalent position consistent with existing exchange practice. With respect to FIA’s question regarding the calculation for swaps and options that are swaps, subparagraph (1) of the futures-equivalent definition applies to an option that is a swap, and subparagraph (3) of the definition applies to a swap that is not an option. 10. ‘‘Independent Account Controller’’ i. Summary of the 2020 NPRM— Independent Account Controller The Commission adopted a revised ‘‘independent account controller’’ definition in the 2016 Final Aggregation Rule.469 The Commission proposed no further amendments to this definition, but included that revised definition in the 2020 NPRM so that all defined terms appeared together. 11. ‘‘Long Position’’ i. Summary of the 2020 NPRM—Long Position The phrase ‘‘long position’’ is currently defined in § 150.1(g) to mean ‘‘a long call option, a short put option or a long underlying futures contract.’’ The Commission proposed to update this definition to apply to swaps and to clarify that such positions would be on a futures-equivalent basis. This provision would thus be applicable to options on futures and swaps such that a long position would also include a long futures-equivalent option on futures and a long futures-equivalent swap. ii. Comments and Summary of the Commission Determination—Long Position No commenter addressed the proposed definition of ‘‘long position.’’ The Commission is adopting the definition as proposed. 12. ‘‘Physical Commodity’’ i. Summary of the 2020 NPRM— Physical Commodity The Commission proposed to define the term ‘‘physical commodity’’ for position limits purposes. Congress used the term ‘‘physical commodity’’ in CEA sections 4a(a)(2)(A) and 4a(a)(2)(B) to mean commodities ‘‘other than excluded commodities as defined by the Commission.’’ 470 The proposed definition of ‘‘physical commodity’’ thus included both exempt and agricultural commodities, but not excluded commodities. ii. Comments and Summary of the Commission Determination—Physical Commodity No commenter addressed the proposed definition of ‘‘physical commodity.’’ The Commission is adopting the definition as proposed. 469 See 468 FIA PO 00000 at 7. Frm 00064 470 7 Fmt 4701 Sfmt 4700 E:\FR\FM\14JAR2.SGM 17 CFR 150.1(e). U.S.C. 6a(a)(2)(A) and (B). 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 13. ‘‘Position Accountability’’ 15. ‘‘Pre-Existing Position’’ i. Summary of the 2020 NPRM— Position Accountability i. Summary of the 2020 NPRM—PreExisting Position The Commission proposed to create the defined term ‘‘pre-existing position’’ to reference any position in a commodity derivative contract acquired in good faith prior to the effective date of a final Federal position limit rulemaking. Proposed § 150.2(g) would set forth the circumstances under which Federal position limits would apply to such positions. Existing § 150.5 permits position accountability in lieu of exchange position limits in certain cases, but does not define the term ‘‘position accountability.’’ The proposed amendments to § 150.5 would allow exchanges, in some cases, to adopt position accountability levels in lieu of, or in addition to, position limits. The Commission proposed a definition of ‘‘position accountability’’ for use throughout proposed § 150.5 as discussed in greater detail in connection with proposed § 150.5. ii. Comments and Summary of the Commission Determination—Position Accountability No commenter addressed the proposed definition of ‘‘position accountability.’’ The Commission is adopting the definition as proposed with some non-substantive technical changes related to the numbering structure. The Commission is also changing the reference of ‘‘trader’’ to ‘‘entity’’ since ‘‘entity’’ is the proper defined term in § 150.1 under the Final Rule while ‘‘trader’’ is not a defined term under § 150.1. 14. ‘‘Pre-Enactment Swap’’ i. Summary of the 2020 NPRM—PreEnactment Swap The Commission proposed to create the defined term ‘‘pre-enactment swap’’ to mean any swap entered into prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), the terms of which had not expired as of the date of enactment of the Dodd-Frank Act. As discussed in connection with proposed § 150.3 later in this release, if acquired in good faith, such swaps would be exempt from Federal position limits, although such swaps could not be netted with post-effective date swaps for purposes of complying with spot month Federal position limits. khammond on DSKJM1Z7X2PROD with RULES2 ii. Comments and Summary of the Commission Determination—PreEnactment Swap No commenter addressed the proposed definition of ‘‘pre-enactment swap.’’ The Commission is adopting the definition as proposed. For further discussion of the treatment of preexisting positions, see Sections II.B.7. and II.C.7. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 ii. Comments and Summary of the Commission Determination—PreExisting Position No commenter addressed the proposed definition of ‘‘pre-existing position.’’ The Commission is adopting the term ‘‘pre-existing position’’ as proposed. However, the Commission did receive comments related to the treatment of certain pre-existing positions. For further discussion of the treatment of pre-existing positions and related comments, see Sections II.B.7. and II.C.7. 16. ‘‘Referenced Contracts’’ i. Background—Referenced Contracts When a futures contract expires, all open futures contract positions in such contract are settled by physical delivery (which the Commission refers to as ‘‘physically-settled’’ herein) or cash settlement (which the Commission refers to as ‘‘cash-settled’’ herein), depending on the contract terms set by the exchange. The nine legacy agricultural contracts currently subject to Federal position limits are all physically-settled futures contracts. Deliveries on physically-settled futures contracts are made through the exchange’s clearinghouse, and the delivery of the physical commodity must be consummated between the buyer and seller per the exchange rules and contract specifications. On the other hand, other futures contracts are ‘‘cashsettled’’ because they do not involve the transfer of physical commodity ownership and require that all open positions at expiration be settled by a transfer of cash to or from the clearinghouse based upon the final settlement price of the contracts. Market participants may use the settlement price of physically delivered futures contracts as a key benchmark to price cash-market contracts and other derivatives, including so-called ‘‘lookalike’’ cash-settled derivatives (which could be futures, options on futures, or swaps contracts). Look-alike cashsettled derivative contracts are explicitly linked to the physically- PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 3299 settled futures contracts. A look-alike cash-settled derivatives contract has nearly identical specifications as its physically-settled counterpart, but rather than calling for delivery of the underlying commodity at expiration, the contract terms require a cash payment at expiration. Each look-alike cash-settled derivatives contract is linked by design to its respective physically-settled contract in that the final settlement value of the cash-settled contract is defined as the final settlement price of the physically-settled contract in the same commodity for the same month. Additionally, other types of cash-settled derivatives contracts may be similar to a look-alike, but the final settlement price of such contracts are determined based on a basis, or differential, to the final settlement price of the corresponding physically-settled contract. Existing § 150.2 applies Federal position limits to the nine legacy agricultural contracts as well as to options thereon on a futures-equivalent basis, but the existing Federal framework does not include provisions to apply Federal position limits to contracts that are linked in some manner to the nine physically-settled legacy agricultural contracts. As a result, the existing Federal position limits do not apply to any cash-settled contracts, including both look-alike contracts and contracts that settle at a basis or differential to a physically-settled contract, options on such cash-settled contracts, or swaps.471 As the Final Rule is expanding the position limits framework to cover certain cash-settled futures contracts, options on such futures contracts, and economically equivalent swaps, for the reasons discussed below, the Commission is adopting the proposed defined term ‘‘referenced contract,’’ with modifications, for use throughout final part 150 to refer to derivatives contracts that are subject to Federal position limits. ii. Summary of the 2020 NPRM— Referenced Contracts The 2020 NPRM proposed a new ‘‘referenced contract’’ definition that included: (1) Any core referenced futures contract listed in proposed § 150.2(d); (2) any other contract (futures or option on futures), on a futures-equivalent basis with respect to a particular core referenced futures contract, that is directly or indirectly linked to the price of a core referenced futures contract, or 471 Under CEA section 1a(47)(A), an option on a swap is deemed to be a swap. E:\FR\FM\14JAR2.SGM 14JAR2 3300 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations that is directly or indirectly linked to the price of the same commodity underlying a core referenced futures contract (for delivery at the same location(s)); and (3) any economically equivalent swap, on a futures-equivalent basis. The proposed referenced contract definition thus included look-alike futures contracts and options on lookalike futures contracts (as well as economically equivalent swaps with respect to such look-alike contracts), contracts of the same commodity but different sizes (e.g., mini contracts), and penultimate contracts.472 Additionally, the 2020 NPRM explicitly excluded from the ‘‘referenced contract’’ definition: (1) Commodity index contracts; (2) location basis contracts; (3) swap guarantees; and (4) trade options that satisfy the requirement of § 32.3 of the Commission’s regulations. Further, while not in the proposed regulatory text, the Commission indicated in the preamble to the 2020 NPRM that a contract for which the settlement price is based on an index published by a price reporting agency (a ‘‘PRA index contract’’) that surveys cash-market transactions (even if the cash-market practice is to price at a differential to a futures contract) was not deemed to be ‘‘directly or indirectly’’ linked to a referenced contract, and thus that such PRA index contract also was excluded from the ‘‘referenced contract’’ definition under the 2020 NPRM.473 Under the 2020 NPRM, a position in a referenced contract in certain circumstances could be netted with a position in another referenced contract, including a core referenced futures contract, which as noted above is a type of referenced contract under the proposed ‘‘referenced contract’’ definition. However, to avoid evasion and undermining of the Federal position limits framework, the 2020 NPRM prohibited the use of non-referenced khammond on DSKJM1Z7X2PROD with RULES2 472 A penultimate contract is a cash-settled contract in which trading ceases one business day prior to the settlement date of the corresponding referenced contract with which the penultimate contract is linked. With respect to penultimate contracts, the 2020 NPRM stated that ‘‘Federal limits would apply to all cash-settled futures and options on futures contracts on physical commodities that are linked in some manner, whether directly or indirectly, to physically-settled contracts subject to Federal limits.’’ Further to this general statement, the 2020 NPRM provided a footnote example of a penultimate contact that, because it cash-settles directly to a core referenced futures contract, the 2020 NPRM explained would therefore be included as a referenced contract. 85 FR at 11619. 473 85 FR at 11620. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 contracts to net down positions in referenced contracts.474 Finally, the 2020 NPRM also stated that, in an effort to provide clarity to market participants regarding which exchange-traded contracts would be subject to Federal position limits, the Commission anticipated publishing, and regularly updating, a list of such contracts on its website. The Commission thus proposed to publish a ‘‘CFTC Staff Workbook,’’ which would provide a non-exhaustive list of referenced contracts and may be helpful to market participants in determining categories of contracts that would fit within the referenced contract definition. iii. Commission Determination— Referenced Contracts The Commission is adopting the proposed ‘‘referenced contract’’ definition with the modification discussed below, as well as one technical change that the Commission believes clarifies the ‘‘referenced contract’’ definition, consistent with the intent of the 2020 NPRM.475 Like the proposed definition, the final ‘‘referenced contract’’ definition also includes (1) the 25 core referenced futures contracts, (2) futures and options on futures that are directly or indirectly linked either to (i) the price of any other core referenced futures contract or (ii) the same commodity underlying a core referenced futures contract,476 and (3) economically equivalent swaps. Like the 2020 NPRM, the final definition also explicitly excludes certain contract types so that these contracts may not be netted against referenced contract positions for purposes of Federal position limits (but also are not aggregated with referenced contract positions). However, in addition to the proposed definition’s exclusions of commodity index contracts, location basis contracts, swap guarantees, and trade options that satisfy the requirement of § 32.3 of the Commission’s regulations, the Final Rule is modifying the 2020 NPRM’s definition to also exclude two 474 85 FR at 11619. For further discussion of the Final Rule’s treatment of the netting of positions, see Section II.B.10. 475 The Commission is providing a clarifying technical change to the ‘‘referenced contract’’ definition in that the final definition refers to ‘‘an option on a futures contract’’ instead of ‘‘options on a futures contract’’ as proposed by the 2020 NPRM, to make clear the original intent of the Commission in the 2020 NPRM that a single option would qualify as a referenced contract. 476 Prong (ii) encompasses physically-settled contracts that do not directly reference a core referenced futures contract but that are nonetheless based on the same commodity and delivery location as the core referenced futures contract. PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 additional contract types: ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts.’’ This section will address the following issues, including related comments, in the following order: a. Cash-settled referenced contracts and contracts that are ‘‘directly or indirectly’’ linked to a core referenced futures contract, including cash-settled and penultimate contracts; b. Contracts explicitly excluded from the ‘‘referenced contract’’ definition; and c. The list of referenced contracts and the related Commission staff ‘‘Workbook.’’ The Commission is also adopting ‘‘economically equivalent swaps,’’ as proposed, as part of the final ‘‘referenced contract’’ definition. However, the Commission addresses the final ‘‘economically equivalent swap’’ definition in Section II.A.4. a. Contracts That Are Directly or Indirectly Linked to a Core Referenced Futures Contract (1) Summary of the 2020 NPRM— Linked to a Core Referenced Futures Contract Paragraph (1) of the proposed referenced contract definition provided that a contract would qualify as a referenced contract if it is a core referenced futures contract, or, with respect to a particular core referenced futures contract, if it is directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of either (i) the core referenced futures contract itself or (ii) the same commodity underlying the core referenced futures contract for delivery at the same location or locations as specified in the core referenced futures contract’s specifications. As the Commission explained in the 2020 NPRM, this provision included a cash-settled ‘‘lookalike’’ future or an option thereon.477 (2) Summary of the Commission Determination—Linked to a Core Referenced Futures Contract The Commission is adopting as final the language in paragraph (1) of the proposed ‘‘referenced contract’’ definition. Accordingly, under paragraph (1) of the final ‘‘referenced contract’’ definition, referenced contracts include a core referenced 477 For example, the 2020 NPRM noted that ICE’s Henry Penultimate Fixed Price Future, which cashsettles directly to NYMEX’s Henry Hub Natural Gas core referenced futures contract, would be considered a referenced contract. 85 FR at 11620. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations futures contract, and any cash-settled futures and options on futures that are directly or indirectly linked either to (i) the price of any other core referenced futures contract or (ii) the same commodity underlying a core referenced futures contract for delivery at the same location or locations as specified in the core referenced futures contract’s specifications.478 Further, in response to the comments described below, the Commission is reaffirming that penultimate futures contracts and options thereon qualify as referenced contracts because they satisfy paragraph (1) of the referenced contract definition under the Final Rule. khammond on DSKJM1Z7X2PROD with RULES2 (i) Comments—Cash-Settled Referenced Contracts Commenters provided differing opinions as to whether linked cashsettled futures and related options should be subject to Federal position limits.479 CME Group and NEFI supported the Commission’s proposal to subject these contracts to Federal position limits.480 According to CME Group, absent parity between cash and physically-settled contracts, artificial distortions on one side of the market could occur due to manipulations on the other side of the market, regulatory arbitrage, or liquidity drain.481 CME Group warned that, ultimately, a lack of parity could undermine the statutory goals of position limits.482 NEFI agreed, arguing that applying Federal position limits to cash-settled contracts is 478 Clause (ii) of this description comprises as referenced contracts any physically-settled contracts that are linked to the same commodity for delivery at the same location underlying a core referenced futures contract. The Commission believes as failure to do so could undermining this Federal position limits framework through the creation of physically-settled look-alike contracts by other exchanges. For example, without including clause (ii) above, an exchange could create a physically-settled look-alike contract, but unlike the existing core referenced futures contract, this new contract would be outside the Federal position limits framework. Such an outcome would clearly disadvantage the exchange with the existing core referenced futures contract and harm liquidity for bona fide hedgers by possibly dividing liquidity among competing physically-settled look-alike contracts, as well as provide significant incentives for market participants to trade contracts that subvert this Federal position limits framework. 479 CME Group at 3–4; FIA at 7–8; ICE at 12; ISDA at 3–5; NEFI at 3; PIMCO at 3; and SIFMA AMG at 4–6. 480 CME Group at 3–4 (stating ‘‘CME Group believes that economically and substantively alike contracts should be accorded the same regulatory treatment to prevent artificial distortions from opening doors for manipulators or shifting one market’s liquidity to another. . . In this regard, as noted above, CME Group recommends that the Commission apply similar provisions to both cashsettled and physically settled swaps.’’). 481 CME Group at 6. 482 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3301 essential to guard against manipulation by a trader who holds positions in both physically-settled and cash-settled contracts for the same underlying commodity.483 Other commenters disagreed. PIMCO and SIFMA AMG contended that cashsettled referenced contracts should not be subject to Federal position limits at all because cash-settled contracts do not introduce the same risk of market manipulation. They argued that subjecting cash-settled referenced contracts to Federal position limits would reduce market liquidity and depth in these instruments.484 ISDA argued that cash-settled contracts should not be included in an immediate Federal position limits rulemaking, and should instead be deferred until the Commission has adopted Federal limits with respect to physically-delivered spot month futures contracts, and after which the Commission should revisit Federal limits for cash-settled contracts.485 FIA and ICE suggested that Federal position limits for cash-settled referenced contracts should apply per DCM (rather than in aggregate across DCMs).486 FIA additionally suggested setting a separate Federal spot-month position limit for economically equivalent swaps.487 FIA and ICE further argued that limits for cashsettled referenced contracts should be higher relative to Federal position limits for physically-settled referenced contracts. They similarly posited that cash-settled referenced contracts are ‘‘not subject to corners and squeezes’’ and higher limits for cash-settled contracts will ‘‘ ‘ensure market liquidity for bona fide hedgers.’ ’’ 488 Further, the Commission addresses FIA’s contention that the Commission should impose a separate Federal spotmonth position limit for economically equivalent swaps in further detail above under Section II.A.4.iii. While the Commission acknowledges commenter views to the effect that cashsettled contracts are less susceptible to effectuating corners and squeezes,490 the Commission is of the view that generally speaking, linked cash-settled and physically-settled contracts form one market, and thus should be subject to Federal position limits. Because the settlement price of a physically delivered futures contract is used as a price benchmark in many other derivative and cash-market contracts, a change in the futures settlement price can affect the value of a trader’s overall portfolio of derivative and cash-market positions. Accordingly, the link between physically delivered futures and their cash-settled derivative counterparts can create incentives for manipulation. This view is informed by the Commission’s experience overseeing derivatives markets, where the Commission has observed that it is common for the same market participant to arbitrage linked cash- and physically-settled contracts, and where the Commission has also observed instances where linked cashsettled and physically-settled contracts have been used together as part of an attempted manipulation.491 Applying position limits to both physically delivered futures and linked cash-settled contracts, including their look-alike cash-settled derivative contracts, reduces a trader’s incentive and ability to manipulate futures markets. Without position limits on (ii) Discussion of Final Rule—CashSettled Reference Contracts general rule for natural gas pursuant to the Commission’s exemptive authority under CEA section 4a(a)(7). For further discussion, see Sections II.B.3.vi. and II.B.11. 490 FIA at 7, stating ‘‘Section 4a(a)(3)(B)(ii) directs the Commission to set limits as appropriate ‘to deter and prevent market manipulation, squeezes and corners.’ ’’ The Commission notes that FIA provides an example as to the effect of squeezes and corners for cash-settled contracts—only two out of three of the points for which the Commission should set an appropriate limit—the third point, which is overlooked by the commenter (market manipulation) is also a statutory objective, and for the reasons described below, provides a basis for including cash-settled contracts within the Federal position limits regime. 491 The Commission has previously found that traders with positions in a cash-settled contract may have an incentive to manipulate and undermine price discovery in the physically-settled contract to which the cash-settled contract is linked. See, e.g., CFTC v. Parnon Energy Inc. et al., No. 1:11-cv03543 (S.D.N.Y. 2014) (alleging defendants amassed sufficient quantity of physical WTI while contemporaneously purchasing cash-settled WTI derivatives positions on NYMEX and ICE with the intent to profit on those positions by manipulating the price of the physically-settled WTI contract). As a general matter, the Commission does not agree with FIA and ICE that Federal position limits should be applied at the DCM level instead of in the aggregate for the reasons discussed below under Section II.B.11.489 483 NEFI at 3. at 3; SIFMA AMG at 4–6. 485 ISDA at 3–5. 486 FIA at 7–8; ICE at 12. 487 FIA 7–8. 488 ICE at 3, 15 (also arguing that cash-settled limits should apply per exchange, rather than across exchanges); FIA at 7–8; For further discussion on the Commission’s determination to generally apply Federal position limits on an aggregate basis across exchanges, see Section II.B.11. 489 As discussed below, as an initial matter, the Commission interprets CEA section 4a(a)(6) as requiring aggregate Federal position limits across exchanges. However, as discussed below, the Commission is providing an exception to this 484 PIMCO PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3302 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations both types of futures contracts, traders could amass a substantial position in the cash-settled look-alike contract and benefit their position by manipulating the settlement price of the physically delivered futures contracts. Additionally, the absence of position limits on look-alike cash-settled derivative contracts would enable traders to manipulate a particular cash commodity price to benefit their cashsettled derivatives position. For example, where market conditions create a shortage of a particular commodity, that shortage should increase the price of the commodity. If markets are functioning properly, the price of the physically delivered futures contract will also increase. A trader could acquire a massive long position in the look-alike cash-settled derivative contract and profit by bidding up the cash price of an already scarce cash commodity. Thus, the trader’s cash commodity positions would directly affect the price of the physically-settled futures contract and its look-alike cashsettled derivative. The trader’s strategy to purchase the cash commodity and bid up its price could cause the value of the look-alike cash-settled derivative position to increase because of the direct links connecting all three markets (i.e., the positions in the underlying cash commodity, the physically-settled derivative, and the cash-settled derivative). Accordingly, the absence of position limits in look-alike cash-settled derivative contracts would enable traders to effectively influence and manipulate cash prices to benefit their cash-settled derivatives position, which could impact the price of the physicallysettled futures contract as well. Additionally, excessive speculation in cash-settled derivative contracts can affect the price of the physically-settled futures contract and the underlying cash commodity and therefore harm the price discovery function of the underlying markets. That is, futures prices are determined by immediate cash commodity prices, and therefore the relationship between cash and futures prices also depends, in part, on the storage location of a particular commodity in relation to its delivery point, and should result in the correct amount of a particular commodity available at the delivery point. Thus, excessive speculation in cash-settled derivative contracts can produce excessive supplies at delivery points and a disruption of the flows of money and commodities exchanged.492 492 For example, manipulated ‘‘higher’’ futures contract prices in a cash-settled futures contract can spill over into ‘‘lower’’ prices for a physically- VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Accordingly, the Commission considers cash-settled referenced contracts to be generally economically equivalent to physical-delivery contracts in the same commodity. In the absence of position limits, an entity with positions in both the physically delivered and cash-settled contracts may have an increased ability and an increased incentive to manipulate one of these contracts to benefit positions in the other contract. As such, the Commission believes that it is essential to apply Federal position limits to cashsettled futures and options on futures that are directly or indirectly linked to physically-settled contracts in order to further the statutory objective in CEA section 4a(a)(3)(B)(iv) to deter and prevent market manipulation. Furthermore, the Commission has determined that including futures contracts and options on futures contracts that are indirectly linked to the core referenced futures contract under the ‘‘referenced contract’’ definition will help prevent the evasion of position limits through the creation of an economically equivalent futures contract or option on a futures contract, as applicable, that does not directly reference the price of the core referenced futures contract. Such contracts that settle to the price of a referenced contract but not to the price of a core referenced futures contract, for example, would be indirectly linked to the core referenced futures contract.493 However, a physically-settled derivative contract with a settlement price that is based on the same underlying commodity at a different delivery location would not be linked, settled futures contract through arbitrage trades between the two futures contracts. Traders arbitraging between the cash-settled and physicallysettled futures contracts would short the ‘‘higher priced’’ cash-settled and long the ‘‘lower-priced’’ physically-settled futures contracts until an equilibrium price is achieved. However, that equilibrium price may be distorted due to the manipulation occurring in the higher priced cashsettled contract, and as a result the physicallysettled contract would have an artificially higher price relative to the actual cash-market price of the underlying commodity. That higher futures contract price would then act as a false price signal to the underlying cash commodity market, thus incentivizing owners of the cash commodity to increase supplies at the delivery points for the physically-settled futures contract. Accordingly, excessive speculation in cash-settled derivative contracts can produce excessive supplies at delivery points and a disruption of liquidity, price discovery, and distribution of the underlying cash commodities. 493 As discussed above, the Commission adopted an ‘‘economically equivalent swap’’ definition that is narrower than the class of futures contracts and option on futures contracts that would be included as referenced contracts. For further discussion of the ‘‘economically equivalent swap’’ definition, see Section II.A.4. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 directly or indirectly, to the core referenced futures contract. By way of example, a hypothetical physicallysettled futures contract on ultra-low sulfur diesel delivered at L.A. Harbor instead of the NYMEX ultra-low sulfur diesel core referenced futures contract delivered in New York Harbor would not be linked, directly or indirectly, to the core referenced futures contract because NYMEX’s ultra-low sulfur diesel futures contract does not include L.A. Harbor as a possible delivery point. Therefore, the contract specification price of the hypothetical physically delivered L.A. Harbor contract would reflect the L.A. Harbor market price for ultra-low sulfur diesel and not the NYMEX contract’s price. (iii) Comments and Discussion of Final Rule—Penultimate Contracts Are a Subset of Cash-Settled Referenced Contracts Penultimate contracts are a type of cash-settled futures contract (or an option thereon) that settles the day before the corresponding physicallysettled futures contract. Penultimate contracts therefore share the same determinative attributes as the other cash-settled look-alike referenced contracts discussed above, including the fact that the settlement price of a penultimate contract is linked to the corresponding physically-settled core referenced futures contract. In response to certain commenters requesting that the Commission exclude penultimate contracts from the 2020 NPRM’s proposed ‘‘referenced contract’’ definition (discussed below), the Commission is affirming that penultimate contracts, as a type of linked cash-settled look-alike contracts, fall within the Final Rule’s ‘‘referenced contract’’ definition. Commenters were split as to whether these penultimate contracts should be included within the ‘‘referenced contract’’ definition. ICE argued that penultimate contracts, and specifically its penultimate cash-settled natural gas contract, should be excluded from position limits for several reasons, including that its natural gas penultimate contract is economically distinct from the NYMEX NG core referenced futures contract and has no ability to impact settlement of that core referenced futures contract.494 SIFMA AMG and ISDA broadly concurred with this position.495 In contrast, CME Group supported the inclusion of penultimate contracts within the definition of 494 ICE at 13–14. at 9; SIFMA AMG at 10–11. 495 ISDA E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 referenced contract.496 As the Commission outlined above, its ‘‘one market’’ view applies to cash-settled contracts that are linked in some manner to physically-settled contracts. Penultimate futures contracts (including options thereon), as a type of linked cash-settled contract, have the same relation to their physically-settled counterparts as discussed above for other linked cash-settled contracts. The Commission therefore is applying Federal position limits to all of these instruments. In support of its view that penultimate contracts should not be subject to Federal position limits, ICE offered the example of the Henry Hub LD1 (‘‘H’’) futures contract (which has an exchange-set spot-month position limit) and the Henry Hub Penultimate (‘‘PHH’’) futures contract (which has exchange-set position accountability), stating that these contracts trade sideby-side, and that there has been no evidence of a migration to the penultimate contract due to the presence of an accountability level rather than a hard spot-month position limit. According to ICE, this suggests that the Commission need not be concerned about an arbitrage opportunity between the two.497 However, in further support of its argument that penultimate contracts should not be subject to Federal position limits, ICE suggested that penultimate contracts ‘‘empirically’’ are not economically the same as the last day contract, as demonstrated by settlement prices.498 To that end, the Commission reviewed the settlement prices of NYMEX NG (the physically settled natural gas core referenced futures contract), H (the ICE LD1 natural gas contract cash-settled to the NYMEX NG), and PHH (the ICE natural gas penultimate contract cash-settled to the NYMEX NG).499 Contrary to the empirical assertion made by ICE, the prices of the six near-month contracts for each of the contracts described above settled at identical prices on the relevant penultimate day for all contracts at all months.500 As reinforced 496 CME Group at 3–4 (arguing that ‘‘economically and substantively alike contracts should be accorded the same regulatory treatment to prevent artificial distortions from opening doors for manipulations or shifting one market’s liquidity to another.’’). 497 ICE at 14. 498 Id. 499 Commission review of these contracts as of August 4, 2020, based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations. 500 The six near-month contracts reviewed by the Commission are as follows: Sep20, Oct20, Nov20, Dec20, Jan21, and Feb21, for each of NYMEX NG, VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 by this observation, the Commission agrees with the commenter that the penultimate contract is tightly correlated (and trades side-by-side) with the cash-settled contract, as well as being demonstrated here, with the physically settled futures contract. However, it is not in spite of this tight correlation, but rather because of it, that the Commission considers these contracts to form one market, and as such, raises the importance of Federal position limits for these instruments. As noted above, the Commission believes that Federal position limits should apply to all contracts covered by the Final Rule’s ‘‘referenced contract’’ definition, including all varieties of linked cash-settled contracts, such as linked penultimate contracts, given the linkages between the physically-settled contract, the cash-settled contract (including penultimate contracts), and the underlying cash-market commodity, and the incentives and opportunities for market manipulation that those linkages create. b. Exclusions From the Referenced Contract Definition (1) Summary of the 2020 NPRM— Exclusions From the Referenced Contract Definition In the 2020 NPRM, paragraph (3) of the proposed ‘‘referenced contract’’ definition explicitly excluded: (1) A location basis contract; (2) a commodity index contract; (3) a swap guarantee; and (4) a trade option that meets the requirements of Commission regulation § 32.3. The 2020 NPRM also included guidance in proposed Appendix C setting forth additional clarification regarding the types of contracts that would qualify as either a location basis contract or a commodity index contract for purposes of the proposed exclusions from the ‘‘referenced contract’’ definition. (2) Summary of the Commission Determination—Exclusions From the Referenced Contract Definition The Commission is adopting paragraph (3) of the 2020 NPRM’s proposed ‘‘referenced contract’’ with the following changes. In addition to excluding the contracts mentioned above, the Final Rule is modifying paragraph (3) to additionally exclude H, and PHH. The Commission does not compare the spot-day price on the last day of trading of the NYMEX NG contract with the penultimate PHH contract since by definition the PHH contract settles on the penultimate day—that is, PHH settles on the day before NYMEX NG’s last day of trading and therefore there is no PHH price to compare against the NYMEX NG price on NYMEX NG’s last day of trading. PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 3303 ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts’’ from the ‘‘referenced contract’’ definition. To the extent a contract fits within one of the excluded contracts in paragraph (3), such contract is not a referenced contract, is not subject to Federal position limits, and could not be used to net down positions in referenced contracts (but also is not required to be added to referenced contract positions when determining compliance with Federal position limits). In order to clarify the types of contracts that qualify as location basis contracts and commodity index contracts, and thus are excluded from the ‘‘referenced contract’’ definition, the Commission also is adopting, with modifications described below, the guidance with respect to these instruments in Appendix C to part 150 of the Commission’s regulations. This guidance includes information to help define the parameters of the terms ‘‘location basis contract’’ and ‘‘commodity index contract.’’ 501 To the extent a particular contract fits within this guidance, such contract would not be a referenced contract, would not be subject to Federal position limits, and could not be used to net down positions in referenced contracts.502 Unlike the 2020 NPRM, the final guidance in Appendix C will also include additional information regarding the definition of the terms ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts.’’ Comments on these topics, and the Commission’s responses, are set forth below. (3) Comments—Exclusions From the Referenced Contract Definition On balance, commenters were generally supportive of the 2020 NPRM’s proposed exclusions from the referenced contract definition.503 (i) Location Basis Contracts Commenters that provided an explicit opinion about location basis contracts were unanimously supportive of the Commission excluding such contracts from the definition of a referenced contract.504 501 The Commission notes that the further definition of parameters regarding a commodity index contract is responsive to the Better Markets comment letter suggesting such additional clarifications. Better Markets at 34. 502 See infra Section II.B.10. (discussion of netting). 503 AGA at 9; CHS at 2; FIA at 2; ICE at 10–11; NCFC at 2. 504 AGA at 9; ICE at 10. E:\FR\FM\14JAR2.SGM 14JAR2 3304 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (ii) Commodity Index Contracts Commenters were divided, however, regarding the exclusion of commodity index contracts. Better Markets and IATP opposed the exclusion,505 while ICE and PIMCO supported it.506 Better Markets concurred with the view expressed by the Commission in the 2020 NPRM that commodity index contracts should not be permitted to net down referenced contract positions, but in lieu of the Commission’s proposal to exclude commodity index contracts as referenced contracts, Better Markets suggested in the alternative that the Commission adopt individual limits for commodity index contracts for persons also involved in physically-settled contracts on physical commodities serving as a constituent in the applicable index.507 IATP cited several studies, including one published by Better Markets, contending that commodity index contracts have price impacts that are detrimental to commercial hedgers.508 IECA stated that the passive speculation provided by commodity index contracts is harmful to the price discovery function of the market.509 In contrast, PIMCO argued in favor of the exclusion for commodity index contracts, contending that commodity index contracts are useful tools for investors looking for broad-based portfolio hedging or to take a view on price trends in the commodity markets.510 (iii) Trade Options khammond on DSKJM1Z7X2PROD with RULES2 All commenters offering a specific opinion regarding trade options unanimously supported the exclusion of trade options from the definition of referenced contract.511 505 Better Markets at 34, 46; IATP at 7–8 (citing studies which they believe demonstrate that commodity index trading harms commercial hedgers). 506 ICE at 2; PIMCO at 5. 507 Better Markets at 46. 508 IATP at 7–8 (citing David Frenk and Wallace Turbeville, ‘‘Commodity Index Traders: Boom and Bust in Commodity Prices,’’ Better Markets, October 2011, at 15). https://bettermarkets.com/sites/ default/files/Better%20Markets%20Commodity%20 Index%20Traders%20and%20Boom-Bust%20in %20Commodities%20Prices.pdf. 509 Industrial Energy at 3–4, suggesting a ban on natural gas commodity index contracts, which functionally equates to a Federal position limit of zero, or alternatively a limit to not exceed the current percentage of the physical market. 510 PIMCO at 5. 511 AGA at 8; CCI at 2; EPSA at 3–4; NGSA at 4; NRECA at 17; CEWG at 4; Chevron at 3; CHS at 2; FIA at 2; NCFC at 2; NGSA at 4; and Suncor at 3. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (iv) Swap Guarantees Similarly, commenters supported the exclusion of swap guarantees from the definition of reference contract.512 (v) Outright Price Reporting Agency Index Contracts FIA and ICE further recommended that the Commission should exclude any outright contracts whose settlement price is based on an index published by a price reporting agency that surveys cash-market transaction prices from the ‘‘referenced contract’’ definition.513 (vi) Monthly Average Pricing Contracts CME Group commented that because a significant amount of commerce is transacted on a monthly average basis, and that because monthly average pricing contracts are calculated using the daily prices during the contract month such that a final settlement price of a core referenced futures contract would have the same weight as the other twenty or more daily prices used in the monthly average price calculation, it would be extremely unlikely for monthly average pricing contracts to be used to manipulate or benefit from a manipulation during the spot period. Thus, CME Group argued monthly average pricing contracts should also be excluded from the definition of referenced contracts.514 (vii) Additional Basis, Differential, and Spread Contracts ICE recommended that certain other contracts, such as additional basis and spread contracts, should generally be excluded from the definition of a referenced contract, even if the contracts reference a core referenced futures contract as one component.515 (4) Discussion of Final Rule— Exclusions From the Referenced Contract Definition The Commission is finalizing as proposed the exclusions from the referenced contract definition for location basis contracts, commodity index contracts, swap guarantees, and trade options that meet the requirements of § 32.3. Further, as noted above, the Commission is expanding prong (3) of the proposed referenced contract definition to additionally exclude two 512 CHS at 2; FIA at 2; NCFC at 2, offering general support for excluding swap guarantees, but not providing a specific rationale for doing so. 513 FIA at 6; ICE at 10–11. 514 CME Group at 13. 515 ICE at 12; see also FIA at 4 (recommending that the spread transaction definition should be expanded to exempt additional, commonly used spreads). For further discussion on the ‘‘spread transaction’’ definition, see Section II.A.20. PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 other contract types: ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts.’’ (i) Location Basis Contracts The Commission has determined that, unless location basis contracts are excluded from the ‘‘referenced contract’’ definition, speculators would be able to net portions of their location basis contracts with outright positions in one of the locations comprising the core referenced futures contract, which would permit extraordinarily large speculative positions in the outright core referenced futures contract.516 For example, the 2020 NPRM explained that a large outright position in NYMEX Henry Hub Natural Gas (NG) futures contracts could not be netted down against a location basis contract that cash-settles to the difference in price between the Gulf Coast Natural Gas futures contract and the NYMEX NG futures contract.517 Absent this exclusion, a market participant could increase its exposure in the outright contract by using the location basis contract to net down against its NYMEX NG futures position, thereby allowing the market participant to further increase the outright NYMEX NG futures contract position that would otherwise exceed the Federal position limits. While excluding location basis contracts from the referenced contract definition would prevent the circumstance described above, it would also mean that location basis contracts would not be subject to Federal position limits. The Commission is comfortable with this outcome because location basis contracts generally demonstrate minimal volatility and are typically significantly less liquid than the core referenced futures contracts, meaning, in the Commission’s estimation, it is less likely that a potential manipulator would be able to effect a market manipulation using these contracts. Further, excluding location basis contracts from the referenced contract definition may allow commercial endusers to more efficiently hedge the cost of commodities at their preferred location to the extent they may frequently require the physical commodity at a location other than the core referenced futures contract’s specified contract delivery point. (ii) Commodity Index Contracts With respect to commodity index contracts, the Commission similarly has 516 See infra Section II.B.10. (discussion of netting). 517 85 FR at 11620. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations determined that excluding commodity index contracts from the ‘‘referenced contract’’ definition will ensure that market participants cannot use a position in a commodity index contract to net down an outright position in a referenced contract that was a component of the commodity index contract. Regarding Better Markets’ and IATP’s requests that the Commission alter the proposed ‘‘referenced contract’’ definition to include commodity index contracts (i.e., to remove commodity index contracts from the list of excluded contracts in paragraph (3) of the ‘‘referenced contract’’ definition), the Commission notes that if it did not exclude commodity index contracts, the Commission’s rules would allow speculators to take on massive outright positions in referenced contracts by netting against a position in a commodity index contract, which could lead to excessive speculation. For example, the Commission understands that it is common for swap dealers to enter into commodity index contracts with participants for which the contract would not qualify as a bona fide hedging position (e.g., with a pension fund). Failing to exclude commodity index contracts from the referenced contract definition could enable a swap dealer to use positions in commodity index contracts to net down offsetting outright futures positions in the components of the index. Additionally, this would have the effect of subverting the statutory pass-through swap provision in CEA section 4a(c)(2)(B), which is intended to foreclose the recognition of positions entered into for risk management purposes as bona fide hedges unless the swap dealer is entering into positions opposite a counterparty for which the swap position is a bona fide hedge.518 The Commission recognizes that although excluding commodity index contracts from the ‘‘referenced contract’’ definition would prevent the potentially risky netting circumstance described above, it would also mean that commodity index contracts would not be subject to Federal position limits. The Commission concludes that this is an acceptable outcome because the contracts comprising the index would themselves be subject to limits, and because commodity index contracts generally tend to exhibit low volatility since they are diversified across many different commodities. With respect to Better Markets’, ICEA’s, and PMAA’s requests to impose separate standalone, or aggregate, 518 7 U.S.C. 6a(c)(2)(B). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3305 position limits on commodity index contracts, the Commission does not believe doing so is useful to the extent that the individual components of a commodity index contract are subject to Federal position limits under the Final Rule. The Commission also is concerned that adopting a standalone limit for a commodity index contract could inadvertently limit transactions in commodity derivatives contracts outside the Final Rule’s scope. Specifically, a commodity index contract may contain components that are subject to Federal position limits, as well as additional components that are not. If the Commission were to place standalone limits on these commodity index contracts, it would impose de facto constraints on commodity derivative contracts that are not intended to be the subject to the Final Rule and for which the Commission has not found position limits to be necessary. position.521 Excluding guarantees of swaps from the definition of ‘‘referenced contract’’ will help avoid any potential confusion regarding the application of position limits to guarantees of swaps. The Commission understands that swap guarantees generally serve as insurance, and, in many cases, swap guarantors guarantee the performance of an affiliate in order to entice a counterparty to enter into a swap with such guarantor’s affiliate. As a result, the Commission believes that swap guarantees do not contribute to excessive speculation, market manipulation, squeezes, or corners. Furthermore, the Commission believes that swap guarantees were not contemplated by Congress when Congress articulated its policy goals with respect to position limits in CEA section 4a(a).522 Accordingly, the Commission is finalizing the exclusion of swap guarantees from the definition of ‘‘referenced contract.’’ (iii) Trade Options The Commission also is finalizing, as proposed, the exclusion of trade options that meet the requirements of § 32.3 from the definition of referenced contract. The Commission has traditionally exempted trade options from a number of Commission requirements because trade options are typically employed by end-users to hedge physical risk and thus do not contribute to excessive speculation. Trade options are not subject to position limits under current regulations, and the proposed exclusion of trade options from the referenced contract definition would simply codify existing practice.519 (v) New Exclusions from the ‘‘Referenced Contract’’ Definition—Price Reporting Agency Index Contracts and Monthly Average Pricing Contracts (iv) Swap Guarantees The Commission additionally is excluding, as proposed, swap guarantees from the ‘‘referenced contract’’ definition. In connection with further defining the term ‘‘swap’’ jointly with the Securities and Exchange Commission in the ‘‘Product Definition Adopting Release,’’ 520 the Commission interpreted the term ‘‘swap’’ (that is not a ‘‘security-based swap’’ or ‘‘mixed swap’’) to include a guarantee of such swap, to the extent that a counterparty to a swap position would have recourse to the guarantor in connection with the 519 In the trade options final rule, the Commission stated its belief that Federal position limits should not apply to trade options, and expressed an intention to address trade options in the context of any final rulemaking on position limits. See Trade Options, 81 FR at 14971. 520 See generally Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012) (‘‘Product Definitions Adopting Release’’). PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 Finally, the Commission is modifying prong (3) of the proposed ‘‘referenced contract’’ definition to additionally exclude from the Final Rule: (a) Monthly average pricing contracts and (b) outright price reporting agency index contracts. (a) Monthly Average Pricing Contracts In response to commenter suggestions, the Commission is providing non-binding guidance in Appendix C to this Final Rule to assist market participants and exchanges in determining whether a particular contract qualifies as a ‘‘monthly average pricing contract,’’ that the Final Rule is excluding from the ‘‘referenced contract’’ definition. Specifically, in response to Question 15 of the 2020 NPRM, CME Group commented that contract types that are generally referred to in industry nomenclature as calendarmonth average (‘‘CMA’’), trade-month average (‘‘TMA’’), and balance-of-themonth (‘‘BALMO’’) contracts should be excluded from the list of referenced contracts and subject solely to exchange-set position limits.523 CME 521 77 FR at 48226. the extent that swap guarantees may lower costs for uncleared OTC swaps in particular by incentivizing a counterparty to enter into a swap with the guarantor’s affiliate, excluding swap guarantees may improve market liquidity, which is consistent with the CEA’s statutory goals in CEA section 4a(a)(3)(B) to ensure sufficient liquidity for bona fide hedgers when establishing its position limit framework. 523 CME Group at 13. 522 To E:\FR\FM\14JAR2.SGM 14JAR2 3306 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Group explains the prevalence of these contracts in the market, and notes an example of the June 2020 monthly average contract (in which there are 22 U.S. business days and thus 22 daily referenced prices incorporated into the calendar month average), concluding that it is difficult to manipulate a CMA. CME Group thus posits that excluding CMAs would not incentivize manipulation of the underlying core referenced futures contract.524 As an initial matter, the Commission’s addition of the new term ‘‘monthly average pricing contracts’’ to Appendix C of this Final Rule is intended to generally cover the types of contracts addressed in CME Group’s comments, which are generally referred to in the industry as ‘‘CMAs,’’ ‘‘TMAs,’’ and ‘‘BALMOs.’’ The Commission agrees with CME Group’s rationale. The Commission understands that because the final settlement price of a core referenced futures contract is only one of many pricing points that constitute that monthly average, and as such generally has a relatively insignificant impact on such core referenced futures contract’s monthly average price, it therefore also has a relatively insignificant impact on the settlement price of the corresponding monthly average pricing contract. Accordingly, the Commission concludes that on balance, excluding monthly average pricing contracts from the definition of referenced contract is consistent with the statutory goals in CEA section 4a(a)(3), including with respect to ensuring sufficient market liquidity for bona fide hedgers due to: (1) The difficulty and expense of any entity artificially moving the price of the monthly average by manipulating one or more component prices within the contract; and (2) the widespread use and utility of these contracts to commercial entities to hedge their risk. The Commission provides non-binding guidance in Appendix C of the Final Rule to assist market participants and exchanges in determining whether a particular contract qualifies as a ‘‘monthly average pricing contract.’’ (b) Outright Price Reporting Agency Index Contracts The Commission is also modifying prong (3) of the proposed ‘‘referenced contract’’ definition to explicitly exclude ‘‘outright price reporting agency index contracts.’’ ICE supported the exclusion of such contracts in its comment letter.525 Further, FIA also commented that it believed that a price 524 Id. 525 ICE reporting agency index contract is outside the definition of a referenced contract.526 The Commission agrees with ICE and FIA and confirms this understanding. The Commission explained in the 2020 NPRM that based on its plain reading, the ‘‘referenced contract’’ definition excluded such contracts because outright price reporting agency index contracts were not ‘‘directly or indirectly’’ linked to the price of a referenced contract.527 The Commission reaffirms its conclusion that an ‘‘outright price reporting agency index contract,’’ which is based on an index published by a price reporting agency that surveys cash-market transaction prices (even if the cash-market practice is to price at a differential to a futures contract), is not directly or indirectly linked to the corresponding referenced contract. The Commission is modifying the final ‘‘referenced contract’’ definition to explicitly exclude such contracts for the sake of regulatory certainty. Similar to the other contracts excluded from the ‘‘referenced contract’’ definition, the Commission is providing non-binding guidance in Appendix C of the Final Rule to assist market participants and exchanges in determining whether a particular contract qualifies as an ‘‘outright price reporting agency index contract’’ and therefore is excluded as a referenced contract. The Commission underscores that this exclusion applies only to ‘‘outright’’ price reporting agency index contracts, and that a contract that settles to the difference (i.e., settled at a basis) between a referenced contract and the price reporting agency index would be directly linked, and thus would qualify as a referenced contract, because it settles in part to the referenced contract price. Since the Commission stated in the preamble to the 2020 NPRM that an outright price reporting agency index contract does not qualify as a ‘‘referenced contract,’’ the Commission does not believe that the Final Rule’s modification to explicitly exclude the term in the regulatory definition of ‘‘referenced contract’’ represents a change in policy. Instead, it is merely a technical change to the regulatory text to provide regulatory clarity to market participants. from the ‘‘referenced contract’’ definition,528 the Commission notes a heightened concern with potential manipulation through the use of outright positions (particularly through inappropriate netting) and spreads, compared to location basis contracts or commodity index contracts.529 Notably, and as described in greater detail above, the Commission views the constraints on the liquidity and volatility associated with location basis and commodity index contracts as not present to an equal degree in other basis and spread contracts. As noted above, while excluding location basis contracts and commodity index contracts from the referenced contract definition could permit large outright positions in such contracts, the Commission believes that excluding these contracts will nonetheless prevent the potentially risky and inappropriate netting of a core referenced futures contract described above. Further, as stated above, the Commission believes that location basis contracts generally demonstrate minimal volatility and are typically significantly less liquid than the core referenced futures contracts, meaning they would be more costly to try to use to manipulate a core referenced futures contract. Similarly, with respect to commodity index contracts, commodities comprising the index could themselves be subject to Federal position limits, and commodity index contracts also generally tend to exhibit low volatility since they are diversified across many different commodities. Additionally, it is unclear from ICE’s discussion what additional contract types that ICE has in mind, other than outright price reporting agency index contracts that the Commission discusses above, since several of the examples provided by ICE may already be exempt under the ‘‘spread transaction’’ definition (e.g., the spread examples provided by ICE 530 may qualify for a spread exemption under the Final Rule as either a quality differential spread or an inter-commodity spread). ICE also stated that the requirement that a spread exemption be approved by the exchange seems unnecessary and is probably unworkable, but did not provide any arguments as to why obtaining exchange approval would be unnecessary.531 (vi) Additional Basis, Differential, and Spread Contracts Regarding ICE’s comment that additional basis, differential, and spread contracts should generally be excluded 528 ICE at 12, noting contracts that capture the differential between different grades of a commodity (e.g., WTI vs. sour crude) or between different but related commodities (e.g., a crack differential) as examples of contracts it believes should excluded. 529 See 78 FR at 75696–75697. 530 ICE at 12. 531 For further discussion of the ‘‘spread transaction’’ definition, see Section II.A.20. 526 FIA at 10. VerDate Sep<11>2014 527 85 03:06 Jan 14, 2021 Jkt 253001 PO 00000 at 6. FR at 11620. Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Additionally, the Commission notes that under the Final Rule, an exemption for any spread that is included in the ‘‘spread transaction’’ definition is selfeffectuating for purposes of Federal position limits, and, unlike the role that exchanges may play with respect to non-enumerated bona fide hedges in final § 150.9, exchanges have no analogous role with respect to spread exemptions for Federal position limits purposes under the Final Rule. iv. List of Referenced Contracts khammond on DSKJM1Z7X2PROD with RULES2 a. Summary of the 2020 NPRM—List of Referenced Contracts In order to provide clarity to market participants, the Commission proposed to publish, and anticipated regularly updating, a CFTC Staff Workbook of Commodity Derivative Contracts under the Regulations Regarding Position Limits for Derivatives (the ‘‘Staff Workbook’’) on the Commission’s website which would list exchangetraded products that are subject to Federal position limits. In order to ensure that the list remained accurate, the Commission also proposed changes to certain provisions of part 40 of its regulations, which pertain to the collection of position limits information through the filing of product terms and conditions. In particular, under existing §§ 40.2, 40.3, and 40.4, DCMs and SEFs must submit certain requirements related to the listing of certain new products. Many of the required submissions include the product’s ‘‘terms and conditions,’’ as defined in § 40.1(j), which in turn includes under § 40.1(j)(1)(vii) ‘‘Position limits, position accountability standards, and position reporting requirements.’’ The Commission proposed to expand § 40.1(j)(1)(vii), which addresses futures contracts and options contracts, to also include an indication as to whether the submitted contract meets the ‘‘referenced contract’’ definition in proposed § 150.1. If so, proposed § 40.1(j)(1)(vii) required the submission to also include the name of the core referenced futures contract on which the submitted new product is based. The Commission further proposed to expand § 40.1(j)(2)(vii), which addresses swaps, to require the applicant to indicate whether the submitted contract meets the proposed ‘‘economically equivalent swap’’ definition in § 150.1. If so, proposed § 40.1(j)(2)(vii) similarly required the submission to include the name of the referenced contract to which the swap is economically equivalent. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 b. Comments and Summary of the Commission Determination—List of Referenced Contracts The Commission is adopting as final the 2020 NPRM’s amendments to part 40 of its regulations with one modification that relates to filing the name of the referenced contract on which the new product is based. Part 40 and the Commission’s amendments pertain to the collection of position limits information through the filing of product terms and conditions, and the publication and regular updates of exchange-traded contracts that are subject to Federal position limits.532 The Commission notes that the Staff Workbook is intended to provide a nonexhaustive list of exchange-traded referenced contracts that are subject to Federal position limits. Although the Commission endeavors to timely update this list of contracts, the omission of a contract from the Staff Workbook does not mean that such contract is outside the definition of a referenced contract subject to Federal position limits. While proposed § 40.1(j)(1)(vii) required the submitted futures contract (or option thereon) to also include the name of the core referenced futures contract on which the submitted new product is based, final § 40.1(j)(1)(vii) instead requires that the submitted product includes the name of either the core referenced futures contract or referenced contract, as applicable, on which the contract is based. This is because, as discussed above under the ‘‘referenced contract’’ definition, a referenced contract could be indirectly or directly linked to another referenced contract that is not a core referenced futures contract. For example, an options contract could be based on a cash-settled look-alike or penultimate futures contract that is a referenced contract rather than on the physicallysettled core referenced futures contract. The Commission’s concurrent publication of the Staff Workbook will provide a non-exhaustive list of exchange-traded referenced contracts, and will help market participants in determining categories of contracts that fit within the referenced contract definition. This effort is intended to provide clarity to market participants regarding which exchange-traded 532 As discussed above, the Commission will provide market participants with reasonable, goodfaith discretion to determine whether a swap would qualify as economically equivalent for Federal position limit purposes. Due to differences between OTC swaps and exchange-traded futures contracts and options thereon, the Staff Workbook would not include a list of economically equivalent swaps. For further discussion, see supra Section II.A.4. (discussion of economically equivalent swaps). PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 3307 contracts are subject to Federal position limits. The proposed amendments to part 40 to specify new referenced contracts generally received support.533 ICE noted the need for clear guidance on how new contracts will be assessed, in order to determine whether such contracts will be referenced contracts, and make consistent determinations with respect to economically similar products.534 Although commenters also generally supported the publication of the Workbook, many suggested modifications, including clarifications regarding which contracts are included as referenced contracts, and the basis for making such determinations.535 The Commission believes that the amendments to part 40 will allow the Commission to consistently and accurately assess whether contracts should be included within the Staff Workbook. The Commission also believes that by providing regular updates to the Staff Workbook, market participants will have accurate and consistent information to assess whether such contracts are subject to Federal position limits. Additionally, the Staff Workbook will provide a linkage between each referenced contract, and either the core referenced futures contract or referenced contract, as applicable, to which it is linked, to aid in market participants’ understanding of the Commission’s determination. Alternatively, some commenters suggested that the Staff Workbook could include a list of all contracts Commission staff finds are not referenced contracts,536 and CME Group and ICE each provided a list of contracts they believe should be excluded from the Staff Workbook.537 The Commission believes that by providing a Staff Workbook listing core referenced futures contracts, and the referenced contracts that are directly or indirectly related to them, the Commission is presenting a list of contracts subject to Federal position limits in the clearest possible fashion. Additionally, the amendments to part 40 will allow regular and accurate updates to this list. Some commenters expressed concern that the Staff Workbook lists contracts that are not referenced contracts,538 or 533 AGA at 10; MFA/AIMA at 4. at 12. 535 AGA at 10; MFA/AIMA at 9; FIA at 6; Chevron at 14; Suncor at 14; and CEWG at 29–30. 536 FIA at 6; MFA/AIMA at 9. 537 CME Group at 13; ICE at 12. 538 FIA at 6; ICE at 9–12. ICE is specifically concerned that the proposed workbook contains 534 ICE E:\FR\FM\14JAR2.SGM Continued 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3308 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations provided examples asking for clarification.539 One commenter recommended that the Commission appoint a task force to develop a comprehensive baseline list of referenced contracts listed for trading on exchanges.540 The Commission believes that Commission staff (as opposed to a taskforce) is best positioned to continually refine the Workbook through accurate, timely updates, as aided by the additional information required by the newly adopted amendments to part 40 under the Final Rule. Further, some commenters believed that the Commission should require exchanges to publish and maintain a definitive list of referenced contracts (other than economically equivalent swaps).541 While CME Group did not believe that the Commission should impose such a requirement on exchanges, it supported coordinating with the Commission to ensure consistency, and publishing this information on CME Group’s website.542 The Commission believes that publication of the Staff Workbook on the www.cftc.gov website will provide a centralized location for market participants to assess whether certain instruments are subject to Federal position limits. Although the Commission is encouraged that exchanges may provide redundancy in also publishing this list of core referenced futures contracts and related referenced contracts listed for trading on their respective exchanges, the Commission is not adopting a requirement for exchanges to publish this information at this time. Finally, CME Group contended that for commodities with only spot month limits, financially-settled futures and options contracts should be excluded from the Staff Workbook and not subject to Federal position limits if the final settlement/expiry of the cash-settled futures or option occurs before the spot month period of its core referenced futures contract begins. CME Group additionally asserted that option contracts that exercise into physicallysettled core referenced futures contracts should be included in the Staff Workbook and subject to Federal position limits even if final settlement/ expiry of the option occurs before spot month period begins. inconsistencies, such as including location basis contracts and PRA/Price Index Contracts. 539 Chevron at 14; CEWG at 29. 540 CEWG at 30. 541 MFA/AIMA at 7; Citadel at 4–5; SIFMA AMG at 11–12. 542 CME Group at 14. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 The Commission agrees with both of CME Group’s assertions with one exception. While the Commission agrees that cash-settled futures contracts and options on such futures contracts that are non-legacy contracts (i.e., the 16 core referenced futures contracts that will not have Federal non-spot position limits) and settle or expire prior to when the spot month limits would become effective in the spot period are not subject to Federal spot month position limits, such futures and options contracts do qualify as referenced contracts based on the settlement price being linked to a core referenced futures contract. However, because the corresponding 16 core referenced futures contracts are not subject to nonspot month Federal position limits, then these cash-settled futures contracts and options contracts similarly are also not subject to Federal position limits during the non-spot month. Accordingly, as contracts not subject to Federal spot or non-spot month position limits, these contracts will not be included in the Staff Workbook, even if such contracts qualify as referenced contracts. The Commission further agrees that options that exercise into the physically-settled core referenced futures contract are within the definition of referenced contract because when the options are exercised, they become positions in the core referenced futures contract. The Commission is clarifying that it will publish a revised Staff Workbook shortly after the publication of this Final Rule on the Commission’s website and before the Final Rule’s Effective Date. This revised Staff Workbook will reflect the revised ‘‘referenced contract’’ definition, clarify CME Group’s discussion with respect to options discussed in the immediately above paragraph, and generally fix any errors identified by commenters. 17. ‘‘Short Position’’ i. Summary of the 2020 NPRM—Short Position The Commission proposed to expand the existing definition of ‘‘short position,’’ currently defined in § 150.1(h), to include swaps and to clarify that any such positions would be measured on a futures-equivalent basis. ii. Comments and Summary of the Commission Determination—Short Position No commenter addressed the proposed definition of ‘‘short position.’’ The Commission is adopting the definition as proposed. PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 18. ‘‘Speculative Position Limit’’ i. Summary of the 2020 NPRM— Speculative Position Limit The Commission proposed to define the term ‘‘speculative position limit’’ for use throughout part 150 of the Commission’s regulations to refer to Federal or exchange-set limits, net long or net short, including single month, spot month, and all-months-combined limits. This proposed definition was not intended to limit the authority of exchanges to adopt other types of limits that do not meet the ‘‘speculative position limit’’ definition, such as a limit on gross long or gross short positions, or a limit on holding or controlling delivery instruments. ii. Comments and Summary of the Commission Determination— Speculative Position Limit No commenter addressed the proposed definition of ‘‘speculative position limit.’’ The Commission is adopting the definition as proposed with some non-substantive technical changes related to the numbering structure. 19. ‘‘Spot Month,’’ ‘‘Single Month,’’ and ‘‘All-Months’’ i. Summary of the 2020 NPRM—Spot Month, Single Month, and All Months The Commission proposed to expand the existing definition of ‘‘spot month’’ to: (1) Account for the fact that the proposed limits would apply to both physically-settled and certain cashsettled contracts; (2) clarify that the spot month for referenced contracts would be the same period as that of the relevant core referenced futures contract; and (3) account for variations in spot month conventions that differ by commodity. In particular, for the ICE Sugar No. 11 (SB) core referenced futures contract, the spot month would mean the period of time beginning at the opening of trading on the second business day following the expiration of the regular option contract traded on the expiring futures contract and ending when the contract expires. For the ICE Sugar No. 16 (SF) core referenced futures contract, the spot month would mean the period of time beginning on the third-to-last trading day of the contract month and ending when the contract expires. For the CME Live Cattle (LC) core referenced futures contract, the spot month would mean the period of time beginning at the close of trading on the first business day following the first Friday of the contract month and ending when the contract expires. The Commission also proposed to eliminate the existing definitions of E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ‘‘single month’’ and ‘‘all-months’’ because the definitions for those terms would be built into the proposed definition of ‘‘speculative position limit’’ described above. ii. Comments and Summary of the Commission Determination—Spot Month, Single Month, and All Months No commenter addressed the proposed definition of ‘‘spot month’’ or the proposed elimination of the existing definitions of ‘‘single month’’ and ‘‘all months.’’ The Commission is adopting the definition of spot month as proposed, but with a correction to reflect the proper spot month period for the Live Cattle (LC) core referenced futures contract. Final § 150.1 defines the spot month for the Live Cattle (LC) core referenced futures contract as the period of time beginning at the close of trading on the first business day following the first Friday of the contract month and ending when the contract expires. The Commission is eliminating the existing definitions of ‘‘single month’’ and ‘‘all months’’ as proposed. Finally, the Commission is adopting some non-substantive technical changes related to the numbering structure. 20. ‘‘Spread Transaction’’ khammond on DSKJM1Z7X2PROD with RULES2 i. Background—Spread Transaction, Existing § 150.3(a)(3) In existing § 150.3(a)(3), the Commission exempts from Federal position limits ‘‘spread or arbitrage positions,’’ subject to certain restrictions, including the restriction that the spread position be outside of the spot month.543 The existing regulations do not, however, define ‘‘spread or arbitrage positions.’’ Further, under existing regulations, spread exemptions from Federal positions limits are self-effectuating and do not require prior Commission approval. Rather, market participants must request spread exemptions from the relevant exchange(s) in advance of exceeding exchange limits. ii. Summary of the 2020 NPRM—Spread Transaction The Commission proposed a ‘‘spread transaction’’ definition to exempt from Federal position limits transactions normally known to the trade as ‘‘spreads.’’ The proposed definition would explicitly include common types 543 See 17 CFR 150.3(a)(3) (permitting spread or arbitrage positions that are ‘‘between single months of a futures contract and/or, on a futures-equivalent basis, options thereon, outside of the spot month, in the same crop year; provided, however, that such spread or arbitrage positions, when combined with any other net positions in the single month, do not exceed the all-months limit set forth in § 150.2.’’) VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 of spread strategies, including: Calendar spreads; inter-commodity spreads; quality differential spreads; processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads); product or by-product differential spreads; and futures-options spreads. The proposed spread transaction definition would also eliminate the existing § 150.3(a)(3) restrictions on spread exemptions, including the restriction that spread positions be outside of the spot-month. Under proposed § 150.3(a)(2)(i), positions that meet the ‘‘spread transaction’’ definition would be selfeffectuating for purposes of Federal position limits. Separately, under proposed § 150.3(a)(2)(ii), the Commission would, on a case-by-case basis, be able to exempt any other spread transaction that was not included in the proposed spread transaction definition, but that the Commission has determined is consistent with CEA section 4a(a)(3)(B),544 and exempted, pursuant to proposed § 150.3(b). iii. Summary of the Commission Determination—Spread Transaction The Commission is adopting the definition of ‘‘spread transaction’’ with certain modifications to the definition to include additional spread types, as described below, to address commenters’ views and other considerations. The Commission is providing additional clarification with respect to cash-and-carry exemptions as well as the application of spread exemptions to the NYMEX NG core referenced futures contract. The Commission is also adopting Appendix G to part 150 under the Final Rule to provide additional clarifications to market participants in connection with the Commission’s treatment of spread exemptions under the Final Rule. iii. Comments—Spread Transaction Generally, commenters requested that the Commission expand or clarify the ‘‘spread transaction’’ definition to ensure that other commonly-used spread strategies are exempted from Federal position limits, including: (1) Intra-market and inter-market spread positions; 545 (2) inter-market spread positions where the legs of the 544 As noted above, CEA section 4a(a)(3)(B) provides that the Commission shall set limits ‘‘to the maximum extent practicable, in its discretion— (i) to diminish, eliminate, or prevent excessive speculation as described under this section; (ii) to deter and prevent market manipulation, squeezes, and corners; (iii) to ensure sufficient market liquidity for bona fide hedgers; and (iv) to ensure that the price discovery function of the underlying market is not disrupted.’’ 545 MFA/AIMA at 10; CMC at 7. PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 3309 transaction are futures contracts in the same commodity and same calendar month or expiration; 546 (3) inter-market spreads in which one leg is a referenced contract and the other is a commodity derivative contract (including an OTC swap) that is not subject to Federal positions limits; 547 (4) a spread between a physically-settled position and a cashsettled position; 548 (5) a spread between two cash-settled contracts in the spot period, even if one leg is not subject to Federal position limits; 549 (6) intracommodity spreads (including an intracommodity spread between two cashsettled contracts or between the cashsettled and related physically-settled futures contract); 550 and (7) cash-andcarry exemptions that are currently permitted under IFUS Rule 6.29(e).551 546 ICE at 7. at 7; FIA at 21. 548 CME Group at 11. 549 Id. 550 CEWG at 27; FIA at 20–21 (explaining that the intra-commodity spread would acknowledge the link between the prices of cash-settled and physical delivery futures involving the same commodity). See also CEWG at 27; CCI at 2–3 (requesting an exemption for intra-commodity spreads that are: (1) In the same class of referenced contract, (2) across classes of referenced contracts, or (3) across markets in referenced contracts (i.e., on different exchanges) in the same or different calendar months); CEWG at 27 (providing proposed revisions to the ‘‘spread transaction’’ regulatory text); CME Group at 11. 551 FIA at 21; see also, IFUS at 7–9 (providing an example of a cash-and-carry exemption and describing such exemption as a type of calendar month spread where a person holds a long position in the spot month and a short position in the second nearby contract month) and IFUS Rule 6.29(e) (outlining its strict procedures that set the terms by which cash-and-carry exemptions may be permitted, including the following conditions: (i) The person seeking the exemption must provide the cost of carrying the physical commodity, the minimum spread differential at which it will enter into a straddle position in order to obtain profit, and the quantity of stocks currently owned in IFUS licensed warehouses or tank facilities; (ii) when granted a cash and carry exemption, the person receiving the exemption shall agree that before the price of the nearby contract month rises to a premium to the second contract month, it will liquidate all long positions in the nearby contract month; and (iii) block trades may not be used to establish positions upon which a cash and carry exemption request is based). IFUS further explained that it has a long history of granting cash and carry exemptions for certain warehoused contracts (specifically coffee, cocoa, and FCOJ), and that where there are plentiful supplies, these exemptions serve an economic purpose in the days leading up to the first notice day and throughout the notice period, because: (1) They help maintain an appropriate economic relationship between the nearby and next successive contract month; (2) they allow commercial market participants the opportunity to compete for the ownership of certified inventories beyond the limitations of the spot-month position limit; and (3) the holder of the exemption provides liquidity so that traders that carry short positions into the notice period without capability to deliver may exit their positions in an orderly manner. According to IFUS, if the appropriate supply and price relationship exists in a given expiry, and the exchange grants the 547 ICE E:\FR\FM\14JAR2.SGM Continued 14JAR2 3310 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations In addition, commenters requested that the Commission clarify that: (1) The ‘‘spread transaction’’ definition is a nonexhaustive list, and therefore, permit exchanges to grant spread exemptions that are not covered by § 150.3(a)(2) by using the streamlined process in § 150.9 for recognizing non-enumerated bona fide hedges; 552 and (2) a calendar spread would permit a market participant to net down its positions for the purposes of Federal spot-month and single-month limits.553 iv. Discussion of Final Rule—Spread Transaction The Commission is adopting the proposed definition of ‘‘spread transaction’’ with certain modifications, as described below, to address commenters’ views and other considerations. First, the Commission is expanding the definition to include additional types of spreads. Second, the Commission is clarifying the treatment of cash-and-carry exemptions as permissible calendar spreads and providing additional guidance to exchanges in connection with such spreads. Third, the Commission addresses the application of spread exemptions in connection with the NYMEX NG core referenced futures contract. The Commission is also providing additional guidance on the use of exempt spread transactions in Appendix G of this Final Rule. khammond on DSKJM1Z7X2PROD with RULES2 a. The ‘‘Spread Transaction’’ Definition Includes Several Additional Spread Types Under the Final Rule First, the Commission is expanding the proposed ‘‘spread transaction’’ definition to make clear that the definition as finalized includes intramarket, inter-market, and intracommodity spread positions in addition to the spread strategies listed in the proposed definition. The final ‘‘spread transaction’’ definition will cover: Intramarket spreads, inter-market spreads, intra-commodity spreads, and intercommodity spreads, including calendar spreads, quality differential spreads, processing spreads, product or byproduct differential spreads, and futures-options spreads.554 The application, then proper application of the terms as expiry approaches will assist in an orderly expiration. IFUS 7–9; FIA at 21. 552 ICE at 7. 553 Citadel at 8–9. 554 For example, trading activity in many commodity derivative markets is concentrated in the nearby contract month, but a hedger may need to offset risk in deferred months where derivative trading activity may be less active. A calendar spread trader could provide liquidity without exposing himself or herself to the price risk inherent in an outright position in a deferred VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Commission intends for the spread transaction definition to be sufficiently broad to capture most, if not all, spread strategies currently granted by exchanges and used by market participants. The Commission believes this is consistent with, but provides more clarity than, its existing approach to spread exemptions in existing § 150.3(a)(3), which broadly exempts ‘‘spread or arbitrage positions.’’ 555 In light of the revised ‘‘spread transaction’’ definition, the Commission expects that most spread strategies will qualify as intra-market, inter-market, inter-commodity, or intra-commodity spreads, and is providing a nonexhaustive list of the most common specific types of spread strategies that fall within those four categories. Any requests for spread exemptions that fall outside of the spread transaction definition are required to be submitted to the Commission in advance pursuant to § 150.3(b) of the Final Rule. Accordingly, the Commission has determined not to allow exchanges to grant new types of spread exemptions using the streamlined process in § 150.9 for various reasons explained below in detail under the discussion of § 150.3.556 In addition, considering the significant number of requests for clarification commenters submitted regarding the spread transaction definition, the Commission is providing guidance on spread transactions in Appendix G to part 150 of the month. Processing spreads can serve a similar function. For example, a soybean processor may seek to hedge his or her processing costs by entering into a ‘‘crush’’ spread, i.e., going long soybeans and short soybean meal and oil. A speculator could facilitate the hedger’s ability to do such a transaction by entering into a ‘‘reverse crush’’ spread (i.e., going short soybeans and long soybean meal and oil). Quality differential spreads, and product or by-product differential spreads, may serve similar liquidity-enhancing functions when spreading a position in an actively traded commodity derivatives market such as CBOT Wheat (W) against a position in another actively traded market, such as MGEX Wheat. 555 Under existing regulations, the Commission views its use of the term ‘‘spread’’ to mean the same as ‘‘arbitrage’’ or ‘‘straddle’’ as those terms are used in CEA section 4a(a) and existing § 150.3(a)(3) of the Commission’s regulations. Consistent with existing regulations, the Commission’s sole use of the term ‘‘spread’’ in this rulemaking is intended to also capture arbitrage or straddle strategies, and is not intended to be a substantive change from its existing regulations. The Commission notes that certain exchanges may distinguish between ‘‘spread’’ and ‘‘arbitrage’’ positions for purposes of exchange exemptions, but the Commission does not make that distinction here for purposes of its ‘‘spread transaction’’ definition. 556 See infra Section II.C.4. (discussing statutory and policy reasons why the Commission will not permit exchanges to process requests for spread exemptions that are not included in the ‘‘spread transaction’’ definition using the § 150.9 process). PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 Commission’s regulations, as adopted in this Final Rule, to address those questions and other considerations. In particular, paragraph (a) of the guidance provides some recommended best practices for exchanges to consider when granting spread exemptions, especially during the spot period. Paragraph (a) of the guidance also reminds exchanges of their existing obligations as self-regulatory organizations, including under DCM Core Principle 5 and SEF Core Principle 6, as applicable, to implement their exchange-set limits and exemption granting processes in a way that (consistent with the rules and procedures in final § 150.5 adopted herein) 557 reduces the potential threat of market manipulation or congestion. Moreover, paragraph (b) of the guidance clarifies that the following spread strategies are covered by the ‘‘spread transaction’’ definition: (1) Inter-market spread positions where the legs of the transaction are futures contracts in the same commodity and same calendar month or expiration; (2) spread positions in which one leg is a referenced contract and the other is a commodity derivative contract that is not subject to Federal positions limits (including OTC commodity derivative contracts, but not including commodity index contracts); 558 (3) a spread between a physically-settled position and a cash-settled position; (4) a spread between two cash-settled contracts; (5) certain cash-and-carry exemptions, subject to certain recommendations and considerations outlined in paragraph (c) of the Commission’s guidance in Appendix G of this Final Rule; and (6) spreads that are ‘‘legged in’’ or carried out in two steps. b. ‘‘Cash-and-Carry’’ Exemptions Second, as mentioned above, paragraph (c) of the guidance recommends certain factors for exchanges to consider when granting cash-and-carry exemptions.559 The 557 See infra Section II.D. (discussing exchanges’ obligations when setting exchange position limits and granting exemptions therefrom). 558 To avoid subverting the Commission’s policy on not allowing self-effectuating risk management exemptions (except through the pass-through swap provision), the spread transaction definition would not cover a spread position in which one leg is a referenced contract and the other leg is a commodity index contract, as clarified in Appendix G. 559 As final Appendix G provides, the spread transaction definition in § 150.1 permits transactions commonly known as ‘‘cash-and-carry’’ trades whereby a market participant enters a long futures positions in the spot month and an equivalent short futures position in the following month, in order to guarantee a return that, at minimum, covers the costs of its carrying charges. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Commission understands that IFUS has granted this type of calendar spread exemption for some time, and has experience monitoring the use of such exemptions to ensure that its market operates in a manner that is consistent with the applicable DCM Core Principles.560 The Commission has, however, previously expressed concern about these exemptions and their impact on the spot month price for a particular futures contract.561 In particular, the Commission has explained that a large demand for delivery on cash-and-carry positions might distort the price of the expiring futures contract upwards.562 This would particularly be a concern in those commodity markets where price discovery for the cash spot price occurred in the expiring futures contract.563 The Commission recognizes, however, the importance of cash-and-carry positions in the price discovery process in certain markets and reminds exchanges of their responsibility to monitor and safeguard against convergence issues that could arise related to the use of cash-and-carry exemptions. Accordingly, the Commission views these exemptions as a type of calendar spread strategy that warrants additional guidance to encourage exchanges to have suitable safeguards in place to ensure that they grant and monitor cash-and-carry exemptions in a manner that is consistent with their obligation to reduce the potential threat of market manipulation and congestion. khammond on DSKJM1Z7X2PROD with RULES2 c. Treatment of Spread Transactions Involving NYMEX NG Third, the Commission is providing clarification regarding the intersection of the conditional natural gas spot month limit exemption and spread exemptions permitted under § 150.3. As set forth in Appendix G, the Commission reinforces that a spread transaction exemption would not cover natural gas spot month positions that exceed the conditional natural gas spot month limit in § 150.3(a)(4) of this Final Rule. That is, a market participant cannot rely on a spread transaction exemption to hold a spot month position that would exceed the equivalent of 10,000 contracts of the With this exemption, the market participant is able to take physical delivery of the product in the nearby month and may redeliver the same product in a deferred month. 560 See IFUS at 7–9 and ICE Futures U.S. Rule 6.29(e). 561 See 81 FR at 96833. 562 Id. 563 See 81 FR at 96833. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 NYMEX Henry Hub Natural Gas core referenced futures contract per exchange that lists a natural gas cash-settled referenced contract. Additional discussion on the natural gas conditional spot month limit exemption is provided further below.564 As discussed further below, in § 150.3, the Commission is providing an exemption from the Federal spot month position limit level for natural gas. The natural gas conditional spot month limit exemption allows a trader to hold up to: (1) 10,000 spot month cash-settled NYMEX NG referenced contracts per exchange that lists a cash-settled NYMEX NG referenced contract (of which there are currently three— NYMEX, IFUS, and Nodal); and (2) an additional position in cash-settled economically equivalent NYMEX NG OTC swaps that has a notional amount equal to 10,000 equivalent-sized contracts; provided, that the market participant does not hold positions in the spot month of the physically-settled NYMEX NG referenced contract.565 The Commission adopted the Federal conditional limit for natural gas in order to avoid disrupting the well-developed, unique liquidity characteristics of the natural gas derivatives markets, in which the cash-settled natural gas referenced contracts, when combined, have significantly higher liquidity than the physically-settled natural gas contracts. The Federal conditional limit requires divestiture of the spot month physically-settled NYMEX referenced contract due to concerns about, among other things, fostering an environment that incentivizes traders to manipulate the physically-settled NYMEX NG referenced contract in order to benefit a larger cash-settled position in natural gas (i.e., ‘‘bang’’ or ‘‘mark’’ the close). The Commission intends for the natural gas conditional limit’s position limit levels to serve as a firm cap for the maximum amount of cash-settled natural gas spot month positions a trader can hold. The Commission clarifies that a person cannot circumvent this cap using a spread transaction exemption. 564 See infra Section II.B.3.vi.a. (discussing the Federal spot-month limit for natural gas under § 150.2) and Section II.C.6 (discussing the conditional spot-month limit for natural gas under § 150.3(a)(4)). 565 This is different from the final Federal spot month position limits for NYMEX NG, pursuant to which a trader may hold up to: (1) 2,000 cashsettled NYMEX NG referenced contracts per exchange that lists a cash-settled NYMEX NG referenced contract; (2) an additional position in cash-settled economically equivalent NYMEX NG OTC swaps that has a notional amount equal to 2,000 equivalent-sized contracts; and (3) 2,000 physically-settled NYMEX NG referenced contracts. PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 3311 That is, the Commission believes that cash-settled natural gas positions that exceed the natural gas conditional limit in the spot month would be unusually large and could potentially have a disruptive effect on the physicallysettled natural gas contract, including by inhibiting convergence at expiration. Specifically, by allowing traders to layer additional cash-settled natural gas spot month positions on top of the maximum cash-settled natural gas spot month positions permitted under the natural gas conditional limit, a person could amass an extremely large cash-settled spot month position in natural gas. This extremely large cash-settled spot month position could push prices up for cashsettled spot month contracts vis-a`-vis the physically-settled spot month contracts. In response, arbitrageurs may attempt to capitalize on this price discrepancy by going short the cashsettled spot month contracts, which would have a downward pressure on the price of these contracts, and going long on the physically-settled spot month contracts, which would have an upward pressure on the price of these contracts. This upward price pressure on the physically-settled contract could potentially push the price of the physically-settled contract away from the actual cash price for the natural gas commodity, which could disrupt convergence upon expiration of the physically-settled contract. As such, the Commission clarifies that a person cannot layer a spread exemption on top of the conditional spot month limit in natural gas and thereby circumvent the conditional spot month limit cap.566 21. ‘‘Swap’’ and ‘‘Swap Dealer’’ i. Summary of the 2020 NPRM—Swap and Swap Dealer The Commission proposed to incorporate the definitions of ‘‘swap’’ and ‘‘swap dealer’’ as they are defined in section 1a of the Act and § 1.3 of this chapter.567 ii. Comments and Summary of the Commission Determination—Swap and Swap Dealer No commenter addressed the proposed definitions of ‘‘swap’’ or ‘‘swap dealer.’’ The Commission is adopting these definitions as proposed. 566 For the avoidance of doubt, traders who avail themselves of a spread exemption and enter into spread positions between the physically-settled NYMEX NG core referenced futures contract during the spot month and one or more cash-settled natural gas referenced contracts or cross commodity contracts, are not allowed under the Final Rule to avail themselves of the natural gas conditional limit until they exit the above-noted spread position. 567 7 U.S.C. 1a(47) and 1a(49); 17 CFR 1.3. E:\FR\FM\14JAR2.SGM 14JAR2 3312 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 22. ‘‘Transition Period Swap’’ 23. Deletion of § 150.1(i) i. Summary of the 2020 NPRM— Transition Period Swap i. Summary of 2020 NPRM—Deletion of § 150.1(i) The Commission proposed to eliminate existing § 150.1(i), which includes a table specifying the ‘‘first delivery month of the crop year’’ for certain commodities. The crop year definition had been pertinent for purposes of the spread exemption to the individual month limit in current § 150.3(a)(3), which limits spreads to those between individual months in the same crop year and to a level no more than that of the all-months limit. This provision was pertinent at a time when the single month and all-monthscombined limits were different, which is no longer the case. The Commission proposed to create the defined term ‘‘transition period swap’’ to mean any swap entered into during the period commencing after the enactment of the Dodd-Frank Act of 2010 (July 22, 2010) and ending 60 days after the publication of a final Federal position limits rulemaking in the Federal Register. As discussed in connection with proposed § 150.3 later in this release, if acquired in good faith, such swaps would be exempt from Federal position limits, although such swaps could not be netted with posteffective date swaps for purposes of complying with spot month speculative position limits. ii. Comments and Summary of the Commission Determination—Transition Period Swap khammond on DSKJM1Z7X2PROD with RULES2 No commenter addressed the proposed definition of ‘‘transition period swap.’’ The Commission is adopting the definition as proposed, with two modifications. The Commission is clarifying that a transition period swap is a swap entered into during the period commencing ‘‘on the day of,’’ rather than ‘‘after,’’ the enactment of the Dodd-Frank Act of 2010 to clarify the ambiguity of the phrase ‘‘after the enactment.’’ The Commission is also adding a phrase to clarify that the terms of such swaps ‘‘have not expired as of 60 days after the publication date.’’ The Commission intended to include this in the 2020 NPRM, but the language was inadvertently omitted from the proposed definition. This modification conforms to the definition of ‘‘preenactment swap,’’ which also addresses the timeframe for expiration of a swap’s terms. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 ii. Comments and Summary of the Commission Determination—Deletion of § 150.1(i) No commenter addressed the proposed elimination of existing § 150.1(i). The Commission is adopting as proposed. Now that the current and proposed single month and all months combined limits are the same, and now that the Commission is adopting new enumerated bona fide hedges in § 150.1 and Appendix B to part 150 as well as a new process for granting spread exemptions in § 150.3, this provision is no longer needed. B. § 150.2—Federal Position Limit Levels This section will address the issues related to Federal position limit levels in final § 150.2 in the following order:568 (1) Background of the existing Federal position limit levels; (2) identification of contracts subject to both Federal spot and non-spot 568 In connection with the discussion of § 150.2 that appears below, for each numbered section, the Commission generally provides a summary of the proposed approach, a brief overview of the Commission’s final determination, a summary of comments, and the Commission’s response to comments. PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 month position limits, and contracts subject only to Federal spot month position limits; (3) Federal spot month position limit levels; (4) Federal non-spot month position limit levels; (5) the establishment of subsequent spot month and non-spot month position limit levels; (6) relevant contract months; (7) limits on ‘‘pre-existing positions’’; (8) positions on foreign boards of trade; (9) anti-evasion; (10) netting and Federal position limit levels for cash-settled referenced contracts; and (11) ‘‘eligible affiliates’’ and position aggregation. As part of the discussion of Federal spot month position limit levels (noted as issue (3) above and found in Section II.B.3. below), the Commission also will address Federal spot month position limit levels specifically for (i) ICE Cotton No. 2 (CT), (ii) NYMEX Henry Hub Natural Gas (NG), and (iii) the three wheat core referenced futures contracts. Similarly, as part of the discussion of Federal non-spot month position limit levels (noted as issue (4) above and found in Section II.B.4. below), the Commission will also address Federal non-spot month position limit levels specifically for (i) ICE Cotton No. 2 (CT) and (ii) the three wheat core referenced futures contracts. 1. Background—Existing Federal Position Limit Levels—§ 150.2 Federal spot month, single month, and all-months-combined position limits currently apply to the nine physically-settled legacy agricultural contracts listed in existing § 150.2, and, on a futures-equivalent basis, to options contracts thereon. Existing Federal position limit levels set forth in § 150.2 569 apply net long or net short and are as follows: 569 17 E:\FR\FM\14JAR2.SGM CFR 150.2. 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 2. Application of Federal Position Limits During the Spot Month and the Non-Spot Month khammond on DSKJM1Z7X2PROD with RULES2 i. Summary of the 2020 NPRM— Application of Federal Position Limits During the Spot Month and the NonSpot Month The Commission proposed to maintain (rather than remove) Federal non-spot month position limits for the nine legacy agricultural contracts, with the modifications described further below, because the Commission has observed no reason to eliminate them.572 These non-spot month position limits have been in place for decades, and while the Commission proposed to modify the Federal non-spot month position limit levels, the Commission believed that removing them entirely could potentially result in market disruption. The Commission’s position was reinforced by the feedback it received from commercial market participants trading the nine legacy agricultural contracts who requested that the Commission maintain Federal position limits outside of the spot month in order to promote market integrity.573 The 2020 NPRM imposed Federal position limits during all contract months for the nine legacy agricultural contracts (and their associated referenced contracts), and only during the spot month for the 16 non-legacy core referenced futures contracts (and their associated referenced contracts) that would be subject to Federal position limits for the first time.570 For the 16 non-legacy core referenced futures contracts (and their associated referenced contracts), the 2020 NPRM also required that they be subject to exchange-set position limits or position accountability outside of the spot month.571 ii. Summary of the Commission Determination—Application of Federal Position Limits During the Spot Month and the Non-Spot Month The Commission is adopting the approach that was proposed in the 2020 NPRM. Under the Final Rule, Federal position limits apply to all 25 core referenced futures contracts during the spot month. The 16 non-legacy core referenced futures contracts subject to Federal position limits for the first time under the Final Rule are subject to Federal position limits only during the 570 As noted in further detail in Section II.A.16., their associated referenced contracts are also subject to Federal position limits. 571 Proposed § 150.5(b)(2). For existing exchangeset position limits, see Market Resources, ICE Futures U.S. Website, available at https:// www.theice.com/futures-us/market-resources (ICE exchange-set position limits); Position Limits, CME Group website, available at https:// www.cmegroup.com/market-regulation/positionlimits.html; Rules and Regulations of the Minneapolis Grain Exchange, Inc., MGEX, available at https://www.mgex.com/documents/Rulebook_ 051.pdf (MGEX exchange-set position limits). 572 85 FR at 11628. 573 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 spot month (and not outside of the spot month). Outside of the spot month, these 16 core referenced futures contracts are subject only to exchangeset position limits or position accountability. iii. Comments—Application of Federal Position Limits During the Spot Month and the Non-Spot Month Many commenters generally agreed with the proposed approach and supported Federal position limits during the spot month for all 25 core referenced futures contracts, and outside of the spot month for only the nine legacy agricultural contracts.574 The Commission did not receive any comments objecting to Federal spot month position limits for all 25 core referenced futures contracts. On the other hand, the Commission received comments expressing concern over two related issues. First, a few commenters disagreed with the 2020 NPRM imposing Federal non-spot month position limits on only the nine legacy agricultural contracts.575 NEFI stated that ‘‘the proposed rule arbitrarily fails to establish limits for non-spot month referenced energy contracts’’ and stated that ‘‘distributing limits across all 574 See MGEX at 1; CHS at 2; CME Group at 2; IFUS at 2; ICE at 2, 3–4; Chevron at 2; CMC at 6; EEI at 4; FIA at 2; MFA/AIMA at 2–3; NCFC at 4; Shell at 3; PIMCO at 4; SIFMA AMG at 4; Suncor at 2; AQR at 2, 4–5, 7–10; CCI at 2; COPE at 4; IECA at 2; NGSA at 3; CEWG at 3; and AFIA at 2. 575 In addition to comments from NEFI and PMAA, which are discussed below, AFR and Rutkowski asserted that the 2020 NPRM will likely be ‘‘ineffective in controlling excessive speculation’’ due, in part, to its failure to ‘‘impose Federal position limits outside of the current spot month for most commodities (outside of legacy agricultural commodities).’’ AFR at 2 and Rutkowski at 2. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.006</GPH> While not explicitly stated in § 150.2, the Commission’s practice has been to set Federal spot month position limit levels at or below 25% of deliverable supply based on exchange estimates of deliverable supply (‘‘EDS’’) that are verified by the Commission, and to set Federal position limit levels outside of the spot month at 10% of open interest for the first 25,000 contracts of open interest, with a marginal increase of 2.5% of open interest thereafter. 3313 3314 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations months is preferable, as it would protect market convergence and mute disruptive signals from large speculative trades.’’ 576 PMAA echoed similar concerns by stating that there was ‘‘no data or discussion provided in the proposal indicating why the Commission believes limits for non-spot months are not appropriate.’’ 577 Second, commenters also expressed concern that, by only having Federal non-spot month position limits for the nine legacy agricultural contracts, the Commission is relying too much on the exchanges to address excessive speculation.578 In particular, commenters were concerned about the incentives and other conflicts of interest that exchanges may have to permit ‘‘higher trading volumes and large numbers of market participants’’ 579 and about the exchanges’ use of position accountability by alleging that it is a ‘‘voluntary’’ limit 580 and pointing to ‘‘recent notable failures in exchange accountability regimes.’’ 581 iv. Discussion of Final Rule— Application of Federal Position Limits During the Spot Month and the NonSpot Month The Commission is adopting the approach that was proposed in the 2020 NPRM by applying Federal position limits to all 25 core referenced futures contracts during the spot month, but only to the existing nine legacy agricultural contracts outside of the spot month for the reasons discussed below. khammond on DSKJM1Z7X2PROD with RULES2 a. Response to Comments Opposing the 2020 NPRM’s Approach To Subject Only the Nine Legacy Agricultural Contracts to Federal Non-Spot Month Position Limits The Commission has concluded that, while it may be important and, as described below, necessary 582 to impose Federal spot month position limits on each core referenced futures contract, the analysis changes with 576 NEFI at 3 and PMAA at 3 (with respect to energy commodity positions, ‘‘[h]istory has shown on a number of occasions that large trades in nonspot months can distort markets and increase volatility’’). 577 PMAA at 3. PMAA also suggested that the Commission apply the ‘‘traditional 2.5% limit formula to energy contracts and economically equivalent energy futures, options, and swaps in non-spot months.’’ 578 NEFI at 3; PMAA at 3; and IATP at 10. 579 NEFI at 3. 580 Id. 581 IATP at 10. See also PMAA at 3 (‘‘[u]nfortunately, the proposal instead finds accountability limits to be sufficient to manage speculation’’). 582 See infra Section III.E. (discussing necessity finding for spot month and non-spot month position limits). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 respect to the non-spot month for the following reasons. First, while the Final Rule only applies Federal position limits to the 16 non-legacy core referenced futures contracts during the spot month, the Final Rule requires exchanges to establish either position limit levels or position accountability outside of the spot month for all such contracts.583 Accordingly, all 16 non-legacy core referenced futures contracts will be subject to either position limits or position accountability outside of the spot month at the exchange level. Any such exchange-set position limit and position accountability must comply with the standards established by the Commission in final § 150.5(b) including, among other things, that any such levels be ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ 584 Exchanges are also required to submit any rules adopting or modifying such position limit or position accountability to the Commission in advance of implementation pursuant to part 40 of the Commission’s regulations.585 Additionally, exchanges are subject to DCM Core Principle 5 or SEF Core Principle 6, as applicable, which establish additional protections against manipulation and congestion.586 These 583 Final § 150.5(b)(2). 584 Id. 585 17 CFR part 40. Under the final ‘‘position accountability’’ definition in § 150.1, exchange accountability rules must require a trader whose position exceeds the accountability level to consent to: (1) Provide information about its position to the exchange; and (2) halt increasing further its position or reduce its position in an orderly manner, in each case as requested by the exchange. 586 Commission regulation § 38.300, which mirrors DCM Core Principle 5, states: ‘‘To reduce the potential threat of market manipulation or congestion (especially during trading in the delivery month), the board of trade shall adopt for each contract of the board of trade, as is necessary and appropriate, position limitations or position accountability for speculators. For any contract that is subject to a position limitation established by the Commission, pursuant to section 4a(a), the board of trade shall set the position limitation of the board of trade at a level not higher than the position limitation established by the Commission.’’ 17 CFR 38.300 and 7 U.S.C. 7(d)(5). Likewise, Commission regulation § 37.600, which mirrors SEF Core Principle 6, states: ‘‘(a) In general. To reduce the potential threat of market manipulation or congestion, especially during trading in the delivery month, a swap execution facility that is a trading facility shall adopt for each of the contracts of the facility, as is necessary and appropriate, position limitations or position accountability for speculators. (b) Position limits. For any contract that is subject to a position limitation established by the Commission pursuant to section 4a(a) of the Act, the swap execution facility shall: (1) Set its position limitation at a level no higher than the Commission limitation; and (2) Monitor positions established on PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 tools and legal obligations, in conjunction with surveillance at both the exchange and Federal level, will continue to offer strong deterrence and protection against manipulation and disruptions outside of the spot month.587 Second, in response to the concerns expressed by NEFI and PMAA that a lack of Federal non-spot month position limits could harm market convergence and lead to disruptive signals from large speculative trades,588 the Commission reiterates that corners and squeezes, and related convergence issues, do not occur outside of the spot month when there is no threat of delivery.589 Convergence occurs during the spot month and, specifically, at the expiration of the spot month for a physically-settled contract. As a result, positions outside of the spot month have minimal impact on convergence. The Commission, however, recognizes that it is possible that unusually large positions in contracts outside of the spot month could distort the natural spread relationship between contract months. For example, if traders hold unusually large positions outside of the spot month, and if those traders exit those positions immediately before the spot month, that could cause congestion and also affect the pricing of the spot month contract. While such congestion or price distortion cannot be ruled out, exchange-set position limits and position accountability function to mitigate against such risks. Thus, the position limits framework adopted herein is able to guard against any such possibility through the tools and legal obligations applicable to exchanges that are described in the prior paragraph. Third, limiting Federal non-spot month position limits to the nine legacy agricultural commodities may limit any market disruptions that could result or through the swap execution facility for compliance with the limit set by the Commission and the limit, if any, set by the swap execution facility.’’ 17 CFR 37.600 and 7 U.S.C. 7b–3(f)(6). 587 85 FR at 11629. 588 NEFI at 3 and PMAA at 3. 589 In the case of certain commodities, it may become difficult to exert market power via concentrated futures positions in deferred month contracts. For example, a participant with a large cash-market position and a large deferred futures position may attempt to move cash markets in order to benefit that deferred futures position. Any attempt to do so could become muted due to general futures market resistance from multiple vested interests present in that deferred futures month (i.e., the overall size of the deferred contracts may be too large for one individual to influence via cash-market activity). However, if a large position that is accumulated over time in a particular deferred month is held into the spot month, it is possible that such positions could form the groundwork for an attempted corner or squeeze in the spot month. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations from adding new Federal non-spot month position limits on certain metal and energy commodities that have never been subject to Federal position limits.590 b. Response to Comments Regarding the Commission’s Reliance on Exchanges In response to commenters’ specific concerns about the reliance on exchanges’ position accountability, the Commission views position accountability outside of the spot month as a more flexible alternative to Federal non-spot month position limits.591 Position accountability establishes a level at which an exchange will start investigating a trader’s current position. This will include, among other things, asking traders additional questions regarding their strategies and their purpose for the positions, while evaluating them under current market conditions. If a position does not raise any concerns, the exchange will allow the trader to exceed the accountability level. If the position raises concerns, the exchange has the authority to instruct the trader to stop adding to the trader’s position, or to reduce the position. Position accountability is a particularly effective tool because it provides the exchanges with an opportunity to intervene once a position hits a relatively low level (vis-a`-vis the level at which a Federal or an exchange position limit level would typically be set), while still affording market participants with the flexibility to establish a position that exceeds the position accountability level if it is justified by the nature of the position and market conditions. Position accountability applies to all participants on the exchange, whether commercial or non-commercial, and regardless of whether the relevant participant would qualify for an exemption. The Commission has decades of experience overseeing position accountability implemented by exchanges, including for all 16 nonlegacy core referenced futures contracts that are not subject to Federal position limits outside of the spot month.592 590 85 FR at 11629. 591 Id. khammond on DSKJM1Z7X2PROD with RULES2 592 See, e.g., 56 FR at 51687 (Oct. 15, 1991) (permitting CME to establish position accountability for certain financial contracts traded on CME); Speculative Position Limits—Exemptions VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Based on the Commission’s experience, position accountability has functioned effectively.593 Furthermore, the Commission notes that position accountability is not the only tool available for exchanges. As noted previously, exchanges can also utilize exchange-set position limits. Several exchanges have set non-spot month position limits for contracts that are not subject to Federal position limits, and all of them appear to have functioned effectively based on the Commission’s observation of those markets.594 With respect to IATP’s reference to ‘‘recent notable failures’’ in position accountability levels, IATP appears to be referencing the events that involve Kraft Foods Group, Inc. and Mondele¯z Global LLC with respect to the CBOT Wheat (W) contract in 2011595 and United States Oil Fund, LP (‘‘US Oil’’) with respect to the WTI contract earlier this year.596 With respect to CBOT Wheat (W), CBOT did not have position accountability for that contract at that time. With respect to the WTI contract, IATP does not describe the failure in position accountability that occurred with respect to US Oil and how such failure resulted in negative prices in the WTI contract.597 With respect to commenter concerns about the incentives of exchanges, the from Commission Rule 1.61, 57 FR 29064 (June 30, 1992) (permitting the use of accountability for trading in energy commodity contracts); and 17 CFR 150.5(e) (2009) (formally recognizing the practice of accountability for contracts that met specified standards). 593 85 FR at 11629. 594 For example, exchanges have set non-spot month position limits for the following core referenced futures contracts, even though such contracts currently are not subject to Federal nonspot month position limits (and will continue to be subject only to Federal spot month position limits under this Final Rule): (1) CME Live Cattle (LC), which has an exchange-set single month position limit level of 6,300 contracts, but no all-monthscombined position limit; (2) ICE FCOJ–A (OJ), which has an exchange-set single month position limit level of 3,200 contracts and an all-monthscombined position limit level of 3,200 contracts; and (3) ICE Sugar No. 16, which has an exchangeset single month position limit level of 1,000 contracts and an all-months-combined position limit level of 1,000 contracts. 595 CFTC Charges Kraft Foods Group, Inc. and Mondele¯z Global LLC with Manipulation of Wheat Futures and Cash Wheat Prices (Apr. 1, 2015), U.S. Commodity Futures Trading Commission website, available at https://www.cftc.gov/PressRoom/ PressReleases/7150–15. 596 IATP at 5, 10, and 18. 597 Id. PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 3315 Commission believes that, although exchanges may have a financial interest in increased trading volume, whether speculative or hedging, the Commission closely oversees the establishment, modification, and implementation of exchange-set position limits and position accountability. As noted above, both exchange-set position limits and position accountability must comply with standards established by the Commission in final § 150.5(b) including, among other things, that any such levels be ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ 598 Exchanges are also required to submit any rules adopting or modifying exchange-set position limits or position accountability to the Commission in advance of implementation, pursuant to part 40 of the Commission’s regulations.599 Additionally, exchanges are subject to DCM Core Principle 5 or SEF Core Principle 6, as applicable, which establishes additional protections against manipulation and congestion.600 Furthermore, exchange-set position limits and position accountability will be subject to rule enforcement reviews by the Commission.601 Finally, the Commission notes that exchanges also have significant financial incentives and regulatory obligations to maintain wellfunctioning markets. This observation, which has been supported by studies, is discussed in greater detail below.602 3. Federal Spot Month Position Limit Levels i. Summary of the 2020 NPRM—Federal Spot Month Position Limit Levels 598 Final § 150.5(b)(2). CFR part 40. 600 17 CFR 38.300 and 17 CFR 37.600. 601 The Commission conducts regular rule enforcement reviews of each exchange’s audit trail, trade practice surveillance, disciplinary, and dispute resolution programs for ongoing compliance with the Core Principles. See Rule Enforcement Reviews of Designated Contract Markets, available at https://www.cftc.gov/ IndustryOversight/TradingOrganizations/DCMs/ dcmruleenf.html. 602 Section II.B.3.iii.b.(3)(iii) (Concern over Exchanges’ Conflict of Interest and Improper Incentives in Maintaining Their Markets). 599 17 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Under the 2020 NPRM, the Commission proposed applying Federal spot month position limits to all 25 core referenced futures contracts and any associated referenced contracts.603 The spot month limits would apply separately to physically-settled and cash-settled referenced contracts, which meant that a market participant could net positions across physically-settled referenced contracts and separately net positions across cash-settled referenced contracts.604 However, the market participant would not be permitted to net cash-settled referenced contracts with physically-settled referenced 603 As described below, under the 2020 NPRM, Federal non-spot month position limit levels would only apply to the nine legacy agricultural contracts and their associated referenced contracts. The 16 non-legacy core referenced futures contracts and their associated referenced contracts would be subject to Federal position limits during the spot month, and exchange-set position limits or position accountability outside of the spot month. 604 See Section II.B.10. 605 Id. 606 Proposed 150.2(e) additionally provided that market participants would not need to comply with the Federal position limit levels until 365 days after publication of the Final Rule in the Federal Register. For further discussion of the Final Rule’s compliance and effective dates, see Section I.D. (Effective Date and Compliance Period). 607 As of October 15, 2020. 608 CBOT’s existing exchange-set position limit level for CBOT Wheat (W) is 600 contracts. However, for its May contract month, CBOT has a VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 contracts.605 Proposed § 150.2(e) provided that Federal spot month position limit levels would be set forth in proposed Appendix E to part 150.606 The proposed spot month position limit levels were as follows: BILLING CODE 6351–01–P variable spot month position limit level that is dependent upon the deliverable supply that it publishes from the CBOT’s Stocks and Grain report on the Friday preceding the first notice day for the May contract month. In the last five trading days of the expiring futures month in May, the speculative spot month position limit level is: (1) 600 contracts if deliverable supplies are at or above 2,400 contracts; (2) 500 contracts if deliverable supplies are between 2,000 and 2,399 contracts; (3) 400 contracts if deliverable supplies are between E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.007</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3316 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 3317 1,600 and 1,999 contracts; (4) 300 contracts if deliverable supplies are between 1,200 and 1,599 contracts; and (5) 220 contracts if deliverable supplies are below 1,200 contracts. 609 The proposed Federal spot month position limit levels for CME Live Cattle (LC) would feature step-down limit levels similar to the CME’s existing Live Cattle (LC) step-down exchange-set limit levels. The proposed Federal spot month step down limit level is: (1) 600 contracts at the close of trading on the first business day following the first Friday of the contract month; (2) 300 contracts at the close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 contracts at the close of trading on the business day prior to the last two trading days of the contract month. 610 CME’s existing exchange-set limit for Live Cattle (LC) has the following step-down spot month position limit levels: (1) 600 contracts at the close of trading on the first business day following the first Friday of the contract month; (2) 300 contracts at the close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 contracts at the close of trading on the business day prior to the last two trading days of the contract month. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 611 CBOT’s existing exchange-set spot month position limit level for Rough Rice (RR) is 600 contracts for all contract months. However, for July and September, there are step-down limit levels from 600 contracts. In the last five trading days of the expiring futures month, the speculative spot month position limit for the July futures month steps down to 200 contracts from 600 contracts and the speculative position limit for the September futures month steps down to 250 contracts from 600 contracts. 612 IFUS technically does not have an exchangeset spot month position limit level for ICE Sugar No. 16 (SF). However, it does have a single-month position limit level of 1,000 contracts, which effectively operates as a spot month position limit. 613 NYMEX recommended implementing the following step-down Federal spot month position limit levels with respect to its Light Sweet Crude Oil (CL) core referenced futures contract: (1) 6,000 contracts as of the close of trading three business days prior to the last trading day of the contract; (2) 5,000 contracts as of the close of trading two business days prior to the last trading day of the contract; and (3) 4,000 contracts as of the close of trading one business day prior to the last trading day of the contract. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 614 In Proposed § 150.3(a)(4), the Commission also proposed an exemption that provided a Federal conditional spot month position limit for NYMEX Henry Hub Natural Gas (NG) (‘‘NYMEX NG’’) that permits a market participation that does not hold any positions in the physically-settled NYMEX NG referenced contract to hold: (1) 10,000 NYMEX NG equivalent-sized referenced contracts per exchange that lists a cash-settled NYMEX NG referenced contract; and (2) an additional position in cashsettled economically equivalent swaps with respect to NYMEX NG that has a notional amount equal to 10,000 contracts. 615 Currently, the cash-settled natural gas contracts are subject to an exchange-set spot month position limit level of 1,000 equivalent-sized contracts per exchange. Currently, there are three exchanges that list cash-settled natural gas contracts—NYMEX, IFUS, and Nodal. As a result, a market participant may hold up to 3,000 equivalent-sized cash-settled natural gas contracts. The exchanges also have a conditional position limit framework for natural gas. The conditional position limit permits up to 5,000 cash-settled equivalent-sized natural gas contracts per exchange that lists such contracts, provided that the market participant does not hold a position in the physically-settled NYMEX NG contract. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.008</GPH> khammond on DSKJM1Z7X2PROD with RULES2 BILLING CODE 6351–01–C 3318 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 The proposed Federal spot month position limit levels for all referenced contracts were set at 25% or less of updated EDS and were derived from the recommendations by CME Group,616 IFUS,617 and MGEX618 for each of their respective core referenced futures contracts. Federal spot month position limit levels for any contract with a proposed level above 100 contracts were rounded up to the nearest 100 contracts from the exchange-recommended limit level or from 25% of updated EDS, as applicable. As discussed in the 2020 NPRM, the existing Federal spot month position limit levels have remained constant for decades, but the markets have changed significantly during that time period.619 616 See Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). CME Group formally provided recommended Federal spot month position limit levels for each of its core referenced futures contracts. 617 See IFUS—Estimated Deliverable Supply— Softs Methodology, IFUS Comment Letter (May 14, 2019) and Reproposal—Position Limits for Derivatives (RIN 3038–AD99) and ICE Comment Letter (Feb. 28, 2017) (attached Sept. 28, 2016 comment letter), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596 and Proposed Rule 81 FR 96704, respectively). IFUS did not formally provide recommended Federal spot month position limit levels for each of IFUS’s core referenced futures contracts. However, ICE had previously recommended setting Federal spot month position limit levels for IFUS’s core referenced futures contracts at 25% of EDS in its comment letter in connection with the 2016 Reproposal and Commission staff also confirmed with ICE/IFUS’s representatives that ICE/IFUS’s position has remained the same with respect to the Federal spot month position limit levels since the 2016 Reproposal. The Commission notes, however, with respect to ICE Cotton No. 2 (CT), that IFUS has submitted a supplemental comment letter recommending that the Federal spot month position limit level be set at 900 contracts, instead of at 25% of EDS. See IFUS—Estimated Deliverable Supply— Cotton Methodology, August 2020, IFUS Comment Letter (August 27, 2020), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 618 See Updated Deliverable Supply Data— Potential Position Limits Rulemaking, MGEX Comment Letter (Aug. 31, 2018), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). MGEX did not formally provide a recommended Federal spot month position limit level for its core referenced futures contract (MGEX Hard Red Spring Wheat (MWE)) because it was opposed to providing a static number for the Federal spot month position limit level that was based on a fixed formula. Instead, MGEX sought to be able to adjust the Federal spot month position limit level based on updated EDS figures and market conditions. However, MGEX stated that the Federal spot month position limit level for MGEX Hard Red Spring Wheat (MWE) should be no lower than 1,000 contracts and also submitted calculations for setting the Federal spot month position limit level at 25% of EDS. Furthermore, MGEX supported setting the Federal spot month position limit level for MGEX Hard Red Spring Wheat (MWE) at 25% of EDS level in its comment letter. MGEX at 3. 619 85 FR at 11625. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 As a result, some of the deliverable supply estimates on which the existing Federal spot month position limits were originally based were decades out of date.620 ii. Summary of the Commission Determination—Federal Spot Month Position Limit Levels a. Federal Spot Month Position Limit Levels Adopted as Proposed, Except for ICE Cotton No. 2 (CT) and NYMEX Henry Hub Natural Gas (NG) The Commission is adopting the Federal spot month position limit levels as proposed, except for modifications with respect to ICE Cotton No. 2 (CT) and NYMEX NG. Specifically, the Federal spot month position limit levels for all 25 core referenced futures contracts are set at or below 25% of EDS, except for the cash-settled NYMEX NG referenced contracts. With respect to ICE Cotton No. 2 (CT), the Commission is adopting a lower Federal spot month position limit level of 900 contracts instead of the proposed 1,800 contracts. The reasons for this change are discussed in Section II.B.3.v. With respect to NYMEX NG, the Final Rule is adopting the same Federal spot month position limit level as proposed in the 2020 NPRM, but the Final Rule is applying the cash-settled portion of the Federal spot month position limit for NYMEX NG separately for each exchange that lists a cash-settled NYMEX NG referenced contract, as well as the cash-settled NYMEX NG OTC swaps market, rather than on an aggregate basis across all exchanges and the OTC swaps market as it does for each of the other core referenced futures contracts. The reasons for this change are discussed in Section II.B.3.vi. (1) The Final Rule Achieves the Four Statutory Objectives in CEA Section 4a(a)(3)(B) Before summarizing and addressing comments below regarding the proposed Federal spot month position limit levels, the Commission states at the outset that the final Federal spot month position limit levels, in conjunction with the rest of the Federal position limits framework, will achieve the four policy objectives in CEA section 4a(a)(3)(B). Namely, they will: (1) Diminish, eliminate, or prevent excessive speculation; (2) deter and prevent market manipulation, squeezes, and corners; (3) ensure sufficient market liquidity for bona fide hedgers; and (4) ensure that the price discovery function 620 Id. PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 of the underlying market is not disrupted.621 In achieving these four statutory objectives, the Commission first believes that the Federal spot month position limit levels are low enough to prevent excessive speculation and also protect price discovery. Setting the Federal spot month position limit levels at or below 25% of EDS is critically important because it would be difficult, in the absence of other factors, for a market participant to corner or squeeze a market if the participant holds less than or equal to 25% of deliverable supply.622 This is because, among other things, any potential economic gains resulting from the manipulation may be insufficient to justify the potential costs, including the costs of acquiring and ultimately offloading the positions used to effectuate the manipulation.623 By restricting positions to a proportion of the deliverable supply of the commodity, the Federal spot month position limits require that no one speculator can hold a position larger than 25% of deliverable supply, reducing the possibility that a market participant can use derivatives, including referenced contracts, to affect the price of the cash commodity (and vice versa). Limiting a speculative position based on a percentage of deliverable supply also restricts a speculative trader’s ability to establish a leveraged position in cash-settled derivative contracts, reducing that trader’s incentive to manipulate the cash settlement price. Further, by finalizing levels that are sufficiently low to prevent market manipulation, including corners and squeezes, the levels also help ensure that the price discovery function of the underlying market is not disrupted, because markets that are free from corners, squeezes, and other manipulative activity reflect fundamentals of supply and demand, rather than artificial pressures. The Commission also believes that the Federal spot month position limit levels adopted herein are high enough to ensure that there is sufficient market liquidity for bona fide hedgers.624 The 621 7 U.S.C. 6a(a)(3)(B). FR at 11625–11626. 623 Id. 624 CEA section 4a(a)(1) requires the Commission to address ‘‘[e]xcessive speculation . . . causing sudden or unreasonable fluctuations or unwarranted [price] changes . . . .’’ Speculative activity that is not ‘‘excessive’’ in this manner is not a focus of CEA section 4a(a)(1). Rather, speculative activity may generate liquidity, including liquidity for bona fide hedgers, by enabling market participants with bona fide hedging positions to trade more efficiently. Setting position limits too 622 85 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Commission has not observed a general lack of liquidity for bona fide hedgers in the markets for the 25 core referenced futures contracts, which are some of the most liquid markets overseen by the Commission.625 By generally increasing the existing Federal spot month position limit levels for the nine legacy agricultural contracts based on updated data, and by adopting Federal spot month position limit levels that are generally equal to or higher than existing exchange-set levels for the 16 non-legacy core referenced futures contracts, the Commission does not expect the final Federal position limit levels to reduce liquidity for bona fide hedgers.626 Furthermore, the Commission has previously stated that ‘‘there is a range of acceptable limit levels,’’ 627 and continues to believe that is true.628 There is no single ‘‘correct’’ spot month position limit level for a given contract, and it is likely that a number of limit levels within a certain range could effectively achieve the four policy objectives in CEA section 4a(a)(3)(B).629 The Commission believes that the spot month position limit levels adopted herein fall within a range of acceptable levels.630 This determination is based on the Commission’s experience in administering its own Federal position limits regime, overseeing exchange-set position limits, and being closely involved in determining the EDS figures underlying the position limit levels, as well as the fact that the Federal spot month position limit levels are generally set at or below 25% of EDS.631 low could result in reduced liquidity, including for bona fide hedgers. 85 FR at 11626. 625 85 FR at 11626. The Commission notes that it has observed a brief period of illiquidity during the early part of the spot month for ICE Cotton No. 2 (CT), which is discussed in Section II.B.3.v. 626 Id. Eighteen of the core referenced futures contracts will have Federal spot month position limit levels that are higher than current exchangeset spot month position limit levels. CME Live Cattle (LC), COMEX Gold (GC), COMEX Copper (HG), CBOT Oats (O), NYMEX Platinum (PL), and NYMEX Palladium (PA) will have Federal spot month position limit levels that are equal to the current exchange-set spot month position limit levels. Finally, although currently there is technically no exchange-set spot month position limit for ICE Sugar No. 16 (SF), this contract is subject to a single month position limit level of 1,000 contracts, which effectively serves as its spot month position limit level. As a result, the Federal spot month position limit level for ICE Sugar No. 16 (SF) will effectively be higher than its current exchange-set spot month position limit level. 627 See, e.g., Revision of Federal Speculative Position Limits, 57 FR 12766, 12770 (Apr. 13, 1992). 628 85 FR at 11627. 629 Id. 630 Id. 631 The exception to this is the cash-settled NYMEX NG referenced contracts, which is discussed in detail in Section II.B.3.vi. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 In addition, the Federal spot month position limit levels are properly calibrated to account for differences between markets. For example, the Commission considered the unique delivery mechanisms for CME Live Cattle (LC) and the NYMEX metals core referenced futures contracts in calibrating the Federal spot month position limit levels for those contracts.632 The Commission also considered the volatility of the EDS for COMEX Copper (HG) in determining its limit level.633 Furthermore, with respect to NYMEX NG, the Commission, in finetuning the proposed limits, considered: the underlying natural gas infrastructure vis-a`-vis commodities underlying other energy core referenced futures contracts; the relatively high liquidity in the cashsettled markets; and the public comments received in response to the 2020 NPRM.634 (2) Federal Position Limit Levels Operate as Ceilings Finally, consistent with the 2020 NPRM and the Final Rule’s position limits framework that leverages existing exchange-level programs and expertise, the Federal position limit levels operate as ceilings. This framework, with Federal spot month limits layered over exchange-set limits, achieves the Commission’s objectives in preventing market manipulation, squeezes, corners, and excessive speculation while also ensuring sufficient market liquidity for bona fide hedgers and avoiding a disruption of the price discovery function of the underlying market. This is, in part, because a layered approach facilitates more expedited responses to rapidly evolving market conditions through exchange action. Under the Final Rule, exchanges are required to set their own spot month position limit levels at or below the respective Federal spot month position limit levels.635 They are also permitted to adjust those levels based on market conditions as long as they are set at or below the Federal spot month position limit levels. Exchanges may also impose 632 85 633 Id. FR at 11627. at 11628. 634 Id. 635 Final § 150.5(a). For the nine legacy agricultural contracts, the Final Rule also requires exchanges to set their own non-spot month position limit levels at or below the respective Federal nonspot month position limit level. For the 16 nonlegacy core referenced futures contracts, final § 150.5(b)(2) requires exchanges to implement either position limits or position accountability during the non-spot month for physical commodity derivatives that are not subject to Federal position limits ‘‘at a level that is necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 3319 liquidity and concentration surcharges to initial margin if they are vertically integrated with a derivatives clearing organization.636 All of these exchange actions can be implemented significantly faster than Commission action, and an immediate response is critical in managing rapidly evolving market conditions. As a result, by having the Federal position limit levels function as ceilings, the position limits framework adopted in this Final Rule will allow exchanges to lower or raise their position limit levels across a greater range of acceptable Federal position limit levels, which will facilitate a faster response to more varied market conditions than if the Federal position limit levels did not operate as ceilings. iii. Comments and Discussion of Final Rule—Federal Spot Month Position Limit Levels Many commenters supported the proposed Federal spot month position limit levels and the method by which the Commission determined those limit levels.637 However, some commenters raised concerns or otherwise commented with respect to: (1) The proposed Federal spot month position limit levels and the methodology used to arrive at those levels generally; (2) the Commission’s review of exchanges’ EDS figures and their recommended spot month position limit levels; (3) a lack of a phase-in for Federal spot month position limit levels; (4) the proposed spot month position limit level for ICE Cotton No. 2 (CT); (5) the proposed spot month position limit level for NYMEX NG and other issues relating to NYMEX NG; and (6) the issue of parity among the proposed Federal spot month position limit levels for the three wheat core referenced futures contracts. The Commission will discuss each of these issues, the related comments, and the Commission’s corresponding determination in greater detail below. a. Federal Spot Month Position Limit Levels and the Commission’s Underlying Methodology, Generally (1) Comments—Federal Spot Month Position Limit Levels and the Commission’s Underlying Methodology, Generally Better Markets objected to the Commission’s proposed Federal spot month position limit levels and 636 85 FR at 11633. ASR at 2; CCI at 2; Shell at 3; EEI/EPSA at 3; Suncor at 2, CEWG at 3; COPE at 2, 4; SIFMA AMG at 3–4; MGEX at 1; 3; MFA/AIMA at 1; AFIA at 1; CMC at 6; NGFA at 3; PIMCO at 6; CME Group at 4–6; NOPA at 1; FIA at 2; and AQR at 8–10. 637 See E:\FR\FM\14JAR2.SGM 14JAR2 3320 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 suggested that there should be a presumption that the Federal spot month position limit levels be set at 10% of EDS, which could be adjusted as needed.638 Another commenter, PMAA, requested Federal spot month position limit levels of less than 25% of EDS, but did not provide a specific level or a range of levels.639 Other commenters believed that the proposed spot month levels were generally too high merely because they were higher than existing levels.640 In support of its suggestion, Better Markets claimed that, ‘‘speculative trading has been sufficient to accommodate legitimate hedging at currently permissible levels,’’ noting that the Commission has previously stated that ‘‘open interest and trading volume have reached record levels’’ and ‘‘the 25 [core referenced futures contracts] represent some of the most liquid markets overseen by the [CFTC].’’ 641 Better Markets also claimed that, if the Commission conducted a study as to whether the increase in open interest for ‘‘particular [core referenced futures contracts] would warrant lower speculative position limits,’’ those studies would have shown that substantially lower position limit levels would be warranted.642 Better Markets also took issue with the Commission’s 25% or less of EDS formula as a basis for determining Federal spot month position limit levels by stating, ‘‘while deliverable supply must be one key measure for constraining speculation, it is not sufficient to address all statutory objectives for Federal position limits.’’ 643 (2) Discussion of Final Rule—Federal Spot Month Position Limit Levels and the Commission’s Underlying Methodology, Generally The Commission declines to adopt a 10% of EDS across-the-board Federal spot month position limit level, or a general reduction in Federal spot month position limit levels to a level below 25% of EDS for those core referenced futures contracts with a proposed position limit level set at 25% of EDS. In response to Better Markets’ suggestion to adopt Federal spot month position limit levels set at 10% of EDS, the Commission first notes that, although Better Markets provided some arguments for why the Commission should consider lower Federal position 638 Better Markets at 41. 639 PMAA at 2. 640 AFR at 2 and Rutkowski at 2. 641 Better Markets at 37–38. 642 Id. at 38. 643 Id. at 37. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 limit levels, Better Markets did not provide any support for the 10% level that it suggested, including any support for the comment letter’s implication that setting limits at or below 25% of EDS is insufficient to prevent corners and squeezes. Likewise, PMAA did not provide any support for adopting Federal spot month position limit levels of less than 25% of EDS, other than claiming that a ‘‘spot month limit of 25 percent of deliverable supply is not sufficiently aggressive to deter excessive speculation’’ and ‘‘prevent market manipulation.’’ 644 The 25% or less of EDS formula that the Commission is utilizing, and has utilized for many years, is a longstanding methodology that was adopted to address corners and squeezes based on the Commission’s experience.645 Also, as described in detail above, the Commission believes that the position limits framework in both the 2020 NPRM and the Final Rule that incorporates the 25% or less of EDS formula achieves the Commission’s statutory objectives in preventing market manipulation, squeezes, corners, and excessive speculation while also ensuring sufficient market liquidity for bona fide hedgers and avoiding a disruption of the price discovery function of the underlying market. In addition, the Final Rule’s position limits framework further addresses the statutory objectives of CEA section 4a(a)(3)(B) by utilizing the Federal position limit levels as a ceiling and leveraging the exchanges’ expertise and experience in determining and adjusting exchange-set position limit levels for their referenced contracts as appropriate, as long as they are under the Federal position limit levels.646 This exchange action can be effectuated significantly faster than a Federal position limit level adjustment, which requires the Commission to engage in a rulemaking process that includes a notice-and-comment period. As a result, compared to the alternative approaches suggested by commenters, this framework will generally facilitate a more expedited response to a more varied set of market conditions, because the exchanges can lower or raise their position limit levels across a greater 644 PMAA at 2. e.g., Chicago Board of Trade Futures Contracts in Corn and Soybeans; Order To Change and To Supplement Delivery Specifications, 62 FR 60831, 60838 (Nov. 13, 1997) (‘‘The 2,400-contract level of deliverable supplies constitutes four times the speculative position limit for the contract, a benchmark historically used by the Commission’s staff in analyzing the adequacy of deliverable supplies for new contracts’’). 646 See 85 FR at 11629, 11633. 645 See PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 range of acceptable Federal position limit levels. In response to Better Markets’ claim that the Federal spot month position limit levels should not be adjusted upward as a result of the higher open interest levels and trading volumes that exist today because they demonstrate that there are sufficient levels of speculation and liquidity under the current rules, the Commission first notes that Better Markets did not provide a methodology based on open interest and/or trading volume that the Commission should consider as an alternative to the Commission’s 25% or less of EDS approach. Regardless, the Commission believes that EDS is the more appropriate basis by which the Commission should adjust Federal spot month position limit levels, rather than open interest and/or trading volume, because the likelihood of a corner or squeeze occurring in the spot month is more closely correlated with the percentage of deliverable supply that a market participant controls. Corners and squeezes are possible in the spot month only because of the imminent prospect of making or taking delivery in the physically-settled contract. Therefore, understanding the amount of deliverable supply in the spot month is critically important.647 Accordingly, the Commission, in consultation with the exchanges, estimated the amount of the underlying commodity available at the specified delivery points in the core referenced futures contract that meet the quality standards set forth in the core referenced futures contract’s terms and conditions in order to understand the size of the relevant commodity market underlying each core referenced futures contract. Once the Commission determined that information in the form of an EDS figure, the Commission was able to determine whether a Federal spot month position limit level would advance the statutory objectives of CEA section 4a(a)(3)(B), including preventing corners and squeezes. A spot month position limit methodology based on open interest and/or trading volume does not take into account the central factors that make corners and squeezes possible (i.e., the imminent prospect of delivery on a physically-settled contract and the deliverable supply of an underlying 647 Deliverable supply is the quantity of the commodity that meets contract specifications that is reasonably expected to be readily available to short traders and salable by long traders at its market value in normal cash-marketing channels at the contract’s delivery points during the specified delivery period, barring abnormal movements in interstate commerce. 17 CFR part 38, Appendix C. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations commodity). Also, open interest and trading volume in an expiring physically-settled contract generally declines as the contract nears expiration, as most traders are not looking to make or take delivery of the underlying commodity. As a result, they would likely not provide additional insights that would materially inform the Commission’s determination of Federal spot month position limit levels in a way that is responsive to CEA section 4a(a)(3)(B). Furthermore, the Commission did not adjust the Federal spot month position limit levels merely by applying a percentage to EDS. As discussed in further detail below, the Commission proposed Federal spot month position limit levels only after the Commission: (1) Extensively reviewed and verified the underlying methodology for each core referenced futures contract’s EDS figure; and (2) reviewed the recommended Federal spot month position limit levels from exchanges that are thoroughly knowledgeable about their own respective core referenced futures contracts’ markets in order to determine whether they advanced the policy objectives of CEA section 4a(a)(3)(B). Also, in adopting the final Federal spot month position limit levels, the Commission also considered comments from market participants, including comments from the end-users of these markets. On a related note, Better Markets and PMAA appear to have misunderstood the proposed Federal spot month position limit levels and the methodology on which they were based.648 The Commission did not propose an across-the-board Federal level set at 25% of EDS. As noted above, the Commission’s methodology sets Federal spot month position limit levels at or below 25% of EDS for each particular commodity.649 As a result, under the Final Rule, only seven of 25 core referenced futures contracts have Federal spot month position limit levels at 25% of EDS. With respect to the 18 remaining core referenced futures contracts, all 18 are set below 20% of EDS, 14 are below 15% of EDS, and eight are already below the 10% of EDS threshold recommended by Better Markets.650 With respect to the petroleum core referenced futures contracts with which PMAA is most likely concerned (i.e., NYMEX Light Sweet Crude Oil (CL), NYMEX NYH ULSD Heating Oil (HO), and NYMEX RBOB Gasoline (RB)), all three levels are at or below 11.16% of EDS. b. Commission Review of Exchanges’ EDS Figures and Recommended Federal Spot Month Position Limit Levels (1) Additional Background Information—Commission Review of Exchanges’ EDS Figures and Recommended Federal Spot Month Position Limits In connection with the 2020 NPRM, the Commission received deliverable supply estimates and recommended Federal spot month position limit levels from CME Group, ICE, and MGEX for their respective core referenced futures contracts.651 Commission staff reviewed these recommendations and conducted its own analysis of them using its own experience, observations, and knowledge.652 This included closely and independently assessing the EDS figures upon which the recommended limit levels were based.653 In reviewing the recommended spot month position limit levels, the Commission considered the four policy objectives in CEA section 4a(a)(3)(B) and preliminarily determined that none of the recommended levels appeared improperly calibrated such that they might hinder liquidity for bona fide hedgers or invite excessive speculation, manipulation, corners, or squeezes, including activity that could impact price discovery.654 As a result, the Commission proposed to adopt each of the exchange-recommended spot month position limit levels as Federal spot month position limit levels.655 (2) Comments—Commission Review of Exchanges’ EDS Figures and Recommended Federal Spot Month Position Limit Levels The Commission received several comments concerning the Commission’s review and verification of the EDS figures and the rationale used by the Commission in accepting the spot month position limit levels that were recommended by exchanges. One commenter, EPSA, supported adopting CME Group’s EDS figures for energy commodities, stating that exchanges are in the ‘‘best position to provide accurate and current 651 See 648 See Better Markets at 39–40 and PMAA at 2. 649 85 FR at 11624. 650 For CME Live Cattle (LC) and NYMEX Light Sweet Crude Oil (CL), which have step-down Federal spot month position limit levels, these percentages were calculated using the first and highest step. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 supra n.616, n.617, and n.618. FR at 11625. 653 Id. at 11625–11626. 654 Id. at 11625. 655 Id. Also, a more detailed discussion about the methodology employed by the Commission in determining proposed Federal spot month position limit levels can be found at 85 FR at 11625–11628. 652 85 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 3321 information on the markets.’’ 656 However, other commenters expressed concerns. Better Markets commented that the Commission failed to ‘‘explain the means by which the DCM-provided data was collected and later ‘verified’ in arriving at proposed spot month position limits, nor the dependencies of the DCM methodologies employed to arrive at those estimates.’’ 657 Similarly, IATP commented that the 2020 NPRM provided insufficient detail about how the Commission concluded that the exchange-recommended spot month position limit levels were appropriate and how the Commission determined that the EDS figures submitted by the exchanges were reasonable.658 On a related note, PMAA commented that the exchanges should not be providing EDS figures and that the Commission instead should ‘‘retain exclusive discretion in determining ‘deliverable supply’ for the purposes of establishing speculative position limits’’ and ‘‘consult with . . . market experts when determining ‘deliverable supply’ and formulating limits.’’ 659 Furthermore, CME Group recommended ‘‘that the Commission not adopt final spot month position limit levels at 25% of deliverable supply as a rigid formula and . . . work with the exchange to determine an appropriate limit based on the market dynamics.’’ 660 Likewise, MGEX commented that it ‘‘fundamentally disagrees with the 25% formulaic calculation for the spot month position, especially if a limit is codified by rule and does not allow for adjustments as deliverable supply changes.’’ 661 Finally, Better Markets also raised concerns about the incentives of exchanges as public, for-profit enterprises, presumably, in part, because the exchanges submitted the EDS figures, upon which the Federal spot month position limit levels are 656 EPSA at 3. Markets at 36. 658 IATP at 9. 659 PMAA at 2–3 (these market experts include governmental entities, such as the Department of Energy’s Energy Information Administration and the U.S. Department of Agriculture, academics, and representatives of industries that produce, refine, process, store, transport, market, and consume the underlying commodity). 660 CME Group at 5–6. Specifically, CME Group believed that using a 25% of EDS formula ‘‘as a fixed formula for establishing recommended limits . . . is unsound as a matter of policy and incompatible with the Commission’s statutory authority to determine that a specific position limit is necessary and set it at an appropriate level.’’ 661 Updated Deliverable Supply Data—Potential Position Limits Rulemaking, MGEX Comment Letter (Aug. 31, 2018) at 2, available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 657 Better E:\FR\FM\14JAR2.SGM 14JAR2 3322 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations based.662 Specifically, Better Markets stated that exchanges ‘‘must balance the interests of their shareholders against the public interest and their commercial interests in market integrity’’ and, as a result, may be incentivized to permit ‘‘speculation—even excess speculation,’’ because it ‘‘is a key revenue driver.’’ 663 (3) Discussion of Final Rule— Commission Review of Exchanges’ EDS Figures and Recommended Federal Spot Month Position Limit Levels The Commission declines to utilize a different methodology and process for determining EDS figures and Federal spot month position limit levels. (i) Determination of EDS Figures In response to comments concerning the Commission’s EDS determinations, the Commission notes that its process for reviewing and verifying the EDS figures provided by exchanges entailed extensive independent review and analysis of each EDS figure and its underlying methodology, and the Commission retained exclusive discretion to determine the reasonableness of the EDS figures. This review and analysis by Commission staff occurred prior to the exchanges’ formal EDS submissions, during which time Commission staff verified that each exchange’s EDS figure for each commodity underlying a core referenced futures contract was reasonable. In doing so, Commission staff confirmed that the methodology and the data 664 for the underlying commodity for each core referenced futures contract reflected the commodity Markets at 22. at 22–23. Better Markets referenced CME Group Inc.’s Form 10–K filings, which stated that ‘‘[t]he adoption and implementation of position limits rules . . . could have a significant impact on our commodities business if Federal rules for position limit management differ significantly from current exchange-administered rules.’’ 664 The data underlying the EDS figures are from sources that Commission staff had determined as accurately representing the underlying commodity. These were typically from publicly available sources. For example, these include data published by the U.S. Department of Energy for NYMEX Light Sweet Crude Oil (CL), data published by the U.S. Department of Agriculture for CBOT Soybeans (S), data published by the Florida Department of Citrus for ICE FCOJ–A (OJ), and data published by CME Group concerning the gold inventories at its approved depositories for COMEX Gold (GC). Furthermore, most data sources were also adjusted based on interviews with market experts and market participants in order to better reflect the actual deliverable supply by taking into consideration the amount of time it takes to move the commodity to/from the delivery points, quality standards, and supplies that are not readily available due to being tied up in long-term contracts. characteristics 665 described in the core referenced futures contract’s terms and conditions, while also recognizing that more than one methodology and one set of assumptions, allowances, and data sources could result in a reasonable EDS figure for a commodity. In addition, Commission staff replicated the exchanges’ EDS figures using the methodology provided. For some commodities, Commission staff also determined the reasonableness of an exchange’s EDS by constructing an alternate EDS using an alternate methodology using other available data and comparing that internal EDS with the exchange’s EDS. In some cases, Commission staff consulted industry experts and market participants to verify that the assumptions and allowances used by the EDS methodology were reasonable and that the EDS figure itself was reasonable. When Commission staff identified any issues during the review process, they raised those concerns with the exchanges in order to revise the methodologies, including the assumptions, allowances, and data sources used therein. As a result, when the exchanges formally submitted their EDS figures, both the EDS figures and the methodologies underlying their calculations had been thoroughly reviewed and analyzed by Commission staff, and some had been refined based on input from Commission staff. The EDS figures and the methodologies used were published in the comment section of the 2020 NPRM on the Commission’s website and have been available for review by the public.666 Additionally, for the past 10 years, commenters to previous Federal position limits rule proposals have 662 Better khammond on DSKJM1Z7X2PROD with RULES2 663 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 665 These characteristics are provided in the guidance in section (b)(1)(i) of Appendix C to part 38, and include, among other things, the commodity’s quality and grade specifications, delivery points (including storage capacity), historic storage levels, processing capacity, and adjustments to remove supply that is committed for long-term contracts and not available to underlie a futures contract. The verified EDS for each commodity reflects the quantity of the commodity that can be reasonably expected to be readily available to short traders and salable by long traders at its market value in normal cash-marketing channels at the contract’s delivery points during the specified delivery period, barring abnormal movements in interstate commerce. 666 See IFUS—Estimated Deliverable Supply— Softs Methodology, IFUS Comment Letter (May 14, 2019); Updated Deliverable Supply Data—Potential Position Limits Rulemaking, MGEX Comment Letter (Aug. 31, 2018); and Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019) (CME Group also provided separate EDS methodology submissions for each of its 18 core referenced futures contracts, which can also be found in the comment file), all available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 consistently recommended that the EDS figures should be supplied by exchanges, given the exchanges’ expertise with their own contract markets and because of the experience they have in producing such figures.667 The Commission has agreed and continues to agree with those comments. As a result, Commission staff has also previously worked in collaboration with the exchanges as part of an iterative process to review and refine the methodologies, assumptions, allowances, and data sources used in calculating the EDS figure for each commodity underlying a core referenced futures contract. (ii) Determination of Federal Spot Month Position Limit Levels In response to comments concerning the Commission’s determination of the Federal spot month position limit levels, the Commission first notes that exchanges were invited to submit their recommended Federal spot month position limit levels for their respective core referenced futures contracts. In response, CME Group,668 ICE,669 and MGEX 670 provided recommended levels for their core referenced futures contracts. When deciding whether to adopt, reject, or modify the exchangerecommended position limit levels, the Commission considered a variety of factors, including whether the recommended level: (i) Was consistent with the 25% or less of EDS formula, as provided in the guidance in Appendix C to part 38; (ii) reflected changes in the EDS of the underlying commodity and trading activity in the core referenced futures contract; and (iii) achieved the four policy objectives in CEA section 4a(a)(3)(B). Furthermore, as described in detail above, the Commission also thoroughly reviewed the methodologies for determining the EDS figures upon which the exchange-recommended spot month position limit levels are based. Finally, the Commission also considered input from market participants concerning the EDS figures and the exchange-recommended Federal position limit levels in recalibrating the Federal position limit levels, as it has done for ICE Cotton No. 2 (CT) and NYMEX Henry Hub Natural Gas (NG) in this Final Rule, as discussed further below. 667 See e.g. 81 FR at 96754, n.495 (listing the commenters that expressed the view that exchanges are best able to determine appropriate spot month position limits and that the Commission should defer to their expertise). 668 See supra n.616. 669 See supra n.617. 670 See supra n.618. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 (iii) Concern Over Exchanges’ Conflict of Interest and Improper Incentives in Maintaining Their Markets In response to Better Markets’ concern about the incentives of exchanges as public, for-profit businesses, as a preliminary matter, the Commission acknowledges that exchanges have a financial interest in increased trading volume, whether speculative or hedging, and, as a result, may be incentivized to increase EDS figures and recommend higher position limit levels. However, as previously discussed, the Commission independently assessed and verified the exchanges’ EDS estimates. Specifically, the Commission: (1) Worked closely with the exchanges to independently verify that all EDS methodologies and figures were reasonable; 671 and (2) reviewed each exchange-recommended level for compliance with the requirements established by the Commission and/or by Congress, including those in CEA section 4a(a)(3)(B).672 Also, as discussed at length above, the Commission conducted its own analysis of the exchange-recommended Federal spot month position limit levels and determined that the levels adopted herein: (1) Are low enough to diminish, eliminate, or prevent excessive speculation and also protect price discovery; (2) are high enough to ensure that there is sufficient market liquidity for bona fide hedgers; (3) fall within a range of acceptable limit levels; and (4) are properly calibrated to account for differences between markets. Thus, the Commission believes that the impact, if any, of such financial incentives were sufficiently mitigated through the Commission’s close review of the methodology underlying the EDS figures, the EDS figures themselves, and the recommended Federal position limit levels. The Commission also notes that exchanges have significant incentives and obligations to maintain wellfunctioning markets as self-regulatory organizations that are themselves subject to regulatory requirements. Specifically, the DCM and SEF Core Principles, as applicable, require exchanges to, among other things, list contracts that are not readily susceptible to manipulation, and surveil trading on 671 As discussed in detail above, the verification involved: Confirming that the methodology and data for the underlying commodity reflected the commodity characteristics described in the core referenced futures contract’s terms and conditions; replicating exchange EDS figures using the methodology provided by the exchange; and working with the exchanges to revise the methodologies as needed. 672 See Section II.B.3.iii.b.(3). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 their markets to prevent market manipulation, price distortion, and disruptions of the delivery or cashsettlement process.673 Exchanges also have significant incentives to maintain well-functioning markets to remain competitive with other exchanges. Market participants may choose exchanges that are less susceptible to sudden or unreasonable fluctuations or unwarranted changes caused by excessive speculation or corners, squeezes, and manipulation, which could, among other things, harm the price discovery function of the commodity derivative contracts and negatively impact the delivery of the underlying commodity, bona fide hedging strategies, and market participants’ general risk management.674 Furthermore, several academic studies, including one concerning futures exchanges and another concerning demutualized stock exchanges, support the conclusion that exchanges are able to both satisfy shareholder interests and meet their self-regulatory organization responsibilities.675 iv. Phase-In of Federal Spot Month Position Limit Levels a. Summary of the 2020 NPRM—PhaseIn of Federal Spot Month Position Limit Levels The 2020 NPRM did not include a phase-in mechanism in which the Commission would gradually adjust the Federal position limit levels over a period of time. As a result, under the 2020 NPRM, the proposed Federal spot month position limit levels for all core referenced futures contracts would immediately go into effect on the proposed effective date. 673 17 CFR 38.200; 17 CFR 38.250; 17 CFR 37.300; and 17 CFR 37.400. 674 Kane, Stephen, Exploring price impact liquidity for December 2016 NYMEX energy contracts, n.33, available at https://www.cftc.gov/ sites/default/files/idc/groups/public/@ economicanalysis/documents/file/oce_ priceimpact.pdf. 675 See David Reiffen and Michel A. Robe, Demutualization and Customer Protection at SelfRegulatory Financial Exchanges, Journal of Futures Markets, Vol. 31, 126–164, Feb. 2011 (in many circumstances, an exchange that maximizes shareholder (rather than member) income has a greater incentive to aggressively enforce regulations that protect participants from dishonest agents); and Kobana Abukari and Isaac Otchere, Has Stock Exchange Demutualization Improved Market Quality? International Evidence, Review of Quantitative Finance and Accounting, Dec 09, 2019, https://doi.org/10.1007/s11156–019–00863-y (demutualized exchanges have realized significant reductions in transaction costs in the postdemutualization period). PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 3323 b. Summary of the Commission Determination—Phase-In of Federal Spot Month Position Limit Levels The Commission declines to adopt a formal phase-in for the Federal spot month position limit levels, because it believes that the markets would operate in an orderly fashion with the Federal position limit levels adopted under this Final Rule. However, as a practical matter, the Commission notes that the operative spot month position limit levels for market participants trading in exchange-listed referenced contracts will be the exchange-set spot month position limit levels, which will continue to remain at their existing levels unless and until an exchange affirmatively modifies its exchange-set spot month position limit levels pursuant to part 40 of the Commission’s regulations.676 c. Comments—Phase-In of Federal Spot Month Position Limit Levels The Commission received comments requesting that the Commission ‘‘consider phasing in these adjustments for agricultural commodities to assess the impacts of increasing limits on contract performance.’’ 677 CMC also noted that, ‘‘A phased approach could provide market participants, exchanges, and the Commission a way to build in scheduled pauses to evaluate the effects of increased limits, thereby fostering confidence and trust in the markets.’’ 678 d. Discussion of the Final Rule—PhaseIn of Federal Spot Month Position Limit Levels In response to comments, the Commission first notes that, although the Federal spot month position limit levels will generally be higher than existing Federal and/or exchange-set spot month position limit levels, the Commission believes that the referenced contract markets will be able to function in an orderly fashion when the final Federal spot month position limit levels 676 17 CFR part 40. at 2 and CMC at 6. 678 CMC at 6. Although commenters did not provide specific details about what they meant by ‘‘phase-in,’’ the Commission understands these comments to mean that they are requesting a gradual, step-up increase in Federal spot month and non-spot month position limit levels over time for agricultural core referenced futures contracts, instead of having an abrupt change to the new Federal position limit levels. This section only addresses the Commission’s response to commenters’ request for phased-in Federal spot month position limit levels. The Commission separately addresses commenters’ request for phased-in Federal non-spot month position limit levels below in Section II.B.4.iv.a.(2)(v). 677 AFIA E:\FR\FM\14JAR2.SGM 14JAR2 3324 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations go into effect.679 This is because, among other things, these final Federal spot month position limit levels are supported by the updated EDS figures and are set at or below 25% of EDS.680 However, as a practical matter, the operative spot month position limit level for market participants with respect to exchange-listed referenced contracts is not the Federal spot month position limit levels, but the exchangeset spot month position limit levels, which must be set at or below the corresponding Federal spot month position limit levels. As a result, despite the changes in the Federal spot month position limit levels (or the imposition of a Federal spot month position limit level for the first time) in this Final Rule, there will be no practical impact on market participants trading in exchange-listed referenced contracts unless and until an exchange affirmatively modifies its exchange-set spot month position limit levels through a rule submission to the Commission pursuant to part 40 of the Commission’s regulations.681 v. ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level khammond on DSKJM1Z7X2PROD with RULES2 a. Summary of the 2020 NPRM—ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level The Commission proposed to increase the Federal spot month position limit level for ICE Cotton No. 2 (CT) from the existing Federal position limit of 300 contracts to 1,800 contracts. Like all of the Federal spot month position limit levels, the Commission’s proposed level for ICE Cotton No. 2 (CT) was based on Commission staff’s review, analysis, and verification of IFUS’s updated EDS figure and Commission staff’s review and analysis of IFUS’s initial recommended Federal spot month position limit level.682 679 A phase-in is unnecessary with respect to the Federal spot month position limit level for CBOT Oats (O), because the Federal spot month position limit level for the contract remains at the current level. 680 The final Federal spot month position limit levels for cash-settled NYMEX NG referenced contracts may exceed 25% of EDS because the Federal spot month position limit level is being applied separately for each exchange and OTC swaps market, but the Commission believes that this approach will not cause any issues, in part, because of the highly liquid nature of that particular market. For additional details concerning the NYMEX NG market, see Section II.B.3.vi.a. 681 17 CFR part 40. 682 See IFUS—Estimated Deliverable Supply— Softs Methodology, IFUS Comment Letter (May 14, 2019) and Reproposal—Position Limits for Derivatives (RIN 3038–AD99); ICE Comment Letter (Feb. 28, 2017) (attached Sept. 28, 2016 comment letter), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596 and Proposed Rule 81 FR 96704, respectively). IFUS did VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 b. Summary of the Commission Determination—ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level In the Final Rule, the Commission is adopting a Federal spot month position limit level of 900 contracts instead of the proposed level of 1,800 contracts for ICE Cotton No. 2 (CT). The reasons for this change are based on the comments received in response to the 2020 NPRM. noted that, ‘‘[i]n a smaller market like cotton, such a drastic increase and high limit will cause excessive volatility and hinder convergence in the spot month.’’ 688 In addition to the market participants, IFUS also submitted a comment letter with respect to ICE Cotton No. 2 (CT), in which it provided an updated recommended Federal spot month position limit level of 900 contracts.689 c. Comments—ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level The Commission received numerous comments objecting to the higher proposed Federal spot month position limit level for ICE Cotton No. 2 (CT) in the 2020 NPRM.683 The commenters requested that the Commission either maintain the current 300 contract limit level or drastically lower the limit from the proposed 1,800 contract limit level.684 In doing so, commenters argued that they disagreed with the EDS figure for ICE Cotton No. 2 (CT) because it does ‘‘not reflect the cotton industry’s historical ability to deliver the physical commodity.’’ 685 AMCOT similarly noted that the ‘‘methodology used in determining the limits is flawed and lacks consideration of the industry’s intricacies including the non-fungible quality as well as warehousing, location, and logistical challenges.’’ 686 Furthermore, AMCOT believed that the Federal spot month position limit level ‘‘would likely be disruptive to orderly market flows.’’ 687 Likewise, ACSA d. Discussion of Final Rule—ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level As a preliminary matter, and as discussed previously, the Commission believes that there is a range of acceptable Federal position limit levels that will achieve the objectives of CEA section 4a(a)(3)(B). Thus, the Commission acknowledges that there may be other acceptable Federal spot month position limit levels in addition to the proposed 1,800 contract level for ICE Cotton No. 2 (CT). Commenters to the 2020 NPRM suggested three alternatives to the proposed Federal spot month position limit level for ICE Cotton No. 2 (CT): (1) 300 contracts; (2) 900 contracts; or (3) a level ‘‘drastically lower’’ than 1,800 contracts. All of these alternatives are below 25% of EDS. The Commission considered the two specifically enumerated levels (i.e., 300 contracts and 900 contracts) and the proposed 1,800 contract level, and has determined that the 900 contract level is the most appropriate among the three for ICE Cotton No. 2 (CT). not formally provide recommended Federal spot month position limit levels for each of its core referenced futures contracts. However, ICE had previously recommended setting Federal spot month position limit levels for IFUS’s core referenced futures contracts at 25% of EDS in its comment letter in connection with the 2016 Reproposal and Commission staff also confirmed with ICE/IFUS’s representatives that ICE/IFUS’s position has remained the same with respect to the Federal spot month position limit levels since the 2016 Reproposal. The Commission notes, however, with respect to ICE Cotton No. 2 (CT), IFUS submitted an updated recommended Federal spot month position limit level recommending a Federal spot month position limit level of 900 contracts. See IFUS—Estimated Deliverable Supply—Cotton Methodology, August 2020, IFUS Comment Letter (August 27, 2020), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 683 AMCOT at 1–2; ACSA at 8; Ecom at 1; Southern Cotton at 2; NCC at 1; Mallory Alexander at 2; Canale Cotton at 2; IMC at 2; Olam at 3; DECA at 2; Moody Compress at 1; ACA at 2; Choice at 1; East Cotton at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; NCC at 2; Omnicotton at 2; Toyo at 2; Texas Cotton at 2; Walcot at 2; White Gold at 1; LDC at 1; SW Ag at 2; NCTO at 2; and Parkdale at 2. 684 Id. 685 See, e.g., ACA at 2. 686 AMCOT at 1. 687 Id. PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 (1) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level Should Be Above 300 Contracts The Commission believes that it is more appropriate to raise the Federal spot month position limit level than to maintain its existing level of 300 contracts, as long as that level is set at or below 25% of EDS. One reason is because the current 300 contract Federal spot month position limit level for ICE Cotton No. 2 (CT) has been in place since at least 1987 while the size of the ICE Cotton No. 2 (CT) market has significantly increased over the years, as evidenced by the material increases in deliverable supply and open interest.690 688 ACSA at 8. 689 IFUS—Estimated Deliverable Supply—Cotton Methodology, August 2020, IFUS Comment Letter (Aug. 14, 2020), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 690 For example, between the periods of 1994– 1999 and 2015–2018, the maximum open interest in ICE Cotton No. 2 (CT) increased from 122,989 contracts to 344,302 contracts. Also, the EDS for ICE Cotton No. 2 (CT) increased from 6,005 contracts to 6,948 contracts between 2016 and 2019. E:\FR\FM\14JAR2.SGM 14JAR2 3325 A second reason why the Commission believes that it is appropriate to raise the Federal spot month position limit level above the existing level of 300 contracts for ICE Cotton No. 2 (CT) is because of potential liquidity concerns. At 300 contracts, the Federal spot month position limit level for ICE Cotton No. 2 (CT) would be set at 4.32% of EDS, which would be the lowest Federal spot month position limit level, by far, in terms of percentage of EDS among all core referenced futures contracts.691 At such a low level, the Commission is concerned that this could hamper liquidity in the market, especially if the ICE Cotton No. 2 (CT) market continues to grow as it has done over the years. This concern is supported by the Commission’s observation that there has been a lack of liquidity at the start of the spot month period in recent years as speculative traders exited the market or reduced their positions to the Federal spot month position limit level of 300 contracts. The Commission’s observation is based on its assessment of the daily price impact liquidity in basis points with the gauge: 692 Raising the limit level above 300 contracts to a higher level, such as 900 contracts, should help alleviate some of the liquidity problems that market participants have experienced because they will not have to reduce their positions to such a low level (i.e., 300 contracts). A third reason for raising the Federal spot month position limit level above its existing level of 300 contracts is because a 300 contract level may not provide adequate headroom under which exchanges may set and adjust their own position limit levels, up or down, in response to market conditions within this position limits framework. This is an especially acute issue because, as noted above, a Federal spot month position limit level of 300 contracts is extremely low in terms of percentage of EDS when compared to other core referenced futures contracts, and there is no market-based reason (e.g., higher susceptibility for corners and squeezes) for why the level should be set so low. A final reason for supporting a Federal spot month position limit level higher than 300 contracts is because IFUS, which is the exchange that lists ICE Cotton No. 2 (CT), has recommended a level higher than 300 contracts.693 This is significant because exchanges have deep knowledge about their markets and are particularly wellpositioned to recommend position limit levels for the Commission’s consideration.694 The Commission recognizes that the comments from the end-users of ICE Cotton No. 2 (CT) unanimously requested that the Commission consider, among other options, maintaining the 300 contract Federal position limit level. The main justifications underlying this request are that: (1) The ICE Cotton No. 2 (CT) market is small; and (2) the EDS figure is extremely high. In response to commenters’ claim about the size of the market, the Commission notes that the market for ICE Cotton No. 2 (CT) is not as small as suggested. Open interest data indicate that the ICE Cotton No. 2 (CT) futures market had a larger average notional open interest in 2019 than nine other core referenced futures contracts.695 Six of these contracts have higher Federal position limit levels in terms of percentage of EDS in this Final Rule.696 In response to commenters’ issue with the EDS, the Commission notes that the cotton merchants may have focused on too narrow of a scope in their comment letters. The commenters appear to focus on the actual cotton that was delivered pursuant to holding the physicallysettled ICE Cotton No. 2 (CT) core referenced futures contract to expiration, and they use that data as evidence that the EDS is extremely high.697 The Commission’s EDS figures are not meant to reflect the actual commodity delivered. Rather, as the term estimated deliverable supply indicates, it is the quantity of the commodity that meets contract specifications that is reasonably expected to be readily available to short traders and salable by long traders at its market value in normal cash-marketing channels at the contract’s delivery points during the specified delivery period, barring abnormal movements in interstate commerce.698 The Commission believes that limiting a speculative trader from controlling more than 25% of this supply, and not the actual commodity delivered, is critical for ensuring that corners and squeezes do not happen.699 691 CBOT KC HRS Wheat (KW) generally has the lowest Federal spot month position limit level in terms of percentage of EDS at 6.82%, which is 58% higher than 4.32%. However, following the close of trading on the business day prior to the last two trading days of the contract month, CME Live Cattle (LC) has the lowest Federal spot month position limit level in terms of percentage of EDS at 5.29%, which is 22% higher than 4.32%. 692 P is the price of trade i. P * is the proxy for i i the current market price (the price of the last trade, Pi—1). Q1 is the quantity traded (the number of futures contracts traded in trade i). See Kane, Stephen, Exploring price impact liquidity for December 2016 NYMEX energy contracts, p.5–6, available at https://www.cftc.gov/sites/default/files/ idc/groups/public/@economicanalysis/documents/ file/oce_priceimpact.pdf. 693 IFUS—Estimated Deliverable Supply—Cotton Methodology, August 2020, IFUS Comment Letter (Aug. 14, 2020), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 694 85 FR at 11598. However, as noted before, the Commission independently reviewed and analyzed the exchange-recommended levels, including the EDS figures that support such levels. 695 These are CBOT Oats (O), CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE FCOJ–A (OJ), ICE Sugar No. 16 (SF), NYMEX Platinum (PL), and NYMEX Palladium (PA). See Section III.C. 696 These are CBOT Oats (O), MGEX HRS Wheat (MWE), ICE Cocoa (CC), ICE FCOJ–A (OJ), ICE Sugar No. 16 (SF), and NYMEX Platinum (PL). 697 See ACSA at 7–8. 698 17 CFR part 38, Appendix C. 699 Generally, only a small percentage of futures contracts actually go to delivery. Basing a speculative position limit on past deliveries for a futures contract would be far too limiting for a speculative position limit and would not reasonably achieve the four policy objectives of CEA section 4a(a)(3)(B). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.030</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 3326 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Furthermore, commenters did not provide specific issues with respect to the methodology used to determine EDS for ICE Cotton No. 2 (CT), which has been available for review by the public since the 2020 NPRM was published.700 As a result, the Commission believes that the EDS for ICE Cotton No. 2 (CT) is appropriate and reasonable based on its review and analysis of the methodology used.701 khammond on DSKJM1Z7X2PROD with RULES2 (2) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level Should Be Below 1,800 Contracts However, the Commission believes that it is appropriate to lower the Federal spot month position limit for ICE Cotton No. 2 (CT) from the proposed 1,800 contract level. First, as noted previously, the Commission received an updated recommended Federal spot month position limit level from IFUS that is lower than 1,800 contracts.702 Second, although the Commission believes that there are issues with the cotton industry commenters’ justifications for lowering the Federal spot month position limit level, the Commission still believes that their comments are informative. Specifically, the Commission believes that the unanimous comments from the endusers of the ICE Cotton No. 2 (CT) core referenced futures contract suggest that lowering the Federal spot month position limit level from 1,800 contracts will not have a material detrimental effect on liquidity for bona fide hedgers in the market. All things being equal, a lower spot month position limit level will better protect the markets against corners and squeezes, but at the expense of a reduction in liquidity for bona fide hedgers as positions held by speculators will be more constrained. However, in this instance, the Commission believes that it could improve protections against corners and squeezes without materially 700 IFUS—Estimated Deliverable Supply—Softs Methodology, IFUS Comment Letter (May 14, 2019), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 701 Specifically, the estimate took into account cotton certified stocks, which are reported daily for the five delivery points specified in the contract specifications, as well as the exchange estimated deliverable stocks close to the delivery points that are not included as certified stocks based on the USDA’s Weekly Bales Made Available to Ship (‘‘BMAS’’) Summary report. The exchange estimated the deliverable stocks contained in or near exchange warehouses, both certified and noncertified, during notice and delivery periods for the futures contract. BMAS deliverable stocks data was also adjusted to exclude cotton at locations that were far away from the delivery points. 702 IFUS—Estimated Deliverable Supply—Cotton Methodology, August 2020, IFUS Comment Letter (Aug. 14, 2020), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 impacting liquidity for bona fide hedgers by adopting a Federal spot month position limit level that is lower than 1,800 contracts, based on the comments received.703 (3) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level Should Be Set at 900 Contracts Given that the Commission believes that it is preferable to set a Federal spot month position limit level higher than 300 contracts but lower than 1,800 contracts for the aforementioned reasons, the Commission believes that a Federal position limit level of 900 contracts is preferable to those alternatives. Specifically, the Commission notes that IFUS, which has deep knowledge about the ICE Cotton No. 2 (CT) market and is particularly well-positioned to recommend the position limit level for the Commission’s consideration, has recommended a Federal spot month position limit level of 900 contracts. This is also supported by commenters who requested a ‘‘drastically lower’’ Federal spot month position limit level as an alternative to maintaining a Federal spot month position limit level of 300 contracts. The Commission also believes that a level of 900 contracts is sufficiently high to address concerns about a lack of liquidity. This is, in part, because a Federal spot month position limit level of 900 contracts would result in a level that is set at 12.95% of EDS, which would coincidentally place ICE Cotton No. 2 (CT) exactly at the median among the legacy agricultural contracts and all core referenced futures contracts in terms of percentage of EDS. Finally, based on the comments received and because, all things being equal, lower spot month position limit levels provide better protection against corners and squeezes, the Commission believes that a level of 900 contracts will provide stronger protection against corners and squeezes without materially impacting liquidity for bona fide hedgers vis-a`-vis a level of 1,800 contracts.704 vi. NYMEX Henry Hub Natural Gas (NG) This section will address the following issues concerning NYMEX 703 However, for the reasons discussed previously, the Commission does not believe that lowering the Federal spot month position limit level to 300 contracts is appropriate, given the observed issues in liquidity during the early part of the spot month period. 704 The Commission recognizes that this will limit the range through which an exchange may set and adjust its own exchange-set position limit level. However, based on the comments received, the Commission believes that the stronger protections against corners and squeezes is appropriate. PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 NG: (i) The Federal spot month position limit level for NYMEX NG; (ii) the conditional spot month position limit exemption for positions in natural gas referenced contracts, which is located in final § 150.3(a)(4); and (iii) NYMEX NG penultimate referenced contracts. The Commission is addressing the latter two issues in this section in order to allow the reader to review all discussions regarding natural gas in one place in this Final Rule. a. NYMEX Henry Hub Natural Gas (NG) Federal Spot Month Position Limit Level (1) Summary of the 2020 NPRM and Additional Background Information— NYMEX NG Federal Spot Month Position Limit Level Under the existing Federal position limits framework, there are no Federal position limits for NYMEX NG in either the spot month or the non-spot month. There is, however, an exchange-set spot month position limit for NYMEX NG, which is set at 1,000 contracts for the physically-settled NYMEX NG contract and 1,000 contracts per exchange for cash-settled equivalent-sized natural gas contracts. Because there are three exchanges that list such cash-settled natural gas contracts (NYMEX, IFUS, and Nodal), a market participant can currently hold up to 3,000 such cashsettled contracts during the spot month. In the 2020 NPRM, the Commission proposed a Federal spot month position limit level of 2,000 contracts for NYMEX NG. The 2,000 contract level was determined based on 25% of updated EDS and was recommended by CME Group. Consistent with the other core referenced futures contracts, the proposed netting and aggregation requirements permitted a market participant to hold up to 2,000 physically-settled NYMEX NG referenced contracts and another 2,000 cash-settled NYMEX NG referenced contracts across all exchanges and in the OTC swaps market.705 (2) Summary of the Commission Determination—NYMEX NG Federal Spot Month Position Limit Level The Commission is adopting its proposed approach with respect to physically-settled NYMEX NG referenced contracts, but is modifying its proposed approach with respect to cash-settled NYMEX NG referenced contracts, as discussed below. 705 For further discussion of netting and aggregation, see Section II.B.10. (Application of Netting and Related Treatment of Cash-settled Referenced Contracts). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (3) Comments—NYMEX NG Federal Spot Month Position Limit Level With respect to the proposed NYMEX NG Federal spot month position limit level, NGSA requested that the Commission ‘‘increase the spot month limit on the NG Contract by recognizing the transportation capacity available now at Henry Hub provided by displacement and the increasing capacity which is coming from future but imminent displacement.’’ 706 In support, NGSA noted that CME Group’s EDS figure has ‘‘incorporated displacement into its estimate of deliverable supply at Henry Hub for years.’’ 707 MFA/AIMA, Citadel, and SIFMA AMG requested that the Commission raise the Federal spot month position limit level for NYMEX NG referenced contracts to at least 3,000 contracts, because the 2020 NPRM effectively decreases the total number of exchangetraded cash-settled NYMEX NG referenced contracts that a market participant may hold in the spot month from the current level of 3,000 contracts to 2,000 contracts.708 In support of this request, MFA/AIMA argued that the 2020 NPRM ‘‘could adversely affect the ability of traders to optimize the proportion of physically-settled and cash-settled natural gas contracts that they wish to hold in their portfolio.’’ 709 SIFMA AMG argued that the 2020 NPRM ‘‘would disrupt existing trading practices and business models without any corresponding regulatory or policy benefit.’’ 710 khammond on DSKJM1Z7X2PROD with RULES2 (4) Discussion of Final Rule—NYMEX NG Federal Spot Month Position Limit Level Under the Final Rule, market participants may hold up to 2,000 cashsettled NYMEX NG referenced contracts per exchange during the spot month and an additional 2,000 cash-settled economically equivalent OTC swaps, rather than being subject to an aggregate position limit level of 2,000 cash-settled NYMEX NG referenced contracts across all exchanges and the OTC swaps market as proposed under the 2020 NPRM. Because there are currently three exchanges that list natural gas referenced contracts, this will allow market participants to hold a total of 706 NGSA at 10–11. at 11. 708 MFA/AIMA at 11–12; Citadel at 7–8; and SIFMA AMG at 10–11 (SIFMA AMG supported the 2,000 contract limit level for physically-settled NYMEX NG referenced contracts, but requested at least a 3,000 contract limit level for the cash-settled NYMEX NG referenced contracts). 709 MFA/AIMA at 11–12. 710 SIFMA AMG at 11. 707 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 8,000 cash-settled NYMEX NG referenced contracts between positions held in cash-settled futures and in cashsettled economically equivalent OTC swaps.711 This is in addition to the 2,000 physically-settled NYMEX NG referenced contracts a market participant may hold during the spot month. These amendments to the proposal are reflected in a revised Appendix E to part 150 that the Commission is adopting in this Final Rule. (i) Request To Increase the Federal Spot Month Position Limit Level To Account for Displacement In response to NGSA’s request, the Commission first notes that CME Group provided the EDS figure that was used as a basis for determining its exchangerecommended Federal spot month position limit level, which the Commission ultimately used as a basis for its own proposed Federal spot month position limit level for NYMEX NG after independently reviewing and assessing the methodology underlying the EDS figure and the EDS figure itself.712 As NGSA noted, CME Group’s EDS has ‘‘incorporated displacement into its estimate of deliverable supply at Henry Hub for years,’’ 713 which means that the EDS figure on which the proposed Federal spot month position limit level was based already ‘‘recogniz[ed] the transportation capacity available now at Henry Hub provided by displacement.’’ 714 As a result, the proposed Federal spot month position limit level took this into account as well. With respect to future increases in EDS based on ‘‘future but imminent displacement,’’ 715 in the event that this occurs, CME Group may submit an updated EDS figure pursuant to § 150.2(f), at which time the Commission would consider whether to modify the Federal spot month position limit level. 711 2,000 cash-settled referenced contracts multiplied by three exchanges plus 2,000 cashsettled economically equivalent OTC swaps equals 8,000 cash-settled NYMEX NG referenced contracts. 712 Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 713 NGSA at 11. 714 Id. at 10. Furthermore, CME Group’s methodology for determining EDS for NYMEX NG explicitly states, ‘‘Additionally, the Exchange has taken into consideration backhaul in estimating the deliverable supply.’’ New York Mercantile Exchange, Inc., Analysis of Deliverable Supply Henry Hub Natural Gas Futures, December 2018 (Dec. 1, 2018), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 715 NGSA at 10. PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 3327 (ii) Request To Increase the Cash-Settled Federal Spot Month Position Limit Level As previewed above, in response to comments from MFA/AIMA, Citadel, and SIFMA AMG, the Commission is modifying the proposed NYMEX NG Federal spot month position limit level for cash-settled NYMEX NG referenced contracts, so that the Federal spot month position limit applies separately per each exchange and the OTC swaps market, rather than across exchanges and the OTC swaps market. The Commission believes that this modification is warranted in order to avoid disrupting the well-developed, unique liquidity characteristics of the natural gas derivatives markets. As detailed below, the cash-settled natural gas market is significantly more liquid than the physically-settled natural gas market during the spot month. This is in contrast with typical commodity markets, in which the physically-settled contracts are generally more liquid than the cash-settled contracts during the spot month.716 The unique nature of the natural gas markets is reflected in the current exchange-set natural gas position limit framework, in which market participants may hold up to 1,000 cashsettled natural gas contracts per exchange, which can result in a position of up to 3,000 cash-settled natural gas contracts (instead of 1,000 cash-settled natural gas contracts altogether), despite only being able to hold up to 1,000 physically-settled NYMEX NG contracts. The Commission believes that, absent the modification adopted herein to apply the spot month limit to NYMEX NG on a per exchange basis, the proposed Federal spot month position limit level could disrupt the cash-settled natural gas markets, in part, because, as commenters have noted: (1) Market participants would be able to hold fewer cash-settled NYMEX NG referenced contracts (i.e., 2,000 contracts) than they were previously permitted under the exchange-set position limit framework (i.e., 3,000 contracts); and (2) some market participants may not be able to hold the same proportion of physicallysettled to cash-settled NYMEX NG referenced contracts that they are 716 Typically, this is because the physicallysettled contract is established first and the natural formation of liquidity in the physically-settled contract historically stays in the established contract due to first mover advantage. More liquid markets provide for better bid/ask spreads and can execute larger transaction sizes without substantial effects on the price of the contract. Thus, in the past, cash-settled look-alike contracts historically have not been as liquid as the original physicallysettled futures contract. E:\FR\FM\14JAR2.SGM 14JAR2 3328 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 currently able to hold if they wish to maximize their positions in physicallysettled NYMEX NG referenced contracts. The Commission also believes that it is appropriate to maintain consistency vis-a`-vis the exchange-set position limit framework in order to minimize disruptions, since the Commission has not observed any issues with the exchange-set position limit framework with respect to natural gas. Accordingly, under the Final Rule, market participants (that are not availing themselves of the Federal spot month conditional position limit exemption for NYMEX NG, which is discussed below) may hold up to 2,000 cash-settled NYMEX NG referenced contracts on each exchange that lists a cash-settled NYMEX NG referenced contract (which is currently NYMEX, IFUS, and Nodal), a total position of 6,000 exchange-listed cash-settled NYMEX NG referenced contracts.717 Furthermore, under the Final Rule, traders may also hold an additional position in cash-settled economically equivalent NYMEX NG OTC swaps that has a notional amount of up to 2,000 equivalent-sized contracts. The Commission is separately permitting up to 2,000 referenced contracts in the NYMEX NG OTC swaps market in order to avoid disruptions to that market, given that traders may be currently participating in that market as well. As a result, under the Final Rule, traders may hold up to a total of 8,000 cashsettled NYMEX NG referenced contracts 718 and 2,000 physicallysettled NYMEX NG referenced contracts.719 The Commission notes that, as discussed further below, as an initial legal matter, the Commission interprets CEA section 4a(a)(6) as generally 717 The Commission notes that market participants are not permitted to net cash-settled NYMEX NG referenced contract positions across exchanges or the OTC swaps market for Federal spot month position limit purposes. 718 2,000 cash-settled NYMEX NG referenced contracts multiplied by three exchanges plus 2,000 cash-settled economically equivalent NYMEX NG OTC swaps equals 8,000 cash-settled NYMEX NG referenced contracts. 719 CME Group also commented that it ‘‘objects to any disparities in the spot-month limits and would rigorously disagree if the Commission adopts any other disparities in treatment between physicallysettled and cash-settled contracts,’’ in the context of the proposed Federal conditional limit, which is discussed in the section below. CME Group at 6. This comment could also be viewed as an objection to the Final Rule’s Federal spot month position limit level for cash-settled NYMEX NG referenced contracts. The Commission believes that the rationale set forth in this section and the Federal conditional limit section below is responsive to CME Group’s possible concern with respect to the Final Rule’s Federal spot month position limit level for cash-settled NYMEX NG referenced contracts. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 requiring aggregate Federal position limits across exchanges.720 Notwithstanding the requirements of CEA section 4a(a)(6), the Commission is adopting this approach with respect to NYMEX NG referenced contracts pursuant to its exemptive authority in CEA section 4a(a)(7). In doing so, the Commission believes that, based on the foregoing reasons, applying the Federal spot month position limit level for cashsettled NYMEX NG referenced contracts separately per exchange and the OTC swaps market does not undermine the purposes of the Federal position limits framework pursuant to CEA section 4a. b. NYMEX NG Federal Spot Month Conditional Position Limit Level (1) Summary of 2020 NPRM and Additional Background Information— NYMEX NG Federal Spot Month Conditional Position Limit Level In addition to the proposed 2,000 contract Federal spot month position limit level for NYMEX NG, proposed § 150.3(a)(4) also included a spot month conditional position limit exemption (‘‘Federal conditional limit’’) from the standard Federal spot month position limit level for NYMEX NG for market participants that do not hold a position in the physically-settled NYMEX NG referenced contract.721 The proposed Federal conditional limit would allow, during the spot month, market participants that do not hold a position in the physically-settled NYMEX NG referenced contract to hold: (1) Up to 10,000 cash-settled NYMEX NG referenced contracts per exchange that lists a cash-settled NYMEX NG referenced contract; and (2) an additional position in cash-settled economically equivalent NYMEX NG OTC swaps that has a notional amount of up to 10,000 equivalent-sized contracts. As a result, the proposed Federal conditional limit would permit a market participant that does not hold a physically-settled NYMEX NG referenced contract to hold a total of 40,000 cash-settled NYMEX NG referenced contracts (up to 10,000 contracts on each of the three exchanges (NYMEX, IFUS, and Nodal) that lists a cash-settled NYMEX NG referenced contract and in the OTC swaps market) during the spot month. The proposed framework for the Federal conditional limit was derived from the existing exchange-set spot 720 For further discussion of the Commission’s aggregation and netting rules, see Section II.B.10. (application of netting section). 721 The Commission is adopting the Federal conditional limit pursuant to its exemptive authority in CEA section 4a(a)(7). 7 U.S.C. 6a(a)(7). PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 month conditional position limit framework that has been in place for approximately a decade. This existing conditional position limit framework permits, during the spot month, up to 5,000 equivalent-sized cash-settled natural gas contracts per exchange that lists a cash-settled natural gas contract, provided that the market participant does not hold a position in the physically-settled NYMEX NG contract.722 The 5,000 contract conditional spot month position limit level equals five-times the existing exchange-set 1,000 contract spot month position limit level for the physicallysettled NYMEX NG contract.723 Noting the unique circumstances of the natural gas futures markets, the Commission’s proposed Federal conditional limit level applied the same multiplier of five to its proposed Federal spot month position limit level for the physically-settled NYMEX NG contract in order to arrive at the 10,000 contract Federal conditional limit level that applies for each exchange and OTC swaps market. The 2020 NPRM included the Federal conditional limit to accommodate certain trading dynamics unique to the natural gas contracts.724 For example, the Commission has observed that, as the physically-settled NYMEX NG core referenced futures contract approaches expiration, open interest tends to decline in NYMEX NG and tends to increase rapidly in ICE’s cash-settled Henry Hub LD1 contract.725 This is in contrast with other commodities in which the physically-settled markets are more liquid than the cash-settled markets during the spot month. These dynamics suggest that cash-settled natural gas contracts serve an important function for hedgers and speculators who wish to recreate and/or hedge the physically-settled NYMEX NG contract price during the spot month without being required to make or take 723 See IFUS Rule 6.20(c), NYMEX Rule 559.F, and Nodal Rule 6.5.7. The spot month for such contracts is three days. See also Position Limits, CMG Group website, available at https:// www.cmegroup.com/market-regulation/positionlimits.html (NYMEX position limits spreadsheet); Market Resources, IFUS website, available at https://www.theice.com/futures-us/marketresources (IFUS position limits spreadsheet). NYMEX rules establish an exchange-set spot month limit of 1,000 contracts for its physically-settled NYMEX NG core referenced futures contract and a separate spot month limit of 1,000 contracts for its cash-settled Henry Hub Natural Gas Last Day Financial Futures contract. IFUS’s natural gas contract is one quarter the size of the NYMEX contract. IFUS thus has rules in place establishing an exchange-set spot month limit of 4,000 contracts (equivalent to 1,000 NYMEX NG contracts) for its cash-settled Henry Hub LD1 Fixed Price Futures contract. 724 85 FR at 11641. 725 Id. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations delivery.726 In addition, the Commission also proposed the divestiture requirement in the Federal conditional limit in order to address historical concerns over the potential for manipulation of physically-settled natural gas contracts during the spot month in order to benefit positions in cash-settled natural gas contracts.727 (2) Summary of the Commission Determination—NYMEX NG Federal Spot Month Conditional Position Limit Level The Commission is adopting the Federal conditional limit as proposed. khammond on DSKJM1Z7X2PROD with RULES2 (3) Comments—NYMEX NG Federal Spot Month Conditional Position Limit Level With respect to the proposed Federal conditional limit, several commenters generally supported its adoption.728 COPE believed that the proposed conditional limit ‘‘permits market liquidity . . . without sacrificing the benefits of position limits.’’729 ICE supported the Federal conditional limit, noting that ‘‘cash-settled contracts present a reduced potential for manipulation of the price of the physically-settled contract.’’ 730 CME Group, on the other hand, objected to the proposal, arguing that it could ‘‘drain liquidity for bona fide hedgers in the physically-settled market and could prevent physical delivery markets from serving the price discovery function that they have long provided’’ and believed that it ‘‘could incentivize the manipulation of a cash commodity price in order to benefit a position in a cashsettled contract.’’ 731 A number of commenters also requested that the Federal conditional limit levels be available to market participants that do not exit positions in the physically-settled NYMEX NG referenced contract during the spot month, which would effectively establish the Federal conditional limit level as the operative Federal spot month limit level for cash-settled NYMEX NG referenced contracts. In support of this request, several commenters argued that the 2020 NPRM’s approach to the Federal conditional limit would result in liquidity leaving the physically-settled NYMEX NG referenced contract when it 726 Id. 727 Id. 728 COPE at 2–3; EEI/EPSA at 4; and ICE at 13. at 2–3. 730 ICE at 13 (referencing a sentiment previously expressed by the Commission). 731 CME Group at 6. 729 COPE VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 is needed the most.732 EEI/EPSA also commented that the Federal conditional limit framework in the 2020 NPRM is ‘‘excessive and is an overly rigid solution that may unnecessarily restrict legitimate trading activity.’’ 733 NGSA commented that the 2020 NPRM ‘‘removes important hedging optionality for physical market participants.’’ 734 Citadel argued that the 2020 NPRM would limit flexibility and impair market efficiency by preventing ‘‘market participants with a meaningful position in the cash-settled market from participating in the physically-settled market—limiting flexibility and impairing market efficiency.’’ 735 CCI also believed that the 2020 NPRM would ‘‘impair price discovery’’ and ‘‘negatively impact price convergence.’’ 736 Finally, ICE requested that ‘‘the Commission revert back to the five-time conditional limit for cash settled contracts . . . instead of the conditional limit of 10,000 contracts in the Proposed Rule,’’ because ‘‘[a]pplying a five-time multiplier versus a hard limit, would allow the conditional limit to track any changes in the spot month limits over time, which in turn will reflect changes in deliverable supply.’’ 737 (4) Discussion of Final Rule—NYMEX NG Federal Spot Month Conditional Position Limit Level (i) Availability of the Federal Conditional Limit for NYMEX NG In response to CME Group’s comment supporting the elimination of the Federal condition limit, the Commission is concerned that eliminating the proposed conditional limit could result in potential market disruptions, given that a conditional limit framework for natural gas has been in place at the exchange level for many years. For example, eliminating the existing conditional limit structure could restrict the positions that market participants may hold in cash-settled NYMEX NG referenced contracts during the spot month, resulting in reduced liquidity, including for commercial hedgers seeking to offset price risks but not necessarily looking to make or take delivery. Additionally, since it was instituted approximately a decade ago, the exchange-set conditional limit framework has functioned well.738 The 732 ISDA at 8; SIFMA AMG at 10–11; FIA at 7– 8; NGSA at 12–14; Citadel at 7; and CCI at 4. 733 EEI/EPSA at 4. 734 NGSA at 12. 735 Citadel at 7. 736 CCI at 4. 737 ICE at 13. 738 85 FR at 11640. PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 3329 Commission has not observed any of the concerns raised by CME Group come to fruition, and the physically-settled NYMEX NG referenced contract remains highly liquid. Furthermore, as discussed above, other commenters supported the availability of the Federal conditional limit. (ii) Federal Conditional Limit’s Divestiture Requirement In response to comments requesting that the Federal conditional limit be available to market participants that do not exit the spot month physicallysettled NYMEX NG referenced contract, the Commission first notes that the requirement that market participants exit the physically-settled NYMEX NG referenced contract has been reflected in exchange rulebooks for many years, in part because the requirement is critically important to discouraging manipulation.739 Without this requirement, a trader could hold up to 40,000 cash-settled NYMEX NG referenced contracts (or more, if additional exchanges list cash-settled NYMEX NG referenced contracts in the future), which is at 500% of EDS, and 2,000 physically-settled NYMEX NG referenced contracts, which is at 25% of EDS. At these levels, it may not require much movement in the physicallysettled markets to disproportionately benefit the cash-settled holdings. As a result, the requirement to exit the physically-settled contract is critical for reducing the market participant’s incentive to manipulate the cash settlement price by, for example, banging-the-close or distorting physical delivery prices in the physically-settled contract to benefit leveraged cashsettled positions.740 With respect to commenters’ concerns about removing flexibility and options for market participants, as well as a potential decrease in liquidity in the physically-settled NYMEX NG referenced contract, the Commission notes that the physically-settled NYMEX NG referenced contract remains highly liquid even in spite of the implementation of the exchange-set conditional limit framework instituted approximately a decade ago. Also, market participants should have more flexibility and options than before because the Federal spot month position limit level for NYMEX NG adopted herein will now permit up to 8,000 cash-settled NYMEX NG referenced contracts, even if the market participant holds 2,000 physically-settled NYMEX 739 85 FR at 11641. 85 FR 11626, 11641. 740 See E:\FR\FM\14JAR2.SGM 14JAR2 3330 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations NG referenced contracts.741 Finally, the Commission reiterates that Federal position limit levels only apply to speculative positions and, as a result, bona fide hedging positions will continue to be allowed to exceed the Federal position limit levels, including the Federal conditional limit level, from the Federal position limits perspective.742 (iii) Application of a Five-Times Multiplier for the Federal Conditional Limit Level The Commission clarifies that, in accordance with historical practice, if the Federal spot month position limit level for the physically-settled NYMEX NG referenced contract is updated in the future through rulemaking, the Commission expects to simultaneously adjust the Federal conditional limit in the same rulemaking, such that the Federal conditional limit level is set at a multiple of five of the new Federal spot month position limit level for NYMEX NG, provided that the Commission does not observe any issues in the markets. c. NYMEX NG Penultimate Referenced Contracts khammond on DSKJM1Z7X2PROD with RULES2 (1) Summary of the 2020 NPRM and Additional Background Information— NYMEX NG Penultimate Referenced Contracts With respect to NYMEX NG, the Commission proposed that penultimate 741 Under the Final Rule’s Federal spot month position limit level for NYMEX NG, a trader may hold 2,000 physically-settled NYMEX NG referenced contracts, 2,000 cash-settled NYMEX NG referenced contracts per exchange that lists such contracts, and 2,000 cash-settled economically equivalent NYMEX NG OTC swaps. Currently, there are three exchanges that list cash-settled NYMEX NG referenced contracts—NYMEX, IFUS, and Nodal. As a result, a trader may hold up to 6,000 exchange-listed cash-settled NYMEX NG referenced contracts and 2,000 cash-settled economically equivalent NYMEX NG OTC swaps, which brings the total number of cash-settled NYMEX NG referenced contracts a trader may hold to 8,000 under the Federal spot month position limit level. 742 This also answers EEI/EPSA’s request to confirm ‘‘that a participant may rely upon the conditional limit in the first instance but may also utilize a hedge exemption to exceed the conditional limit.’’ EEI/EPSA at 4. However, the Commission notes that exchanges have rarely, if ever, allowed a market participant to exceed the exchange-set natural gas conditional limit by layering a bona fide hedge position on top of the cash-settled natural gas contract position permitted under the natural gas conditional limit. Similar to this existing practice, the Commission expects that, under the Final Rule, a market participant will rarely be permitted to hold: (1) A bona fide hedge position in the physically-settled NYMEX NG referenced contract while taking advantage of the conditional limit for cash-settled NYMEX NG referenced contracts; or (2) a bona fide hedge position in cash-settled NYMEX NG referenced contracts on top of the maximum position permitted under the conditional limit for cash-settled NYMEX NG referenced contracts. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 contracts, which are cash-settled contracts that settle on the trading day immediately preceding the final trading day of the corresponding referenced contract, are also considered referenced contracts that are subject to Federal spot month position limits.743 The Commission also proposed a slightly broader economically equivalent swap definition for natural gas, so that swaps with delivery dates that diverge by less than two calendar days (instead of one calendar day) from an associated referenced contract could still be deemed economically equivalent and therefore subject to Federal position limits. The Commission made these adjustments to: Recognize the active and vibrant penultimate natural gas contract markets; prevent and disincentivize manipulation and regulatory arbitrage; and prevent volume from shifting away from non-penultimate cash-settled NYMEX NG markets to penultimate NYMEX NG contract futures and/or penultimate NYMEX NG swaps markets in order to avoid Federal position limits.744 (2) Comments—NYMEX NG Penultimate Referenced Contracts In response to this part of the 2020 NPRM, ICE requested ‘‘that the Commission continue to allow exchanges to impose spot month accountability levels which expire during the period when spot month limits for the Henry Hub core-referenced futures contract are in effect and to not aggregate penultimate options into the Henry Hub LD1 cash-settled limit.’’ 745 One of the ways in which ICE supported this request was by claiming that, ‘‘The Commission states that penultimate 743 Such penultimate contracts include: ICE’s Henry Financial Penultimate Fixed Price Futures (PHH) and options on Henry Penultimate Fixed Price (PHE), and NYMEX’s Henry Hub Natural Gas Penultimate Financial Futures (NPG). 744 The Commission proposed a relatively narrow ‘‘economically equivalent swap’’ definition in order to prevent market participants from inappropriately netting positions in core referenced futures contracts against swap positions further out on the curve. The Commission acknowledges that liquidity could shift to penultimate swaps as a result, but believes that, with the exception of natural gas, this concern is mitigated since certain constraints exist that militate against this from occurring, including basis risk between the penultimate swap and the core referenced futures contract. However, this constraint does not necessarily apply to the natural gas futures markets, because natural gas has a relatively liquid penultimate futures market that enables a market participant to hedge or off-set its penultimate swap positions. As a result, the Commission believes that liquidity may be incentivized to shift from NYMEX NG to penultimate natural gas swaps in order to avoid Federal position limits in the absence of the Commission’s exception for natural gas in the ‘‘economically equivalent swap’’ definition. 745 ICE at 14. PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 contracts are economically the same as the last day contract, however, empirically, this statement is not correct as settlement prices have demonstrated.’’ 746 (3) Discussion of Final Rule—NYMEX NG Penultimate Referenced Contracts The Commission declines to exclude NYMEX NG penultimate contracts from Federal position limits for the reasons set forth in this Final Rule’s section addressing ‘‘Referenced Contract.’’ 747 In doing so, the Commission notes, in particular, that ICE’s specific assertion that penultimate natural gas contracts are not economically the same as last day contracts based on settlement prices runs counter to the Commission’s review of a sample of the daily settlement prices for NYMEX NG (the physically-settled natural gas contract), ICE Henry Hub LD1 (the ICE natural gas contract cash-settled to NYMEX NG), and ICE Henry Hub Penultimate (the ICE penultimate natural gas contract cash-settled to NYMEX NG).748 vii. Wheat Core Referenced Futures Contracts’ Federal Spot Month Position Limit Levels a. Summary of the 2020 NPRM and Additional Background Information— Wheat Federal Spot Month Position Limit Levels The Commission proposed to increase the Federal spot month position limit levels for all three wheat core referenced futures contracts (CBOT Wheat (W), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE)) from 600 contracts to 1,200 contracts. The proposed Federal limit levels were based on the underlying EDS figures for each wheat core referenced futures contract and CME’s and MGEX’s recommended Federal spot month position limit levels of 1,200 contracts for each of their respective wheat core referenced futures contracts. b. Summary of the Commission Determination—Wheat Federal Spot Month Position Limit Levels The Commission is adopting the Federal spot month position limit levels for all three wheat core referenced futures contracts as proposed. c. Comments—Wheat Federal Spot Month Position Limit Levels The Commission received one comment, from MGEX, fully supporting 746 Id. 747 For further discussion of the Commission’s determination to include penultimate contracts within the Federal position limits framework, see Section II.A.16.iii.a.(2)(iii). 748 Id. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 4. Federal Non-Spot Month Position Limit Levels i. Background—Federal Non-Spot Month Position Limit Levels The Commission most recently updated the Federal non-spot month position limit levels in 2011.750 At that time, the Commission utilized a formula 749 MGEX at 3. Commission notes that the 2011 Final Rulemaking that adopted the most recent Federal non-spot month position limit levels was vacated by an order of the U.S. District Court for the District of Columbia on September 28, 2012. However, that order did not apply with respect to the 2011 Final Rulemaking’s amendments to the Federal non-spot month position limit levels in § 150.2. ISDA, 887 F.Supp.2d 259 (2012). 751 See, e.g., Revision of Federal Speculative Position Limits and Associated Rules, 64 FR at 24038 (May 5, 1999) (increasing deferred-month limit levels based on 10% of open interest up to an open interest of 25,000 contracts, with a marginal increase of 2.5% thereafter). Prior to 1999, the Commission had given little credence to the size of open interest in the contract in determining the position limit level. Instead, the Commission’s khammond on DSKJM1Z7X2PROD with RULES2 750 The VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 that was called the ‘‘10/2.5% formula,’’ 751 which calculated the Federal non-spot month position limit levels by multiplying the first 25,000 contracts in open interest by 10% and multiplying the remaining contracts by 2.5% and adding the two numbers together.752 The 10/2.5% formula was first adopted in 1999 based on two primary factors: Growth in open interest and the size of large traders’ positions.753 The existing Federal nonspot month position limit levels that traditional standard was to set limit levels based on the distribution of speculative traders in the market. See, e.g., 64 FR at 24039; Revision of Federal Speculative Position Limits and Associated Rules, 63 FR at 38525, 38527 (July 17, 1998). 752 For example, assume a commodity contract has an aggregate open interest of 200,000 contracts over the past 12 month period. Applying the 10/ 2.5% formula to an aggregate open interest of 200,000 contracts would yield a non-spot month position limit level of 6,875 contracts. That is, 10% of the first 25,000 contracts would equal 2,500 contracts (25,000 contracts × 0.10 = 2,500 contracts). Then add 2.5% of the remaining 175,000 of aggregate open interest or 4,375 contracts (175,000 contracts × 0.025 = 4,375 contracts) for a total non-spot month position limit level of 6,875 contracts (2,500 contracts + 4,375 contracts = 6,875 contracts). PO 00000 Frm 00097 Fmt 4701 Sfmt 4725 were adopted in 2011 have not been updated to reflect changes in open interest data in over a decade.754 ii. Summary of the 2020 NPRM— Federal Non-Spot Month Position Limit Levels Proposed § 150.2(e) provided that Federal non-spot month position limit levels were set forth in proposed Appendix E to part 150 and were as follows: 755 753 See 64 FR at 24038. See also 63 FR at 38525, 38527 (The 1998 proposed revisions to non-spot month levels, which were eventually adopted in 1999, were based upon two criteria: ‘‘(1) The distribution of speculative traders in the markets; and (2) the size of open interest.’’). 754 In setting the Federal non-spot month position limit levels in 2011, the Commission used open interest data from 2009. 76 FR at 71642. 755 85 FR at 11624. As discussed above, the proposed Federal non-spot month position limits would apply to only the nine legacy agricultural contracts and any associated referenced contracts. All other referenced contracts subject to Federal position limits would be subject to Federal position limits only during the spot month, as specified above, and would only be subject to exchange-set position limits or position accountability levels outside of the spot month. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.009</GPH> the 2020 NPRM’s Federal spot month parity among the three wheat core referenced futures contracts.749 3331 3332 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations In generally calculating the above levels, the Commission proposed to maintain the existing 10/2.5% formula for non-spot month position limit levels, but with the following limited changes: (1) The 10% rate would apply to the first 50,000 contracts of open interest (instead of the first 25,000 contracts); (2) the 2.5% rate would apply to open interest above 50,000 contracts (rather than above the current level of 25,000 contracts); and (3) the modified 10/2.5% formula would apply to updated open interest data for the applicable futures and delta-adjusted options for the periods from July 2017 to June 2018 and July 2018 to June 2019.756 All Federal non-spot month position limit levels that were calculated based on the 10/ 2.5% formula (i.e., all legacy agricultural contracts, with the exception of CBOT Oats (O), CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), and the single month position limit level for ICE Cotton No. 2 (CT)) were rounded up to the nearest 100 contracts. As outlined in the table above, the proposed Federal non-spot month position limit levels are generally higher than the existing Federal non-spot month position limit levels, with the exception of CBOT Oats (O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), for which the proposed limit levels would remain at existing levels. As described in detail below, this proposed general increase is primarily due to the increases in open interest that have occurred since the Federal nonspot month position limit levels were last updated approximately a decade ago.757 khammond on DSKJM1Z7X2PROD with RULES2 iii. Summary of the Commission Determination—Federal Non-Spot Month Position Limit Levels The Commission is adopting each of the Federal non-spot month position limit levels as proposed in § 150.2(e) and Appendix E to part 150, with the exception of setting a lower single month position limit for ICE Cotton No. 2 (CT). The Commission will first describe the general rationale for the final Federal non-spot month position limit levels that are being adopted. Next, the Commission will describe the 756 The 12-month period yielding the higher open interest level is selected as the basis for the Federal non-spot month position limit level. 757 See 85 FR at 11630. The 2020 NPRM’s proposed modification to the 10/2.5% formula from 25,000 to 50,000 contracts results in a modest increase in the Federal non-spot month position limit level of 1,875 contracts over what the limit level would be if the 10/2.5% formula were applied at 25,000 contracts, assuming that the market for the core referenced futures contract has an open interest of at least 50,000 contracts. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 comments it received in connection with the proposed Federal non-spot month position limit levels. Finally, the Commission will provide responses to such comments, including further rationale for the Commission’s position concerning the final Federal non-spot month position limit levels. a. Rationale for the Final Federal NonSpot Month Position Limit Levels As explained below, the Commission believes that the final Federal non-spot month position limit levels, in conjunction with the rest of the Federal position limits framework, will achieve the four policy objectives in CEA section 4a(a)(3)(B). Namely, they will: (1) Diminish, eliminate, or prevent excessive speculation; (2) deter and prevent market manipulation, squeezes, and corners; (3) ensure sufficient market liquidity for bona fide hedgers; and (4) ensure that the price discovery function of the underlying market is not disrupted.758 As a preliminary matter, the Commission continues to believe that a formula based on a percentage of open interest, such as the 10/2.5% formula, will permit position limit levels to better reflect the changing needs and composition of the futures markets.759 Open interest is a measure of market activity that reflects the number of contracts that are ‘‘open’’ or live, where each contract of open interest represents both a long and a short position.760 The Commission believes that limiting positions to a percentage of open interest: (1) Helps ensure that positions are not so large relative to observed market activity that they risk disrupting the market; (2) allows speculators to hold sufficient contracts to provide a healthy level of liquidity for bona fide hedgers; and (3) allows for increases in position limits and position sizes as markets expand and become more active.761 (1) Modification of the 10/2.5% Formula However, the Commission believes that the current 10/2.5% formula should be updated based on market developments since it was adopted in 1999. As a result, the Commission proposed modifying the 10/2.5% formula by adjusting the inflection point between the 10% rate and the 2.5% rate from 25,000 contracts to 50,000 contracts.762 The Commission also 758 7 U.S.C. 6a(a)(3)(B). FR at 11630. 760 Id. 761 Id. 762 This results in a modest increase in the Federal non-spot month position limit level of 1,875 contracts over what the limit level would be 759 85 PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 proposed applying updated open interest data to the modified 10/2.5% formula. The Commission is adopting these changes as proposed because: (1) Open interest has increased significantly since the 10/2.5% formula was originally adopted in 1999; and (2) futures market composition has changed significantly since 1999. The Commission discusses both developments in turn below. (i) Increases in Open Interest As noted in the 2020 NPRM, there has generally been a significant increase in maximum open interest for each of the legacy agricultural contracts (except for CBOT Oats (O)) since the existing 10/ 2.5% formula was first adopted in 1999.763 Under the existing 10/2.5% formula, because the 2.5% incremental increase applies after the first 25,000 contracts of open interest, limit levels with respect to contracts with open interest above 25,000 contracts (i.e., all applicable core referenced futures contracts other than CBOT Oats (O)) continue to increase at the much slower rate of 2.5% rather than the 10% rate that’s applicable for the first 25,000 contracts. As a result, the existing 10/ 2.5% formula has become proportionally more restrictive as the percentage of open interest above 25,000 contracts increased. The table below provides data that describes the market environment during the period prior to, and subsequent to, the adoption of the existing 10/2.5% formula by the Commission in 1999. The data includes futures contracts and the delta-adjusted options on futures open interest.764 The first column of the table provides the maximum open interest in the nine legacy agricultural contracts over the five year period ending in 1999. The CBOT Corn (C) contract had a maximum open interest of approximately 463,000 contracts, and the CBOT Soybeans (S) contract had a maximum open interest if the 10/2.5% formula were applied at 25,000 contracts, assuming that the market for the core referenced futures contract has an open interest of at least 50,000 contracts. 763 85 FR at 11631. 764 Delta is a ratio comparing the change in the price of an asset (a futures contract) to the corresponding change in the price of its derivative (an option on that futures contract) and has a value that ranges between zero and one. In-the-money call options get closer to 1 as their expiration approaches. At-the-money call options typically have a delta of 0.5, and the delta of out-of-themoney call options approaches 0 as expiration nears. The deeper in-the-money the call option, the closer the delta will be to 1, and the more the option will behave like the underlying asset. Thus, deltaadjusted options on futures will represent the total position of those options as if they were converted to futures. E:\FR\FM\14JAR2.SGM 14JAR2 3333 of approximately 227,000 contracts. The other seven contracts had maximum open interest figures that ranged from less than 20,000 contracts for CBOT Oats (O) to approximately 172,000 for CBOT Soybean Oil (SO). Hence, when adopting the 10/2.5% formula in 1999, the Commission’s experience in these markets was of aggregate futures and options on futures open interest well below 500,000 contracts. The table also displays the maximum open interest figures for subsequent periods up to, and including, 2018. The maximum open interest for all legacy agricultural contracts, except for CBOT Oats (O), generally increased over the period. By the 2015–2018 period covered in the last column of the table, five of the contracts had maximum open interest greater than 500,000 contracts. Also, the contracts for CBOT Corn (C), CBOT Soybeans (S), and CBOT Hard Red Winter Wheat (KW) saw maximum open interest increase by a factor of four to five times the maximum open interest observed during the 1994–1999 period when the Commission adopted the 10/ 2.5% formula in 1999. As open interest has increased, the current Federal non-spot month position limit levels have become significantly more restrictive over time. In particular, as discussed above, because the 2.5% incremental increase applies after the first 25,000 contracts of open interest under the existing 10/ 2.5% formula, Federal non-spot month position limit levels on legacy agricultural contracts with open interest above 25,000 contracts (i.e., all contracts other than CBOT Oats (O)) continue to increase at a much slower rate of 2.5% rather than the 10% that applies for the first 25,000 contracts. The existing 10/2.5% formula’s inflection point of 25,000 contracts was less of a problem in the latter part of the 1990s, for example, when open interest in each of the nine legacy agricultural contracts was below 500,000, and in many cases below 200,000. More recently, however, open interest has grown above 500,000 for a majority of the legacy agricultural contracts. The existing 10/2.5% formula has thus become more restrictive for market participants, including, as discussed immediately below, certain banks and dealers with positions that may not be eligible for a bona fide hedging exemption, but who might otherwise provide valuable liquidity to commercial firms. individual traders, who tended to be long.765 Several years after the Commission adopted the 10/2.5% formula, the composition of futures market participants changed as dealers began to enter the physical commodity futures market in larger size. These dealers, including ones affiliated with banks or large financial institutions that are now provisionally registered and regulated as swap dealers, sometimes held significant positions in these markets by acting as aggregators or market makers and providing swaps to commercial hedgers and to other market participants.766 The existing 10/2.5% formula has thus become particularly restrictive for dealers, including those with positions that may not be eligible for a bona fide hedging exemption, but VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (ii) Changes in Market Composition The potentially restrictive nature of the existing Federal non-spot month position limit levels has become more problematic over time because dealers play a much more significant role in the market today than at the time the Commission adopted the 10/2.5% formula. Prior to 1999, the Commission regulated physical commodity markets where the largest participants were often large commercial interests who held short positions. The offsetting positions were often held by small, PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 765 Stewart, Blair, An Analysis of Speculative Trading in Grain Futures, Technical Bulletin No. 1001, U.S. Department of Agriculture (Oct. 1949). See also Draper, Dennis, ‘‘The Small Public Trader in Futures Markets’’, pp. 211–269, Futures Markets: Regulatory Issues (ed. Anne Peck, 1985): American Enterprise Institute. 766 Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations, U.S. Commodity Futures Trading Commission (Sept. 2008), available at https://www.cftc.gov/sites/ default/files/idc/groups/public/@newsroom/ documents/file/cftcstaffreportonswapdealers09.pdf. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.010</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations that might otherwise provide valuable liquidity to commercial firms.767 The table below demonstrates the trend of increased dealer participation by presenting data from the Commission’s publicly available ‘‘Bank Participation Report’’ (‘‘BPR’’), as of the December report for 2002–2018.768 The table displays the number of banks holding reportable positions for the seven futures contracts for which Federal position limits apply and that were reported in the BPR.769 The report presents data for every market where five or more banks hold reportable positions. The BPR is based on the same large-trader reporting system database used to generate the Commission’s Commitments of Traders (‘‘COT’’) report.770 No data was reported for the seven futures contracts in December 2002, indicating that fewer than five banks held reportable positions at the time of the report. The December 2003 report shows that five or more banks held reportable positions in four of the commodity futures. The number of banks with reportable positions generally increased in the early to mid- 2000s, which included dealers that operated in the swaps markets by acting as aggregators or market makers, providing swaps to commercial hedgers and to other market participants while using the futures markets to hedge their own exposures.771 When the Commission adopted the 10/2.5% formula in 1999, it had limited experience with physical commodity derivatives markets in which such banks were significant participants. For 2003, which was the first year in the report with reported data on the futures for these physical commodities, the BPR showed, as displayed in the table below, that the reporting banks held modest positions, totaling 3.4% of futures long open interest for CBOT Wheat (W) and smaller positions in other futures. The positions displayed in the table below increased over the next several years, generally peaking around 2005/2006 as a percentage of the long open interest. 767 The Commission notes that this issue with respect to swap dealers is being addressed through a combination of a modification of the 10/2.5% formula and the pass-through swap provision, the latter of which is described in Section II.A.1.x. (Pass-Through Swap and Pass-Through Swap Offset Provisions). 768 Bank Participation Reports, available at https://www.cftc.gov/MarketReports/ BankParticipationReports/index.htm. 769 The term ‘‘reportable position’’ is defined in § 15.00(p) of the Commission’s regulations. 17 CFR 15.00(p). 770 Commitments of Traders, available at www.cftc.gov/MarketReports/ CommitmentsofTraders/index.htm. Commitments of Traders reports indicate that there are generally still as many large commercial traders in the markets today as there were in the 1990s. 771 Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations, U.S. Commodity Futures Trading Commission (Sept. 2008), available at https://www.cftc.gov/sites/ default/files/idc/groups/public/@newsroom/ documents/file/cftcstaffreportonswapdealers09.pdf. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 BILLING CODE 6351–01–P E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.011</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3334 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 The Commission believes that the application of the modified 10/2.5% formula adopted herein to updated open interest data will prevent the Federal non-spot month limits from becoming overly restrictive by providing an appropriate increase in the non-spot month position limit levels for most contracts to better reflect the abovedescribed changes in market dynamics observed since the late 1990s. (2) Non-Spot Month Position Limit Levels for CBOT Oats (O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE) The Commission is adopting the proposed Federal non-spot month position limit levels with respect to CBOT Oats (O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE). These remain at the current Federal non-spot month position limit levels, which are 2,000 contracts for CBOT Oats (O) and 12,000 contracts for both CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE). These Federal nonspot month position limit levels are higher than the levels that would have been determined using the modified 10/ 2.5% formula and updated open interest data, which would have resulted in 700 contracts for CBOT Oats (O), 11,900 contracts for CBOT KC HRW Wheat VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (KW), and 5,700 contracts for MGEX HRS Wheat (MWE). However, the Commission saw no reason to reduce these Federal non-spot month position limit levels in accordance with the 10/ 2.5% formula because the Commission has observed that the existing limit levels have functioned well for these core referenced futures contracts and the Commission believes that strictly following the 10/2.5% formula to determine Federal non-spot month position limit levels could harm liquidity in those markets. (3) Single Month Position Limit Level for ICE Cotton No. 2 (CT) The Commission is adopting a modified single month Federal position limit level for ICE Cotton No. 2 (CT). The Commission proposed a uniform single month and all-months-combined position limit for the ICE Cotton No. 2 (CT) contract, as well as uniform single month and all-months-combined position limits for the eight other legacy agricultural contracts. However, in the 2020 NPRM the Commission requested comments from the public concerning whether the Commission should adopt a lower single month position limit level for ICE Cotton No. 2 (CT) PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 compared to the all-months-combined position limit level.772 The Commission received numerous comments from the end users of ICE Cotton No. 2 (CT) in the cotton industry, including growers and merchants, who requested that the Commission establish a lower Federal single month position limit level for ICE Cotton No. 2 (CT) compared to the all-months-combined position limit level, including establishing the single month position limit level at 50% of the all-monthscombined position limit level.773 The Commission did not receive any comments from commercial end-users opposing a lower Federal single month position limit level for ICE Cotton No. 2 (CT) compared to the all-monthscombined position limit level. In response to the comments received, the Commission is adopting a lower Federal single month position limit level of 5,950 contracts for ICE Cotton No. 2 (CT), which is 50% of the proposed Federal non-spot month position limit level. However, the Commission is adopting the proposed all-months772 85 FR 11637 (Request for Comment #26). at 2, 8; LDC at 2; Olam at 2; Ecom at 1; ACA at 2; Canale Cotton at 2; Choice at 2; Jess Smith at 2; East Cotton at 2; Memtex at 2; NCC at 1–2; Southern Cotton at 2–3; Texas Cotton at 2; Toyo Cotton Co. at 2; WCSA at 2; and Omnicotton at 2. 773 ACSA E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.012</GPH> BILLING CODE 6351–01–C 3335 3336 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 combined position limit level of 11,900 contracts, which is based on the modified 10/2.5% formula. This change is discussed further below. (4) The Final Rule’s Federal Non-Spot Month Position Limits Achieve the Four Statutory Objectives in CEA Section 4a(a)(3)(B) As noted above, in the Final Rule, the Commission is not reducing Federal non-spot month position limit levels for any of the legacy agricultural contracts and will be raising them for six of the nine such contracts in accordance with the updated open interest data and the modified 10/2.5% formula.774 As a result, the Commission believes that the final Federal non-spot month position limit levels will generally improve liquidity for bona fide hedgers and, at the very least, not harm liquidity compared to the status quo. The Commission also believes that the final Federal non-spot month position limit levels remain low enough to diminish, eliminate, or prevent excessive speculation, and to deter and prevent market manipulation. This is because, as discussed above, by taking into account the amount of observed market activity through open interest, the modified 10/2.5% formula adopted herein helps ensure, among other things, that positions are not so large relative to observed market activity that they risk disrupting the market.775 This, in turn, also helps ensure that the price discovery function of the underlying market is not disrupted, because markets that are free from manipulative activity reflect fundamentals of supply and demand rather than artificial pressures. The Commission also notes that the 10/2.5% formula has functioned well, based on the Commission’s decades of experience administering the formula.776 The Commission reiterates that the modified 10/2.5% formula provided in this Final Rule is generally a continuation of the same approach the Commission has taken for decades. The increased levels adopted herein are primarily driven by utilizing updated open interest figures. With respect to the slight modification to the 10/2.5% formula, the Commission does not believe that the modification will negatively impact the formula’s effectiveness in ensuring that the 774 As noted previously, the Commission is not following the modified 10/2.5% formula for determining the single month position limit level for ICE Cotton No. 2 (CT). However, the Final Rule still increases that limit level compared to its existing limit level. 775 85 FR at 11630. 776 Id. at 11675. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Federal non-spot month position limit levels remain low enough to diminish, eliminate, or prevent excessive speculation, and to deter and prevent market manipulation. This is because the difference between utilizing the existing 10/2.5% formula and the modified 10/2.5% formula results in a modest increase in Federal non-spot month position limit level of 1,875 contracts, which is generally counterbalanced by the increased amount of open interest that is subject to the 2.5% rate.777 Additionally, the Commission has previously studied prior increases in Federal non-spot month position limit levels and concluded that the overall impact was modest, and that any changes in market performance were most likely attributable to factors other than changes in the Federal position limit rules.778 The Commission has since gained additional experience which supports that conclusion, including by monitoring amendments to position limit levels by exchanges. Further, given the significant increases in open interest and changes in market composition that have occurred since the 1990s, the Commission is comfortable that the Federal non-spot month position limit levels adopted herein will adequately address each of the policy objectives set forth in CEA section 4a(a)(3)(B), including preventing manipulation and excessive speculation. (5) Federal Non-Spot Month Position Limits as Ceilings The Commission reiterates that, under this position limits framework, the Federal non-spot month position limit 777 When the Commission adopted the existing Federal non-spot month position limit levels in 2011, the Federal non-spot month position limit levels for four of the nine legacy agricultural contracts were based on the existing 10/2.5% formula and utilized open interest data from 2009. These were CBOT Corn (C), CBOT Soybeans (S), CBOT Wheat (W), and CBOT Soybean Oil (SO). For those four contracts, the ratio of Federal non-spot month position limit level to open interest changes as follows: CBOT Corn (C) (the ratio increases from 0.026 to 0.027); CBOT Soybeans (S) (the ratio increases from 0.028 to 0.029); CBOT Wheat (W) (the ratio increases from 0.029 to 0.031); and CBOT Soybean Oil (SO) (the ratio increases from 0.030 to 0.032). The other five legacy agricultural contracts’ Federal non-spot month position limit levels deviated from the 10/2.5% formula. The ratio changes for these five contracts are as follows (based on 2009 open interest data): ICE Cotton No. 2 (CT) (the ratio increases from 0.025 to 0.037 for the all-months-combined and decreases from 0.025 to 0.018 for the single month); CBOT Soybean Meal (SM) (the ratio decreases from 0.038 to 0.032); CBOT Oats (O) (the ratio increases from 0.130 to 0.291); MGEX Hard Red Spring Wheat (MWE) (the ratio decreases from 0.323 to 0.162); and CBOT KC Hard Red Winter Wheat (KW) (the ratio decreases from 0.113 to 0.037). 778 64 FR at 24039. PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 levels serve as ceilings. Exchanges are required to establish their own non-spot month position limit levels with respect to the nine legacy agricultural contracts pursuant to final § 150.5(a)(1). A discussion of the implications of this approach is provided above in Section II.B.3.ii.a(2). iv. Comments and Discussion of Final Rule—Federal Non-Spot Month Position Limit Levels Most commenters did not express concerns with respect to the proposed Federal non-spot month position limit levels and the method by which the Commission determined those levels.779 However, some commenters raised concerns with respect to: (1) The Federal non-spot month position limit levels, generally; (2) the proposed nonspot month position limit level for ICE Cotton No. 2 (CT); and (3) the issue of partial parity for the three wheat core referenced futures contracts with respect to their Federal non-spot month position limit levels. The Commission will discuss each of these issues, the related comments, and the Commission’s corresponding determination in greater detail below. a. Federal Non-Spot Month Position Limit Levels, Generally (1) Comments—Federal Non-Spot Month Position Limit Levels, Generally Several commenters raised concerns about the proposed Federal non-spot month position limit levels generally. Two commenters, NGFA and LDC, advocated for lowering the Federal nonspot month position limit levels for the nine legacy agricultural contracts.780 NGFA stated that the proposed increases are ‘‘very large’’ and that the Commission should not view increasing non-spot month position limit levels as a ‘‘tradeoff’’ for eliminating the risk management exemption, but should instead establish limits that ‘‘will telescope down to relatively muchsmaller spot-month limits in an orderly fashion.’’ 781 LDC and several others 779 See, e.g., COPE at 2; CMC at 6; CCI at 2; and CHS at 2. 780 NGFA at 3 and LDC at 2. 781 NGFA at 3. NGFA also commented that, ‘‘NGFA still is not completely convinced that open interest is the best yardstick for this exercise,’’ because ‘‘[a]s volume and open interest grow, Federal non-spot limits expand correspondingly . . . which leads to yet higher volume and open interest. . .which again prompts expanded Federal non-spot limits . . . and so on.’’ However, NGFA did not provide any alternatives to utilizing open interest for determining Federal non-spot month position limit levels. As discussed previously, the Commission believes that open interest is an appropriate means of measuring market activity for a particular contract and that a formula based on open interest, such as the 10/2.5% formula: (1) E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 believed that adopting lower Federal single month position limit levels would ‘‘prevent speculative activity from concentrating in a single contract month and thus jeopardizing convergence.’’ 782 NGFA and LDC also offered the following alternatives to the proposed Federal non-spot month position limit levels: (1) Set singlemonth limits at some percentage of the all-months-combined limit, such as 50%; or (2) maintain existing singlemonth limits while adopting the proposed all-months-combined limits.783 NGFA also offered a third alternative, which was to adopt a phased-in approach to the higher nonspot month position limits, ‘‘together with very active monitoring of contract performance, though NGFA does not favor this option.’’ 784 On the other hand, ISDA requested higher Federal non-spot month position limit levels.785 ISDA stated that the proposed levels ‘‘for the legacy agricultural contracts are not high enough to provide [ ] significant liquidity to these markets based on the experience of market participants and anticipated growth in these markets.’’ 786 ISDA also appeared to suggest that higher levels could ‘‘help markets offset any liquidity that may be lost if the risk management exemption is not retained.’’ 787 Finally, ISDA also provided a table with suggested Federal non-spot month position limit levels that ranged from 18% to 191% higher than the proposed levels, except for CBOT Oats (O), which remained the same.788 Another commenter, MGEX, disagreed with the 10/2.5% formula, stating that ‘‘a formulaic approach is too Helps ensure that positions are not so large relative to observed market activity that they risk disrupting the market; (2) allows speculators to hold sufficient contracts to provide a healthy level of liquidity for hedgers; and (3) allows for increases in position limits and position sizes as markets expand and become more active. Furthermore, the Commission notes that under the Final Rule, Federal non-spot month position limit levels do not automatically increase with higher open interest levels. In order to make any amendments to the Federal position limit levels, the Commission is required to engage in notice-and-comment rulemaking. 782 LDC at 2. See also e.g., Moody Compress at 1; ACA at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; Mallory Alexander at 2; Walcot at 2; and White Gold at 1. 783 NGFA at 4 and LDC at 2. 784 NGFA at 4. IATP also provided a similar suggestion, by stating that, ‘‘it is prudent to phase in new non-spot month limit levels so that the Commission can acquire data and experience with how the new Federal non-spot limits are working for the commercial hedging of those legacy contracts.’’ IATP at 11. 785 ISDA at 7. 786 Id. 787 Id. 788 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 rigid and inflexible’’ and that the ‘‘Commission needs to be flexible in the future and should not preclude further limits or discussion.’’ 789 (2) Discussion of Final Rule—Federal Non-Spot Month Position Limit Levels, Generally With the exception of ICE Cotton No. 2 (CT), as discussed below, the Commission declines to modify the proposed Federal non-spot month position limit levels or the general methodology underlying the determination of those levels for the remaining legacy agricultural contracts, and also declines to adopt a phase-in for Federal non-spot month position limit levels. 3337 the modification is modest and is supported by the general increase in open interest among the legacy agricultural contracts and the change in the composition of market participants in those markets, as discussed above.794 (ii) Request To Generally Lower Single Month Position Limit Levels In response to comments generally requesting lower single month position limit levels, the Commission first acknowledges that it has set singlemonth position limit levels lower than all-months-combined position limit levels in the past. However, since the Commission set both single month and all-months-combined levels set at the same level in 2011, the Commission has (i) Request To Generally Lower Federal not observed any issues with respect to Non-Spot Month Position Limits the nine legacy agricultural contracts as a result of that change. In response to these comments, the Commission believes that the modified In response to commenters’ concern 10/2.5% formula is generally an about possible convergence issues from appropriate way to calculate Federal setting the single-month and all-monthsnon-spot month position limit levels. combined levels set at the same level, The Commission also believes that the the Commission notes that positions in final non-spot month position limit the non-spot months have minimal levels are supported by updated open impact on convergence. This is because interest data, some of which have convergence occurs in the spot month, increased significantly since 2009. and, specifically, at the expiration of the The Commission continues to believe physically-settled spot month that a formula based on a percentage of contract.795 open interest, such as the 10/2.5% Furthermore, the Commission notes formula, is appropriate for establishing that an important benefit of having a limit levels outside of the spot month, single Federal non-spot month limit as discussed above and in the 2020 NPRM.790 The Commission believes that level for both the single-month and allmonths-combined is the ability for limiting positions to a percentage of market participants to enter into open interest, such as through the 10/ calendar spread transactions that would 2.5% formula: (1) Helps ensure that normally be constrained by the lower positions are not so large relative to single month position limit level. observed market activity that they risk However, the Commission notes that, in disrupting the market; (2) allows response to comments received, it is speculators to hold sufficient contracts adopting a lower Federal single month to provide a healthy level of liquidity for bona fide hedgers; and (3) allows for position limit level for ICE Cotton No. increases in position limits and position 2 (CT), the reasons for which is discussed below. sizes as markets expand and become 791 more active. Furthermore, the 10/ factors that counsel in favor of deviating from the 2.5% formula has functioned well for 10/2.5% formula. Federal non-spot month position limit 794 The modification results in a modest increase purposes for many years.792 Also, the in the Federal non-spot month position limit level of 1,875 contracts over what the limit level would Commission does not believe that the be if the inflection point for the 10/2.5% formula slight modification to the 10/2.5% was set at 25,000 contracts, assuming that the formula materially impacts the market for the core referenced futures contract has formula’s efficacy in determining an an open interest of at least 50,000 contracts. 795 The Commission, however, recognizes that it appropriate Federal non-spot month is possible that unusually large positions in position limit level as well,793 because 789 MGEX at 3. 790 See 85 FR at 11630–11633. 791 Id. 792 See id. at 11675. 793 The Commission notes, as discussed elsewhere in this Final Rule, that CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), CBOT Oats (O), and ICE Cotton No. 2 (CT) (single month limit only) are subject to unique circumstances or other PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 contracts outside of the spot month could distort the natural spread relationship between contract months. For example, if traders hold unusually large positions outside of the spot month, and if those traders exit those positions immediately before the spot month, that could cause congestion and also affect the pricing of the spot month contract. While such congestion or price distortion cannot be ruled out, exchange-set position limits and position accountability function to mitigate against such risks. E:\FR\FM\14JAR2.SGM 14JAR2 3338 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 (iii) Request To Increase Federal NonSpot Month Position Limit Levels In response to ISDA’s comment that the proposed Federal non-spot month position limit levels should be higher to compensate for the proposed loss of risk management exemptions for swap dealers, the Commission believes that any potential impact on existing risk management exemption holders may be mitigated by the finalized pass-through swap provision, to the extent swap dealers can utilize it.796 The Commission believes that this is a preferable approach to either a hypothetical alternative formula or ISDA’s own suggested Federal non-spot month position limit levels that would allow higher limit levels beyond those adopted in this Final Rule for all market participants. This is because, while the pass-through swap provision adopted herein is narrowly-tailored to enable liquidity providers to continue providing liquidity to bona fide hedgers, higher limit levels beyond those adopted in this Final Rule for all market participants could also permit excessive speculation and increase the possibility of market manipulation or harm to the underlying price discovery function.797 (iv) Concern With the Commission’s ‘‘Formulaic’’ Approach In response to MGEX’s concern that the Commission’s approach is too formulaic and rigid, the Commission notes that the Federal non-spot month position limit levels will operate as ceilings within a broader Federal position limits framework in which exchanges, including MGEX, are always free to determine their own exchangeset position limit levels and position accountability levels below the Federal position limit levels as they see fit based on market conditions. In fact, by having the Federal position limit levels operate as ceilings, this framework will enable exchanges to respond to market conditions through a greater range of acceptable position limit levels than if the Federal position limit levels did not operate as ceilings. In addition, as described further below, the Commission has deviated from the 10/2.5% formula with respect to CBOT Oats (O), ICE Cotton No. 2 (CT) (single month only), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE) based on the unique circumstances concerning those core referenced futures contracts. Furthermore, the Commission also notes 796 See 85 FR at 11676. See also Section II.A.1.x. (Pass-Through Swap and Pass-Through Swap Offset Provisions). 797 See 85 FR at 11676. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 that this Final Rule does not ‘‘preclude further limits or discussion.’’ 798 The Commission is also continually monitoring market conditions to evaluate whether different Federal position limit levels may be warranted. (v) Request To Implement a Phase-In Period The Commission declines to adopt a formal phase-in period for Federal nonspot month position limits, in which the Commission gradually implements the Federal non-spot month position limit levels over a period of time. The Commission believes that the markets will operate in an orderly fashion with the Federal position limit levels adopted under this Final Rule, because the final Federal non-spot month position limit levels are supported by increased open interest and are generally set pursuant to the modified 10/2.5% formula, which, as discussed above, achieves the policy objectives set forth in CEA section 4a(a)(3)(B).799 However, as noted in the Federal spot month position limit level phase-in discussion above, as a practical matter, the Commission emphasizes that the operative non-spot month position limit levels for a market participant trading in exchange-listed referenced contracts is not the Federal non-spot month position limit levels, but the exchange-set nonspot month position limit levels. As a result, despite the changes in the Federal non-spot month position limit levels in this Final Rule, there will be no practical impact on market participants trading in exchange-listed referenced contracts unless and until an exchange affirmatively modifies its exchange-set non-spot month position limit levels through a rule submission to the Commission pursuant to part 40 of the Commission’s regulations.800 c. ICE Cotton No. 2 (CT) Federal NonSpot Month Position Limit Level (1) Summary of the 2020 NPRM and Additional Background Information— ICE Cotton No. 2 (CT) Federal Non-Spot Month Position Limit Level In the 2020 NPRM, the Commission proposed to increase both the Federal single month and all-months-combined position limit levels for ICE Cotton No. 2 (CT) from the existing Federal level of 5,000 contracts to 11,900 contracts by applying the updated open interest data 798 MGEX at 3. phase-in is not necessary with respect to the Federal non-spot month position limit levels for CBOT Oats (O), KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), because the Federal non-spot month position limit levels will remain at the current levels. 800 17 CFR part 40. 799 A PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 into the proposed modified 10/2.5% formula. The Commission also solicited comments asking whether the Commission should consider lowering the Federal single month position limit level to a percentage of the Federal allmonths-combined position limit level for ICE Cotton No. 2 (CT), and if so, what percentage of the all-monthscombined position limit level should be used.801 (2) Comments—ICE Cotton No. 2 (CT) Federal Non-Spot Month Position Limit Level In response to the 2020 NPRM, numerous commenters from the cotton industry, including growers and merchants, requested that the Commission ‘‘maintain its single-month limit, particularly for smaller markets like cotton,’’ 802 or, in the alternative, set a Federal single month position limit level of 50% of the all-monthscombined limit (i.e., 5,950 contracts).803 In support, commenters also noted that the proposed non-spot month position limit level for ICE Cotton No. 2 (CT) was ‘‘not in line with historical limits.’’ 804 One commenter also stated, ‘‘Experience with modern trading has shown a propensity by speculators to focus too heavily on the nearest futures contract, leaving later months with poor liquidity from time to time.’’ 805 In contrast, ISDA argued that the proposed Federal nonspot month position limit levels, including that for ICE Cotton No. 2 (CT), were too low and asserted that the level for ICE Cotton No. 2 (CT) should be increased to 24,000 contracts to make up for the elimination of the risk management exemption.806 (3) Discussion of Final Rule—ICE Cotton No. 2 (CT) Federal Non-Spot Month Position Limit Level The Commission is adopting the proposed all-months-combined position limit level of 11,900 contracts, but is 801 85 FR at 11637 (Request for Comment #26). e.g., East Cotton at 2; Omnicotton at 2; Choice at 2; Canale Cotton at 2; Ecom at 1; Olam at 2; Texas Cotton at 2; Toyo Cotton at 2; Walcot Trading at 2; White Gold at 2; and NCTO at 2. See also ACA at 2; Gerald Marshall at 1–2; Jess Smith at 2; LDC at 2; Mallory Alexander at 2; McMeekin at 2; MemTex at 2; Moody Compress at 2; Parkdale at 2; Southern Cotton at 2–3; SW Ag at 2; and ACSA at 8. 803 ACSA at 8; LDC at 2; and Olam at 2. The following commenters also supported ACSA’s comment letter: ACA at 2; Ecom at 1; East Cotton at 2; Jess Smith at 2; IMC at 2; Mallory Alexander at 2; McMeekin at 2; Memtex at 2; Moody Compress at 2; Omnicotton at 2; Canale Cotton at 2; SW Ag at 2; Texas Cotton at 2; Toyo Cotton at 2; Walcot at 2; and White Gold at 2. 804 AMCOT at 1–2 and Parkdale at 2. 805 Gerald Marshall at 2. 806 ISDA at 7 (providing specific alternative levels). 802 See E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 adopting a modified single month position limit level of 5,950 contracts for ICE Cotton No. 2 (CT). The Commission is adopting the proposed 11,900 contract Federal allmonths-combined position limit level for ICE Cotton No. 2 (CT) because, as discussed earlier, the Commission believes that a formula based on a percentage of open interest—specifically the modified 10/2.5% formula—is an appropriate tool for establishing limits outside of the spot month. However, the Commission does not believe that it is appropriate to raise either the Federal single month or all-months-combined position limit level for ICE Cotton No. 2 (CT) to 24,000 contracts as suggested by ISDA, because the open interest levels do not support such a drastic increase and there is no other reason to deviate so significantly upward from the modified 10/2.5% formula.807 On the other hand, the Commission believes that it is appropriate to adopt a lower Federal single month position limit level at this time. As noted in the Commission’s request for comment in the 2020 NPRM, the Commission believed that there could be concerns with respect to the Federal single month position limit level for ICE Cotton No. 2 (CT), especially from the commercial end-users of the core referenced futures contract.808 In response to the Commission’s request for comment, the Commission received approximately 25 comment letters from the cotton industry (out of approximately 75 comment letters on the 2020 NPRM from all commenters) unanimously requesting a lower Federal single month position limit level compared to the Federal all-months-combined position limit level for ICE Cotton No. 2 (CT). The Commission believes that these unanimous comments from the commercial end-users of the ICE Cotton No. 2 (CT) core referenced futures contract are informative, because they suggest that lowering the 2020 NPRM’s Federal single month position limit level from the proposed 11,900 contract level to either the existing 5,000 contract level or a 5,950 contract level (which is 50% of the all-monthscombined position limit level of 11,900 807 The Commission acknowledges ISDA’s comment that the proposed Federal non-spot month position limit levels should be higher to compensate for the proposed loss of risk management exemptions for swap dealers. However, as noted previously, the Commission believes that any potential impact on existing risk management exemption holders may be mitigated by the pass-through swap provision adopted herein, and that this is a preferable and more tailored approach than increasing the non-spot month position limit levels for all market participants. 808 85 FR 11637 (Request for Comment #26). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 contracts) may not have a material detrimental effect on liquidity for bona fide hedgers in the market. All things being equal, a lower single month position limit level will better protect the markets against manipulation and price distortion,809 but at the expense of reduced liquidity for bona fide hedgers. However, in this instance, in light of the comments received, the Commission believes that it could improve protections against manipulation and price distortion without materially impacting liquidity for bona fide hedgers by adopting a lower Federal single month position limit level of either 5,000 contracts or 5,950 contracts. Of these two suggested levels, the Commission believes that it is more appropriate to adopt the 5,950 contract level over the existing 5,000 contract level to account, in part, for the increase in open interest levels since the single month position limit level of 5,000 contracts was adopted in 2011.810 d. Wheat Core Referenced Futures Contracts’ Federal Non-Spot Month Position Limit Levels (1) Summary of the 2020 NPRM and Additional Background Information— Wheat Federal Non-Spot Month Position Limit Levels There are three wheat contracts: CBOT Wheat (W), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE). Currently, the Federal non-spot month position limit levels for all three are set at 12,000 contracts. This has been referred to as ‘‘full wheat parity.’’ In the 2020 NPRM, the Commission proposed ‘‘partial wheat parity’’ by increasing the Federal non-spot month position limit level for CBOT Wheat (W) from 12,000 contracts to 19,300 based on the application of the modified 10/ 2.5% formula and updated open interest levels, while maintaining the existing levels of 12,000 contracts for CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE). The 12,000 contract Federal non-spot month position limit levels for CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) are above the levels that would be calculated based on the application of the modified 10/2.5% formula and recent open interest levels, which would be 11,900 contracts for CBOT KC HRW Wheat (KW) and 5,700 contracts for MGEX HRS Wheat (MWE). 809 Specifically, the Commission is referring to the price distortion that could be caused by a speculative trader who, after amassing a large position during the non-spot month, exits the entire position immediately before the spot month. 810 The maximum open interest for ICE Cotton No. 2 (CT) was 197,191 contracts in 2009, 161,582 contracts in 2011, and 324,952 contracts in 2019. PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 3339 The Commission proposed partial wheat parity between CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) at 12,000 contracts for two reasons. First, both contracts provide exposure to hard red wheats. As a result, the Commission believed that drastically decreasing the Federal nonspot month position limit level for MGEX HRS Wheat (MWE) vis-a`-vis CBOT KC HRW Wheat (KW) by following the 10/2.5% formula could impose liquidity costs on the MGEX HRS Wheat (MWE) market and harm bona fide hedgers, which could further harm liquidity for bona fide hedgers in the related CBOT KC HRW Wheat (KW) market.811 Second, the existing Federal non-spot month position limit levels for CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) appear to have functioned well, and the Commission saw no market-based reason to reduce those levels based on recent open interest data.812 (2) Comments—Wheat Federal NonSpot Month Position Limit Levels The Commission received several comments concerning the proposed Federal non-spot month position limit levels with respect to the three wheat core referenced futures contracts. One commenter, MGEX, stated that it ‘‘supports maintaining partial wheat parity by keeping the existing non-spot month limits for [MGEX HRS Wheat (MWE)] and CBOT KC Hard Red Wheat at 12,000.’’ 813 Another commenter agreed ‘‘with the increase in the nonspot month for CBOT Wheat (W).’’ 814 However, other commenters requested that the Federal non-spot month position limit level for CBOT KC HRW Wheat (KW) be at least the same as CBOT Wheat (W) (i.e., raise it to 19,300 contracts).815 In support, commenters contended that the ‘‘physical market for the wheat crop that is deliverable under [CBOT KC HRW Wheat (KW)] is much larger than the wheat crop that is deliverable under [CBOT Wheat (W)].’’ 816 Also, commenters stated that the ‘‘characteristics of the physical wheat that is deliverable under [CBOT KC HRW Wheat (KW)] is more similar to the global wheat crop than the wheat that is deliverable under [CBOT Wheat 811 85 FR at 11633. at 11632. 813 MGEX at 3. 814 MFA/AIMA at 12. 815 SIFMA AMG at 3–4; ISDA at 12; PIMCO at 4– 5; MFA/AIMA at 12; and Citadel at 6–7. 816 PIMCO at 4. See also ISDA at 12 and SIFMA AMG at 3–4. 812 Id. E:\FR\FM\14JAR2.SGM 14JAR2 3340 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (W)].’’ 817 As a result, commenters stated that, ‘‘[CBOT KC HRW Wheat (KW)] may be important for hedging for many market participants.’’ 818 Similarly, MFA/AIMA stated that ‘‘open interest data and supply data published by the USDA for hard red winter wheat, which is the underlying commodity for [CBOT KC HRW Wheat (KW)], would also justify an increase in the [CBOT KC HRW Wheat (KW)] non-spot month limit.’’ 819 khammond on DSKJM1Z7X2PROD with RULES2 (3) Discussion of Final Rule—Wheat Federal Non-Spot Month Position Limit Levels The Commission declines to raise the proposed 12,000 contract Federal nonspot month position limit level for CBOT KC HRW Wheat (KW) to match the final Federal non-spot month position limit level of CBOT Wheat (W) at 19,300 contracts. First, as noted earlier, the Federal non-spot month position limit level for CBOT KC HRW Wheat (KW) is already set higher, albeit slightly, than the limit level calculated under the updated open interest figure and 10/2.5% formula, which, as discussed previously, is a formula that the Commission believes is generally proper for determining Federal non-spot month position limit levels.820 Raising the Federal non-spot month position limit level for CBOT KC HRW Wheat (KW) to 19,300 contracts would be a drastic increase over the existing level that is not supported by the 10/2.5% formula or by the Commission’s observations of how that market has functioned under the 12,000 contract Federal non-spot month position limit level. As a result, the Commission is concerned that this could result in excessive speculation and increase the possibility of market manipulation or harm to the underlying price discovery function with respect to that contract. Second, the Commission believes that maintaining partial wheat parity between CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) is appropriate because the commodities underlying both of those wheat core referenced futures contracts are hard red wheats that, together, represent the majority of the wheat grown in both the United States and Canada, which results in those markets being closely intertwined.821 This is in contrast with CBOT Wheat (W), which typically sees deliveries of soft white wheat varieties (even though it allows for delivery of hard red wheat).822 Finally, the Commission reiterates that bona fide hedging positions will continue to be allowed to exceed the Federal position limit levels. Intermarket spreading is also permitted as well, which should address any concerns over the potential for loss of liquidity in the spread trades among the three wheat core referenced futures contracts during the non-spot months.823 5. Subsequent Spot and Non-Spot Month Limit Levels i. Summary of the 2020 NPRM— Subsequent Spot and Non-Spot Month Limit Levels Unlike in previous iterations of the position limit rules, the 2020 NPRM did not require the Commission to periodically review and revise EDS figures or adjust the Federal spot month position limit levels.824 Instead, under proposed § 150.2(f), an exchange listing a core referenced futures contract would be required to provide EDS figures only if requested by the Commission. Proposed § 150.2(j) delegated the authority to make such requests to the Director of the Division of Market Oversight.825 The 2020 NPRM also allowed exchanges to voluntarily submit EDS figures to the Commission at any time, and encouraged them to do so.826 When submitting EDS figures, exchanges would be required to provide a description of the methodology used to derive the EDS figures, as well as all data and data sources used to calculate the estimate, so that the Commission could verify that the EDS figures are reasonable.827 Likewise, the 2020 NPRM also did not require the Commission to periodically review the open interest data and update the non-spot month position limit levels for the legacy agricultural core referenced futures contracts, unlike in previous iterations of the position limit rules.828 ii. Summary of the Commission Determination—Subsequent Spot and Non-Spot Month Limit Levels The Commission is adopting § 150.2(f) as proposed and will not include a formal mechanism to periodically renew or revise EDS figures or otherwise 822 Id. 817 SIFMA AMG at 3. See also ISDA at 12 and PIMCO at 4. 818 SIFMA AMG at 4. See also ISDA at 12. 819 MFA/AIMA at 12. See also Citadel at 6–7. 820 85 FR at 11630. 821 Id. at 11632. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 823 Id. at 11633. e.g., 81 FR at 96769–96771. 825 85 FR at 11633. 826 Id. at 11633–11634. 827 Id. at 11634. 828 See e.g., 81 FR at 96769, 96771–96773. 824 See PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 review and update the Federal spot month or non-spot month position limit levels. The Commission is also adopting the delegation provision in § 150.2(j) as proposed.829 iii. Comments—Subsequent Spot and Non-Spot Month Limit Levels The Commission received several comments concerning updates to the Federal position limit levels, with commenters requesting that the Commission periodically review the levels and revise them if appropriate.830 One commenter was concerned that the Federal position limit levels could become too high over time,831 while the rest were concerned that the levels could become too low.832 In addition, CME Group also suggested that exchanges should update the EDS figures ‘‘every two years [and] . . . DCMs should be provided the opportunity to submit data voluntarily to the Commission on a more frequent basis.’’ 833 iv. Discussion of Final Rule— Subsequent Spot and Non-Spot Month Limit Levels The Commission declines to implement a periodic, predetermined schedule to review Federal position limits because the Commission believes that it is more appropriate to retain flexibility for both the exchanges and the Commission itself in updating the Federal position limit levels. Reviewing and adjusting the Federal spot month position limit levels requires the Commission to review, among other things, updated EDS figures for the core referenced futures contracts. Having worked closely with 829 The Commission did not receive any comments on proposed § 150.2(j). 830 MFA/AIMA at 5 (‘‘the Commission should direct exchanges to periodically monitor the proposed new position limit levels’’); PIMCO at 6 (‘‘we urge the CFTC to include . . . a mandatory requirement to regularly (and at least annually) review and update limits as markets grow and change’’); SIFMA AMG at 10 (the Final Rule should require ‘‘that the Commission regularly consult with exchanges and review and adjust position limits when it is necessary to do so based on relevant market factors’’); ISDA at 10 (‘‘the Commission must regularly convene and consult with exchanges on deliverable supply and, if appropriate, propose notice and comment rulemaking to adjust limit levels’’); and IATP at 16– 17 (the Commission should engage in ‘‘an annual review of position limit levels to give [commercial hedgers] legal certainty over that period’’ and also retain ‘‘the authority to revise position limits . . . if data monitoring and analysis show that those annual limit levels are failing to prevent excessive speculation and/or various forms of market manipulation’’). 831 IATP at 16–17. 832 MFA/AIMA at 5–6; PIMCO at 6; SIFMA AMG at 10; and ISDA at 10. 833 CME Group at 5. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations exchanges to analyze and independently verify the methodology underlying the EDS figures and the EDS figures themselves, the Commission recognizes that estimating deliverable supply can be a time and resource consuming process for both the exchanges and the Commission.834 Furthermore, periodic, predetermined review intervals may not always align with market changes or other events resulting in material changes to deliverable supply that would warrant adjusting Federal spot month position limit levels. As a result, the Commission believes that it would be more efficient, timely, and effective to review the EDS figure and the Federal position limit level for a core referenced futures contract if warranted by market conditions, including changes in the underlying cash market, which the Commission and exchanges continually monitor. Reviewing and adjusting the Federal non-spot month position limit levels requires the Commission to review, among other things, open interest data for the relevant core referenced futures contracts. Unlike EDS figures, open interest is easily obtainable because it is regularly updated by the exchanges. As a result, the output of the 10/2.5% formula can be quickly calculated. However, the Commission does not believe that it is appropriate to update the Federal non-spot month position limit levels separately from the Federal spot month position limit levels. The Commission has historically reviewed all of the Federal position limit levels— spot month and non-spot month— together for a particular contract because all months of a particular contract are part of the same market. As a result, updating both the spot and non-spot month position limits levels at the same time provides a holistic and integrated position limit regime for each commodity contract because the limits are based upon updated data covering the same or overlapping time period. Final § 150.2(f) provides flexibility and authority for the Commission to be able to request an updated EDS figure, along with the methodology and underlying data, for a core referenced futures contract whenever market conditions suggest that a change in Federal position limit levels may be warranted. The exchanges are also encouraged to submit such information at any time as well under final § 150.2(f).835 Once the Commission 834 85 FR at 11633. providing an updated EDS figure, exchanges should consult the guidance concerning estimating deliverable supply set forth in section (b)(1)(i) (‘‘Estimating Deliverable Supplies’’) of 17 CFR part 38, Appendix C. 835 In VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 receives the updated EDS figures, then the Commission can undertake the appropriate review and analysis of the EDS figures and any additional information, such as exchange recommendations, to adjust the Federal spot month position limit levels, if necessary, through rulemaking. At that time, the Commission would also review the open interest data for the core referenced futures contract and undertake the necessary analysis to ensure that the Federal non-spot month position limit levels are set at appropriate levels as well. Finally, the Commission notes that, under this position limits framework, the exchanges always have the freedom to set their exchange-set position limit levels lower than the Federal position limit levels. Adjusting the Federal position limit levels necessarily requires the Commission to engage in rulemaking with notice-and-comment, which can take a significant amount of time.836 Thus, an exchange may adjust its exchange-set position limit levels lower in response to market conditions, while waiting for the Commission to adjust the Federal position limit levels.837 6. Relevant Contract Month Proposed § 150.2(c) clarified that the spot month and single month for any given referenced contract is determined by the spot month and single month of the core referenced futures contract to which that referenced contract is linked. The Commission did not receive any comments and is adopting as proposed. Final § 150.2(c) requires that referenced contracts be linked to the core referenced futures contract in order to be netted for position limit purposes. For example, for the NYMEX NY Harbor ULSD Heating Oil (HO) core referenced futures contract, the spot month period starts at the close of trading three business days prior to the last trading day of the contract. The spot month period for the NYMEX NY Harbor ULSD Financial (MPX) futures referenced contract would thus start at the same time—the close of trading three business days prior to the last 836 Market participants may petition the Commission to adjust Federal position limit levels, subject to the Commission’s notice-and-comment rulemaking, under existing § 13.1, which provides that any ‘‘person may file a petition with . . . the Commission . . . for the issuance, amendment or repeal of a rule of general application.’’ 837 However, an exchange cannot set its exchangeset position limit levels above the Federal position limit levels, even if market conditions may warrant raising the levels. Thus, in order to allow market participants to hold positions higher than the Federal position limit levels (absent an exemption), the Commission would need to raise the Federal position limit levels through rulemaking. PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 3341 trading day of the core referenced futures contract. 7. Limits on ‘‘Pre-Existing Positions’’ i. Summary of the 2020 NPRM—PreExisting Positions Under proposed § 150.2(g)(1) Federal spot month position limits applied to ‘‘pre-existing positions, other than preenactment swaps and transition period swaps,’’ each defined in proposed § 150.1. Accordingly, Federal spot month position limits would not apply to any pre-existing positions in economically equivalent swaps. The 2020 NPRM defined ‘‘pre-existing positions’’ in proposed § 150.1 as positions established in good faith prior to the effective date of a final Federal position limits rulemaking. In contrast, proposed § 150.2(g)(2) provided that Federal non-spot month limits would not apply to pre-existing positions, including pre-enactment swaps and transition period swaps, if acquired in good faith prior to the effective date of such limit. However, other than pre-enactment swaps and transition period swaps, any preexisting positions held outside the spot month would be attributed to such person if the person’s position is increased after the effective date of a final Federal position limits rulemaking. The 2020 NPRM’s disparate treatment of pre-existing positions during and outside the spot month was predicated on the concern that failing to apply spot month limits to such pre-existing positions could result in a large, preexisting position either intentionally or unintentionally causing a disruption to the price discovery function of the core referenced futures contract as positions are rolled into the spot month. In contrast, outside the spot month, large, pre-existing positions may have a relatively less disruptive effect given that physical delivery occurs only during the spot month. ii. Summary of the Commission Determination—Pre-Existing Positions The Commission is adopting § 150.2(g)(1) as proposed, and is adopting § 150.2(g)(2) with the following two changes: First, the Commission is amending proposed § 150.2(g)(2) to provide that non-spot month limits shall apply to pre-existing positions, other than preenactment swaps and transition period swaps. As noted above, proposed § 150.2(g)(2) in the 2020 NPRM exempted pre-existing positions from the Final Rule’s Federal non-spot month position limits. However, as discussed below, the nine legacy agricultural E:\FR\FM\14JAR2.SGM 14JAR2 3342 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 contracts currently are subject to the Commission’s existing non-spot month position limits, and the Commission did not intend to exclude existing non-spot month positions in the nine legacy agricultural contracts that would otherwise qualify as ‘‘pre-existing positions’’ under the Final Rule. As discussed, the other 16 non-legacy core referenced futures contracts that are subject to Federal position limits for the first time under the Final Rule are not subject to Federal non-spot month position limits and therefore proposed § 150.2(g)(2) would not have applied to these contracts in any event. The Commission based the language in proposed § 150.2(g) on similar language found in the 2016 Reproposal, which imposed Federal non-spot month position limits on all of the proposed core referenced futures contracts (as opposed to only on the nine legacy agricultural contracts under the Final Rule). In the context of the 2016 Reproposal, the Commission believed it made sense to exempt pre-existing positions in non-spot months in core referenced futures contracts that would have been subject to Federal position limits for the first time under the 2016 Reproposal. However, as noted above, such core referenced futures contracts that are subject to Federal position limits for the first time under the Final Rule are not subject to Federal non-spot month position limits. Accordingly, the Commission is modifying § 150.2(g) so that pre-existing positions in the nine legacy agricultural contracts remain subject to Federal non-spot month position limits under the Final Rule, as the Commission had originally intended. Second, since the Commission is clarifying that pre-existing positions in the nine legacy agricultural contracts, other than pre-enactment swaps and transition period swaps, are subject to Federal non-spot month position limits under the Final Rule, the language in proposed § 150.2(g)(2) that would attribute to a person any increase in their non-spot month positions after the effective date of the Final Rule’s nonspot month limits is no longer necessary. The Commission is therefore removing this language from final § 150.2(g)(2). iii. Comments—Pre-Existing Positions Commenters generally supported proposed § 150.2(g), although several commenters asked for additional clarity.838 MGEX and FIA both argued that the provision could be simplified by creating only two categories: ‘‘pre838 MGEX at 4; FIA at 9; ISDA at 8. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 existing swaps’’ (exempt from all spot/ non-spot Federal position limits) and ‘‘pre-existing futures’’ (exempt from all non-spot Federal position limits, provided there is no increase in such non-spot positions), stating that relying upon the proposed relief as structured will be ‘‘operationally challenging’’ for market participants.839 MGEX and FIA also requested that the Commission clarify that a market participant is not required to rely upon the exemption so that its pre-existing positions could be netted, as applicable, with the market participant’s other referenced contracts.840 ISDA encouraged the Commission to provide that the Final Rule’s new Federal position limits do not apply to any pre-existing positions, whether in futures contracts or swaps.841 Finally, CHS encouraged the Commission to adopt a ‘‘safe harbor’’ provision where participants could demonstrate a ‘‘good-faith’’ effort at compliance so ‘‘inadvertent’’ violations would not trigger possible enforcement action.842 iv. Discussion of Final Rule—PreExisting Positions As stated in the 2020 NPRM, the Commission believes that the absence of spot-month limits on pre-existing positions, other than pre-existing swaps and transition period swaps, could render the Federal spot month position limits ineffective. Failure to apply spot month limits to such pre-existing positions, particularly for the 16 commodities that are not currently subject to Federal position limits and where market participants may have pre-existing positions in excess of the spot-month position limits adopted herein, could result in a large, preexisting position either intentionally or unintentionally causing a disruption to the price discovery function of the core referenced futures contract as positions are rolled into the spot month.843 The Commission is particularly concerned about protecting the spot month in physically delivered futures contracts from price distortions or manipulation that would disrupt the hedging and price discovery utility of the futures contract.844 With respect to non-spot month position limits, only the nine legacy agricultural contracts are currently subject to such limits under the existing Federal position limits framework and 839 FIA at 8–9; MGEX at 4. at 3–4; FIA at 8–9, 18–19. 841 ISDA at 2, 8. 842 CHS at 5. 843 85 FR at 11634. 844 Id. 840 MGEX PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 will continue to be subject to Federal non-spot month position limits under the Final Rule. The Commission did not intend in the 2020 NPRM to exclude such pre-existing positions in the nine legacy agricultural contracts from nonspot month limits. Accordingly, for the Final Rule the Commission is modifying final § 150.2(g)(2) to make clear that Federal non-spot month position limits do apply to these pre-existing positions. However, as noted above, the 16 nonlegacy core referenced futures contracts that are subject to Federal position limits for the first time under this Final Rule are not subject to Federal non-spot month position limits and so are not affected by the Commission’s change in final § 150.2(g)(2). The Commission agrees with MGEX’s and FIA’s comments that pre-existing positions can be netted. The Commission confirms that market participants may continue to net their pre-existing positions, as applicable, with market participants’ post-effective date referenced contract positions. In the 2020 NPRM, the Commission made explicit in proposed § 150.3(a)(5) that market participants would be permitted to net pre-existing swap positions with post-effective date referenced contract positions (to the extent such preexisting swap positions qualify as ‘‘economically equivalent swaps’’ under the Final Rule).845 The Commission adopted this clarification in final § 150.3(a)(5) for the avoidance of doubt. The Commission believes this explicit clarification with respect to swaps is helpful to market participants since swaps are subject to Federal position limits for the first time under this Final Rule and since it may not otherwise be clear whether a market participant could net a pre-enactment swap or transition period swap given that such pre-enactment and transition period swaps are exempt from Federal position limits under final § 150.3(a)(5). However, the Commission similarly intended that market participants also would be able to net pre-existing futures contracts and option on futures contracts against post-effective date positions. The Commission did not feel such a clarification was necessary since futures contracts and options thereon have been subject to the existing Federal position limits framework. Accordingly, for the avoidance of doubt, the Commission is affirming that market participants may continue to net preexisting futures contracts and option on 845 Pre-existing swap positions (i.e., preenactment swaps and transition period swaps) would otherwise be exempt from Federal position limits. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations futures contracts with post-effective date positions in referenced contracts. In response to ISDA’s request for clarification, the Commission notes that Federal non-spot month position limits will apply to pre-existing positions in the nine legacy agricultural contracts (but not to the 16 non-legacy core referenced futures contracts). However, for the reasons articulated above, Federal position limits will apply during the spot month for futures contracts and options on futures contracts for all 25 core referenced futures contracts, other than preenactment swaps and transition period swaps. While the Commission is not adopting a ‘‘safe harbor’’ provision, it is providing a transition period, as requested by CHS,846 so that market participants will have until January 1, 2022 (or January 1, 2023 for economically-equivalent swaps or positions relying on the riskmanagement exemption) to comply with the Final Rule. The Commission believes this will provide sufficient time for market participants to implement and test new systems and processes that have been established to comply with the Final Rule. 8. Positions on Foreign Boards of Trade i. Background CEA section 4a(a)(6)(B) directs the Commission to establish limits on the aggregate number of positions in contracts based upon the same underlying commodity that may be held by any person across contracts traded on a foreign board of trade (‘‘FBOT’’) with respect to a contract that settles against any price of at least one contract listed for trading on a registered entity.847 khammond on DSKJM1Z7X2PROD with RULES2 ii. Summary of the 2020 NPRM— Foreign Boards of Trade Proposed § 150.2(h) applied the proposed Federal position limits to a market participant’s aggregate positions in referenced contracts executed on a DCM or SEF and on, or pursuant to the rules of, an FBOT, provided that (1) the referenced contracts settle against a price of a contract listed for trading on a DCM or SEF and (2) the FBOT makes such contract available in the United States through ‘‘direct access.’’ 848 In other words, a market participant’s 846 CHS at 5. U.S.C. 6a(a)(6)(B). The CEA’s definition of ‘‘registered entity’’ includes DCMs and SEFs. 7 U.S.C. 1a(40). 848 Commission regulation § 48.2(c) defines ‘‘direct access’’ to mean an explicit grant of authority by an FBOT to an identified member or other participant located in the United States to enter trades directly into the trade matching system of the FBOT. 17 CFR 48.2(c). 847 7 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 positions in referenced contracts listed on a DCM or SEF and on an FBOT registered to provide direct access would collectively have to stay below the Federal position limit for the relevant core referenced futures contract. iii. Summary of the Commission Determination—Foreign Boards of Trade The Commission is adopting § 150.2(h) as proposed. iv. Comments—Foreign Boards of Trade The Commission received comments from CEWG, Chevron, and Suncor regarding proposed § 150.2(h) and its possible effects with respect to certain contracts listed on ICE Futures Europe (‘‘IFEU’’) that are price-linked to the energy core referenced futures contracts.849 Each of the commenters expressed concern that the extension of the proposed Federal position limits regime to referenced contracts listed for trading on IFEU could have unintended consequences, such as: (1) Requiring U.S.-based market participants to comply with potentially conflicting requirements of multiple regulators and position limits regimes; and (2) incentivizing foreign regulators to extend their reach into the Commission’s jurisdictional markets.850 Chevron and Suncor requested that the Commission reconsider what they perceive to be the potential regulatory conflicts and burdens that could be imposed on market participants who transact referenced contracts listed on IFEU, and adopt a policy of substituted compliance to minimize such conflicts.851 CEWG recommended that the Commission adopt an approach based on substituted compliance with respect to referenced contracts listed on FBOTs similar to that adopted for swaps under CEA section 2(i).852 v. Discussion of Final Rule—Foreign Boards of Trade As stated above, the Commission is adopting § 150.2(h) as proposed. As stated in the 2020 NPRM,853 CEA section 4a(a)(6)(B) requires the Commission to establish limits on the aggregate number or amount of positions in contracts based upon the same underlying commodity that may be held by any person across certain contracts traded on an FBOT with linkages to a contract traded on a registered entity. Final § 150.2(h) simply 849 CEWG at 28–29; Chevron at 15–16; Suncor at 14–15. 850 CEWG at 28; Chevron at 16; Suncor at 15. 851 Chevron at 16; Suncor at 15. 852 CEWG at 29. 853 85 FR at 11634. PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 3343 codifies requirements set forth in CEA section 4a(a)(6)(B), and will lessen regulatory arbitrage by eliminating a potential loophole whereby a market participant could accumulate positions on certain FBOTs in excess of limits in referenced contracts.854 Accordingly, the Commission believes that § 150.2(h) is consistent with the goal set forth in CEA section 4a(a)(2)(C) to ensure that liquidity does not move to foreign jurisdictions or place U.S. exchanges at a competitive disadvantage to foreign competitors. If the Commission did not attribute positions held in referenced contracts on FBOTs, the Commission inadvertently could incentivize market participants to shift trading and liquidity in referenced contracts to FBOTs in order to avoid Federal position limits. 9. Anti-Evasion i. Summary of the 2020 NPRM—AntiEvasion Pursuant to the Commission’s rulemaking authority in section 8a(5) of the CEA,855 the Commission proposed § 150.2(i), which was intended to deter and prevent a number of potential methods of evading Federal position limits. The proposed anti-evasion provision provided: (1) A commodity index contract and/or location basis contract, which would otherwise be excluded from the proposed referenced contract definition, would be considered a referenced contract subject to Federal position limits if used to willfully circumvent position limits; (2) a bona fide hedge recognition or spread exemption would no longer apply if used to willfully circumvent speculative position limits; and (3) a swap contract used to willfully circumvent speculative position limits would be deemed an economically equivalent swap, and thus a referenced contract, even if the swap does not meet the economically equivalent swap definition set forth in proposed § 150.1. ii. Summary of the Commission Determination—Anti-Evasion The Commission is adopting § 150.2(i) as proposed with conforming changes that reflect revisions to the ‘‘referenced contract’’ definition adopted herein in 854 In addition, CEA section 4(b)(1)(B) prohibits the Commission from permitting an FBOT to provide direct access to its trading system to its participants located in the United States unless the Commission determines, in regards to any FBOT contract that settles against any price of one or more contracts listed for trading on a registered entity, that the FBOT (or its foreign futures authority) adopts position limits that are comparable to the position limits adopted by the registered entity. 7 U.S.C. 6(b)(1)(B). 855 7 U.S.C. 12a(5). E:\FR\FM\14JAR2.SGM 14JAR2 3344 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 which the Final Rule additionally is excluding ‘‘monthly average pricing contracts’’ and ‘‘outright price reporting agency index contracts’’ from the ‘‘referenced contract’’ definition.856 A discussion of these conforming changes appears immediately below, followed by a summary of the comments, which addressed different aspects of the proposed anti-evasion provision. a. Discussion of Conforming Changes— Anti-Evasion The Commission is revising proposed § 150.2(i)(1), which addressed evasion of Federal position limits by using commodity index contracts and location basis contracts, to also cover monthly average pricing contracts and outright price reporting agency index contracts. This change is needed to conform the anti-evasion provision to the ‘‘referenced contract’’ definition adopted herein. In particular, while the 2020 NPRM would exclude commodity index contracts and location basis contracts from the ‘‘referenced contract’’ definition, the Final Rule excludes those contracts as well as monthly average pricing contracts and outright price reporting agency index contracts from the ‘‘referenced contract definition.’’ 857 Because contracts that are excluded from the final ‘‘referenced contract’’ definition are not subject to Federal position limits, the Commission intends that final § 150.2(i)(1) will prevent a potential loophole whereby a market participant who has reached its limits could otherwise utilize these contract types to willfully circumvent or evade speculative position limits. For example, a market participant could purchase a commodity index contract in a manner that allowed the participant to exceed limits when taking into account the weighting in the component commodities of the index contract. The Final Rule also will avoid creating what could otherwise be similar potential loopholes with respect to monthly average pricing contracts, outright price reporting agency index contracts, and location basis contracts. Additionally, the Commission is adopting § 150.2(i)(2) as proposed. This provision provides that a bona fide hedge recognition or spread exemption will no longer apply if used to willfully circumvent speculative position limits. This provision is intended to help ensure that bona fide hedge recognitions and spread exemptions are granted and utilized in a manner that comports with 856 See supra Section II.A.16.iii.b. (explanation of proposed exclusions from the ‘‘referenced contract’’ definition). 857 See Section II.A.16.iii.b. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 the CEA and Commission regulations, and that the ability to obtain bona fide hedge recognitions and spread exemptions does not become an avenue for market participants to inappropriately exceed speculative position limits. The Commission is also adopting § 150.2(i)(3) as proposed. Under this provision, a swap contract used to willfully circumvent speculative position limits is deemed an economically equivalent swap, and thus a referenced contract, even if the swap does not meet the economically equivalent definition set forth in final § 150.1. This provision is intended to deter and prevent the structuring of a swap in order to willfully evade speculative position limits. iii. Comments—Anti-Evasion Several commenters stated that the anti-evasion provision is prudent, but would be difficult to apply in practice, in part due to the subjective ‘‘willful circumvention’’ standard.858 FIA recommended that, instead, the antievasion analysis should be based on the presence of ‘‘deceit, deception, or other unlawful or illegitimate activity’’ so market participants will be better equipped to evaluate the surrounding facts and circumstances in making an evasion determination.859 FIA further expressed that, because markets evolve, it is inadvisable to consider ‘‘historical practices behind the market participant and transaction in question.’’ 860 FIA also asked the Commission to confirm that it is not evasion for a market participant to consider ‘‘costs or regulatory burdens, including the avoidance thereof,’’ if that participant has a legitimate business purpose for a transaction.861 Specific to swaps, ISDA encouraged the Commission to expressly acknowledge and confirm that an out-ofscope swap transaction would not be considered evasion under any set of circumstances.862 FIA recommended that, for structured swaps, the antievasion analysis should ask whether the 858 SIFMA AMG at 7, n.16 (noting that the antievasion provision makes the application of the proposed ‘‘economically equivalent swap’’ definition less clear because it incorporates a subjective measure of intent); see also FIA at 25 (questioning how a participant would distinguish a strategy that minimizes position size with an evasive strategy); Better Markets at 33 (describing the anti-evasion provision as a ‘‘useful deterrent,’’ but noting that the willful circumvention standard would be difficult to meet and partially turns on the Commission’s consideration of the legitimate business purpose analysis). 859 FIA at 25–26. 860 Id. 861 Id. 862 ISDA at 5, n.7 PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 swap serves the market participant’s commercial needs or objectives.863 Finally, FIA suggested that the Final Rule should provide an automatic safe harbor from a retroactive evasion determination for all swaps entered into prior to the compliance date.864 iv. Discussion of Final Rule—AntiEvasion The Final Rule’s anti-evasion provision is not intended to capture a trading strategy merely because the strategy may result in a smaller position size for purposes of position limits. Instead, the anti-evasion provision is intended to deter and prevent cases of willful evasion of speculative position limits, the specifics of which the Commission may be unable to anticipate. The Federal position limit requirements adopted herein will apply during the spot month for all referenced contracts subject to Federal position limits, while non-spot month Federal position limit requirements will only apply for the nine legacy agricultural contracts. Under this framework, and because the threat of corners and squeezes is the greatest in the spot month, the Commission anticipates that it may focus its attention on antievasion activity during the spot month. The determination of whether particular conduct is intended to circumvent or evade requires a facts and circumstances analysis. In interpreting these anti-evasion rules, the Commission is guided by its interpretations of anti-evasion provisions appearing elsewhere in the Commission’s regulations, including the interpretation of the anti-evasion rules that the Commission adopted in its rulemakings to further define the term ‘‘swap’’ and to establish a clearing requirement under section 2(h)(1)(A) of the CEA.865 Generally, consistent with those interpretations, in evaluating whether conduct constitutes evasion, the Commission will consider, among other things, the extent to which the person lacked a legitimate business purpose for structuring the transaction in that particular manner. For example, an analysis of how a swap was structured could reveal that a person or persons crafted derivatives transactions, structured entities, or conducted 863 FIA at 25. 864 Id. 865 See Further Definition of ‘‘Swap, ‘‘SecurityBased Swap,’’ and ’’Security-Based Swap Agreement;’’ Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208, 48297– 48303 (Aug. 13, 2012); Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74317–74319 (Dec. 13, 2012). E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations themselves in a manner without a legitimate business purpose and with the intent to willfully evade position limits by structuring one or more swaps such that such swap(s) would not meet the ‘‘economically equivalent swap’’ definition in final § 150.1. In response to FIA’s comment that the Commission should confirm that it is not evasion for a market participant with a legitimate business purpose for a transaction to consider ‘‘costs or regulatory burdens,866 the Commission acknowledges that it fully expects that a person acting for legitimate business purposes within its respective industry will naturally consider a multitude of costs and benefits associated with different types of financial transactions, entities or instruments, including the applicable regulatory obligations.867 As stated in a prior rulemaking, a person’s specific consideration of, for example, costs or regulatory burdens, including the avoidance thereof, is not, in and of itself, dispositive that the person is acting without a legitimate business purpose in a particular case.868 In response to FIA’s comment 869 that an anti-evasion analysis of a structured swap should evaluate whether the transaction serves the market participant’s commercial needs or objectives, as stated in the 2020 NPRM, the Commission will view legitimate business purpose considerations on a case-by-case basis in conjunction with all other relevant facts and circumstances. Additionally, the Commission disagrees with FIA’s comment 870 that an historical practices inquiry is inadvisable. Because transactions and instruments are regularly structured, and entities regularly formed, in a particular way and for various, often times multiple, reasons, the Commission believes it is essential that all relevant facts and circumstances be considered, including historical practices.871 While historical practice is a factor the Commission will consider as part of its facts and circumstances analysis, it is not dispositive in determining whether particular conduct constitutes evasion. As part of its facts and circumstances analysis, the Commission will look at factors such as the historical practices behind the market participant and transaction in question. For example, with respect to § 150.2(i)(2) (i.e., bona fide hedges or spreads used to evade), at 25. 867 See 77 FR at 48301. 868 See 77 FR at 74319. 869 FIA at 25. 870 Id. at 25–26. 871 See 77 FR at 48302. 03:06 Jan 14, 2021 872 See Section II.A.1.ix. 873 Id. 874 See 77 FR at 48297–48303; 77 FR at 74317– 74319. 875 FIA at 25. 876 SIFMA AMG at 7, n.16; see also FIA at 25; Better Markets at 33. 877 See In re Squadrito, [1990–1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,262 (CFTC 866 FIA VerDate Sep<11>2014 the Commission is adopting guidance in Appendix B to part 150 with respect to gross versus net hedging. As discussed elsewhere in this release, the Commission believes that measuring risk on a gross basis to willfully circumvent or evade speculative position limits would potentially run afoul of § 150.2(i)(2).872 Use of gross or net hedging that is inconsistent with an entity’s historical practice, or a change from gross to net hedging (or vice versa), could be an indication that an entity is seeking to evade position limits regulations.873 With respect to § 150.2(i)(3) (i.e., swaps used to evade), the Commission will consider whether a market participant has a history of structuring its swaps one way, but then starts structuring its swaps a different way around the time the participant risked exceeding a speculative position limit as a result of its swap position, such as by modifying the delivery date or other material terms and conditions such that the swap no longer meets the definition of an ‘‘economically equivalent swap.’’ Consistent with interpretive language in prior rulemakings addressing evasion,874 when determining whether a particular activity constitutes willful evasion, the Commission will consider the extent to which the activity involves deceit, deception, or other unlawful or illegitimate activity. Although it is likely that fraud, deceit, or unlawful activity will be present where willful evasion has occurred, the Commission disagrees with FIA’s comment 875 that these factors should be a prerequisite to an evasion finding. A position that does not involve fraud, deceit, or unlawful activity could still lack a legitimate business purpose or involve other indicia of evasive activity. The presence or absence of fraud, deceit, or unlawful activity is one fact the Commission will consider when evaluating a person’s activity. That said, the final anti-evasion provision does require willfulness, i.e. ‘‘scienter.’’ In response to commenters 876 who expressed concern regarding the practical application of this intent standard, the Commission will interpret ‘‘willful’’ consistently with how the Commission has done so in the past, i.e., that acting either intentionally or with reckless disregard constitutes acting ‘‘willfully.’’ 877 Jkt 253001 PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 3345 In determining whether a transaction has been entered into or structured willfully to evade position limits, the Commission will not consider the form, label, or written documentation as dispositive. The Commission also is not requiring a pattern of evasive transactions as a prerequisite to prove evasion, although such a pattern may be one factor in analyzing whether evasion has occurred. In instances where one party willfully structures a transaction to evade but the other counterparty does not, § 150.2(i) will apply to the party who willfully structured the transaction to evade. Further, entering into transactions that qualify for the forward exclusion from the swap definition, standing alone, shall not be considered evasive. However, in circumstances where a transaction does not, in fact, qualify for the forward exclusion, the transaction may or may not be evasive depending on an analysis of all relevant facts and circumstances. The Commission declines to adopt ISDA’s request 878 to carve out-of-scope swap transactions from the anti-evasion provision. This request was unsupported and did not address whether an out-of-scope swap could be used to evade position limits. Finally, the Commission declines to adopt FIA’s request 879 that all swaps entered into prior to the compliance date be granted an automatic safe harbor from a retroactive finding of evasion. This change is unnecessary given that under final § 150.3, pre-enactment swaps and transition period swaps will not be subject to Federal position limits at all during or outside the spot month.880 10. Application of Netting and Related Treatment of Cash-Settled Referenced Contracts i. Background Under the existing Federal framework, Federal position limits apply only to the nine legacy agricultural contracts, which are all physically-settled. However, existing part 150 does not include the equivalent concept of a ‘‘referenced contract,’’ and therefore existing Federal position limits do not apply to any cash-settled look-alike contracts as they would under the Final Rule. Accordingly, the issue of netting across look-alike contracts that may be located across Mar. 27, 1992) (adopting definition of ‘‘willful’’ in McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1987)). 878 ISDA at 5, n.7. 879 FIA at 25. 880 See final § 150.3(a)(5). E:\FR\FM\14JAR2.SGM 14JAR2 3346 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations different exchanges is not addressed under the existing framework. ii. Summary of the 2020 NPRM— Netting and Related Treatment of CashSettled Referenced Contracts Under the 2020 NPRM, the referenced contract definition in proposed § 150.1 included, among other things, (i) cashsettled contracts that are linked, either directly or indirectly, to a core referenced futures contract, and (ii) ‘‘economically equivalent swaps.’’ 881 Proposed § 150.2(a) provided that during the spot month, Federal position limits would apply ‘‘separately’’ to physically delivered referenced contracts and cash-settled referenced contracts. Under the 2020 NPRM, positions in a physically-settled core referenced futures contract would not be required to be added to, nor permitted to be netted down by, positions in corresponding cash-settled referenced contracts (and vice-versa). Proposed § 150.2(b), in contrast, provided that during the non-spot months, including the single month and all-months-combined, Federal position limits would apply in the aggregate to both physically-delivered referenced contracts and cash-settled referenced contracts. This meant that for the purposes of determining whether a market participant complies with the Federal non-spot month position limits, a person’s physically-settled and cashsettled referenced contract positions would be added together and could net against each other. Under both proposed §§ 150.2(a) and (b), positions in referenced contracts would be aggregated across exchanges for purposes of determining one’s net position for Federal position limit purposes. iii. Summary of the Commission Determination—Netting and Related Treatment of Cash-Settled Referenced Contracts The Commission is finalizing § 150.2(a) and (b) of the 2020 NPRM as proposed.882 khammond on DSKJM1Z7X2PROD with RULES2 iv. Comments—Netting and Related Treatment of Cash-Settled Referenced Contracts PIMCO, SIFMA AMG, and ISDA contended that cash-settled referenced contracts should not be subject to 881 See Section II.A.16. (discussion of the proposed referenced contract definition). 882 As discussed above, the Commission is making an exception for natural gas referenced contracts to the general netting rules discussed below. For further discussion on the Final Rule’s treatment of natural gas referenced contracts, see Section II.B.3.vi. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Federal position limits at all because cash-settled contracts do not introduce the same risk of market manipulation. They argued that subjecting cash-settled referenced contracts to Federal position limits would reduce market liquidity and depth in these instruments.883 FIA and ICE argued that limits for cash-settled referenced contracts should be higher relative to Federal position limits for physically-settled referenced contracts. They similarly argued that cash-settled referenced contracts are ‘‘not subject to corners and squeezes’’ and will ‘‘ ‘ensure market liquidity for bona fide hedgers.’ ’’ 884 FIA and ICE further suggested that Federal position limits for cash-settled referenced contracts should apply per DCM (rather than in aggregate across DCMs).885 FIA additionally suggested setting a separate Federal spot-month position limit for economically equivalent swaps.886 In contrast, CME Group supported the Commission’s approach for spot-month parity for physically-settled and cashsettled referenced contracts across all commodity markets. CME Group explained that absent such parity, one side of the market could be vulnerable to: Artificial distortions from manipulations on the other side of the market; regulatory arbitrage; and liquidity drain to the other side of the market.887 CME Group warned that, ultimately, a lack of parity could undermine the statutory goals of position limits.888 NEFI agreed, arguing similarly that ‘‘this move is essential to guard against manipulation by a trader who holds positions in both physicallysettled and cash-settled contracts for the same underlying commodity.’’ 889 v. Discussion of Final Rule—Netting and Related Treatment of Cash-Settled Referenced Contracts The Commission is finalizing §§ 150.2(a) and (b) as proposed. Under final § 150.2(a), Federal spot month limits apply to physical-delivery referenced contracts ‘‘separately’’ from 883 PIMCO at 3; SIFMA AMG at 4–7; ISDA at 3– 5. These entities did not specifically argue that cash-settled contracts should be excluded from the ‘‘referenced contract’’ definition, but rather in general that such instruments should not be subject to Federal position limits. The Commission noted that this is technically a different argument since cash-settled instruments could be exempt from position limits while still technically qualifying as ‘‘referenced contracts,’’ but the end result is the same as a practical matter. 884 ICE at 3, 15 (also arguing that cash-settled limits should apply per exchange, rather than across exchanges); FIA at 7–8. 885 FIA at 7–8; ICE at 13. 886 FIA 7–8. 887 CME Group at 3–4. 888 Id. at 6. 889 NEFI at 3. PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 Federal spot month limits applied to cash-settled referenced contracts, meaning that during the spot month, positions in physically-settled contracts may not be netted with positions in linked cash-settled contracts but also are not required to be added to linked cashsettled contracts for the purposes of determining compliance with Federal position limits. Specifically, all of a trader’s positions (long or short) in a given physically-settled referenced contract (across all exchanges and OTC as applicable) 890 are netted and subject to the spot month limit for the relevant commodity, and all of such trader’s positions in any cash-settled referenced contracts (across all exchanges and OTC as applicable) linked to such physicallysettled core referenced futures contract are netted and independently (rather than collectively along with the physically-settled positions) subject to the Federal spot month limit for that commodity.891 Additionally, a position in a commodity contract that is not a referenced contract, and therefore is not subject to Federal position limits, as a consequence, cannot be netted with positions in referenced contracts for purposes of Federal position limits.892 For example, a swap that is not a referenced contract because it does not meet the economically equivalent swap definition could not be netted with positions in a referenced contract. 890 In practice, the only physically-settled referenced contracts subject to the Final Rule will be the 25 core referenced futures contracts, none of which are listed on multiple DCMs, although there could potentially be physically-settled OTC swaps that would satisfy the ‘‘economically equivalent swap’’ definition and therefore would also qualify as referenced contracts. For further discussion on economically equivalent swaps, see Section II.A.4. 891 Consistent with CEA section 4a(a)(6), this would include positions across exchanges. However, for the reasons discussed in Section II.B.3.vi., the Commission is exercising its exemptive authority under CEA section 4a(a)(7) to provide an exception for natural gas to the general aggregation rule in CEA section 4a(a)(6). As discussed above, the Commission has concluded that the natural gas market is well-established with contracts that currently trade across several exchanges, and is relatively liquid with significant open interest. Accordingly, the Commission is exercising its judgment to establish Federal position limits on a per-exchange (and OTC as applicable) basis in order to maintain the status quo rather than risk disturbing the existing natural gas market. 892 Proposed Appendix C to part 150 provides guidance regarding the referenced contract definition, including that the following types of contracts are not deemed referenced contracts, meaning such contracts are not subject to Federal position limits and cannot be netted with positions in referenced contracts for purposes of Federal position limits: Location basis contracts; commodity index contracts; swap guarantees; trade options that meet the requirements of 17 CFR 32.3; monthly average pricing contracts; and outright price reporting agency index contracts. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Allowing the netting of linked physically-settled and cash-settled contracts during the spot month could lead to disruptions in the price discovery function of the core referenced futures contract or allow a market participant to manipulate the price of the core referenced futures contract. Absent separate spot month position limits for physically-settled and cash-settled contracts, the spot month position limit would be rendered ineffective, as a participant could maintain large positions in excess of limits in both the physically-settled contract and the linked cash-settled contract, enabling the participant to disrupt the price discovery function as the contracts go to expiration by taking large opposite positions in the physically-settled core referenced futures and cash-settled referenced contracts, or potentially allowing a participant to effect a corner or squeeze.893 Consistent with current and historical practice, the Federal position limits adopted herein apply to positions throughout each trading session (i.e., on an intra-day basis during each trading session), as well as at the close of each trading session.894 In response to the comments from PIMCO, SIFMA AMG, and ISDA that cash-settled referenced contracts should not be subject to position limits at all because such contracts do not introduce the same risk of market manipulation, as discussed above under Section II.A.16.iii.a., the Commission has concluded that cash-settled referenced contracts should be subject to Federal position limits since they form one market with their corresponding physically-settled core referenced futures contracts.895 In response to ISDA’s recommendation that the Final Rule only include physically-settled referenced contracts and that the Commission apply Federal position limits on cash-settled referenced contracts at a later time, the Commission notes that as discussed under Section I.D., the Final Rule will be subject to a general compliance period until January 1, 2022. During this period, exchanges may choose to implement exchange-set position limits that provide for a different phased-in 893 For example, absent such a restriction in the spot month, a trader could stand for 100 percent of deliverable supply during the spot month by holding a large long position in the physicaldelivery contract along with an offsetting short position in a cash-settled contract, which effectively would corner the market. 894 See, e.g., Elimination of Daily Speculative Trading Limits, 44 FR 7124, 7125 (Feb. 6, 1979). 895 For further discussion, see Section II.A.16.iii.a(2). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 approach for cash-settled versus physically-settled referenced contracts as the exchanges may find appropriate for their respective markets. Additionally, the compliance period will be further extended until January 1, 2023 for economically equivalent swaps and positions held in reliance on a riskmanagement exemption, which in each case the Commission notes include mostly cash-settled positions. Accordingly, as a practical matter, many cash-settled contracts will be subject to a longer compliance period. However, as discussed further above under Section II.A.16.iii.a, the Commission has determined that it is appropriate to include cash-settled referenced contracts in Federal position limits under this Final Rule.896 FIA and ICE similarly argued that cash-settled referenced contracts should be subject to higher Federal position limits compared to the physicallysettled core referenced futures contracts. Their arguments were predicated, in part, on their conclusions that market participants cannot use cash-settled contracts to effect a corner or squeeze.897 The Commission declines to adopt higher Federal position limits for cashsettled referenced contracts for several reasons. First, as an initial matter, the Commission acknowledges that preventing corners and squeezes is a crucial focus of the Commission. However, in response to FIA’s and ICE’s arguments that cash-settled referenced contracts should be subject to higher Federal position limits compared to physically-settled futures contracts because cash-settled contracts cannot be used to effect a corner or squeeze, the Commission notes that there are other forms of manipulation, such as ‘‘banging’’ or ‘‘marking’’ the close, that cash-settled referenced contracts can effect, and the Commission emphasizes that it endeavors to prevent all such market manipulation, consistent with CEA section 4a(a)(3)(B)(ii).898 While CEA section 4a(a)(3)(B)(ii) specifically references corners and squeezes, the CEA section also references ‘‘manipulation’’ generally, and neither FIA nor ICE recognized the existence of other types of market manipulation, such as ‘‘banging’’ the close, in their analysis. Second, the Commission believes that FIA’s and ICE’s arguments for higher 896 For further discussion of the Commission’s rationale for including cash-settled referenced contracts under the Final Rule, see Section II.A.16.iii.a. 897 FIA at 7; ICE at 12–13. 898 For further discussion, see Sections II.A.16., II.A.4.iii.d(2), and II.B.10.iv. PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 3347 Federal position limits for cash-settled referenced contracts is intrinsically related to the comments from PIMCO, SIFMA AMG, and ISDA discussed above arguing that cash-settled referenced contracts should not be subject to Federal position limits at all. That is, the higher the Federal position limits for cash-settled referenced contracts that FIA or ICE recommend establishing, the closer, as a practical matter, it is to having no Federal position limits for cash-settled referenced contracts.899 As a result, the Commission believes that its general rationale for including cash-settled referenced contracts within the Federal position limits framework similarly supports parity between cash-settled and physically-settled referenced contracts. Third, the Commission generally agrees with the reasons articulated in the comments from CME Group and NEFI that it is appropriate to establish spot-month parity for physically-settled and cash-settled referenced contracts across all commodity markets. While FIA argued that higher position limits for cash-settled referenced contracts could ensure liquidity for bona fide hedgers,900 the Final Rule has established the Federal position limit levels in general for the 25 core referenced futures contracts (including increases for many of the nine legacy agricultural contracts) and has expanded the enumerated bona fide hedges and streamlined the related application process under final §§ 150.3 and 150.9 in order to ensure sufficient liquidity for bona fide hedgers. FIA and ICE similarly argued that market participants should not be required to aggregate cash-settled positions across all exchanges but rather should be subject to a disaggregated Federal position limit that applies perexchange. In other words, as the Commission understands FIA’s and ICE’s request, if the Federal position limit is 1,000 contracts, FIA and ICE believe that a market participant should be able to hold 1,000 cash-settled referenced contracts per exchange rather than being required to aggregate positions across all exchanges. Under this approach, a long position of 1,000 contracts on Exchange A would not be aggregated with a long position of 1,000 contracts on Exchange B. However, under this approach, a long position on Exchange A also would not net with a short position on Exchange B. ICE specifically argued that a single, aggregate Federal position limit for all 899 See 900 FIA E:\FR\FM\14JAR2.SGM Section II.A.16.iii.a. at 7–8. 14JAR2 3348 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations referenced contracts across exchanges may make it difficult for an exchange to launch a new referenced contract since the hypothetical new referenced contract would be aggregated with an existing referenced contract for purposes of Federal position limits.901 According to ICE, establishing new exchanges and/or new contracts is made more difficult under the Commission’s aggregated approach, since it is purportedly more difficult to attract sufficient liquidity to establish a sustainable exchange or contract.902 ICE also references the Commission’s obligations under CEA section 15 to consider the public interest and antitrust laws.903 ICE recommends a more flexible approach to allow an exchange to develop its own liquidity and establish its own limits, even for similar or look-alike cash-settled referenced contracts, to help develop robust and liquid markets while protecting against excessive speculation.904 In response to FIA and ICE, as discussed immediately below, the Commission believes that, as a general matter, establishing aggregate limits across exchanges promotes competition and innovation while also better addressing the statutory goals in CEA section 4a(a)(3) as compared to ICE’s request to establish disaggregated, perexchange position limits. However, before discussing the Commission’s underlying policy rationale supporting aggregate Federal position limits, the Commission has determined that as an initial legal matter that CEA section 4a(a)(6)(B) requires the Commission to establish the ‘‘aggregate number or amount of positions . . . that maybe held by any person . . . for each month across . . . contracts listed by [DCMs] . . . .’’ (emphasis added).905 While ICE cites CEA section 15 in its comment letter, ICE does not address CEA section 4a(a)(6)’s requirement that the Commission generally must establish aggregate position limits across exchanges. Accordingly, in addition to the policy rationale discussed immediately below, the Commission further has determined that the Final Rule’s requirement to aggregate positions across exchanges does not on its face violate CEA section 15.906 khammond on DSKJM1Z7X2PROD with RULES2 901 ICE 902 ICE at 12–13. at 12–13. 903 Id. 904 Id. 905 7 U.S.C. 6a(a)(6); CEA 4a(a)(6). Section IV.D. As discussed elsewhere in this release, the Commission is exercising its exemptive authority pursuant to CEA Section 4a(a)(7) to establish an exception to this rule in connection with, and based on the particular 906 See VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 As noted above, the Commission also believes it is appropriate to aggregate positions across exchanges for Federal position limit purposes for the same general reasons that the Commission has determined both to include cash-settled referenced contracts within the Federal position limits framework and also to maintain parity for Federal position limit levels between physically-settled and cash-settled referenced contracts. For example, applying a per-exchange Federal position limit, rather than aggregating across exchanges, effectively increases the applicable Federal position limit. Accordingly, the Commission likewise believes it generally is inappropriate to permit perexchange Federal position limits for cash-settled referenced contracts. In response to ICE’s concern regarding liquidity formation and that aggregating cash-settled positions across exchanges would harm competitiveness and innovation by making it more difficult to attract enough liquidity to become sustainable on an ongoing basis,907 the Commission believes that to the extent Federal position limit levels under the Final Rule have been correctly calibrated, the Federal position limits framework should promote—or at least not disincentivize—liquidity formation. However, ICE’s proposal to allow Federal position limits to apply on a disaggregated, per-exchange basis risks dividing liquidity among several liquidity pools, which itself could harm liquidity for bona fide hedgers and reduce price discovery. The Commission also observes that, as a practical matter, ICE’s request to disaggregate positions across exchanges would significantly increase the applicable position limit (possibly by a multiple of two or three—or more— depending on the number of exchanges that list referenced contracts). Consequently, if the Commission assumes, in arguendo, that Federal position limit levels are reasonably calibrated under the Final Rule, then applying a per-exchange limit by definition would increase the potential risks of excessive speculation and possible manipulation as market participants are permitted to hold larger directional positions in referenced contracts. Moreover, to the extent Federal position limits under this Final Rule are not reasonably calibrated to ensure necessary liquidity for bona fide hedgers, then the Commission, as a general matter, would prefer to address the lack of liquidity by adjusting the circumstances of the natural gas market. See Section II.B.3.iv (discussing natural gas). 907 ICE at 12–13. PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 Federal position limit levels to appropriate levels rather than applying Federal position limits on a perexchange basis for the reasons discussed in the paragraphs above and as discussed in the paragraph immediately below. Last, the Commission believes that ICE’s approach could actually harm innovation since under ICE’s rationale, Federal position limit levels would need to be set lower than the Federal levels adopted herein. For example, if the Commission were to allow disaggregated netting across exchanges as a general rule, then it would likely lead to increased excessive speculation and possible manipulation, as discussed above. Accordingly, in order to avoid the threat of excessive speculation and manipulation, the Commission would be obligated to set Federal position limits sufficiently low in order to compensate for a per-exchange position limit disaggregated approach. However if the Commission were to establish Federal position limits sufficiently low to prevent these concerns from happening, then innovation could be adversely affected since it means that the concomitant lower Federal position limit levels likely would make it difficult for exchanges to develop sufficient liquidity for a new product— unless other competing exchanges offered linked contracts to add sufficient liquidity to the market. In such a case, the success of any new product offered by the initial exchange could be dependent upon competing exchanges offering competing look-alike contracts to allow for sufficient liquidity. In contrast, the Commission believes that the Final Rule’s approach to make the full aggregated Federal position limit available to the contract is more responsive to the needs of the market compared to a disaggregated approach, and the Commission believes that the Final Rule’s aggregated approach promotes innovation and competition in the marketplace. Accordingly, the Commission does not believe that applying netting on an aggregate basis harms competition and innovation. Rather, the Commission believes its approach supports healthy competition and innovation while ICE’s approach could harm liquidity and innovation. While the Commission believes the above rationale generally applies, the Commission notes that for the reasons discussed in Section II.B.3.vi., the Commission is exercising its exemptive authority under CEA section 4a(a)(7) to provide an exception for natural gas to the general aggregation rule in CEA section 4a(a)(6). The Commission does E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations not believe that the rationale above necessarily applies to the natural gas market. As discussed above, the natural gas market has existing natural gas commodity derivatives contracts that are well-established with liquidity, trading, and open interest currently across several exchanges. Accordingly, the Commission is exercising its judgment to establish Federal position limits on a per-exchange basis in order to maintain the status quo rather than risk disturbing the structure of the existing natural gas market, which could harm liquidity for bona fide hedgers or price discovery. In response to FIA’s suggestion that economically equivalent swaps should be subject to separate Federal spotmonth position limits, as discussed under Section II.A.4.iii., the Commission does not believe doing so would be appropriate.908 As discussed above, the Commission believes that establishing separate class position limits for futures contracts and swaps could harm liquidity formation while establishing a single Federal position limit promotes integration between the futures and swaps markets. 11. ‘‘Eligible Affiliates’’ and Position Aggregation i. Background In 2016, the Commission amended § 150.4 to adopt new rules governing the aggregation of positions for purposes of compliance with Federal position limits.909 These aggregation rules currently apply only to the nine legacy agricultural contracts previously subject to Federal position limits, but now will also apply to the 16 new contracts subject to Federal position limits for the first time under this Final Rule. Under the existing aggregation rules, unless an exemption applies, all of the positions held and trading done by the person must be aggregated with positions for which the person controls trading or for which the person holds a 10% or greater ownership interest. DMO has issued time-limited no-action relief through August 12, 2022 (‘‘NAL 19–19’’) from some of the aggregation requirements contained in that rulemaking.910 khammond on DSKJM1Z7X2PROD with RULES2 908 FIA 7–8. 81 FR at 91454. 910 See CFTC Letter No. 19–19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/ download. NAL 19–19 extends NAL 17–37 and provides an additional three-year period of noaction relief from compliance with certain position aggregation requirements under Commission Regulation 150.4 by streamlining the compliance requirements that must be satisfied for a person or entity to rely on an exemption from aggregation. 909 See VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 ii. Summary of the 2020 NPRM— Eligible Affiliates and Position Aggregation Proposed § 150.2(k) addressed entities that would qualify as an ‘‘eligible affiliate’’ as defined in proposed § 150.1. Under the proposed definition, an ‘‘eligible affiliate’’ would include certain entities that, among other things, are required to aggregate their positions under § 150.4 and that do not claim an exemption from aggregation. There may be certain entities that would be eligible for an exemption from aggregation, but that prefer to aggregate rather than disaggregate their positions (such as when aggregation would result in advantageous netting of positions with affiliated entities). Proposed § 150.2(k) intended to address such a circumstance by making clear that an ‘‘eligible affiliate’’ may opt to aggregate its positions even though it is eligible to disaggregate. iii. Summary of the Commission Determination—Eligible Affiliates and Position Aggregation The Commission is adopting § 150.2(k) as proposed. iv. Comments—Eligible Affiliates and Position Aggregation Although the Commission did not receive any comments on this provision, it received a number of comments related to position aggregation in general. These commenters urged the Commission to amend the Federal position limits aggregation rules in existing § 150.4 by codifying existing NAL 19–19.911 Some commenters further requested that the Commission revisit certain aspects of NAL 19–19 and the aggregation rules, such as the threshold ownership percentage set forth in existing § 150.4 that triggers the requirement to aggregate positions or rely upon an exemption.912 Conversely, IATP argued that before applying the existing aggregation rules, and accompanying exemptions, to additional commodities, the Commission should study whether the existing exemptions from aggregation have resulted in increased speculation.913 v. Discussion of Final Rule—Eligible Affiliates and Position Aggregation The Commission declines to codify NAL 19–19 914 in this rulemaking since 911 FIA at 28; ISDA at 11; PIMCO at 6; CMC at 12–13; and SIFMA AMG at 2, 9. 912 CMC at 12–13; FIA at 28. 913 IATP at 18–19. 914 See CFTC Letter No. 19–19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/ download. PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 3349 NAL 19–19’s relief from some of the aggregation requirements contained in 2016 Final Aggregation Rulemaking 915 continues to apply until August 12, 2022. DMO extended this relief for three years to provide sufficient time to ‘‘evaluate whether the relief granted is hindering Commission staff’s ability to conduct surveillance; assess the impact of the relief; and consider long-term solutions that must, appropriately, be implemented by a notice and comment rulemaking.’’ 916 Accordingly, the Commission believes it is appropriate to first monitor the application of the existing position aggregation requirements before considering amendments to those aggregation requirements, and the Commission will address the aggregation rules, including whether to codify NAL 19–19, as needed, after this Final Rule goes into effect. C. § 150.3—Exemptions From Federal Position Limits 1. Background—Existing §§ 150.3, 1.47, and 1.48—Exemptions From Federal Position Limits Existing § 150.3(a), which pre-dates the Dodd-Frank Act, lists positions that may, under certain circumstances, exceed Federal position limits, including: (1) Bona fide hedging transactions, as defined in the current bona fide hedging definition in § 1.3; and (2) spread or arbitrage positions, subject to certain conditions.917 Existing § 150.3(b) provides that the Commission or certain Commission staff may make a ‘‘call’’ to demand certain information from exemption holders so that the Commission can effectively oversee the use of such exemption. Section § 150.3(b) also provides that any such call may request information relating to positions owned or controlled by that person, trading done pursuant to that exemption, the futures, options or cashmarket positions that support the claimed exemption, and the relevant business relationships supporting a claim of exemption.918 The current bona fide hedge definition in existing § 1.3 requires applicants who wish to receive bona fide hedging recognition and exceed Federal position limits to apply for nonenumerated bona fide hedges under § 1.47 and to apply for anticipatory bona fide hedges under § 1.48 of the Commission’s existing regulations. Under § 1.47, persons seeking recognition by the Commission of a non915 81 FR 91454 (December 16, 2016). CFTC Letter No. 19–19 at 4. 917 17 CFR 150.3(a). 918 17 CFR 150.3(b). 916 See E:\FR\FM\14JAR2.SGM 14JAR2 3350 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations enumerated bona fide hedging transaction or position must file certain initial statements with the Commission at least 30 days in advance of the date that such transaction or position would be in excess of Federal position limits.919 Similarly, persons seeking recognition by the Commission of certain anticipatory bona fide hedges must submit their application 10 days in advance of the date that such transactions or positions would be in excess of Federal position limits.920 With respect to spread exemptions, the Commission’s authority and existing regulation for exempting certain spread positions can be found in CEA section 4a(a)(1) and existing § 150.3(a)(3) of the Commission’s regulations. In particular, CEA section 4a(a)(1) authorizes the Commission to exempt from Federal position limits transactions ‘‘normally known to the trade as ’spreads’ or ’straddles’ or ’arbitrage.’’’ Similarly, in existing § 150.3(a)(3), the Commission exempts ‘‘spread or arbitrage positions,’’ and allows such exemptions to be selfeffectuating for the nine legacy agricultural contracts currently subject to Federal position limits. The Commission does not specify a formal process, in § 150.3(a)(3), for granting spread exemptions.921 khammond on DSKJM1Z7X2PROD with RULES2 2. Overview of Proposed § 150.3, Commenters’ Views, and the Commission’s Final Rule Determination This section provides a brief overview of proposed § 150.3, commenters’ general views, and the Commission’s determination. The Commission will summarize and address each subsection of § 150.3 in greater detail further below. The Commission proposed several changes to § 150.3. First, the Commission proposed to update § 150.3 to conform to the proposed bona fide hedging definition in § 150.1 (described above) and the new streamlined process in proposed § 150.9 for recognizing non-enumerated bona fide hedging positions (described further below). The Commission also proposed to amend § 150.3 to include new exemption types not explicitly listed in existing § 150.3, including: (i) Exemptions for financial distress situations; (ii) conditional exemptions for certain spot month positions in cashsettled natural gas contracts; and (iii) 919 17 CFR 1.47. CFR 1.48. 921 Since 1938, the Commission (then known as the Commodity Exchange Commission) has recognized the use of spread positions to facilitate liquidity and hedging. See Notice of Proposed Order in the Matter of Limits on Position and Daily Trading in Grain for Future Delivery, 3 FR 1408 (June 14, 1938). 920 17 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 exemptions for pre-enactment swaps and transition period swaps.922 Proposed § 150.3(b)–(g) respectively addressed: Non-enumerated bona fide hedge and spread exemption requests submitted directly to the Commission; previously-granted risk management exemptions to Federal position limits; exemption-related recordkeeping and reporting requirements; the aggregation of accounts; and the delegation of certain authorities to the Director of the Division of Market Oversight. The most substantive comments on proposed § 150.3 relate to the spread transaction exemption in proposed § 150.3(a)(2) and to the natural gas conditional position limit exemption in proposed § 150.3(a)(4), as described in detail below and under the discussion of § 150.2, above.923 In addition, one commenter expressed general support for the Commission’s proposed approach to recognizing exemptions under § 150.3.924 The Commission has determined to adopt § 150.3 largely as proposed, with certain modifications and clarifications in response to commenters’ views and other considerations, as described in detail below. 3. Section 150.3(a)(1)—Exemption for Bona Fide Hedging Transaction or Position i. Summary of the 2020 NPRM— Exemption for Bona Fide Hedging Transaction or Position First, under proposed § 150.3(a)(1)(i), a bona fide hedging transaction or position that falls within one of the proposed enumerated hedges set forth in proposed Appendix A to part 150, discussed above, would be selfeffectuating for purposes of Federal position limits. A market participant thus would not be required to request Commission approval prior to exceeding Federal position limits for such transaction or position. However, this does not affect a market participant’s obligations under proposed § 150.5(a) and under the relevant exchange’s rules and thus, the market participant would be required to request a bona fide hedge exemption from the relevant exchange for purposes of exchange-set limits established pursuant to proposed § 150.5(a), and submit required cashmarket information to the exchange as 922 The Commission revised § 150.3(a) in 2016, relocating the independent account controller aggregation exemption from § 150.3(a)(4) in order to consolidate it with the Commission’s aggregation requirements in § 150.4(b)(4). See Final Aggregation Rulemaking, 81 FR at 91489–91490. 923 See supra Section II.B.3.vi.a. (discussing the spot-month limit for natural gas). 924 See CMC at 6. PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 part of that request.925 The Commission also proposed to allow the existing enumerated anticipatory bona fide hedges (some of which are not currently self-effectuating, and must be approved by the Commission, under existing § 1.48) to be self-effectuating for purposes of Federal position limits (and thus would not require prior Commission approval). Second, under proposed § 150.3(a)(1)(ii), for positions in referenced contracts that do not satisfy one of the proposed enumerated hedges in Appendix A, (i.e., non-enumerated bona fide hedges), a market participant must request approval from the Commission either directly, or indirectly through an exchange, prior to exceeding Federal position limits. Such exemptions thus would not be selfeffectuating and a market participant in such cases would have one of the following two options for requesting such a non-enumerated bona fide hedge recognition: (1) Apply directly to the Commission in accordance with § 150.3(b) (described below), and, separately, also apply to an exchange pursuant to exchange rules established under proposed § 150.5(a); 926 or (2) apply through an exchange pursuant to proposed § 150.9 for a non-enumerated bona fide hedge recognition that could ultimately be valid both for purposes of Federal and exchange-set position limit requirements, unless the Commission (and not staff, which would not have delegated authority) denies the application within a limited period of time.927 As discussed in the 2020 NPRM, market participants relying on enumerated or non-enumerated bona fide hedge recognitions would no longer have to file the monthly Form 204/304 with supporting cash-market information.928 ii. Comments and Discussion of Final Rule—Exemption for Bona Fide Hedging Transactions or Positions The Commission did not receive any comments on proposed § 150.3(a)(1). As such, the Commission is finalizing § 150.3(a)(1) with a few grammatical and organizational changes to improve readability. The Commission is also finalizing the introductory text in § 150.3(a) with a clarification that ‘‘each’’ of a person’s transactions or positions must satisfy at least one of the 925 See infra Section II.D.3. See also 85 FR at 11644 (proposed § 150.5(a)(2)(ii)(A)). 926 See infra Section II.D.3. (discussion of proposed § 150.5). 927 See infra Section II.G. (discussion of proposed § 150.9). 928 See infra Section II.H.2. (discussion of the proposed elimination of Form 204). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations exemptions in § 150.3(a) in order to exceed Federal limits. None of the technical revisions are intended to change the substance of proposed § 150.3(a)(1). 4. Section 150.3(a)(2)—Spread Exemptions i. Summary of the 2020 NPRM—Spread Exemptions Under proposed § 150.3(a)(2)(i), a spread position would be selfeffectuating for purposes of Federal position limits, provided that the position fits within at least one of the types of spread strategies listed in the ‘‘spread transaction’’ definition in proposed § 150.1,929 and provided further that the market participant separately requests a spread exemption from the relevant exchange’s limits established pursuant to proposed § 150.5(a). Under proposed § 150.3(a)(2)(ii), for a spread strategy that does not meet the ‘‘spread transaction’’ definition in proposed § 150.1, a market participant must apply for a spread exemption directly from the Commission in accordance with proposed § 150.3(b). The market participant must also receive a notification of the approved spread exemption under proposed § 150.3(b)(4) before exceeding the Federal speculative position limits for that spread position. The Commission thus did not propose a process akin to § 150.9 for spreads that do not meet the proposed ‘‘spread transaction’’ definition. khammond on DSKJM1Z7X2PROD with RULES2 ii. Comments—Spread Exemptions Several commenters advocated for the Commission to expand the proposed § 150.9 process, which would allow exchanges to process applications for non-enumerated bona fide hedge exemptions for purposes of both Federal and exchange limits, to also allow exchanges to grant ‘‘non-enumerated’’ spread exemptions for spread positions that do not meet the ‘‘spread transaction’’ definition.930 Commenters also requested that the Commission 929 See supra Section II.A.20. (proposed definition of ‘‘spread transaction’’ in § 150.1, which would cover: Intra-market, inter-market, intracommodity, or inter-commodity spreads, including calendar spreads, quality differential spreads, processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads), product or by-product differential spreads, and futures-options spreads.) 930 See MFA/AIMA at 10; FIA at 21; Citadel at 8– 9; ISDA at 9; ICE at 7–8 (suggesting that if the list of spread positions in the spread transaction definition is determined to be an exhaustive list, then the Commission should permit additional flexibility for an exchange to grant additional spread exemptions—that are not covered in the spread transaction definition—using the proposed § 150.9 process). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 provide an explanation for why the Commission would not expand § 150.9 to cover ‘‘non-enumerated’’ spread exemptions.931 Finally, commenters requested that market participants be able to apply for spread exemptions on a late or retroactive basis the same way they would be permitted to apply for bona fide hedge exemptions within five days of exceeding Federal position limits under proposed §§ 150.3 and 150.9.932 iii. Discussion of Final Rule—Spread Exemptions The Commission has determined to adopt § 150.3(a)(2) with non-substantive revisions to address technical edits or improve readability. For the reasons discussed immediately below, the Commission has determined not to expand § 150.3(a)(2) as requested by commenters to allow market participants to apply to exchanges for ‘‘non-enumerated’’ spread exemptions that are not covered in the ‘‘spread transaction’’ definition in § 150.1. First, as discussed above,933 the Commission has determined to expand the ‘‘spread transaction’’ definition so that it covers most, if not all, of the most common spread exemptions used by market participants. With this expansion, the Commission expects that most spread exemption requests will fall within the scope of the ‘‘spread transaction’’ definition. Accordingly, the Commission expects that most spread exemptions will thus be selfeffectuating for purposes of Federal position limits. Also, the Commission expects that any spread exemption requests falling outside of the ‘‘spread transaction’’ definition are likely to be novel exemption requests that the Commission—and not exchanges— should review, considering certain statutory considerations in CEA section 4a(a)(3)(B). As explained immediately below, the Commission cannot authorize exchanges to conduct this analysis because exchanges would lack clear standards for assessing whether a particular spread position satisfies the requirements of the CEA. Second, bona fide hedge recognitions and spread exemptions are subject to different legal standards. That is, under CEA section 4a(a)(c)(2), Congress provided clear criteria to the Commission for determining what constitutes a bona fide hedging transaction or position. In turn, the Commission has defined in detail the 931 See MFA/AIMA at 10. ICE at 8. 933 See supra Section II.A.20. (discussing changes to expand the spread transaction definition). term bona fide hedging transaction or position in § 150.1. As a result, under final § 150.9, the Commission is permitting exchanges to evaluate applications for non-enumerated bona fide hedges for purposes of exchange-set limits in accordance with the same clear criteria used by the Commission. In contrast, the CEA does not include clear criteria for granting spread exemptions. Instead, CEA section 4a(a)(1) generally permits the Commission to exempt ‘‘transactions normally known to the trade as ‘‘spreads’’ or ‘‘straddles’’ or ‘‘arbitrage’’ from position limits 934 and requires the Commission to administer Federal position limits in a manner that comports with certain policy considerations in CEA section 4a(a)(3)(B).935 Analyzing novel spread exemption requests in accordance with these general principles requires the Commission to use its judgment to conduct a highly fact-specific analysis. And, in the absence of any detailed statutory or regulatory criteria, the Commission is not comfortable, at this time, with leveraging an exchange’s analysis and determination with respect to novel spread exemption requests. As such, the Commission has determined that the Commission should conduct a direct review of any spread exemptions that do not meet the ‘‘spread transaction’’ definition, and the Commission thus will not expand § 150.9 to cover spreads because exchanges would lack clear standards for assessing whether a particular spread position satisfies the requirements of the CEA. In the future, the Commission may, however, consider developing regulatory criteria for spread exemptions such that novel spread exemptions could be considered through a more streamlined process, such as § 150.9. Finally, unlike for certain bona fide hedge recognitions as discussed below, the Commission has determined not to permit retroactive applications for spread exemptions or other exemptions permitted under this § 150.3(a). The Commission believes that the Federal position limits framework adopted herein provides sufficient flexibility through expanded speculative limits, and a clear, comprehensive set of exemptions, most of which are selfeffectuating and thus do not require prior Commission approval. As such, the Commission believes that market participants will be able to identify their exemption needs based on these clear regulatory requirements and apply for 932 See PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 3351 934 7 935 7 E:\FR\FM\14JAR2.SGM U.S.C. 6a(a)(1). U.S.C. 6a(a)(3)(b). 14JAR2 3352 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations all such exemptions ahead of time. In addition, the Commission believes that allowing retroactive spread exemptions and other types of retroactive exemptions (such as the financial distress or conditional natural gas spot month exemption) could potentially be harmful to the market as these types of strategies may involve non-riskreducing or speculative activity that should be evaluated prior to a person exceeding Federal position limits. khammond on DSKJM1Z7X2PROD with RULES2 5. Section 150.3(a)(3)—Financial Distress Exemptions i. Summary of the 2020 NPRM— Financial Distress Exemptions Proposed § 150.3(a)(3) would allow for a financial distress exemption in certain situations, including the potential default or bankruptcy of a customer or a potential acquisition target. For example, in periods of financial distress, such as a customer default at an FCM or a potential bankruptcy of a market participant, it may be beneficial for a financiallysound market participant to take on the positions and corresponding risk of a less stable market participant, and in doing so, exceed Federal speculative position limits. Pursuant to authority delegated under §§ 140.97 and 140.99, Commission staff previously granted exemptions in these types of situations to avoid sudden liquidations required to comply with a position limit.936 Such sudden liquidations could otherwise potentially hinder statutory objectives, including by reducing liquidity, disrupting price discovery, and/or increasing systemic risk.937 The proposed exemption would be available for the positions of ‘‘a person, or related persons,’’ meaning that a financial distress exemption request should be specific to the circumstances of a particular person, or to persons affiliated with that person, and not a more general request by a large group of unrelated people whose financial distress circumstances may differ from one another. The proposed exemption would be granted on a case-by-case basis in response to a request submitted to the Commission pursuant to § 140.99, and would be evaluated based on the specific facts and circumstances of a particular person or a related person or persons. Any such financial distress position would not be a bona fide hedging transaction or position unless it otherwise met the substantive and 936 See, e.g., CFTC Press Release No. 5551–08, CFTC Update on Efforts Underway to Oversee Markets, (Sept. 19, 2008), available at https:// www.cftc.gov/PressRoom/PressReleases/pr5551-08. 937 See 7 U.S.C. 6a(a)(3). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 procedural requirements set forth in proposed §§ 150.1, 150.3, and 150.9, as applicable. ii. Comments and Summary of the Commission Determination—Financial Distress Exemptions The Commission did not receive any substantive comments on proposed § 150.3(a)(3), although one commenter expressed general support for the financial distress exemption.938 As such, the Commission has determined to finalize § 150.3(a)(3) as proposed, for the reasons discussed above and in the 2020 NPRM. 6. Section 150.3(a)(4)—Conditional Spot Month Exemption in Natural Gas i. Summary of the 2020 NPRM— Conditional Spot Month Exemption in Natural Gas Certain natural gas contracts are currently subject to exchange-set position limits, but not Federal position limits.939 In the 2020 NPRM, the Commission proposed applying Federal position limits to certain natural gas contracts for the first time by including the physically-settled NYMEX Henry Hub Natural Gas (‘‘NYMEX NG’’) contract as a core referenced futures contract listed in proposed § 150.2(d). The Commission also proposed, consistent with existing exchange practice, establishing a conditional spot month exemption for Federal position limit purposes that would permit larger positions during the spot month for cash-settled natural gas referenced contracts so long as the market participant held no physically-settled NYMEX NG. ii. Summary of the Commission Determination—Conditional Spot Month Exemption in Natural Gas For the Final Rule, the Commission is adopting the conditional spot month exemption in natural gas, as proposed. The Commission discusses this conditional spot month exemption, as well as other issues in connection with NYMEX NG, above under the discussion of § 150.2.940 The Commission is discussing all the issues related to the NYMEX NG core referenced futures at 2. examples include natural gas contracts that use the NYMEX NG futures contract as a reference price, such as ICE’s Henry Financial Penultimate Fixed Price Futures (PHH), options on Henry Penultimate Fixed Price (PHE), Henry Basis Futures (HEN) and Henry Swing Futures (HHD), NYMEX’s E-mini Natural Gas Futures (QG), Henry Hub Natural Gas Last Day Financial Futures (HH), and Henry Hub Natural Gas Financial Calendar Spread (3 Month) Option (G3). 940 See supra Section II.B.3.vi.a. (discussing the Federal spot-month limit for natural gas). contract, including this conditional spot month exemption, together in one place in this release for the reader’s convenience. 7. Section 150.3(a)(5)—Exemption for Pre-Enactment Swaps and Transition Period Swaps i. Background and Summary of the 2020 NPRM—Exemption for Pre-Enactment Swaps and Transition Period Swaps Currently, swaps are not subject to the existing Federal position limits framework, and the Commission is unaware of any exchange-set limits on swaps with respect to any of the 25 core referenced futures contracts. In order to promote a smooth transition to compliance for swaps, which were not previously subject to Federal speculative position limits, in the 2020 NPRM, the Commission proposed to exempt pre-enactment swaps and transition period swaps from Federal position limits. Proposed § 150.3(a)(5) provided that Federal position limits would not apply to positions acquired in good faith in any pre-enactment swaps or in any transition period swaps, in either case as defined by § 150.1.941 Under the 2020 NPRM, any pre-enactment swap or transition period swap would be exempt from Federal position limits—even if the swap would qualify as an economically equivalent swap under the 2020 NPRM. This proposed exemption would be self-effectuating and would not require a market participant to request relief from the Commission. For purposes of complying with the proposed Federal non-spot month limits, the 2020 NPRM would also allow both pre-enactment swaps and transition period swaps (to the extent such swaps qualify as ‘‘economically equivalent swaps’’) to be netted with post-Effective Date commodity derivative contracts. The 2020 NPRM did not permit such positions to be netted during the spot month so as to avoid rendering spot month limits ineffective. Specifically, the Commission explained that it was particularly concerned about protecting the spot month in physically-delivered futures contracts from price distortions or manipulation to protect against 938 CCI 939 Some PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 941 ‘‘Pre-enactment swap’’ would mean any swap entered into prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), the terms of which have not expired as of the date of enactment of that Act. ‘‘Transition period swap’’ would mean a swap entered into during the period commencing after the enactment of the Dodd-Frank Act of 2010 (July 21, 2010), and ending 60 days after the publication in the Federal Register of final amendments to this part implementing section 737 of the Dodd-Frank Act of 2010, the terms of which have not expired as of 60 days after the publication date. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations disrupting the hedging and price discovery utility of the futures contract. ii. Comments and Summary of the Commission Determination—Exemption for Pre-Enactment Swaps and Transition Period Swaps The Commission did not receive any comments specifically addressing the exemption for pre-enactment swaps and transition period swaps addressed in proposed § 150.3(a)(5). The Commission is adopting § 150.3(a)(5) as proposed with certain limited grammatical and technical changes that are not intended to reflect a change in the substantive meaning. For comments generally related to the exemption for preenactment swaps and transition period swaps, please refer to the discussion of pre-existing positions in general and comments thereto, in § 150.2(g) above,942 and § 150.5(a)(3)(ii) below.943 8. Section 150.3(b)—Application for Relief and Removal of Existing Commission Application Processes khammond on DSKJM1Z7X2PROD with RULES2 i. Summary of the 2020 NPRM— Application for Relief and Removal of Existing Commission Application Processes The Commission proposed two avenues for a market participant to request a non-enumerated bona fide hedge recognition: § 150.3(b), described below, which would allow market participants to apply directly to the Commission; and § 150.9, which, as described in detail further below, would allow market participants to apply to exchanges for a non-enumerated bona fide hedge exemption for purposes of both Federal and exchange limits.944 The Commission proposed to remove its existing processes for applying for such exemptions under §§ 1.47 and 1.48. The Commission also proposed to remove existing § 140.97, which delegates to the Director of the Division of Enforcement or his designee authority regarding requests for classification of positions as bona fide hedges under existing §§ 1.47 and 1.48.945 In the 2020 NPRM, the Commission explained that it did not intend the proposed replacement of §§ 1.47 and 1.48 to have any bearing on bona fide hedges previously recognized under those provisions. With the exception of certain recognitions for risk management positions discussed below, 942 See supra Section II.B.7. (discussing § 150.2 Federal position limits on pre-existing positions). 943 See infra Section II.D.3. (discussing § 150.5 requirements for exchange limits on pre-existing positions in a non-spot month). 944 See infra Section II.G. 945 17 CFR 140.97. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 positions that were previously recognized as bona fide hedges under §§ 1.47 or 1.48 would continue to be recognized, provided such positions continue to meet the statutory bona fide hedging definition and all other existing and proposed requirements. With respect to a § 150.3(b) application for a bona fide hedge recognition, the Commission proposed that such application must include: (i) A description of the position in the commodity derivative contract for which the application is submitted, including the name of the underlying commodity and the position size; (ii) information to demonstrate why the position satisfies CEA section 4a(c)(2) and the definition of bona fide hedging transaction or position in proposed § 150.1, including ‘‘factual and legal analysis;’’ (iii) a statement concerning the maximum size of all gross positions in derivative contracts for which the application is submitted (in order to provide a view of the true footprint of the position in the market); (iv) information regarding the applicant’s activity in the cash markets and the swaps markets for the commodity underlying the position for which the application is submitted; 946 and (v) any other information that may help the Commission determine whether the position meets the requirements of CEA section 4a(c)(2) and the definition of bona fide hedging transaction or position in § 150.1.947 In addition, under the 2020 NPRM, a market participant would be required to apply to the Commission using the application process in § 150.3(b) for exemptions for any spread positions that do not meet the proposed ‘‘spread transaction’’ definition. With respect to a § 150.3(b) application for a spread exemption, the Commission proposed that such application must include: (i) A description of the spread transaction for which the exemption application is submitted; 948 (ii) a statement concerning the maximum size of all gross positions in derivative contracts for which the application is submitted; and (iii) any other information that may 946 The Commission stated that it would expect applicants to provide cash-market data for at least the prior year. 947 For example, the Commission may, in its discretion, request a description of any positions in other commodity derivative contracts in the same commodity underlying the commodity derivative contract for which the application is submitted. Other commodity derivative contracts could include other futures contracts, option on futures contracts, and swaps (including OTC swaps) positions held by the applicant. 948 The nature of such description would depend on the facts and circumstances, and different details may be required depending on the particular spread. PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 3353 help the Commission determine whether the position is consistent with CEA section 4a(a)(3)(B). Under proposed § 150.3(b)(2), the Commission (or Commission staff pursuant to delegated authority proposed in § 150.3(g)) could request additional information from the applicant and would provide the applicant with ten business days to respond. Under proposed § 150.3(b)(3) and (4), the applicant, however, could not exceed Federal position limits unless it receives a notice of approval from the Commission or from Commission staff pursuant to delegated authority proposed in § 150.3(g)—with one exception. That is, due to demonstrated sudden or unforeseen increases in a person’s bona fide hedging needs, the person could request a recognition of a bona fide hedging transaction or position within five business days after the person established the position that exceeded the Federal speculative position limit.949 Under this proposed process, market participants would be encouraged to submit their requests for bona fide hedge recognitions and spread exemptions as early as possible since proposed § 150.3(b) would not set a specific timeframe within which the Commission must make a determination for such requests. Further, under the 2020 NPRM, all approved bona fide hedge recognitions and spread exemptions would need to be renewed if there are any changes to the information submitted as part of the request, or upon request by the Commission or Commission staff.950 949 Where a person requests a bona fide hedge recognition within five business days after exceeding Federal position limits, such person would be required to demonstrate that they encountered sudden or unforeseen circumstances that required them to exceed Federal position limits before submitting and receiving approval of their bona fide hedge application. These applications submitted after a person has exceeded Federal position limits should not be habitual and would be reviewed closely. If the Commission reviews such application and finds that the position does not qualify as a bona fide hedge, then the applicant would be required to bring its position into compliance within a commercially reasonable time, as determined by the Commission in consultation with the applicant and the applicable DCM or SEF. If the applicant brings the position into compliance within a commercially reasonable time, then the applicant would not be considered to have violated the position limits rules. Further, any intentional misstatements to the Commission, including statements to demonstrate why the bona fide hedging needs were sudden and unforeseen, would be a violation of sections 6(c)(2) and 9(a)(2) of the Act. 7 U.S.C. 9(2) and 13(a)(2). 950 See proposed § 150.3(b)(5). Currently, the Commission does not require automatic updates to bona fide hedge applications, and does not require E:\FR\FM\14JAR2.SGM Continued 14JAR2 3354 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Finally, under proposed § 150.3(b)(6), the Commission (and not staff) could revoke or modify any bona fide hedge recognition or spread exemption at any time if the Commission determines that the bona fide hedge recognition or spread exemption, or portions thereof, are no longer consistent with the applicable statutory and regulatory requirements.951 In the 2020 NPRM, the Commission noted that it anticipates that most market participants would utilize the streamlined process set forth in proposed § 150.9 rather than the process proposed in § 150.3(b) because: Exchanges would generally be able to make an initial determination more efficiently than Commission staff; and market participants are likely already familiar with the proposed processes set forth in § 150.9 (which are intended to leverage the processes currently used by exchanges to address requests for exemptions from exchange-set limits). Nevertheless, proposed § 150.3(a)(1) and (2) clarify that market participants could request non-enumerated bona fide hedge recognitions and spread exemptions that do not meet the ‘‘spread transaction’’ definition directly from the Commission. After receiving any approval of a bona fide hedge recognition or spread exemption from the Commission under proposed § 150.3(b), the market participant would still be required to request a bona fide hedge recognition or spread exemption from the relevant exchange for purposes of exchange-set limits established pursuant to proposed § 150.5(a). khammond on DSKJM1Z7X2PROD with RULES2 ii. Comments—Application for Relief and Removal of Existing Commission Application Processes The Commission received one comment on proposed § 150.3(b) requesting that the Commission remove the requirement proposed in § 150.3(b)(1)(i)(B) that an applicant provide a ‘‘factual and legal analysis’’ as part of an exemption application for a non-enumerated bona fide hedge.952 applications or updates thereto for spread exemptions, which are self-effectuating. Consistent with current practices, under proposed § 150.3(b)(5), the Commission would not require automatic annual updates to bona fide hedge and spread exemption applications; rather, updated applications would only be required if there are changes to information the requestor initially submitted or upon Commission request. This approach is different than the proposed streamlined process in § 150.9, which would require automatic annual updates to such applications, which is more consistent with current exchange practices. See, e.g., CME Rule 559. 951 This proposed authority to revoke or modify a bona fide hedge recognition or spread exemption would not be delegated to Commission staff. 952 CME Group at 10. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 iii. Discussion of Final Rule— Application for Relief and Removal of Existing Commission Application Processes The Commission has determined to finalize its proposal to remove existing §§ 1.47, 1.48, and 140.97.953 The Commission has also determined to finalize § 150.3(b) largely as proposed but with the following modifications in response to commenters and other considerations. Generally, the information required to be submitted as part of the § 150.3(b) application is necessary to allow the Commission to evaluate whether the applicant’s position satisfies the requirements in § 150.3(b)(1), as applicable. The Commission has determined to modify the requirement, as it appears in both § 150.3(b) and § 150.9(c), that an applicant provide a ‘‘factual and legal analysis’’ as part of its non-enumerated bona fide hedge exemption application. As explained further below, in proposing this requirement, the Commission did not intend to require that applicants engage legal counsel to complete their applications for non-enumerated bona fide hedge recognitions. Rather, the purpose of this proposed requirement was to ensure that applicants explain their hedging strategies and provide sufficient information to demonstrate why a particular position satisfies the bona fide hedge definition in proposed § 150.1 and CEA section 4a(c)(2).954 Accordingly, the Commission has revised § 150.3(b)(1)(i)(B) to replace the requirement to provide ‘‘factual and legal’’ analysis with the requirement that an applicant provide: (1) An explanation of the hedging strategy, including a statement that the applicant’s position complies with the applicable requirements of the bona fide hedge definition, and (2) information 953 Although §§ 1.47 and 1.48 are currently reflected in the Code of Federal Regulations (‘‘CFR’’) as ‘‘[Reserved]’’, §§ 1.47 and 1.48 that existed prior to the 2011 Final Rulemaking are currently in effect. The 2011 Final Rulemaking removed and reserved §§ 1.47 and 1.48. However, the U.S. District Court for the District of Columbia in ISDA subsequently vacated the 2011 Final Rulemaking on September 28, 2012. As a result, §§ 1.47 and 1.48 that existed prior to the 2011 Final Rulemaking went back into effect, though they were not recodified in the CFR. This Final Rule removes §§ 1.47 and 1.48 as they are currently in effect (i.e., as they existed prior to the 2011 Final Rulemaking) and leaves those two sections reserved in the CFR. As this action does not result in a change to the currently codified CFR, there is no corresponding amendment in the regulatory text of this document. 954 See supra Section II.G.5. (providing a more detailed discussion of this requirement as it appears in § 150.9(c)). PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 that demonstrates why the position satisfies the applicable requirements. The Commission is also making several other clarifications to § 150.3(b). First, in § 150.3(b)(3)(ii)(C), the Commission proposed that, for a retroactive application submitted to the Commission after a person has already exceeded Federal position limits, the Commission would not hold an applicant accountable for a position limits violation during the period of the Commission’s review, nor once the Commission has issued its determination. The Commission is revising this provision to clarify that the Commission ‘‘will not pursue an enforcement action’’ in these circumstances. The Commission is also revising this provision to clarify that the provision applies so long as the applicant submitted its application in good faith and, if required, the applicant brings its position below the Federal position limits. This revision is simply intended to make explicit an implicit presumption that the applicant should have a reasonable and good faith basis for determining that its position meets the requirements of § 150.3(b) and for submitting the retroactive application. This requirement is also intended to deter the filing of frivolous retroactive exemption applications. Finally, the Commission is making a few technical revisions to clarify that this section is referring to the retroactive application provisions in § 150.3(b)(3)(ii), and to correct a cross-reference in this paragraph to correctly reference paragraph § 150.3(b)(3)(ii)(B). In addition, the Commission is modifying proposed § 150.3(b)(5) to clarify that an applicant who received its original approval of a recognition of a non-enumerated bona fide hedge or spread exemption through the Commission’s § 150.3(b) process is required to submit a renewal application if there are any ‘‘material’’ changes to the original application, but is not required to submit a renewal application as a result of circumstances involving any minor or non-substantive changes to the information underlying the original application. If a market participant using the § 150.3(b) process has any questions regarding what qualifies as a material change to the original application, the Commission encourages the market participant to contact DMO staff for guidance on a case-by-case basis. Next, the Commission is revising its revocation authority under § 150.3(b)(6) to expressly require that the Commission provide a person with an opportunity to respond after the Commission notifies such person that E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations the Commission believes their transactions or positions no longer satisfy the bona fide hedge definition or spread exemption requirements, as applicable. The Commission is also revising § 150.3(b)(6) to clarify that the Commission will discuss with the applicant and consult with the relevant exchange when determining what is a commercially reasonable amount of time for the applicant to bring its position below the Federal position limits. The Commission also reorganized this section to improve readability. Finally, the Commission made several grammatical and technical changes to § 150.3(b) that are not intended to change the substance of the remaining sections, unless discussed above. khammond on DSKJM1Z7X2PROD with RULES2 9. Section 150.3(c)—Previously-Granted Risk Management Exemptions i. Summary of the 2020 NPRM— Previously-Granted Risk Management Exemptions As discussed above, the Commission previously recognized, as bona fide hedges under § 1.47, certain riskmanagement positions in physical commodity futures and/or option on futures contracts held outside of the spot month that were used to offset the risk of commodity index swaps and other related exposures, but that did not represent substitutes for transactions or positions to be taken in a physical marketing channel.955 However, the 2020 NPRM interpreted the Dodd-Frank Act amendments to the CEA as eliminating the Commission’s authority to grant such relief unless the position satisfies the pass-through provision in CEA section 4a(c)(2)(B).956 Accordingly, to ensure consistency with the DoddFrank Act, the Commission proposed that it would not recognize further risk management positions as bona fide hedges, unless the position otherwise satisfies the requirements of the passthrough provisions.957 In addition, the Commission proposed in § 150.3(c) that such previouslygranted exemptions shall not apply after the effective date of a final Federal position limits rulemaking implementing the Dodd-Frank Act. Proposed § 150.3(c) used the phrase ‘‘positions in financial instruments’’ to refer to such commodity index swaps and related exposure, and would have the effect of revoking the ability to use previously-granted risk management 955 See supra Section II.A.1.iii. (discussing the temporary substitute test and risk management exemption under § 150.1). 956 Id. 957 85 FR at 11641. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 exemptions once the limits proposed in § 150.2 go into effect. ii. Comments and Discussion of Final Rule—Previously-Granted Risk Management Exemptions The Commission has addressed any comments on risk management exemptions in the discussion of § 150.1 above.958 As discussed above, to ensure consistency with the Dodd-Frank Act, the Commission will not recognize risk management positions as bona fide hedges under the Final Rule, unless the position otherwise satisfies the requirements of the Final Rule’s passthrough swap provisions.959 Consequently, the Commission is adopting § 150.3(c) largely as proposed, which provides that such previouslygranted risk management exemptions issued pursuant to § 1.47 shall no longer be recognized.960 However, the Final Rule is also providing for a compliance date of January 1, 2023 with respect to the elimination of the risk management exemption by which risk management exemption holders must reduce their risk management exemption positions to comply with Federal position limits under the Final Rule.961 Section 150.3(c) uses the phrase ‘‘positions in financial instruments’’ to refer to such commodity index swaps and related exposure and would have the effect of revoking the ability to use previously-granted risk management exemptions once the Final Rule’s Federal position limits in § 150.2 become effective. However, the Final Rule will also include an extended compliance date until January 1, 2023 with respect to positions entered into upon reliance of an existing risk management exemption.962 The Final Rule also deletes the sentence in proposed § 150.3(c), which stated that nothing in § 150.3(c) shall preclude the Commission, a DCM, or SEF from recognizing a bona fide hedging transaction or position for the former holder of such a risk management exemption if the position complies with the definition of bona fide hedging transaction or position under this part, including appendices hereto. This sentence was intended to 958 See supra Section II.A.1.iii (discussing risk management exemptions and comments received in greater detail). 959 See supra Section II.A.1.x. (discussing the proposed pass-through swap provisions). 960 Under this Final Rule, however, exchanges may continue to grant risk management exemptions (that do not otherwise meet the bona fide hedge definition in § 150.1) up to the applicable Federal position limit. 961 See supra Section I.D. (discussing the effective and compliance dates). 962 Id. PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 3355 clarify what has been explained above— risk management exemptions that meet the pass-through swap provisions are permitted under the Final Rule.963 The Commission has determined that this sentence is unnecessary. The Commission is making several technical changes to proposed § 150.3(c), including to clarify that the provision covers risk management exemptions previously granted by the Commission or by Commission staff. The Commission also reorganized § 150.3(c) to improve readability. 10. Section 150.3(d)—Recordkeeping i. Summary of the 2020 NPRM— Recordkeeping Proposed § 150.3(d) would establish recordkeeping requirements for persons who claim any exemption under proposed § 150.3. Proposed § 150.3(d) is intended to help ensure that any person who claims any exemption permitted under proposed § 150.3 could demonstrate compliance with the applicable requirements by providing all relevant records to support the claim of a particular exemption. That is, under proposed § 150.3(d)(1), any persons claiming an exemption would be required to keep and maintain complete books and records concerning all details of their related cash, forward, futures, options on futures, and swap positions and transactions, including anticipated requirements, production and royalties, contracts for services, cash commodity products and by-products, crosscommodity hedges, and records of bona fide hedging swap counterparties. Proposed § 150.3(d)(2) would address recordkeeping requirements related to the pass-through swap provision in the proposed definition of bona fide hedging transaction or position in proposed § 150.1.964 Under proposed § 150.3(d)(2), a pass-through swap counterparty, as contemplated by proposed § 150.1, that relies on a representation received from a bona fide hedging swap counterparty that a swap qualifies in good faith as a bona fide hedging position or transaction under proposed § 150.1, would be required to: (i) Maintain any written representation for at least two years following the expiration of the swap; and (ii) furnish the representation to the Commission upon request. ii. Comments—Recordkeeping Several commenters requested clarification that the recordkeeping 963 See supra Section II.A.1.x. (discussing the proposed pass-through language). 964 See supra Section II.A.1.x. (discussion of proposed pass-through swap provision). E:\FR\FM\14JAR2.SGM 14JAR2 3356 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 requirements in proposed § 150.3(d)(1) would not impose an additional recordkeeping obligation on commercial end-users beyond the records that are kept in the normal course of business and are typical for the relevant industry.965 In addition, commenters recommended that the Commission delete the pass-through swap recordkeeping requirements in proposed § 150.3(d)(2).966 Commenters were concerned that the pass-through swap provision in § 150.1 places all compliance burdens on the passthrough swap counterparty offering the swap, and not on the bona fide hedging counterparty using the swap.967 Commenters expressed that this recordkeeping provision would require the pass-through swap counterparty to maintain records of each representation made by the bona fide hedging counterparty on a trade-by-trade basis— a practice commenters view as onerous and unnecessary.968 Commenters suggested that the Commission will have access to records from anyone availing themselves of any exemption from speculative limits, and thus does not need the additional recordkeeping requirement in proposed § 150.3(d)(2).969 One commenter also requested that the Commission clarify that the pass-through swap counterparty can rely on the bona fide hedging counterparty’s good faith representation that a record of an agreement or confirmation of the transaction containing the bona fide hedge passthrough representation would satisfy the record retention requirements set forth in proposed § 150.3(d)(2).970 iii. Discussion of Final Rule— Recordkeeping The Commission has determined to finalize § 150.3(d), for the reasons stated in the 2020 NPRM, with certain clarifications discussed below. First, the Commission clarifies that the recordkeeping requirements in § 150.3(d)(1) are not intended to impose any additional recordkeeping obligations on market participants beyond the records they are required to keep in the normal course of business. The Commission notes, however, that, consistent with the general recordkeeping obligations in Commission regulation 1.31, and as explained in the 2020 NPRM, 965 Cope at 5–6; EEI/EPSA at 7–8. at 6; Shell at 6. 966 Cargill § 150.3(d)(1) is intended to capture records market participants should be maintaining with respect to each of their exemptions from Federal position limits. The Commission is revising § 150.3(d)(1) to clarify that market participants that avail themselves of exemptions under this section are required to keep the relevant ‘‘books and records’’ of ‘‘each of their exemptions’’ and any related position or transaction information for such applications, including any books and records market participants create for related ‘‘merchandising activity’’ or other relevant aspects of a particular exemption (including the items listed in § 150.3(d)(1)), as applicable. Next, regarding the pass-through swap recordkeeping requirements, in § 150.2(d)(2), the Commission intended for this requirement to be an extension of market participants’ existing obligations to maintain swap data records under Part 45 and regulatory records under § 1.31.971 That is, under § 150.1, the Commission has revised paragraph (2) of the bona fide hedging transaction or position definition to require that a pass-through swap counterparty receive a written representation from its bona fide hedging swap counterparty that the swap ‘‘qualifies as a bona fide hedging transaction or position’’ pursuant to paragraph (1) of the definition of a bona fide hedging transaction or position in § 150.1 in order for the pass-through swap to qualify as a bona fide hedge. The pass-through swap counterparty may rely in good faith on such written representation from the bona fide hedging swap counterparty, unless the pass-through swap counterparty has information that would cause a reasonable person to question the accuracy of the representation. Thus, the recordkeeping requirements in § 150.3(d)(2) are intended to capture any ‘‘written’’ record created for purposes of making such demonstration. The Commission provides additional explanation above on how a passthrough swap counterparty can demonstrate good faith reliance.972 For the avoidance of doubt, the Commission is revising § 150.3(d)(2) to clarify that a person relying on the pass-through swap provision is required to maintain any records created for purposes of demonstrating a good faith reliance on that provision in accordance with § 150.1. The Commission also clarifies that, pursuant to the swap recordkeeping 967 Id. 968 Shell at 7; CMC at 5. at 5–6. 970 Shell at 6. 971 17 CFR 1.31(a)–(b). supra Section II.A.1.x. (discussing the pass-through swap provision in greater detail). 969 COPE VerDate Sep<11>2014 03:06 Jan 14, 2021 972 See Jkt 253001 PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 requirements in § 45.2(b) 973 and the general recordkeeping requirements in § 1.31,974 the bona fide hedging swap counterparty to the pass-through swap is required to maintain a record of such pass-through swap. The Commission considers any written representation the bona fide hedging swap counterparty provides to the pass-through swap counterparty as being part of the full, complete, and systematic records that the bona fide hedging swap counterparty is required to keep pursuant to § 45.2(b), with respect to each pass-through swap to which it is a counterparty. The bona fide hedging swap counterparty is required to keep such records according to the form and duration requirements of § 1.31. Such records are also subject to the inspection and production requirements of both § 1.31(d) 975 and § 45.2(h).976 As such, the Commission reminds bona fide hedging swap counterparties to a passthrough swap that they are responsible for maintaining an accurate and true record of any written representations they make to the pass-through swap counterparty regarding the bona fides of the pass-through swap. Further, any such records and written representations that a bona fide hedging swap counterparty makes may, upon request, be filed with the Commission as part of an inspection, pursuant to §§ 1.31(d) and 45.2(h), and would be subject to the Commission’s prohibition regarding false statements in section 6(c)(2) of the Act, as well as any other applicable provisions regarding false information.977 11. Section 150.3(e)—Call for Information i. Summary of the 2020 NPRM—Call for Information The Commission proposed to move existing § 150.3(b), which currently allows the Commission or certain Commission staff to make calls to demand certain information regarding positions or trading, to proposed 973 17 CFR 45.2(b) (requiring that all non-swap dealer/non-major swap participant counterparties keep full, complete, and systematic records, together with all pertinent data and memoranda, with respect to each swap in which they are a counterparty). 974 17 CFR 1.31 (regulatory records, retention, and production requirements). 975 17 CFR 1.31(d) (requirement for a records entity, as defined in § 1.31(a), to produce or make accessible for inspection all regulatory records). 976 17 CFR 45.2(h) (swap record inspection requirements). 977 7 U.S.C. 9(2) (prohibition on making a false or misleading statement of material fact to the Commission); see also 7 U.S.C. 9(4) (general enforcement authority of the Commission). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations § 150.3(e), with some technical modifications. Together with the recordkeeping provision of proposed § 150.3(d), proposed § 150.3(e) should enable the Commission to monitor the use of exemptions from speculative position limits and help to ensure that any person who claims any exemption permitted by proposed § 150.3 can demonstrate compliance with the applicable requirements. ii. Comments and Summary of Commission Determination—Call for Information The Commission did not receive comments on proposed § 150.3(e). Accordingly, the Commission is adopting § 150.3(e) with one grammatical edit that is not intended to reflect a substantive change to this section. 12. Section 150.3(f)—Aggregation of Accounts i. Summary of the 2020 NPRM— Aggregation of Accounts Proposed § 150.3(f) would clarify that entities required to aggregate under § 150.4 would be considered the same person for purposes of determining whether they are eligible for a bona fide hedge recognition under § 150.3(a)(1).978 ii. Comments and Summary of Commission Determination— Aggregation of Accounts The Commission did not receive comments on proposed § 150.3(f). Accordingly, the Commission is adopting § 150.3(f) as proposed.979 13. Section § 150.3(g)—Delegation of Authority khammond on DSKJM1Z7X2PROD with RULES2 i. Summary of the 2020 NPRM— Delegation of Authority Proposed § 150.3(g) would delegate authority to the Director of the Division of Market Oversight to: Grant financial distress exemptions pursuant to proposed § 150.3(a)(3); request additional information with respect to an exemption request pursuant to proposed § 150.3(b)(2); determine, in consultation with the exchange and applicant, a commercially reasonable 978 See 17 CFR 150.4 (providing the Commission’s existing aggregation requirements for Federal position limits); See also supra Section II.B.11. (discussing eligible affiliates and position aggregation requirements). 979 The Commission did receive general comments on position aggregation discussing existing no-action relief in connection with the position aggregation requirement in existing § 150.4. For a discussion on comments received in connection with existing staff no-action relief for position aggregation requirements, see supra Section II.B.11. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 amount of time for a person to bring its positions within the Federal position limits pursuant to proposed § 150.3(b)(3)(ii)(B); make a determination whether to recognize a position as a bona fide hedging transaction or to grant a spread exemption pursuant to proposed § 150.3(b)(4); and to request that a person submit additional application information or updated materials or renew their request pursuant to proposed § 150.3(b)(2) or (5). This proposed delegation would enable the Division of Market Oversight to act quickly in the event of financial distress and in the other circumstances described above. ii. Comments and Summary of the Commission Determination—Delegation of Authority The Commission did not receive comments on proposed 150.3(g). Accordingly, the Commission is adopting § 150.3(g) with one technical edit to correct a punctuation error, which is not intended to reflect a change in the substance of this section. 14. Request for a New Exemption in § 150.3(a) for Certain Energy Utility Entities i. Summary of the 2020 NPRM and Comments—New Exemption for Certain Energy Utility Entities Although the 2020 NPRM did not include a new exemption explicitly applicable to certain energy utility entities, it did include a request for comment regarding the possibility of such an exemption.980 In response, NRECA (which encompasses several not-for-profit energy associations) 981 along with other commenters,982 requested that the Commission use its authority in CEA section 4a(a)(7) to exempt certain not-for-profit electric and natural gas utility entities (‘‘NFP Energy Entities’’) from position limits. These commenters (in particular, NRECA) argued that Congress did not intend for the Commission’s position limits regime to apply to commercial market participants engaged in hedging and mitigating commercial risk, such as the NFP Energy Entities.983 The commenters also provided several reasons why the Commission’s position limits regulatory regime is incongruous with the operations of NFP Energy Entities, including that NFP Energy Entities: (a) Operate on a not-for-profit basis; (b) have unique public service 980 See 85 FR at 11642. at 3–14. 982 See IECA at 5; LIPA at 1; NFPEA at 6. 983 NRECA at 19. obligations to provide reliable, affordable utility services to residential, commercial, and industrial customers; (c) have governance structures with oversight by elected or appointed government officials or cooperative members/consumers; (d) do not engage in speculative trading in derivatives markets; and (e) enter into energy commodity swaps and trade options only to hedge or mitigate commercial risk arising from ongoing business operations.984 NRECA expressed concern that the effort required for NFP Energy Entities to analyze and identify every transaction as non-speculative would be purely academic and would unnecessarily increase the cost of electricity, natural gas and other fuels for generation for American consumers and businesses served by the NFP Energy Entities.985 ii. Discussion of the Commission Determination—New Exemption for Certain Energy Utility Entities The Commission has considered these comments and believes that many of the concerns raised by NFP Energy Entities are addressed through the Final Rule’s pass-through swap provision and the expanded list of enumerated bona fide hedge exemptions. That is, the Commission believes that most, if not all, of the hedging needs of NFP Energy Entities will be considered enumerated, self-effectuating bona fide hedges that will not be subject to Federal position limits. Further, NFP Energy Entity counterparties that are not bona fide hedgers would receive pass-through bona fide hedging treatment for any swaps with NFP Energy Entities, or any offsetting positions as a result of such swaps with NFP Energy Entities. This expanded flexibility should significantly alleviate the compliance burdens and cost concerns voiced by NFP Energy Entities. The Commission recommends that NFP Energy Entities assess the impact of the Final Rule on their operations, and if needed, pursue the requested exemption separate from this Final Rule. The Commission also believes that the extended compliance date for the Final Rule of January 1, 2022 in connection with the Federal position limits for the 16 non-legacy core referenced futures contracts, and the further extended compliance date of January 1, 2023 for swaps that are subject to Federal position limits under the Final Rule, should give commenters and the Commission sufficient time to 981 NRECA PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 3357 984 Id. 985 Id. E:\FR\FM\14JAR2.SGM 14JAR2 3358 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations continue to discuss this request if necessary. D. § 150.5—Exchange-Set Position Limits and Exemptions Therefrom For the avoidance of confusion, this discussion of § 150.5 addresses exchange-set limits and exemptions therefrom, not Federal position limits. For a discussion of the proposed processes by which an exemption may be recognized for purposes of Federal position limits, please see the discussion of proposed § 150.3 above and § 150.9 below.986 1. Background—Existing Requirements for Exchange-Set Position Limits i. Applicable DCM and SEF Core Principles khammond on DSKJM1Z7X2PROD with RULES2 Under DCM Core Principle 5, a DCM shall adopt for each contract, as is necessary and appropriate, position limitations or position accountability for speculators. In addition, for any contract that is listed on a DCM and subject to a Federal position limit, the DCM must establish exchange-set limits for such contract no higher than the Federal limit level.987 Finally, DCMs are required to monitor their markets and enforce compliance with their rules.988 Similarly, under SEF Core Principle 6, a SEF that is a trading facility must adopt for each contract, as is necessary and appropriate, position limitations or position accountability for speculators.989 Such SEF must also, for any contract that is listed on the SEF and subject to a Federal position limit, establish exchange-set limits for such contract no higher than the Federal limit.990 Finally, such SEF must monitor positions established on or through the SEF for compliance with the limit set by the Commission and the limit, if any, set by the SEF.991 Beyond these and other statutory and certain specified Commission requirements, unless otherwise determined by the Commission, DCM Core Principle 1 and SEF Core Principle 1 afford DCMs and SEFs, respectively, ‘‘reasonable discretion’’ in establishing the manner in which they comply with the core principles.992 986 See supra Section II.C. (discussing § 150.3 exemptions from Federal position limits). See also infra Section II.G. (discussing the § 150.9 streamlined process for recognizing nonenumerated bona fide hedges for purposes of both exchange and Federal position limits). 987 See 7 U.S.C. 7(d)(5). 988 See 7 U.S.C. 7(d)(2). 989 See 7 U.S.C. 7b–3(f)(6). 990 Id. 991 Id. 992 See 7 U.S.C. 7(d)(1) and 7 U.S.C. 7b–3(f)(1). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 The current regulatory provisions governing exchange-set position limits and exemptions therefrom appear in § 150.5.993 To align § 150.5 with statutory changes made by the DoddFrank Act,994 and with other changes in the 2020 NPRM,995 the Commission proposed a new version of § 150.5. This new proposed § 150.5 would generally afford exchanges the discretion to decide how best to set limit levels and grant exemptions from such limits in a manner that best reflects their specific markets. ii. Existing § 150.5 As noted above, existing § 150.5 predates the Dodd-Frank Act and addresses the establishment of DCM-set position limits for all contracts not subject to Federal position limits under existing § 150.2 (aside from certain major foreign currencies).996 First, existing § 150.5(a) authorizes DCMs to set different limits for different contracts and contract months, and permits DCMs to grant exemptions from DCM-set limits for spreads, straddles, or arbitrage trades. Existing § 150.5(b) provides a limited set of methodologies for DCMs to use in establishing initial limit levels, including separate maximum spotmonth limit levels for physical-delivery contracts and cash-settled contracts,997 as well as separate non-spot month limits for tangible commodities (other than energy),998 and for energy products and non-tangible commodities, including financials.999 Existing 993 17 CFR 150.5. existing § 150.5 on its face only applies to contracts that are not subject to Federal position limits, DCM Core Principle 5, as amended by the Dodd-Frank Act, and SEF Core Principle 6, establish requirements both for contracts that are, and are not, subject to Federal position limits. 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6). 995 Significant changes discussed herein include the process set forth in proposed § 150.9 and revisions to the bona fide hedging definition proposed in § 150.1. 996 Existing § 150.5(a) states that the requirement to set position limits shall not apply to futures or option contract markets on major foreign currencies, for which there is no legal impediment to delivery and for which there exists a highly liquid cash market. 17 CFR 150.5(a). 997 See 17 CFR 150.5(b)(1) (providing that, for physical delivery contracts, the spot month limit level must be no greater than one-quarter of the estimated spot month deliverable supply, calculated separately for each month to be listed, and for cash settled contracts, the spot month limit level must be no greater than necessary to minimize the potential for manipulation or distortion of the contract’s or the underlying commodity’s price). 998 See 17 CFR 150.5(b)(2) (providing that individual non-spot or all-months-combined levels must be no greater than 1,000 contracts for tangible commodities other than energy products). 999 See 17 CFR 150.5(b)(3) (providing that individual non-spot or all-months-combined levels must be no greater than 5,000 contracts for energy products and nontangible commodities, including contracts on financial products). 994 While PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 § 150.5(c) provides guidelines for how DCMs may adjust their speculative initial levels. Next, existing § 150.5(d) addresses bona fide hedging exemptions from DCM-set limits, including an exemption application process, providing that exchange-set speculative position limits shall not apply to bona fide hedging positions as defined by a DCM in accordance with the definition of bona fide hedging transactions and positions for excluded commodities in § 1.3. Existing § 150.5(d) also addresses factors for DCMs to consider in recognizing bona fide hedging exemptions (or position accountability), including whether such positions ‘‘are not in accord with sound commercial practices or exceed an amount which may be established and liquidated in an orderly fashion.’’ 1000 As an alternative to exchange-set position limits set in accordance with the provisions described above, existing § 150.5(e) permits a DCM, in certain circumstances, to submit for Commission approval a rule requiring traders ‘‘to be accountable for large positions’’ (or position accountability levels). That is, under certain circumstances, the DCM would require traders to, upon request, provide information about their position to the exchange, and/or consent to halt further increasing a position if so ordered by the exchange.1001 Among other things, this provision includes open interest and volume-based parameters for determining when DCMs may do so.1002 In addition, existing § 150.5(f) provides that DCM speculative position limits adopted pursuant to § 150.5 shall not apply to certain positions acquired in good faith prior to the effective date of such limits or to a person that is registered as an FCM or as a floor broker under the CEA except to the extent that transactions made by such person are made on behalf of, or for the account or benefit of, such person.1003 This provision also provides that in addition to the express exemptions specified in § 150.5, a DCM may propose such other exemptions from the requirements of § 150.5 as are consistent with the purposes of § 150.5, and submit such rules for Commission review.1004 Finally, existing § 150.5(g) addresses aggregation of positions for which a person directly or indirectly controls trading. 1000 See 17 CFR 150.5(d)(1). CFR 150.5(e). 1002 17 CFR 150.5(e)(1)–(4). 1003 17 CFR 150.5(f). 1004 Id. 1001 17 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 2. Overview of the 2020 NPRM, Commenters’ Views, and Commission Final Rule Determination—ExchangeSet Position Limits and Exemptions Therefrom This section provides a brief overview of proposed § 150.5, commenters’ general views, and the Commission’s determination. The Commission will summarize and address each subsection of § 150.5 in greater detail further below. Pursuant to CEA sections 5(d)(1) and 5h(f)(1), the Commission proposed a new version of § 150.5.1005 Proposed § 150.5 is intended to allow DCMs and SEFs to set limit levels and grant exemptions in a manner that best accommodates activity particular to their markets, while promoting compliance with DCM Core Principle 5 and SEF Core Principle 6. Proposed § 150.5 is also intended to ensure consistency with other changes proposed herein, including the process for exchanges to administer applications for non-enumerated bona fide hedge exemptions for purposes of Federal position limits proposed in § 150.9.1006 Proposed § 150.5 contains two main sub-sections, with each sub-section addressing a different category of contract: (i) § 150.5(a) proposed rules governing exchange-set limits for referenced contracts subject to Federal position limits; and (ii) § 150.5(b) proposed rules governing exchange-set limits for physical commodity derivative contracts that are not subject to Federal position limits. Notably, with respect to exchange-set limits on swaps, the Commission proposed to delay compliance with DCM Core Principle 5 and SEF Core Principle 6, as compliance would otherwise be impracticable, and, in some cases, impossible, at this time. In the 2020 NPRM, the Commission explained that this delay was based largely on the fact that exchanges cannot view positions in OTC swaps across the various places they are trading, including on competitor exchanges. The Commission has determined to finalize § 150.5 largely as proposed, with certain modifications and 1005 While proposed § 150.5 included references to swaps and SEFs, the proposed rule would initially only apply to DCMs, as requirements relating to exchange-set limits on swaps would be phased in at a later time. 1006 To avoid confusion created by the parallel Federal and exchange-set position limit frameworks, the Commission clarifies that proposed § 150.5 deals solely with exchange-set position limits and exemptions therefrom, whereas proposed § 150.9 deals solely with a streamlined process for the Commission to recognize non-enumerated bona fide hedges for purposes of Federal position limits by leveraging exchanges. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 clarifications in response to commenters and other considerations, as discussed below. The Commission will oversee swaps in connection with compliance with Federal position limits under the Final Rule. The Commission has also determined to delay compliance for the requirement for exchanges to set position limits on swaps at this time. Specifically, with respect to exchangeset position limits on swaps, the Commission notes that in two years, the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms with respect to swaps and to implement DCM Core Principle 5 and SEF Core Principle 6, as applicable. The Commission believes that delayed implementation of exchange-set position limits on swaps at this time is not inconsistent with the statutory objectives outlined in section 4a(a)(3) of the CEA for several reasons. First, as explained above, at this time, it would be impracticable and, in some cases, impossible for exchanges to comply with any requirement for establishing exchange-set limits on swaps. Next, the Commission is adopting in this Final Rule Federal position limits on economically equivalent swaps, which the Commission will monitor. These factors, coupled with the Commission’s existing ability to surveil swap exposure across markets in a manner that at this time would be impracticable for the exchanges, will help ensure that the Commission meets its statutory obligations. Accordingly, while § 150.5 as finalized herein will apply to DCMs and SEFs, the Final Rule’s requirements associated with exchange oversight of swaps, including with respect to exchange-set position limits, will be enforced at a later time. In other words, upon the compliance date, exchanges must comply with final § 150.5 only with respect to futures and options on futures traded on DCMs. 3. Section 150.5(a)—Requirements for Exchange-Set Limits on Commodity Derivative Contracts Subject to Federal Position Limits Set Forth in § 150.2 The following section discusses the 2020 NPRM, comments received, and the Commission’s final determination with respect to each sub-section of § 150.5(a), which addresses exchangeset position limits on contracts that are subject to Federal position limits. PO 00000 i. Section § 150.5(a)(1)—Requirements for Exchange-Set Limits on Contracts Subject to Federal Position Limits a. Summary of the 2020 NPRM— Requirements for Exchange-Set Limits on Contracts Subject to Federal Position Limits Proposed § 150.5(a) would apply to all contracts subject to the Federal position limits proposed in § 150.2 and, among other things, is intended to help ensure that exchange-set limits do not undermine the Federal position limits framework. Under proposed § 150.5(a)(1), for any contract subject to a Federal limit, DCMs and, ultimately, SEFs, would be required to establish exchange-set limits for such contracts. Consistent with DCM Core Principle 5 and SEF Core Principle 6, the exchangeset limit levels on such contracts, whether cash-settled or physicallysettled, and whether during or outside the spot month, would have to be no higher than the level specified for the applicable referenced contract in proposed § 150.2. An exchange would be free to set position limits that are lower than the Federal limit. An exchange would also be permitted to adopt position accountability levels that are lower than the Federal position limits, in addition to any exchange-set position limits it adopts that are equal to or less than the Federal position limits. b. Comments—Requirements for Exchange-Set Limits on Contracts Subject to Federal Position Limits With respect to requirements for exchange-set limits under proposed § 150.5(a)(1), some commenters expressed concern that if an exchange determines to set a position limit for a particular contract significantly below the Federal position limit for that contract, then market participants could be restricted in their ability to provide liquidity, hedge activity, and otherwise pursue their trading objectives.1007 ISDA recommended that to the extent that an exchange determines to set position limits significantly below Federal position limits, CFTC staff, through its exchange examination process, should make transparent the exchange’s reasoning and analysis underlying any lower position limits.1008 Likewise, SIFMA AMG encouraged the Commission to require exchanges to explain and justify any exchange-set limits that are below Federal position limits, and to work 1007 ISDA 1008 ISDA Frm 00125 Fmt 4701 Sfmt 4700 3359 E:\FR\FM\14JAR2.SGM at 11; SIFMA AMG at 4. at 11. 14JAR2 3360 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations with exchanges to ensure that exchange limits do not discourage liquidity.1009 c. Discussion of Final Rule— Requirements for Exchange-Set Limits on Contracts Subject to Federal Position Limits The Commission is adopting § 150.5(a)(1) as proposed. In response to comments on § 150.5(a)(1) requesting that the Commission require transparency into exchanges’ reasoning for when they set limits well below Federal position limits, the Commission believes market participants already have sufficient transparency under part 40 of the Commission’s regulations. When exchanges seek to implement rules to establish new or amended exchange-set limits, exchanges are required to submit those rules through the Commission’s part 40 process, and the rules are made publicly available on the CFTC’s website.1010 Exchanges are also required to post such submissions on their own websites.1011 Further, regarding the request that the Commission work with exchanges on exchange-set limits that are below Federal position limits, exchanges are permitted to establish exchange-set limits in a manner that is most appropriate for their own marketplaces and in a manner that allows them to comply with the applicable DCM and SEF core principles. The Commission views this process as a business and compliance decision that is best left in the discretion of each exchange. However, pursuant to DCM Core Principle 5 and SEF Core Principle 6, exchanges must implement exchangeset position limits in a manner that reduces market manipulation and congestion. ii. Section 150.5(a)(2)—Exemptions to Exchange-Set Limits for Contracts Subject to Federal Position Limits khammond on DSKJM1Z7X2PROD with RULES2 a. Summary of the 2020 NPRM— Exemptions to Exchange-Set Limits for Contracts Subject to Federal Position Limits Under the 2020 NPRM, § 150.5(a)(2)(ii) would permit exchanges to grant exemptions from exchange-set limits according to the guidelines outlined below. First, if such exemptions from exchange-set limits conform to the types of exemptions that may be granted for purposes of Federal position limits 1009 SIFMA AMG at 4. 1010 See CFTC Industry Filings available at https://www.cftc.gov/IndustryOversight/ IndustryFilings/index.htm. 1011 See 17 CFR 40.2(a)(3)(vi), 40.3(a)(9), 40.5(a)(6), 40.6(a)(2). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 under proposed sections: (1) 150.3(a)(1)(i) (enumerated bona fide hedge recognitions), (2) 150.3(a)(2)(i) (spread exemptions that meet the ‘‘spread transaction’’ definition in § 150.1), (3) 150.3(a)(4) (exempt conditional spot month positions in natural gas), or (4) 150.3(a)(5) (preenactment and transition period swaps), then the level of the exemption may exceed the applicable Federal position limit under proposed § 150.2. Because the proposed exemptions listed in the four provisions above are selfeffectuating for purposes of Federal position limits, exchanges may grant such exemptions pursuant to proposed § 150.5(a)(2)(i) without prior Commission approval. Second, if such exemptions from exchange-set limits conform to the exemptions from Federal position limits that may be granted under proposed §§ 150.3(a)(1)(ii) (non-enumerated bona fide hedges) and 150.3(a)(2)(ii) (spread positions that do not meet the ‘‘spread transaction’’ definition in proposed § 150.1), then the level of the exemption may exceed the applicable Federal position limit under proposed § 150.2, provided that the exemption for purposes of Federal position limits is first approved in accordance with proposed § 150.3(b) or, in the case of non-enumerated bona fide hedges, § 150.9, as applicable. Third, if such exemptions conform to the exemptions from Federal position limits that may be granted under proposed § 150.3(a)(3) (financial distress positions), then the level of the exemption may exceed the applicable Federal position limit under proposed § 150.2, provided that the Commission has first issued a letter or other notice approving such exemption pursuant to a request submitted under § 140.99.1012 Finally, for purposes of exchange-set limits only, under the 2020 NPRM, exchanges may grant exemption types that are not listed in § 150.3(a). However, in such cases, the exemption level would have to be capped at the level of the applicable Federal position limit, so as not to undermine the Federal position limits framework, unless the Commission has first approved such exemption for purposes of Federal position limits pursuant to § 140.99 or proposed § 150.3(b). The 2020 NPRM also explained that exchanges that wish to offer exemptions 1012 Under the 2020 NPRM, requests for exemptions for financial distress positions would be submitted directly to the Commission (or delegated staff) for consideration, and any approval of such exemption would be issued in the form of an exemption letter from the Commission (or delegated staff) pursuant to § 140.99. PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 from their own limits other than the types listed in proposed § 150.3(a) could also submit rules for the Commission’s review, pursuant to part 40, allowing for such exemptions. The Commission would carefully review any such exemption types for compliance with applicable standards, including any statutory requirements 1013 and Commission regulations.1014 Under proposed § 150.5(a)(2)(ii)(A)(1), exchanges that wish to grant exemptions from their own limits would have to require traders to file an application. The 2020 NPRM explained that, generally, exchanges would have flexibility to establish the application process as they see fit, but subject to the requirements discussed below, including the requirement that the exchange collect cash-market and swaps market information from the applicant. For all exemption types, exchanges would have to generally require that such applications be filed in advance of the date such position would be in excess of the limits. However, under proposed § 150.5(a)(2)(ii)(B) and (C), exchanges would be given the discretion to adopt rules allowing traders to file retroactive applications for bona fide hedges within five business days after a trader established such position so long as the applicant demonstrates a sudden and unforeseen increase in its hedging needs. Further, under proposed § 150.5(a)(2)(ii)(D), if the exchange denies a retroactive application, it would require that the applicant bring its position into compliance with exchange-set limits within a commercially reasonable amount of time (as determined by the exchange). Finally, pursuant to proposed § 150.5(a)(2)(ii)(A)(5), neither the Commission nor the exchange would enforce a position limits violation for such retroactive applications. Proposed § 150.5(a)(2)(ii)(B) provided that an exchange would require that a trader reapply for the exemption granted 1013 For example, an exchange would not be permitted to adopt rules allowing for risk management exemptions for positions in physical commodities that exceed Federal limits because the Commission interprets the Dodd-Frank Act amendments to CEA section 4a(c)(2) as prohibiting risk management exemptions in such commodities (unless such position is considered a pass-through swap under paragraph (2) of the bona fide hedging definition in § 150.1). See supra Section II.A.1. (discussing of the temporary substitute test, riskmanagement exemptions, and the pass-through swap provision). 1014 For example, as discussed below, proposed § 150.5(a)(2)(ii)(C) would require that exchanges consider whether the requested exemption would result in positions that are not in accord with sound commercial practices in the relevant commodity derivative market and/or would not exceed an amount that may be established and liquidated in an orderly fashion in that market. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 under proposed § 150.5(a)(2) at least annually so that the exchange and the Commission can closely monitor exemptions for contracts subject to Federal position limits, and to help ensure that the exchange and the Commission remain aware of the trader’s activities. Proposed § 150.5(a)(2)(ii)(C) would authorize an exchange to deny, limit, condition, or revoke any exemption request in accordance with exchange rules,1015 and would set forth a principles-based standard for doing so. Specifically, under proposed § 150.5(a)(2)(ii)(C), exchanges would be required to take into account: (i) Whether granting the exemption request would result in a position that is ‘‘not in accord with sound commercial practices’’ in the market in which the DCM is granting the exemption; and (ii) whether granting the exemption request would result in a position that would ‘‘exceed an amount that may be established or liquidated in an orderly fashion in that market.’’ The 2020 NPRM explained that exchanges’ evaluation of exemption requests against these standards would be a facts and circumstances determination. The 2020 NPRM further explained that activity may reflect ‘‘sound commercial practice’’ for a particular market or market participant but not for another market or market participant. Similarly, activity may reflect ‘‘sound commercial practice’’ outside the spot month, but not in the spot month. Further, activity with manipulative intent or effect, or that has the potential or effect of causing price distortion or disruption, would be inconsistent with ‘‘sound commercial practice,’’ even if it is common practice among market participants. While an exemption granted to an individual market participant may reflect ‘‘sound commercial practice’’ and may not ‘‘exceed an amount that may be established or liquidated in an orderly fashion in that market,’’ the 2020 NPRM clarified that the Commission expects exchanges to also evaluate whether the granting of a particular exemption type to multiple participants could have a collective impact on the market in a 1015 Currently, DCMs review and set exemption levels annually based on the facts and circumstances of a particular exemption and the market conditions at that time. As such, a DCM may decide to deny, limit, condition, or revoke a particular exemption, typically, if the DCM determines that certain conditions have changed and warrant such action. This may happen if, for example, there are droughts, floods, embargoes, trade disputes, or other events that cause shocks to the supply or demand of a particular commodity and thus impact the DCM’s disposition of a particular exemption. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 manner inconsistent with ‘‘sound commercial practice’’ or in a manner that could result in a position that would ‘‘exceed an amount that may be established or liquidated in an orderly fashion in that market.’’ In the 2020 NPRM, the Commission explained that it understands that the above-described parameters for exemptions from exchange-set limits are generally consistent with current practice among DCMs. Bearing in mind that proposed § 150.5(a) would apply to contracts subject to Federal position limits, the Commission proposed codifying such parameters, as they would establish important, minimum standards needed for exchanges to administer, and the Commission to oversee, a robust program for granting exemptions from exchange-set limits in a manner that does not undermine the Federal position limits framework. Proposed § 150.5(a) also would afford exchanges the ability to generally oversee their programs for granting exemptions from exchange-set limits as they see fit, including to establish different application processes and requirements to accommodate the unique characteristics of different contracts. Finally, proposed § 150.5(a)(2)(ii)(D) would permit an exchange, in its discretion, to require a person relying on an exchange-granted exemption (for contracts subject to Federal position limits) to exit or limit the size of any position in excess of exchange-set limits during the lesser of the last five days of trading or the time period for the spot month in a physical-delivery contract. The Commission has traditionally referred to such requirements as a ‘‘Five-Day Rule.’’ b. Comments—Exemptions to ExchangeSet Limits for Contracts Subject to Federal Position Limits With respect to permitted exemptions from exchange-set limits under proposed § 150.5(a)(2), CMC requested that the Commission clarify that each exchange has discretion to determine what information is required of applicants when applying for a spread exemption from exchange-set limits, and that an exchange is not responsible for monitoring the use of spread positions for purposes of Federal position limits.1016 In addition, regarding the retroactive application provision in proposed § 150.5(a)(2)(ii)(A)(5), CME Group recommended that the Commission should implement a standard that permits exchanges to impose position 1016 CMC PO 00000 at 7. Frm 00127 Fmt 4701 Sfmt 4700 3361 limits violations in cases where a person has exceeded Federal position limits and filed a late or retroactive application that the exchange then denies.1017 The Commission also received several comments regarding the provision that allows exchanges to impose a Five-Day Rule in proposed § 150.5(a)(2)(ii)(D). In particular, commenters requested that the Commission expressly clarify that the Five-Day Rule does not apply to markets for energy commodity derivatives.1018 Commenters also requested clarification about whether, in cases where an exchange opts not to apply the Five-Day Rule, the Commission expects the exchange to follow the waiver guidance in proposed Appendix B, or whether the exchange can simply take no further action.1019 c. Discussion of Final Rule— Exemptions to Exchange-Set Limits for Contracts Subject to Federal Position Limits The Commission has determined to finalize § 150.5(a)(2) largely as proposed and with the clarifications and modifications, described below, in response to commenters and other considerations. Regarding comments on application information exchanges are required to collect under § 150.5(a)(2), as explained in the 2020 NPRM, the Commission is providing exchanges great flexibility to create an application process for exemptions from exchange-set limits as they see fit. This means an exchange has discretion to determine what information is required of applicants applying for a spread exemption, or any other exemption from exchange-set limits, except for instances where the exchange is processing a nonenumerated bona fide hedge application 1017 See CME Group at 10 (explaining that today at the exchange level, CME Group considers firms to be in violation of a position limit if the firms exceed a limit and the exemption application is denied. CME Group believes the Commission should implement this standard, rather than permitting the proposed grace period for denial of an exemption application. CME Group explains that, otherwise, market participants with excessively large speculative positions could exploit the grace period accompanying an application for an exemption and intentionally go over the applicable limit without consequences—all the while disrupting orderly market operations. In CME Group’s experience, the prospect of having an application denied and being found in violation of position limits has worked to deter market participants from attempting to exploit the retroactive exemption process). 1018 Chevron at 13; Suncor at 12. 1019 CCI at 9–10; CEWG at 25–26. See also supra Section II.A.1.viii. (explaining Appendix B, which provides guidance the Commission believes exchanges should consider when determining whether to apply the Five-Day Rule restriction). E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3362 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations in accordance with the application requirements of § 150.9. The Commission is making one modification to clarify the Commission’s posture when reviewing exchange-granted exemptions. In proposed § 150.5(a)(2)(ii)(A), the Commission proposed to require exchanges to collect sufficient information for the exchange to determine and the Commission to ‘‘verify’’ that the facts and circumstances demonstrate that the exchange may grant the exemption. In final § 150.5(a)(2)(ii)(A), the Commission is revising this provision to make clear that the Commission will conduct an independent evaluation of any application it reviews to ‘‘determine’’ (not verify) whether the facts and circumstances demonstrate that the exchange may grant the exemption. Further, regarding monitoring spread exemptions, exchanges are required to administer and monitor their position limits and any exemptions therefrom in accordance with DCM Core Principle 5 and SEF Core Principle 6, as applicable. To the extent, however, that an exchange grants an inter-market spread exemption where part of the spread position is executed on another exchange or OTC, although an exchange is not responsible for monitoring a trader’s position on other exchanges or OTC, an exchange should request information from the spread exemption applicant about the entire composition of the spread position so that the exchange is best informed about whether to grant the exemption. Ultimately, the person relying on the spread exemption is responsible for monitoring for compliance with the applicable Federal position limits. The Commission reminds market participants that an approved exemption does not preclude the Commission from finding that a person has otherwise disrupted or manipulated the market. Next, regarding comments on the retroactive application provision in proposed § 150.5(a)(2)(ii)(A)(5), the Commission believes that exchanges are in the best position to determine whether to pursue enforcement actions for violations of exchange-set limits. Accordingly, the Commission has determined to revise this provision so that exchanges have discretion to determine whether to impose a position limits violation for any retroactive exemption request for exchange-set limits that the exchange ultimately denies. The Commission, however, retains its position that the Commission will not pursue a position limits violation in those circumstances, VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 provided that the application was submitted in good faith and the applicant brings its position within the DCM or SEF’s speculative position limits within a commercially reasonable time, as determined by the DCM or SEF.1020 This revision is simply intended to make explicit an implicit presumption that the applicant should have a reasonable and good faith basis for determining that its position meets the requirements of § 150.5(a)(2)(ii)(A) and for submitting the retroactive application. Next, regarding various comments on the provision that allows exchanges to impose the Five-Day Rule, or a similar requirement, in proposed § 150.5(a)(2)(ii)(D), for the avoidance of doubt, the Commission reiterates that exchanges are not required to impose the Five-Day Rule. Further, the Commission is adopting Appendix B and Appendix G to provide guidance for exchanges to consider when determining whether to impose the Five-Day Rule or similar requirements in the spot period with respect to bona fide hedge exemptions or spread exemptions, respectively.1021 The Final Rule permits exchanges to determine whether any such restriction on trading in the spot period is necessary given the facts and circumstances of a particular exemption request. Further, when an exchange determines not to impose the Five-Day Rule or similar requirement for an approved exemption, it is not obligated to take any additional steps. The Commission has revised § 150.5(a)(2)(ii)(H) to make these points clear. Finally, the Commission is making various non-substantive technical and grammatical changes to § 150.5(a)(2) to improve readability. The Commission has also updated the outline numbering of § 150.5(a)(2)(ii). These changes are not intended to change the substance of this section. 1020 The Commission notes that, under Section 4a(e) of the Act, the Commission could pursue violations of exchange position limit rules; however, the Commission, as a matter of policy, will not pursue such violations so long as the conditions of § 150.5(a)(2)(ii)(E) are met. 1021 See supra Sections II.A.1.viii. (discussing Appendix B) and II.A.20 (discussing Appendix G). See also infra Appendices B and G. PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 iii. Section 150.5(a)(3)—Exchange-Set Limits on Pre-Existing Positions for Contracts Subject to Federal Position Limits a. Summary of the 2020 NPRM— Exchange-Set Limits on Pre-Existing Positions for Contracts Subject to Federal Position Limits In the 2020 NPRM, the Commission recognized that the proposed Federal position limits framework may result in certain ‘‘pre-existing positions’’ being subject to speculative position limits, even though the positions predated the adoption of such limits. So as not to undermine the Federal position limits framework during the spot month, and to minimize disruption outside the spot month, proposed § 150.5(a)(3) would require that during the spot month, for contracts subject to Federal position limits, exchanges impose limits no larger than Federal levels on ‘‘preexisting positions,’’ other than for preenactment swaps and transition period swaps. However, outside the spot month, an exchange would not be required to impose limits on any such position, provided the position is acquired in good faith consistent with the ‘‘pre-existing position’’ definition of proposed § 150.1, and provided further that if the person’s position is increased after the effective date of the limit, such pre-existing position (other than preenactment swaps and transition period swaps) along with the position increased after the effective date, would be attributed to the person. This provision is consistent with the proposed treatment of pre-existing positions for purposes of Federal position limits set forth in proposed § 150.2(g), and was intended to prevent spot-month limits from being rendered ineffective. That is, not subjecting pre-existing positions to spot-month position limits could result in a large, pre-existing position either intentionally or unintentionally causing a disruption as it is rolled into the spot month, and the Commission was particularly concerned about protecting the spot month in physical-delivery futures from corners and squeezes. Outside of the spot month, however, concerns over corners and squeezes may be less acute. b. Comments—Exchange-Set Limits on Pre-Existing Positions for Contracts Subject to Federal Position Limits The Commission addressed comments on pre-existing positions under its discussion of § 150.2(g)(2) above.1022 1022 See supra Section II.B.7. (further discussing limits on pre-existing positions). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations c. Discussion of Final Rule—ExchangeSet Limits on Pre-Existing Positions for Contracts Subject to Federal Position Limits The Commission is adopting § 150.5(a)(3) with two modifications to conform to the changes made to § 150.2(g)(2), described below. First, the Commission is amending § 150.5(a)(3)(ii) to clarify that non-spot month limits shall apply to pre-existing positions, other than pre-enactment swaps and transition period swaps. As discussed above in Section II.B.7., the Commission did not intend in the 2020 NPRM to exclude existing non-spot month positions in the nine legacy agricultural contracts that would otherwise qualify as ‘‘pre-existing positions.’’ As discussed, the other 16 non-legacy core referenced futures contracts that are subject to Federal position limits for the first time under the Final Rule are not subject to Federal non-spot month position limits and therefore proposed § 150.5(a)(3)(ii) would not have applied to these contracts in any event.1023 Second, the Commission is eliminating the language in proposed § 150.5(a)(3)(ii) that would attribute to a person any increase in their position after the effective date of the non-spot month limit. This language is no longer necessary since final § 150.5(a)(3)(ii) clarifies that pre-existing positions, other than pre-enactment swaps and transition period swaps, are subject to non-spot month limits. For further discussion on pre-existing positions in general and comments thereto, please refer to §§ 150.2(g).1024 iv. Section 150.5(a)(4)—Monthly Report Detailing Exemption Applications for Contracts Subject to Federal Limits khammond on DSKJM1Z7X2PROD with RULES2 a. Summary of the 2020 NPRM— Monthly Report Detailing Exemption Applications for Contracts Subject to Federal Limits In the 2020 NPRM, the Commission explained that it seeks a balance between having sufficient information to oversee the exchange-granted exemptions, and not burdening exchanges with excessive periodic reporting requirements. The Commission thus proposed under § 150.5(a)(4) to require one monthly report by each exchange providing certain information about exchangegranted exemptions for contracts that are subject to Federal position limits. Certain exchanges already voluntarily 1023 See supra Section II.B.7. (discussing § 150.2 Federal position limits on pre-existing positions). 1024 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 file these types of monthly reports with the Commission, and proposed § 150.5(a)(4) would standardize such reports for all exchanges that process applications for bona fide hedges, spread exemptions, and other exemptions from exchange-set limits for contracts that are subject to Federal position limits. The proposed report would provide information regarding the disposition of any application to recognize a position as a bona fide hedge (both enumerated and nonenumerated) or to grant a spread or other exemption, including any renewal, revocation of, or modification to the terms and conditions of, a prior recognition or exemption.1025 As specified under proposed § 150.5(a)(4), the report would provide certain details regarding any application to recognize a bona fide hedging position, or grant a spread exemption or other exemption, including: The effective date and expiration date of any recognition or exemption; any unique identifier assigned to track the application or position; identifying information about the applicant; the derivative contract or positions to which the application pertains; the maximum size of the commodity derivative position that is recognized or exempted by the exchange (including any ‘‘walkdown’’ requirements); 1026 any size limitations the exchange sets for the position; and a brief narrative summarizing the applicant’s relevant cash-market activity. With respect to any unique identifiers to be included in the proposed monthly report, the exchange’s assignment of a unique identifier would assist the Commission’s tracking process. Accordingly, the Commission suggested that, as a ‘‘best practice,’’ the exchange’s procedures for processing bona fide hedging position and spread exemption applications contemplate the assignment of such unique 1025 Under the 2020 NPRM, in the monthly report, exchanges may elect to list new recognitions or exemptions, and modifications to or revocations of prior recognitions and exemptions each month. Alternatively, exchanges may submit cumulative monthly reports listing all active recognitions and exemptions (i.e., including exemptions that are not new or have not changed). 1026 An exchange could determine to recognize as a bona fide hedge or spread exemption all, or a portion, of the commodity derivative position for which an application has been submitted, provided that such determination is made in accordance with the requirements of proposed § 150.5 and is consistent with the Act and the Commission’s regulations. In addition, an exchange could require that a bona fide hedging position or spread position be subject to ‘‘walk-down’’ provisions that require the trader to scale down its positions in the spot month in order to reduce market congestion as needed based on the facts and circumstances. PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 3363 identifiers.1027 The proposed report would also be required to specify the maximum size and/or size limitations by contract month and/or type of limit (e.g., spot month, single month, or allmonths-combined), as applicable. The proposed monthly report would be a critical element of the Commission’s surveillance program by facilitating the Commission’s ability to track bona fide hedging positions and spread exemptions approved by exchanges. The proposed monthly report would also keep the Commission informed as to the manner in which an exchange is administering its application procedures, the exchange’s rationale for permitting large positions, and relevant cash-market activity. The Commission expected that exchanges would be able to leverage their current exemption processes and recordkeeping procedures to generate such reports. In certain instances, information included in the proposed monthly report may prompt the Commission to request records required to be maintained by an exchange. For example, the Commission proposed that, for each derivative position that an exchange wishes to recognize as a bona fide hedge, or any revocation or modification of such recognition, the report would include a concise summary of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the position. The Commission explained that it expects that this summary would focus on the facts and circumstances upon which an exchange based its determination to recognize a bona fide hedge, to grant a spread exemption, or to revoke or modify such recognition or exemption. In light of the information provided in the summary, or any other information included in the proposed monthly report regarding the position, the Commission may request the exchange’s complete record of the application. The Commission also explained that it expects that it would only need to request such complete records in the event that it noticed an issue that could cause market disruptions. Proposed § 150.5(a)(4) would require an exchange, unless instructed otherwise by the Commission, to submit such monthly reports according to the form and manner requirements the Commission specifies. In order to facilitate the processing of such reports, 1027 The unique identifier could apply to each of the bona fide hedge or spread exemption applications that the exchange receives, and, separately, each type of commodity derivative position that the exchange wishes to recognize as a bona fide hedge or spread exemption. E:\FR\FM\14JAR2.SGM 14JAR2 3364 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations and the analysis of the information contained therein, the Commission would establish reporting and transmission standards. The 2020 NPRM would also require that such reports be submitted to the Commission using an electronic data format, coding structure, and electronic data transmission procedures specified on the Commission’s Forms and Submissions page of its website. khammond on DSKJM1Z7X2PROD with RULES2 b. Comments—Monthly Report Detailing Exemption Applications for Contracts Subject to Federal Limits With respect to the monthly reporting requirement in proposed § 150.5(a)(4), ICE requested that the Commission clarify that the monthly report is only required to capture positions that are subject to Federal position limits and does not apply to other exchange-set non-enumerated exemptions.1028 ICE also requested that the Commission codify when the monthly reports are required to be submitted, and that any regular reports can be made at the discretion of the exchange.1029 Other commenters expressed that they prefer that the Commission not specify a particular day each month as a deadline for exchanges to submit their monthly reports pursuant to § 150.5(a)(4).1030 Finally, ICE requested that the Commission clarify how factual and legal justifications for exemptions should be provided in the monthly report, and the level of granularity required.1031 c. Discussion of Final Rule—Monthly Report Detailing Exemption Applications for Contracts Subject to Federal Limits The Commission is finalizing § 150.5(a)(4) as proposed, with minor technical revisions. The Commission clarifies, as stated in the proposed and final regulation text, that the monthly reporting requirement only applies to exemptions an exchange grants for contracts that are subject to Federal position limits. Further, in consideration of comments and the Commission’s past with collecting voluntary monthly reports from exchanges, the Commission has determined not to prescribe a particular day of the month or monthly deadline for exchanges to submit the monthly reports. Rather, the Commission defers to exchanges on the best timing for submitting their reports so long as the reports are submitted on a monthly 1028 ICE at 14. basis in accordance with § 150.5(a)(4). Finally, the Commission clarifies that § 150.5(a)(4) does not require exchanges to provide factual and legal analysis in the monthly report. The monthly report is intended to give the Commission a snapshot of all exemptions the exchange has granted from exchange-set limits for contracts that are subject to Federal position limits. The Commission’s expectation is that in circumstances when it needs additional information on the exchange’s analysis for a particular exemption application, it will work with the exchange to obtain such additional information. 4. Section 150.5(b)—Requirements and Acceptable Practices for Exchange-Set Limits on Commodity Derivative Contracts in a Physical Commodity That Are Not Subject to the Limits Set Forth in § 150.2 i. Summary of the 2020 NPRM— Exchange-Set Limits on Commodity Derivative Contracts in a Physical Commodity Not Subject to the Limits Set Forth in § 150.2 Under proposed § 150.5(b), for physical commodity derivative contracts that are not subject to Federal position limits, whether cash-settled or physically-settled, exchanges would be subject to flexible standards for setting exchange limits during the contract’s spot month and non-spot month. During the spot month, under proposed § 150.5(b)(1)(i), exchanges would be required to establish position limits, and such limits would have to be set at a level that is no greater than 25 percent of deliverable supply. As described in detail in connection with the proposed Federal spot-month limits described above, it would be difficult, in the absence of other factors, for a participant to corner or squeeze a market if the participant holds less than or equal to 25 percent of deliverable supply, and the Commission has long used deliverable supply as the basis for spot month position limits due to concerns regarding corners, squeezes, and other settlement-period manipulative activity.1032 In the 2020 NPRM, the Commission recognized, however, that there may be circumstances where an exchange may not wish to use the 25% formula, including, for example, if the contract is cash-settled, does not have a measurable deliverable supply, or if the exchange can demonstrate that a different parameter is better suited for a 1029 Id. 1030 CME 1031 ICE Group at 14; IFUS at 13. at 14. VerDate Sep<11>2014 03:06 Jan 14, 2021 1032 See supra Section II.B. (discussing proposed § 150.2). Jkt 253001 PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 particular contract or market.1033 Accordingly, proposed § 150.5(b)(1) would afford exchanges the ability to submit to the Commission alternative potential methodologies for calculating spot month limit levels, provided that the limits are set at a level that is ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ This standard has appeared in existing § 150.5 since its adoption in connection with spot-month limits on cash-settled contracts. As noted above, existing § 150.5 includes separate parameters for spotmonth limits in physical-delivery contracts and for cash-settled contracts, but does not include flexibility for exchanges to consider alternative parameters. In an effort to both simplify the regulation and provide the ability for exchanges to consider multiple parameters that may be better suited for certain products, the Commission proposed the above standard as a principles-based requirement for both cash-settled and physically-settled contracts subject to proposed § 150.5(b). Outside of the spot month, where, historically, attempts at certain types of market manipulation is generally less of a concern, proposed § 150.5(b)(2)(i) would allow exchanges to choose between position limits or position accountability for physical commodity contracts that are not subject to Federal position limits. While exchanges would be permitted to decide whether to use limit levels or accountability levels for any such contract, under either approach, the exchange would have to set a level that is ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ To help exchanges efficiently demonstrate compliance with this standard for physical commodity contracts outside of the spot month, the Commission proposed separate acceptable practices for exchanges that wish to adopt non-spot month position limits and exchanges that wish to adopt non-spot month accountability.1034 For 1033 Guidance for calculating deliverable supply can be found in Appendix C to part 38. 17 CFR part 38, Appendix C. 1034 The acceptable practices in Appendix F to part 150 of the 2020 NPRM reflected non-exclusive methods of compliance. Accordingly, the language of these proposed acceptable practices, used the word ‘‘shall’’ not to indicate that the acceptable practice is a required method of compliance, but rather to indicate that in order to satisfy the E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 exchanges that choose to adopt non-spot month position limits, rather than position accountability, proposed paragraph (a)(1) to Appendix F of part 150 would set forth non-exclusive acceptable practices. Under that provision, an exchange would be deemed in compliance with proposed § 150.5(b)(2)(i) if the exchange sets nonspot limit levels for each contract subject to § 150.5(b) at a level no greater than: (1) The average of historical position sizes held by speculative traders in the contract as a percentage of the contract’s open interest; 1035 (2) the spot month limit level for the contract; (3) 5,000 contracts (scaled up proportionally to the ratio of the notional quantity per contract to the typical cash-market transaction if the notional quantity per contract is smaller than the typical cash-market transaction, or scaled down proportionally if the notional quantity per contract is larger than the typical cash-market transaction); 1036 or (4) 10% of open interest in that contract for the most recent calendar year up to 50,000 contracts, with a marginal increase of 2.5% of open interest thereafter.1037 When evaluating average position sizes acceptable practice, a market participant must (i.e., shall) establish compliance with that particular acceptable practice. 1035 For example, if speculative traders in a particular contract typically make up 12 percent of open interest in that contract, the exchange could set limit levels no greater than 12 percent of open interest. 1036 Under the 2020 NPRM, for exchanges that choose to adopt a non-spot month limit level of 5,000 contracts, this level assumes that the notional quantity per contract is set at a level that reflects the size of a typical cash-market transaction in the underlying commodity. However, if the notional quantity of the contract is larger/smaller than the typical cash-market transaction in the underlying commodity, then the DCM must reduce/increase the 5,000 contract non-spot month limit until it is proportional to the notional quantity of the contract relative to the typical cash-market transaction. These required adjustments to the 5,000-contract metric are intended to avoid a circumstance where an exchange could allow excessive speculation by setting excessively large notional quantities relative to typical cash-market transaction sizes. For example, if the notional quantity per contract is set at 30,000 units, and the typical observed cashmarket transaction is 2,500 units, the notional quantity per contract would be 12 times larger than the typical cash-market transaction. In that case, the non-spot month limit would need to be 12 times smaller than 5,000 (i.e., at 417 contracts.). Similarly, if the notional quantity per contract is 1,000 contracts, and the typical observed cash-market transaction is 2,500 units, the notional quantity per contract would be 2.5 times smaller than the typical cash-market transaction. In that case, the non-spot month limit would need to be 2.5 times larger than 5,000, and would need to be set at 12,500 contracts. 1037 In connection with the proposed Appendix F to part 150 acceptable practices, open interest should be calculated by averaging the month-end open positions in a futures contract and its related option contract, on a delta-adjusted basis, for all months listed during the most recent calendar year. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 held by speculative traders, the Commission expected exchanges: (i) To be cognizant of speculative positions that are extraordinarily large relative to other speculative positions, and (ii) to not consider any such outliers in their calculations. These proposed parameters have largely appeared in existing § 150.5 for many years in connection with either initial or subsequent levels.1038 The Commission was of the view that these parameters would be useful, flexible standards to carry forward as acceptable practices. For example, the Commission expected that the 5,000-contract acceptable practice would be a useful benchmark for exchanges because it would allow them to establish limits and demonstrate compliance with Commission regulations in a relatively efficient manner, particularly for new contracts that have yet to establish open interest. Similarly, for purposes of exchange-set limits on physical commodity contracts that are not subject to Federal position limits, the Commission proposed to maintain the baseline 10/2.5 percent formula as an acceptable practice. Because these parameters are simply acceptable practices, exchanges may, after evaluation, propose higher limits or accountability levels. Along those lines, the Commission recognized that other parameters may be preferable and/or just as effective, and was open to considering alternative parameters submitted pursuant to part 40 of the Commission’s regulations, provided, at a minimum, that the parameter complies with § 150.5(b)(2)(i). The Commission encouraged exchanges to submit potential new parameters to Commission staff in draft form prior to submitting them under part 40. For exchanges that choose to adopt position accountability, rather than limits, outside of the spot month, proposed paragraph (a)(2) of Appendix F to part 150 would set forth a nonexclusive acceptable practice that would permit such exchanges to comply with proposed § 150.5(b)(2)(i) by adopting rules establishing ‘‘position accountability’’ as defined in proposed § 150.1. ‘‘Position accountability’’ would mean rules that the exchange submits to the Commission pursuant to part 40 that require a trader, upon request by the exchange, to consent to: (i) Provide information to the exchange about their position, including, but not limited to, information about the nature of the positions, trading strategies, and 1038 17 CFR 150.5(b) and (c). Proposed § 150.5(b) would address physical commodity contracts that are not subject to Federal position limits. PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 3365 hedging information; and (ii) halt further increases to their position or to reduce their position in an orderly manner.1039 Proposed § 150.5(b)(3) addressed a circumstance where multiple exchanges list contracts that are substantially the same, including physically-settled contracts that have the same underlying physical commodity and delivery location, or cash-settled contracts that are directly or indirectly linked to a physically-settled contract. Under proposed § 150.5(b)(3), exchanges listing contracts that are substantially the same in this manner must either adopt ‘‘comparable’’ limits for such contracts, or demonstrate to the Commission how the non-comparable levels comply with the standards set forth in proposed § 150.5(b)(1) and (2). Such a determination also must address how the levels are necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index. Proposed § 150.5(b)(3) would apply equally to cash-settled and physically-settled contracts, and to limits during and outside of the spot month, as applicable.1040 Proposed § 150.5(b)(3) was intended to help ensure that position limits established on one exchange would not jeopardize market integrity or otherwise harm other markets. Further, proposed § 150.5(b)(3) would be consistent with the Commission’s proposed approach to generally apply equivalent Federal position limits to linked contracts, including linked contracts listed on multiple exchanges.1041 Finally, under proposed § 150.5(b)(4), exchanges would be permitted to grant exemptions from any limits established under proposed § 150.5(b). As noted, proposed § 150.5(b) would apply to physical commodity contracts not subject to Federal position limits; thus, exchanges would be given flexibility to 1039 While existing § 150.5(e) includes openinterest and volume-based limitations on the use of position accountability, the Commission opted not to include such limitations in the 2020 NPRM. Under the 2020 NPRM, if an exchange submitted a part 40 filing seeking to adopt position accountability, the Commission would determine on a case-by-case basis whether such rules are consistent with the Act and the Commission’s regulations. The Commission did not want to use one-size-fits-all volume-based limitations for making such determinations. 1040 For reasons discussed elsewhere in the 2020 NPRM, this provision would not apply to natural gas contracts. See supra Section II.C.6. (discussion of proposed conditional spot month exemption in natural gas). 1041 See supra Section II.A.16. (discussion of the proposed referenced contract definition and linked contracts). E:\FR\FM\14JAR2.SGM 14JAR2 3366 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 grant exemptions in such contracts, including exemptions for both intramarket and inter-market spread positions,1042 as well as other exemption types (including risk management exemptions) not explicitly listed in proposed § 150.3.1043 However, such exchanges must require that traders apply for the exemption. In considering any such application, the exchanges would be required to consider whether the exemption would result in a position that would not be in accord with ‘‘sound commercial practices’’ in the market for which the exchange is considering the application, and/or would ‘‘exceed an amount that may be established and liquidated in an orderly fashion in that market.’’ While exchanges would be subject to the requirements of § 150.5(a) and (b) described above, such proposed requirements are not intended to limit the discretion of exchanges to utilize other tools to protect their markets. Among other things, an exchange would have the discretion to: Impose additional restrictions on a person with a long position in the spot month of a physical-delivery contract who stands for delivery, takes that delivery, and then re-establishes a long position; establish limits on the amount of delivery instruments that a person may hold in a physical-delivery contract; and impose such other restrictions as it deems necessary to reduce the potential threat of market manipulation or congestion, to maintain orderly execution of transactions, or for such other purposes consistent with its responsibilities. ii. Comments—Exchange-Set Limits on Commodity Derivative Contracts in a Physical Commodity Not Subject to the Limits Set Forth in § 150.2 Better Markets recommended revisions for proposed § 150.5(b)(2) if the Commission decides to finalize the proposed approach to only implement spot month limits on contracts that are not subject to Federal position limits.1044 Proposed § 150.5(b)(2) requires exchanges to have either nonspot month position limits or accountability levels, as necessary and appropriate, to reduce manipulation and price distortions for contracts that are not subject to limits in § 150.2. Better Markets’ recommendation goes a step 1042 See Appendix G (providing additional guidance on spread exemptions). 1043 As noted above, proposed § 150.3 would allow for several exemption types, including: Bona fide hedging positions; certain spreads; financial distress positions; and conditional spot month limit exemption positions in natural gas. 1044 Better Markets at 47–48. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 further and would require exchanges to set position limits and position accountability levels outside of the spot month to reduce the potential threat of market manipulation or price distortion and the potential for sudden or unreasonable fluctuations or unwarranted changes.1045 iii. Discussion of Final Rule—ExchangeSet Limits on Commodity Derivative Contracts in a Physical Commodity Not Subject to the Limits Set Forth in § 150.2 The Commission is adopting § 150.5(b), as proposed, with a few technical or grammatical revisions to improve readability and the following explanation. Of note, the Commission is revising the beginning of § 150.5(b)(1) to clarify that this section applies to exchange-set limits on cash-settled and physically-settled commodity derivative contracts in a physical commodity that are not subject to the Federal position limits set forth in § 150.2. Although this point is made clear in the preamble and the introductory title of § 150.5(b), the Commission has added the additional clarification for the avoidance of any confusion. In response to comments from Better Markets, and as explained in detail earlier in this release, the Commission believes that outside the spot month, either exchange-set position limits or exchange-set accountability levels will be sufficient for exchanges to reduce the potential threat of market manipulation and price distortions and manage fluctuations and changes in their markets.1046 Accordingly, the Commission has determined to finalize the position limits and accountability requirements as proposed. 5. Section 150.5(c)—Requirements for Security Futures Products i. Background and Summary of the 2020 NPRM—Requirements for Security Futures Products As the Commission has previously noted, security futures products and security options may serve economically equivalent or similar functions to one another.1047 Therefore, when the Commission originally adopted position limits regulations for security futures products in part 41, it set levels that were generally comparable to, although not identical 1045 Id. 1046 See supra Section II.B.2.iv. (providing a detailed discussion of the Commission’s extensive experience monitoring position accountability levels, which have been effective at exchanges). 1047 See Position Limits and Position Accountability for Security Futures Products, 83 FR at 36799, 36802 (July 31, 2018). PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 with, the limits that applied to options on individual securities.1048 The Commission has pointed out that security futures products may be at a competitive disadvantage if position limits for security futures products vary too much from those of security options.1049 As a result, the Commission in 2019 adopted amendments to the position limitations and accountability requirements for security futures products, noting that one goal was to provide a level regulatory playing field with security options.1050 The Commission proposed § 150.5(c), therefore, to include a cross-reference clarifying that for security futures products, position limitations and accountability requirements for exchanges are specified in § 41.25.1051 This would allow the Commission to take into account the position limits regime that applies to security options when considering position limits regulations for security futures products. ii. Comments and Summary of the Commission Determination— Requirements for Security Futures Products The Commission did not receive comments on § 150.5(c) and is adopting this section as proposed. 6. Section 150.5(d)—Rules on Aggregation i. Summary of the 2020 NPRM—Rules on Aggregation As noted earlier in this release, the Commission adopted in 2016 final aggregation rules under § 150.4 that apply to all contracts subject to Federal position limits. The Commission recognized that with respect to contracts not subject to Federal position limits, market participants may find it burdensome if different exchanges adopt different aggregation standards. Accordingly, under proposed § 150.5(d), all DCMs, and, ultimately, SEFs, that list any physical commodity derivatives, regardless of whether the contract is subject to Federal position limits, would be required to adopt position aggregation rules for such contracts that 1048 Id. See also Listing Standards and Conditions for Trading Security Futures Products, 66 FR at 55078, 55082 (Nov. 1, 2001) (explaining the Commission’s adoption of position limits for security futures products). 1049 See 83 FR at 36802. 1050 See Position Limits and Position Accountability for Security Futures Products, 84 FR at 51005, 51009 (Sept. 27, 2019). 1051 See 17 CFR 41.25. Rule § 41.25 establishes conditions for the trading of security futures products. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations conform to § 150.4.1052 Exchanges that list excluded commodities would be encouraged to also adopt position aggregation rules that conform to § 150.4. Aggregation policies that otherwise vary from exchange to exchange would increase the administrative burden on a trader active on multiple exchanges, as well as increase the administrative burden on the Commission in monitoring and enforcing exchange-set position limits. ii. Comments and Summary of the Commission Determination—Rules on Aggregation The Commission did not receive comments on § 150.5(d) and is adopting this section as proposed. 7. Section 150.5(e)—Requirements for Submissions to the Commission i. Summary of the 2020 NPRM— Requirements for Submissions to the Commission khammond on DSKJM1Z7X2PROD with RULES2 Proposed § 150.5(e) reflects that, consistent with the definition of ‘‘rule’’ in existing § 40.1, any exchange action establishing or modifying exchange-set position limits or exemptions therefrom, or position accountability, in any case pursuant to proposed § 150.5(a), (b), (c), or Appendix F to part 150, would qualify as a ‘‘rule’’ and must be submitted to the Commission as such pursuant to part 40 of the Commission’s regulations. Such rules would also include, among other things, parameters used for determining position limit levels, and policies and related processes setting forth parameters addressing, among other things, which types of exemptions are permitted, the parameters for the granting of such exemptions, and any exemption application requirements. Proposed § 150.5(e) further provides that exchanges would be required to review regularly1053 any position limit levels established under proposed 1052 Under § 150.4, unless an exemption applies, a person’s positions must be aggregated with positions for which the person controls trading or for which the person holds a 10% or greater ownership interest. Commission Regulation § 150.4(b) sets forth several exemptions from aggregation. See Final Aggregation Rulemaking, 81 FR at 91454. The Division of Market Oversight has issued time-limited no-action relief from some of the aggregation requirements contained in that rulemaking. See CFTC Letter No. 19–19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/ download. 1053 Under the 2020 NPRM, an acceptable, regular review regime would consist of both a periodic review and an event-specific review (e.g., in the event of supply and demand shocks such as unanticipated shocks to supply and demand of the underlying commodity, geo-political shocks, and other events that may result in congestion and/or other disruptions). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 § 150.5 to ensure the level continues to comply with the requirements of those sections. For example, in the case of § 150.5(b), exchanges would be expected to ensure the limits comply with the requirement that limits be set ‘‘at a level that is necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ Exchanges would also be required to update such levels as needed, including if the levels no longer comply with the proposed rules. ii. Comments and Summary of the Commission Determination— Requirements for Submissions to the Commission The Commission did not receive comments on § 150.5(e) and is adopting this section with a few non-substantive revisions to address grammatical issues and improve the readability and organization of the section. These revisions are not intended to change the substance of this section. 8. Section 150.5(f)—Delegation of Authority to the Director of the Division of Market Oversight i. Summary of the 2020 NPRM— Delegation of Authority to the Director of the Division of Market Oversight The Commission proposed to delegate its authority, pursuant to proposed § 150.5(a)(4)(ii), to the Director of the Commission’s Division of Market Oversight, or such other employee(s) that the Director may designate from time to time, to provide instructions regarding the submission of information required to be reported by exchanges to the Commission on a monthly basis, and to determine the manner, format, coding structure, and electronic data transmission procedures for submitting such information. ii. Comments and Summary of the Commission Determination—Delegation of Authority to the Director of the Division of Market Oversight The Commission did not receive comments on § 150.5(f) and is adopting this section as proposed. 9. Commission Enforcement of Exchange-Set Limits As discussed throughout this Final Rule, the framework for exchange-set limits operates in conjunction with the Federal position limits framework. The Futures Trading Act of 1982 gave the Commission, under CEA section 4a(5) (since re-designated as section 4a(e)), the authority to directly enforce violations of exchange-set, Commission- PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 3367 approved speculative position limits in addition to position limits established directly by the Commission.1054 Since 2008, it has also been a violation of the Act for any person to violate an exchange position limit rule certified to the Commission by such exchange pursuant to CEA section 5c(c)(1).1055 Thus, under CEA section 4a(e), it is a violation of the Act for any person to violate an exchange position limit rule certified to or approved by the Commission, including to violate any subsequent amendments thereto, and the Commission has the authority to enforce those violations. The Commission did not receive comments on its authority to enforce exchange-set position limits. E. § 150.6—Scope Existing § 150.6 provides that nothing in this part shall be construed to affect any provisions of the CEA relating to manipulation or corners nor to relieve any contract market or its governing board from responsibility under the CEA to prevent manipulation and corners.1056 1. Summary of the 2020 NPRM—Scope Proposed § 150.6 was intended to make clear that fulfillment of specific part 150 requirements alone does not necessarily satisfy other obligations of an exchange. Proposed § 150.6 provided that part 150 of the Commission’s regulations would only be construed as having an effect on position limits set by the Commission or an exchange including any associated recordkeeping and reporting requirements. Proposed § 150.6 provided further that nothing in part 150 would affect any other provisions of the CEA or Commission regulations including those relating to actual or attempted manipulation, corners, squeezes, fraudulent or deceptive conduct, or to prohibited 1054 See Futures Trading Act of 1982, Public Law 97–444, 96 Stat. 2299–30 (1983). 1055 See CFTC Reauthorization Act of 2008, Food, Conservation and Energy Act of 2008, Public Law 110–246, 122 Stat. 1624 (June 18, 2008) (also known as the ‘‘Farm Bill’’) (amending CEA section 4a(e), among other things, to assure that a violation of exchange-set position limits, regardless of whether such position limits have been approved by or certified to the Commission, would constitute a violation of the Act that the Commission could independently enforce). See also Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulations, 75 FR at 4144, 4145 (Jan. 26, 2010) (summarizing the history of the Commission’s authority to directly enforce violations of exchange-set speculative position limits). 1056 17 CFR 150.6. The Commission notes that while existing § 150.6 references ‘‘section 5(4) of the [CEA]’’ no such CEA section currently exists. The Final Rule instead references section 5(d)(4) of the CEA. E:\FR\FM\14JAR2.SGM 14JAR2 3368 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 transactions. For example, proposed § 150.5 would require DCMs, and, ultimately, SEFs, to impose and enforce exchange-set speculative position limits. The fulfillment of the requirements of § 150.5 alone would not satisfy any other legal obligations under the CEA or Commission regulations applicable to exchanges to prevent manipulation and corners. Likewise, a market participant’s compliance with position limits or an exemption thereto would not confer any type of safe harbor or good faith defense to a claim that the participant had engaged in an attempted or perfected manipulation. Further, the proposed amendments were intended to help clarify that § 150.6 would apply to: Regulations related to position limits found outside of part 150 of the Commission’s regulations (e.g., relevant sections of part 1 and part 19); and recordkeeping and reporting regulations associated with speculative position limits. 2. Comments and Discussion of Final Rule—Scope The Commission received no comments on proposed § 150.6 and is adopting as proposed. As the Commission explained in the 2020 NPRM, position limits are meant to diminish, eliminate, and prevent excessive speculation and to deter and prevent market manipulation, squeezes, and corners. The Commission stresses that nothing in the Final Rule’s revisions to part 150 would impact the anti-disruptive, anti-cornering, and antimanipulation provisions of the CEA and Commission regulations, including but not limited to CEA sections 6(c) or 9(a)(2) regarding manipulation, CEA section 4c(a)(5) regarding disruptive practices including spoofing, or sections 180.1 and 180.2 of the Commission’s regulations regarding manipulative and deceptive practices. It may be possible for a trader to manipulate or attempt to manipulate the prices of futures contracts or the underlying commodity with a position that is within the Federal position limits. It may also be possible for a trader holding a bona fide hedge, as recognized by the Commission or an exchange, to manipulate or attempt to manipulate the markets. The Commission would not consider it a defense to a charge under the antimanipulation provisions of the CEA or the regulations that a trader’s position was within position limits. F. § 150.8—Severability Final § 150.8 provides that should any provision(s) of part 150 be declared invalid, including the application thereof to any person or circumstance, VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 all remaining provisions of part 150 shall not be affected to the extent that such remaining provisions, or the application thereof, can be given effect without the invalid provisions. The Commission did not receive comments on proposed § 150.8, and is adopting it as proposed. G. § 150.9—Process for Recognizing Non-Enumerated Bona Fide Hedging Transactions or Positions With Respect to Federal Speculative Position Limits 1. Background—Non-Enumerated Bona Fide Hedging Transactions or Positions The Commission’s authority and existing processes for recognizing bona fide hedges can be found in CEA section 4a(c), and §§ 1.3, 1.47, and 1.48 of the Commission’s regulations.1057 In particular, CEA section 4a(c)(1) provides that no CFTC rule issued under CEA section 4a(a) applies to ‘‘transactions or positions which are shown to be bona fide hedging transactions or positions.’’ 1058 Under the existing definition of ‘‘bona fide hedging transactions and positions’’ in § 1.3,1059 paragraph (1) provides the Commission’s general definition of bona fide hedging transactions or positions; paragraph (2) provides a list of enumerated bona fide hedging positions that, generally, are self-effectuating, and must be reported (along with supporting cash-market information) to the Commission monthly on Form 204 after the positions are taken; 1060 and paragraph (3) provides a procedure for market participants to seek recognition from the Commission for nonenumerated bona fide hedging positions. Under paragraph (3), any person that seeks a Commission recognition of a position as a nonenumerated bona fide hedge must apply to the Commission in advance of taking on the position, and pursuant to the processes outlined in § 1.47 (30 days in advance for non-enumerated bona fide hedges) or § 1.48 (10 days in advance for enumerated anticipatory hedges), as applicable. For the nine legacy agricultural contracts currently subject to Federal position limits, the Commission’s current process for recognizing nonenumerated bona fide hedge positions 1057 7 U.S.C. 6a(c); 17 CFR 1.3, 1.47, and 1.48. U.S.C. 6a(c)(1). 1059 As described above, the Commission is moving an amended version of the bona fide hedging definition from § 1.3 to § 150.1. See supra Section II.A.1. (discussion of § 150.1). 1060 As described below, the Commission is eliminating Form 204 and relying instead on the cash-market information submitted to exchanges pursuant to §§ 150.5 and 150.9. See infra Section II.H. (discussion of amendments to part 19). 1058 7 PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 exists in parallel with exchange processes for granting exemptions from exchange-set limits, as described below. The exchange processes for granting exemptions vary by exchange, and generally do not mirror the Commission’s processes.1061 Thus, when requesting a non-enumerated bona fide hedging position recognition, currently market participants must submit two applications—one application submitted to the Commission in accordance with § 1.47 for purposes of compliance with Federal position limits, and another application submitted to the relevant exchange in accordance with the exchange’s rules for purposes of exchange-set position limits. 2. Overview of the 2020 NPRM, Comments, and the Commission’s Determination Generally, the Commission is adopting § 150.9 largely as proposed, but with certain clarifications and modifications to address commenters’ views and other considerations. This section provides an overview of, and addresses general comments regarding, proposed § 150.9. Further below, the Commission summarizes each subsection of § 150.9 and comments relevant to that sub-section, and provides a more detailed discussion of the Commission’s determination and any changes to each sub-section of § 150.9. i. General Overview of the 2020 NPRM The Commission proposed § 150.9 to establish a new framework whereby a 1061 As discussed in the 2020 NPRM, exchanges typically use one application process to grant all exemption types, whereas the Commission has different processes for different bona fide hedge exemption types. That is, the Commission currently has different processes for permitting enumerated bona fide hedges and for recognizing positions as non-enumerated bona fide hedges or anticipatory bona fide hedges. Generally, for bona fide hedges enumerated in paragraph (2) of the bona fide hedge definition in § 1.3, no formal process is required by the Commission. Instead, such enumerated bona fide hedge recognitions are self-effectuating and Commission staff reviews monthly reporting of cash-market positions on existing Form 204 and part 17 position data to monitor such positions. Requests for recognitions of non-enumerated bona fide hedging positions and for certain enumerated anticipatory bona fide hedge positions, as explained above, must be submitted to the Commission pursuant to the processes in existing §§ 1.47 and 1.48 of the regulations, as applicable. Further, exchanges generally do not require the submission of monthly cash-market information; instead, they generally require exemption applications to include cash-market information supporting positions that exceed the limits, to be filed prior to exceeding a position limit, and to be updated on an annual basis. On the other hand, the Commission has various monthly reporting requirements under Form 204 and part 17 of the Commission’s regulations as described above. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 market participant seeking a nonenumerated bona fide hedge recognition could file one application with an exchange to receive a non-enumerated bona fide hedge recognition for purposes of both exchange-set limits and Federal position limits.1062 The proposed framework was intended to be independent of, and serve as an alternative to, the Commission’s process for reviewing exemption requests under proposed § 150.3. The proposed framework was also intended to help: (1) Streamline the process by which non-enumerated bona fide hedge applications are addressed; (2) minimize disruptions by leveraging existing exchange-level processes with which many market participants are already familiar; 1063 and (3) reduce inefficiencies created when market participants are required to comply with different Federal and exchange-level processes. In the 2020 NPRM, the Commission emphasized that proposed § 150.9 would serve as a separate, selfcontained process that is related to, but independent of, the proposed regulations governing: (1) The process in proposed § 150.3 for traders to apply directly to the Commission for a bona fide hedge recognition; and (2) exchange processes for establishing exchange-set limits and granting exemptions therefrom in proposed § 150.5. The Commission also emphasized that proposed § 150.9 would serve as a voluntary process that exchanges could implement to provide additional flexibility for their market participants to file one non-enumerated bona fide hedge application with an exchange to receive a recognition for purposes of both exchange-set limits and Federal speculative position limits. Finally, the 2020 NPRM made clear that an exchange’s determination to recognize a non-enumerated bona fide hedge in accordance with proposed § 150.9 with respect to exchange-set limits would serve to inform the Commission’s own 1062 Alternatively, under the proposed framework, a trader could submit a request directly to the Commission pursuant to proposed § 150.3(b). A trader that submitted such a request directly to the Commission for purposes of Federal position limits would have to separately request an exemption from the applicable exchange for purposes of exchange-set limits. As discussed earlier in this release, the Commission proposed to separately allow for enumerated hedges and spreads that meet the ‘‘spread transaction’’ definition to be selfeffectuating. See supra Section II.C. (discussing proposed § 150.3). 1063 In particular, the Commission recognizes that, in the energy and metals spaces, market participants are familiar with exchange application processes and are not familiar with the Commission’s processes since, currently, there are no Federal position limits for those commodities. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 decision as to whether to recognize the exchange’s determination for purposes of Federal speculative position limits set forth in proposed § 150.2, and would not be a substitute for the Commission’s determination. Under the proposed procedural framework, an exchange’s determination to recognize a non-enumerated bona fide hedge in accordance with proposed § 150.9 with respect to exchange-set limits would serve to inform the Commission’s own decision as to whether to recognize the exchange’s determination for purposes of Federal position limits set forth in proposed § 150.2. Among other conditions, the exchange would be required to base its determination on standards that conform to the Commission’s own standards for recognizing bona fide hedges for purposes of Federal position limits. Further, the exchange’s determination with respect to its own position limits and application process would be subject to Commission review and oversight. These requirements were proposed to facilitate the Commission’s independent review and determination by ensuring that any bona fide hedge recognized by an exchange for purposes of exchange-set limits in accordance with proposed § 150.9 conforms to the Commission’s standards. For a given referenced contract, proposed § 150.9 would allow a person to exceed Federal position limits if the exchange listing the contract recognized the position as a bona fide hedge with respect to exchange-set limits, unless the Commission denies or stays the application within ten business days (or two business days for applications, including retroactive applications, filed due to sudden or unforeseen circumstances) (the ‘‘10/2-day review’’). Under the 2020 NPRM, if the Commission does not intervene during that 10/2-day review period, then the exemption would be deemed approved for purposes of Federal position limits. The Commission provides a more detailed discussion of each sub-section of proposed § 150.9 further below. ii. General Comments—NonEnumerated Bona Fide Hedging Transactions or Positions, Generally Generally, the majority of commenters supported the Commission’s proposed approach in § 150.9.1064 In particular, one commenter expressed that § 150.9 1064 ICE at 8; CCI at 2; IECA at 1–2; NGFA at 9; MGEX at 4; AGA at 11; CME Group at 7; FIA at 2; CMC at 10–11; EPSA at 6–7; Suncor at 2; COPE at 4; Shell at 3–4; and CEWG at 3; See also ASR at 3 (noting that proposed § 150.9 effectively leverages existing exchange frameworks). PO 00000 Frm 00135 Fmt 4701 Sfmt 4700 3369 represents a ‘‘fair and balanced’’ approach,1065 and another commenter expressed that § 150.9 offers an ‘‘efficient and timely process for hedgers to obtain permission to mitigate their risk.’’ 1066 On the other hand, certain commenters opposed the streamlined process in § 150.9 and requested that the Commission reduce or eliminate the role of exchanges in processing nonenumerated bona fide hedge exemptions.1067 In particular, certain commenters expressed concerns regarding the proposed role of exchanges in § 150.9. That is, certain commenters were concerned that the streamlined approach in proposed § 150.9 would create conflicts of interest for exchanges (which commenters note are for-profit entities) where exchanges could benefit from granting non-compliant nonenumerated bona fide hedge exemptions to boost trading volume and profits.1068 Other commenters expressed concern that § 150.9 delegates too much discretion to exchanges to determine what qualifies as a non-enumerated bona fide hedge without well-defined criteria, and that such discretion could lead to an unlimited universe of new non-enumerated bona fide hedge exemptions that could adversely impact 1065 Suncor at 2. at 4. 1067 Rutkowski at 1; AFR at 2; IECA at 2–3; Public Citizen at 2–3; NEFI at 4; Better Markets at 3, 62; IATP at 13–14; NEFI at 4; and PMAA at 4 (noting a concern that non-enumerated bona fide hedges would be granted outside of the notice and comment rulemaking process). 1068 Rutkowski at 1; see also AFR at 2 (stating concerns that proposed § 150.9 would be ineffective at controlling speculation due, in part, to the substantially increased flexibility of exchanges and market participants to determine whether positions qualify for bona fide hedge exemptions or to propose and institute new non-enumerated hedge exemptions, despite clear conflicts posed by exchanges’ incentive to directly profit from trading volume); IECA at 2–3 and NEFI at 4 (stating that proposed § 150.9 would perpetuate a concern, raised by Congress in the Dodd-Frank Act, that exchanges may be motivated by profit to allow broad hedge exemptions that may include noncommercial market participants); Public Citizen at 2–3 (stating that proposed § 150.9 puts for-profit exchanges in the driver’s seat of making decisions on granting exemptions, and that customer incentive programs offered by exchanges to increase trading volumes would undermine the exchanges’ efforts to determine hedge exemptions; arguing that certain exchanges have experienced difficulty in ‘‘cooperating’’ with current laws and regulations, thus casting doubt on their ability to enforce the proposed rule; and arguing that no additional authority should be granted to CME pending resolution of CFTC v. Byrnes, Case. No. 13–cv– 01174 (SDNY) (alleging a violation of internal firewalls and sales of confidential trading information to an outside broker). Regarding Public Citizen’s comment on CFTC v. Byrnes, the Commission notes that this case has been resolved and is not a condition precedent to this Final Rule. 1066 COPE E:\FR\FM\14JAR2.SGM 14JAR2 3370 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 markets.1069 Finally, several commenters shared the view that § 150.9 would erode the Commission’s authority over exchange-granted exemptions, and that the Commission should retain all authority to grant nonenumerated bona fide hedge exemptions.1070 iii. Discussion of Final Rule—NonEnumerated Bona Fide Hedging Transactions or Positions, Generally— General Concerns and Comments on § 150.9 First, the Commission reiterates, as stated in the 2020 NPRM, that an exchange’s determination to recognize a non-enumerated bona fide hedge in accordance with proposed § 150.9 with respect to exchange-set limits would serve to inform the Commission’s decision whether to recognize such position as a non-enumerated bona fide hedge for purposes of Federal position limits set forth in proposed § 150.2. The Commission is not delegating or ceding its authority to exchanges to make the determination for purposes of Federal position limits to recognize a position as a non-enumerated bona fide hedge for applications submitted under § 150.9. In that regard, the exchange’s determination to recognize a bona fide hedge with respect to exchange-set limits established under § 150.5 is not a substitute for the Commission’s independent review of, and determination with respect to, nonenumerated bona fide hedge applications submitted pursuant to § 150.9. As described in detail below, under § 150.9 as adopted herein, exchanges that elect to review non-enumerated bona fide hedge applications under § 150.9 are required to establish and maintain standards and processes for such review, approved by the Commission pursuant to § 40.5. Section 150.9 requires, among other things, that the exchanges base their determinations on standards that conform to the Commission’s own standards for recognizing bona fide hedges for purposes of Federal position limits. The Final Rule also requires an exchange to directly notify the Commission of any determinations to recognize a nonenumerated bona fide hedge for purposes of exchange-set limits, and, upon such notification, the Commission 1069 PMAA at 4; see also Better Markets at 63 (arguing that the standards for exchanges to grant non-enumerated bona fide hedge recognitions are too flexible and lack meaningful constraints). 1070 PMAA at 4 (noting a concern that nonenumerated bona fide hedges would be granted outside of the notice and comment rulemaking process); IATP at 13–14; NEFI at 4. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 will make its determination as to such applications for purposes of Federal position limits. The Commission also reserves authority to, at a later date and after providing an opportunity to respond, revoke a non-enumerated bona fide hedge recognition that is approved through the § 150.9 process and require a participant to lower its position below the Federal position limit level within a commercially reasonable time if the Commission finds that the position no longer meets the bona fide hedge definition in § 150.1. In response to general concerns that § 150.9 would create conflicts of interest for exchanges, the Commission does not believe that § 150.9 creates incentives for exchanges to grant non-enumerated bona fide hedge exemptions in order to boost trading volume and profits.1071 On the contrary, the Commission believes there are several requirements and obligations that incentivize and require exchanges to implement § 150.9 in a manner that protects their markets. First, under § 150.9, exchanges may only grant non-enumerated bona fide hedges that meet the Commission’s bona fide hedging definition, and each nonenumerated bona fide hedge approved by an exchange for purposes of its own limits is separately and independently reviewed by the Commission for purposes of Federal position limits. Next, under § 150.5(a)(2)(ii)(G) finalized herein, exchanges are required to consider whether approving a particular exemption request would result in positions that would not be in accord with sound commercial practices in the relevant commodity derivatives market and/or whether the position resulting from an approved exemption would exceed an amount that may be established and liquidated in an orderly fashion in that market.1072 Finally, under DCM Core Principle 5 and SEF Core Principle 6, exchanges are accountable for administering position limits in a manner that reduces the potential threat of market manipulation or congestion.1073 The Commission believes that these requirements, working in concert, provide sufficient guardrails to mitigate any potential conflicts of interest for exchanges. Further, the Commission does not agree that § 150.9 improperly delegates discretion to exchanges or erodes the Commission’s authority over exchanges and the non-enumerated bona fide hedge recognition process because, as 1071 See generally supra Sections II.B.2.iv.b. and II.G.2. (discussing studies that indicate that exchanges are incentivized to maintain market integrity). 1072 See infra Final Rule § 150.5(a)(2)(ii)(G). 1073 See 17 CFR 37.600 and 38.300. PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 discussed above, the Commission is not delegating its decision-making authority with respect to the granting of bona fide hedge recognitions for purposes of Federal position limits. Rather, the Commission is allowing exchanges to offer traders the opportunity to submit their applications for a bona fide hedge recognition pursuant to a consolidated review process under which the Commission will conduct its own review and make an independent determination for purposes of Federal speculative position limits. The Commission has thus determined to adopt § 150.9 largely as proposed, but with certain modifications and clarifications, as described further below, to address commenters’ views and other considerations. The following discussions summarize each sub-section of proposed § 150.9, as well as comments received and the Commission’s final determination with respect to each sub-section of § 150.9. 3. Section 150.9(a)—Approval of Exchange Rules Related to the Application Submission Process for Non-Enumerated Bona Fide Hedging Transactions or Positions i. Summary of 2020 NPRM—Approval of Rules Proposed § 150.9(a) would require an exchange to have rules, adopted pursuant to the existing rule-approval process in § 40.5 of the Commission’s regulations, that establish standards and processes in accordance with proposed § 150.9 as described below. The Commission would review such rules to ensure that the exchange’s standards and processes for recognizing bona fide hedges for its own exchange-set limits conform to the Commission’s standards and processes for recognizing bona fide hedges for Federal position limits. ii. Comments—Approval of Exchange Rules Related to the Application Submission Process for NonEnumerated Bona Fide Hedging Transactions or Positions Although the Commission did not receive comments directly about the requirements under proposed § 150.9(a), the Commission did receive comments related to when an exchange could start implementing § 150.9, which is contingent on the exchange having approved rules in place. That is, several commenters recommended a phased implementation for starting the § 150.9 process to avoid a concentration of nonenumerated bona fide hedge applications at one time.1074 1074 See ICE at 9; IFUS at 7; CMC at 12; Shell at 4; FIA at 18; Chevron at 16; and CEWG at 27. See E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Commenters suggested starting the process either six months prior to the effective date or permitting phased compliance for six months after the effective date of the Final Rule. khammond on DSKJM1Z7X2PROD with RULES2 iii. Discussion of Final Rule—Approval of Exchange Rules Related to the Application Submission Process for Non-Enumerated Bona Fide Hedging Transactions or Positions The Commission is finalizing § 150.9(a) with the clarifications and rewording changes described below. As explained in the Proposal, the Commission’s pre-approval of an exchange’s standards and process for review of non-enumerated bona fide hedge applications ensures that the exchange’s determination is based on the Commission’s applicable standards and process, allowing the Commission to leverage off exchange determinations in conducting the Commission’s own, independent review. While the Commission has determined, as described above, to extend the compliance period with respect to certain obligations under this Final Rule,1075 exchanges may start, but are not required, to implement and begin processing non-enumerated bona fide hedge applications under § 150.9 as early as the Effective Date of the Final Rule.1076 The Commission reminds exchanges that, to implement § 150.9, they will first need to submit new or amended rules to the Commission, pursuant to the existing rule-approval process in § 40.5 (which could take up to 45–90 days or longer, as agreed to by the exchange) before they exchanges can begin processing applications under § 150.9. Finally, the Commission clarifies that market participants with existing Commission-granted non-enumerated or anticipatory bona fide hedge recognitions (other than risk management exemptions) are not required to reapply to the Commission for a new recognition under the Final Rule. That is, if the Commission previously issued a non-enumerated or anticipatory bona fide hedge recognition for one of the nine legacy agricultural contracts pursuant to existing § 1.47 or § 1.48, as applicable, a market participant is not required, under the also CME Group at 8 (supporting a 12-month compliance date, but suggesting that the Commission work with exchanges to implement a rolling process where market participants are ‘‘grandfathered into current exchange approved exemptions they hold today, permitting them to file for those exemptions on the same annual schedule’’). 1075 See supra Section I.D. (discussing the effective and compliance dates for the Final Rule). 1076 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Final Rule, to reapply to the Commission for such recognition pursuant to final § 150.3 or § 150.9. In addition, the Commission is making a technical change by rewording § 150.9(a) to clarify that exchanges must seek approval, using the Commission’s rule approval process in existing § 40.5, to implement their rules establishing application processes under § 150.9. 4. Section 150.9(b)—Prerequisites for an Exchange To Recognize NonEnumerated Bona Fide Hedges in Accordance With This Section i. Summary of 2020 NPRM— Prerequisites for an Exchange To Recognize Non-Enumerated Bona Fide Hedges Proposed § 150.9(b) set forth conditions that would require an exchange-recognized bona fide hedge to conform to the corresponding definitions and standards the Commission uses in proposed §§ 150.1 and 150.3 for purposes of the Federal position limits regime. Proposed § 150.9(b) would require the exchange to meet the following conditions: (i) The exchange lists the applicable referenced contract for trading; (ii) the position is consistent with both the definition of bona fide hedging transaction or position in proposed § 150.1 and existing CEA section 4a(c)(2); and (iii) the exchange does not recognize as bona fide hedges any positions that include commodity index contracts and one or more referenced contracts, including exemptions known as risk management exemptions.1077 ii. Comments and Summary of Commission Determination— Prerequisites for an Exchange To Recognize Non-Enumerated Bona Fide Hedges The Commission did not receive any comments on proposed § 150.9(b) and is finalizing this section as proposed, for reasons stated above with respect to § 150.9(b), and with only minor grammatical edits to change certain words to a singular tense. 5. Section 150.9(c)—Application Process Proposed § 150.9(c) set forth the information and representations that the exchange, at a minimum, would be 1077 The Commission finds that financial products are not substitutes for positions taken or to be taken in a physical marketing channel. Thus, the offset of financial risks arising from financial products would be inconsistent with the definition of bona fide hedging transactions or positions for physical commodities in proposed § 150.1. See supra Section II.A.1. (discussion of the temporary substitute test and risk-management exemptions). PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 3371 required to obtain from applicants as part of the § 150.9 application process. Proposed § 150.9(c) would permit exchanges to rely upon their existing application forms and processes in making such determinations, provided that they collect the information outlined below. The following sections summarize each sub-section of proposed § 150.9(c) as well as comments received and the Commission’s determination on each sub-section. i. Section 150.9(c)(1)—Required Information for Non-Enumerated Bona Fide Hedging Positions a. Summary of 2020 NPRM—Required Information for Non-Enumerated Bona Fide Hedging Positions With respect to bona fide hedging positions in referenced contracts, proposed § 150.9(c)(1) would require that any application include: (i) A description of the position in the commodity derivative contract for which the application is submitted (which would include the name of the underlying commodity and the position size); (ii) information to demonstrate why the position satisfies CEA section 4a(c)(2) and the definition of bona fide hedging transaction or position in proposed § 150.1, including ‘‘factual and legal analysis;’’ (iii) a statement concerning the maximum size of all gross positions in derivative contracts for which the application is submitted (in order to provide a view of the true footprint of the position in the market); (iv) information regarding the applicant’s activity in the cash markets for the commodity underlying the position for which the application is submitted; 1078 and (v) any other information the exchange requires, in its discretion, to enable the exchange and the Commission to determine whether such position should be recognized as a bona fide hedge.1079 In the 2020 NPRM, the Commission noted that exchanges would not need to require the identification of a hedging need against a particular identified 1078 The Commission expects that exchanges would require applicants to provide cash-market data for at least the prior year. 1079 Under proposed § 150.9(c)(1)(iv) and (v), exchanges, in their discretion, could request additional information as necessary, including information for cash-market data similar to what is required in the Commission’s existing Form 204. See infra Section II.H.2. (discussion of Form 204 and amendments to part 19). Exchanges could also request a description of any positions in other commodity derivative contracts in the same commodity underlying the commodity derivative contract for which the application is submitted. Other commodity derivatives contracts could include other futures contracts, option on futures contracts, and swaps (including OTC swaps) positions held by the applicant. E:\FR\FM\14JAR2.SGM 14JAR2 3372 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations category, but that the requesting party must satisfy all applicable requirements in proposed § 150.9, including demonstrating with a factual and legal analysis that a position would fit within the bona fide hedge definition. The 2020 NPRM was not intended to require the hedging party’s books and records to identify the particular type of hedge being applied. b. Comments—Required Information for Non-Enumerated Bona Fide Hedging Positions The Commission received few comments related to the application requirements exchanges must implement under proposed § 150.9(c)(1). Some commenters requested that the Commission remove the requirement that the exchange applications implemented under proposed § 150.9(c)(1)(ii) require a ‘‘factual and legal analysis’’ from applicants.1080 Another commenter requested that the Commission clarify any additional factors exchanges should consider when granting non-enumerated bona fide hedge applications pursuant to proposed § 150.9.1081 khammond on DSKJM1Z7X2PROD with RULES2 c. Discussion of Final Rule—Required Information for Non-Enumerated Bona Fide Hedging Positions The Commission is adopting § 150.9(c)(1), with certain revisions and clarifications, explained below. The information required to be submitted as part of the application is necessary to allow the exchange and the Commission to evaluate whether the applicant’s hedging position satisfies the bona fide hedge definition in proposed § 150.1 and CEA section 4a(c)(2). The Commission is making one modification to clarify the 1080 CME Group at 10 (noting its concern that this requirement could be interpreted as requiring applicants to engage legal counsel to complete their applications. CME Group stated that by way of background, CME Group exchanges have never required detailed legal or economic analysis to demonstrate compliance with regulatory requirements. Instead, CME Group requires the applicant to explain its strategy, and CME Group considers and analyzes this explanation using the exchange’s expertise. CME Group recommends that the CFTC instead require an applicant to ‘‘explain its strategy and state that it complies with the regulatory requirements for a bona fide hedge exemption without having to provide a legal analysis.’’ The exchange can solicit additional information from the applicant as needed.) and CMC at 11 (providing that, in the alternative, the Commission could clarify that exchanges or the Commission might request legal analyses at their discretion, which may be in the form of analysis provided by in-house counsel). 1081 See ISDA at 9 (requesting that the final rule include factors exchanges should consider, such as ‘‘sound commercial practices’’ or ‘‘necessary and appropriate to reduce potential threat of market manipulation’’). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Commission’s posture when reviewing non-enumerated bona fide hedge applications under the § 150.9 process. In proposed § 150.9(c)(1) the Commission proposed to require exchanges to collect sufficient information for the exchange to determine and the Commission to ‘‘verify’’ that the facts and circumstances demonstrate that the exchange may recognize a position as a bona fide hedge. In final § 150.9(c)(1), the Commission is revising this provision to make clear that the Commission will conduct an independent evaluation of any application it reviews to ‘‘determine’’ (not verify) whether the facts and circumstances demonstrate that the exchange may recognize the position as a bona fide hedge. Likewise, the Commission is also revising final § 150.9(c)(1)(v), to require that exchanges collect any other information they deem necessary to ‘‘determine’’ (not ‘‘verify’’ as proposed) whether a particular position meets the bona fide hedge definition. The term ‘‘determine’’ more accurately describes the exchange’s responsibility to conduct an independent evaluation of each application, as opposed to a verification, as proposed. In final § 150.9(c)(1)(ii), the Commission is modifying the requirement from proposed § 150.9(c)(1)(ii) that exchanges request a ‘‘factual and legal’’ analysis from applicants for non-enumerated bona fide hedge recognitions. In proposing this requirement, the Commission did not intend for exchanges to require that applicants engage legal counsel to complete their applications for nonenumerated bona fide hedge recognitions. Rather, the purpose of this proposed provision was to ensure that applicants provide an explanation and information that sufficiently demonstrates why a particular position qualifies as bona fide hedge, as defined in § 150.1 and CEA section 4a(c)(2). Instead of requiring a ‘‘factual and legal analysis,’’ the Commission has revised § 150.9(c)(1)(ii) in the Final Rule accordingly so that an applicant must provide an explanation of the hedging strategy, including a statement that the applicant’s position complies with the applicable requirements of the bona fide hedge definition, and information to demonstrate why the position satisfies the applicable requirements. This revision is intended to clarify that the applicant is not required to provide a detailed legal analysis or engage legal counsel to complete their application. Rather, the applicant must provide: (1) PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 A simple explanation or description of the hedging strategy (and include a statement that the strategy complies with the bona fide hedge definition requirements); and (2) the relevant information that shows why or how the strategy meets the bona fide hedge definition requirements. The exchange can then consider this explanation and information in light of its expertise with the relevant market in performing its own analysis. Also, under § 150.9(c)(1), regarding the request that the Commission provide additional factors that exchanges should consider when granting non-enumerated bona fide hedge recognitions, the Commission believes that the requirements under final § 150.9(c) provide sufficient criteria for exchanges to consider when evaluating applications. As stated in the 2020 NPRM, the Commission believes the information an exchange is required to collect under § 150.9(c) is sufficient for the exchange and the Commission to determine whether a particular transaction or position satisfies the definition of bona fide hedging transaction for purposes of Federal position limits. The Commission further highlights that, under final § 150.9(c)(1)(v), an exchange has the authority to collect any additional information that, in its discretion, would help it assess whether to approve a request for a non-enumerated bona fide hedge recognition. Further, in response to ISDA’s request, an exchange is required by § 150.5(a)(2)(ii)(G) to consider some of the factors ISDA recommended when determining whether to grant an exemption, including whether the approval of an exemption would result in positions that are in accord with sound commercial practices, among other considerations.1082 In summary, the Commission believes that the final regulations strike the proper balance by providing sufficient guidance to the exchanges for their review and determination in the context of exchange-set limits, while preserving the exchanges’ discretionary authority to determine what types of additional information, if any, to collect. In addition to the revisions and explanations above, the Commission is adding the word ‘‘needed’’ to § 150.9(c)(1) to clarify that exchanges may collect all information needed to conduct their analysis of a particular application. 1082 See supra Section II.D.3. (addressing other factors exchanges must consider, under § 150.5(a)(2)(ii)(G), when granting exemptions for contracts that are subject to Federal position limits). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ii. Section 150.9(c)(2)—Timing of NonEnumerated Bona Fide Hedge Application khammond on DSKJM1Z7X2PROD with RULES2 a. Summary of 2020 NPRM—Timing of Non-Enumerated Bona Fide Hedge Application The Commission did not propose to prescribe timelines (e.g., a specified number of days) for exchanges to review applications because the Commission believed that exchanges are in the best position to determine how to best accommodate the needs of their market participants. Rather, under proposed § 150.9(c)(2), an applicant must submit its application in advance of exceeding the applicable Federal position limits for any given referenced contract. However, the 2020 NPRM would permit a person to submit a bona fide hedge application within five days after the person has exceeded Federal speculative limits (commonly referred to as retroactive applications) if such person exceeds the limits due to ‘‘demonstrated sudden or unforeseen increases in its bona fide hedging needs.’’ Where an applicant claims a sudden or unforeseen increase in its bona fide hedging needs, the 2020 NPRM would require exchanges to require that the person provide materials demonstrating that the person exceeded the Federal speculative limit due to sudden or unforeseen circumstances. Further, in the 2020 NPRM, the Commission cautioned exchanges that applications submitted after a person has exceeded Federal position limits should not be habitual and would be reviewed closely. Finally, if the Commission found that the position did not qualify as a bona fide hedge, then the applicant would be required to bring its position into compliance, and could face a position limits violation if it did not reduce the position within a commercially reasonable time. b. Comments—Timing of NonEnumerated Bona Fide Hedge Application The Commission received several comments regarding the retroactive application provision in proposed § 150.9(c)(2)(ii). CME preferred allowing retroactive application exemptions that are not limited to circumstances involving sudden/unforeseen increases in bona fide hedging needs.1083 Instead, 1083 CME Group at 9–10 (explaining that in its experience, position limit violations ‘‘often occur unintentionally due to operational or administrative oversight, not because the market participant needed to enter into a hedge quickly in response to changing market conditions’’ and that over the past three years, CME Group has received at least 49 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 CME Group recommended that the Commission (i) allow retroactive applications regardless of the circumstances, and (ii) impose a position limits violation upon an applicant if the exchange denies the retroactive application.1084 ICE recommended that the Commission permit retroactive exemptions for other types of exemptions (including spread exemptions and pass-through-swap exemptions) as well as for position limit overages that occur as a result of operational or incidental issues where the applicant did not intend to evade position limits.1085 Finally, IFUS supported the retroactive application provision as it was proposed.1086 IFUS noted that it follows a similar approach under its existing rules.1087 c. Discussion of Final Rule—Timing of Non-Enumerated Bona Fide Hedge Application The Commission is adopting § 150.9(c) largely as proposed, with certain modifications and clarifications to reflect commenters’ views and other considerations. First, the Commission is revising Final Rule § 150.9(c)(2)(i) so that it is consistent with changes the Commission is making to § 150.9(e)(3), discussed further below.1088 As explained below, under Final Rule § 150.9(e)(3),1089 applicants may elect (at their own risk) 1090 to exceed Federal position limits after an exchange notifies the Commission of the exchange’s approval of the application for purposes of exchange-set limits,1091 retroactive exemption applications to address some type of administrative oversight issue); See also CMC at 11 (agreeing with CME Group), and FIA at 18 (recommending the Commission allow retroactive exemptions within five business days for any reason). 1084 CME Group at 9–10 (explaining that without the threat of a potential position limits violation, market participants could exploit the retroactive provision and intentionally exceed position limits without consequences—‘‘all while disrupting orderly market operations.’’ According to CME Group, the prospect of having an application denied and being found in violation of position limits has worked to deter market participants from attempting to exploit the retroactive exemption process). 1085 ICE at 10. 1086 IFUS at 13–14. 1087 Id. 1088 See infra Section II.G.7. (discussing when a person may exceed Federal position limits). 1089 Id. 1090 See infra Section II.G.7.ii. (explaining that an applicant bears the risk that the Commission could deny the application and require the person to bring their position into compliance with Federal position limits). 1091 The Commission clarifies, for the avoidance of doubt, that an exchange approval of a nonenumerated bona fide hedge (for purposes of exchange limits) issued under § 150.9 is not a Commission approval of the non-enumerated bona fide hedge. PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 3373 and during the Commission’s 10-day review period. This is a change from the 2020 NPRM under which a person would be required to wait until the Commission’s 10-day review period expired before exceeding Federal position limits. Proposed § 150.9(c)(2)(i) was drafted in a manner that reflects this proposed requirement. Accordingly, the Commission is revising § 150.9(c)(2)(i) to clarify that an applicant may exceed Federal position limits after receiving a notice of approval from the relevant designated contract market or swap execution facility. Next, the Commission has determined not to expand the retroactive application provision in § 150.9(c)(2)(ii) to be available in any circumstances (i.e., not just for sudden or unforeseen hedging needs) or for other exemption types. The Final Rule provides broad flexibility to market participants in the form of various exemptions from Federal position limits. In particular, this Final Rule significantly expands the list of self-effectuating enumerated bona fide hedges available to market participants,1092 provides an expansive spread transaction exemption provision,1093 and provides new exemptions for relief for financial distress positions and conditional spot month limits for certain natural gas positions.1094 This Final Rule also grants additional flexibility for market participants to exceed Federal position limits during the pendency of the Commission’s review of the application. Given these additional enhancements to the Federal position limits framework for bona fide hedges and other exemptions, the Commission expects that there will be a limited number of non-enumerated bona fide hedge requests submitted through the § 150.9 process and that it is reasonable to expect that market participants will be able to file any such non-enumerated bona fide hedge requests ahead of needing to exceed limits. The Commission is willing to permit the limited exception for retroactive applications that occur due to sudden or unforeseen bona fide hedging needs, as described above. Otherwise, market participants would be penalized and prevented from assuming appropriate hedges even though their hedging need arises from circumstances beyond their 1092 See supra Section II.A.1. (discussing the expanded list of enumerated bona fide hedges in Appendix A). 1093 See supra Section II.A.20. (discussing the expanded spread transaction definition in § 150.1). 1094 See supra Section II.C.5–6. (discussing the financial distress exemption and the conditional spot month limit exemption in natural gas). E:\FR\FM\14JAR2.SGM 14JAR2 3374 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations control. Beyond that exception, the Commission believes that market participants are able, and should be required, to file timely applications. The Commission believes this is particularly true for trading strategies that are not enumerated bona fide hedges and thus may involve some element of non-risk reducing activity. Expanding the exception beyond bona fide hedging needs that arise due to sudden or unforeseen circumstances may disincentivize market participants from properly monitoring their hedging activities and filing exemption applications in a timely manner. iii. Section 150.9(c)(3)—Renewal of Applications for Non-Enumerated Bona Fide Hedges a. Summary of 2020 NPRM—Renewal of Applications for Non-Enumerated Bona Fide Hedges Proposed § 150.9(c)(3) would require that the exchange require persons with approved non-enumerated bona fide hedges that were previously granted pursuant to proposed § 150.9 to reapply to the exchange at least on an annual basis by updating their original applications. Proposed § 150.9(c)(3) would also require that the exchange require applicants to receive a notice of approval of the renewal from the exchange prior to exceeding the applicable position limit. khammond on DSKJM1Z7X2PROD with RULES2 b. Comments—Renewal of Applications for Non-Enumerated Bona Fide Hedges Several commenters requested a clarification that an applicant (i) would only be subject to the Commission’s 10/ 2-day review process in § 150.9(e) (described below) for initial applications for non-enumerated bona fide hedge recognitions, and (ii) would not be subject to such review for annual renewal applications, unless the facts and circumstances materially change from those presented in the initial application.1095 Commission is also clarifying that, except as provided below, renewals of previously-approved non-enumerated bona fide hedge applications are not required to be submitted to the Commission under § 150.9, and need only be submitted to and approved by the relevant exchange at least on an annual basis for the applicant to continue relying on such recognition for purposes of Federal position limits. Such renewal application serves the purpose of confirming that the facts and circumstances underlying the original application approved by the Commission remain operative. However, if the facts and circumstances underlying a renewal application are materially different than the initial application, then such application should be treated as a new request that should be submitted through the § 150.9 process and subject to the Commission’s 10/2-day review process in § 150.9(e). iv. Section 150.9(c)(4)—Exchange Revocation Authority a. Summary of the 2020 NPRM— Exchange Revocation Authority Proposed § 150.9(c)(4) would require that an exchange retain its authority to limit, condition, or revoke, at any time, any recognition previously issued pursuant to proposed § 150.9, for any reason, including if the exchange determines that the recognition is no longer consistent with the bona fide hedge definition in proposed § 150.1 or section 4a(c)(2) of the Act. b. Comments and Summary of the Commission Determination—Exchange Revocation Authority The Commission did not receive comments on proposed § 150.9(c)(4) and is finalizing this section as proposed. 6. Section 150.9(d)—Recordkeeping i. Summary of the 2020 NPRM— Recordkeeping c. Discussion of Final Rule—Renewal of Applications for Non-Enumerated Bona Fide Hedges The Commission is adopting § 150.9(c)(3) with modifications to clarify that the Commission’s review and determination conducted under final § 150.9(e) is required only for initial applications for non-enumerated bona fide hedge recognitions. The Proposed § 150.9(d) would require exchanges to maintain complete books and records of all activities relating to the processing and disposition of applications in a manner consistent with the Commission’s existing general regulations regarding recordkeeping.1096 Such records would need to include: All information and documents submitted by an applicant in connection with its application; records of oral and written 1095 CEWG at 27; MGEX at 3; CME Group at 8; FIA at 17; ICE at 9; and IFUS at 7 (further requesting that if a non-enumerated bona fide hedge is granted, a participant should be able to treat similar positions as bona fide hedges so long as they reapply to the exchange through the annual renewal process). 1096 Requirements regarding the keeping and inspection of all books and records required to be kept by the Act or the Commission’s regulations are found at § 1.31. 17 CFR 1.31. DCMs are already required to maintain records of their business activities in accordance with the requirements of § 1.31 and § 38.951. 17 CFR 38.951. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 communications between the exchange and the applicant in connection with the application; and information and documents in connection with the exchange’s analysis of, and action on, such application. Exchanges would also be required to maintain any documentation submitted by an applicant after the disposition of an application, including, for example, any reports or updates the applicant files with the exchange. ii. Comments—Recordkeeping The Commission received one comment regarding exchange recordkeeping requirements under proposed § 150.9. NGSA requested that any exchange recordkeeping/reporting requirements that apply to the proposed § 150.9 process do not require matching applicants’ hedge positions to their underlying cash positions on a one-tobasis, but should instead allow for recordkeeping/reporting of positions on an aggregate basis.1097 iii. Discussion of Final Rule— Recordkeeping The Commission is adopting § 150.9(d) as proposed, and with only one minor grammatical edit to change the term ‘‘designated contract market’’ to the correct possessive tense. The Commission also clarifies here, in response to comments, that the § 150.9(d) recordkeeping requirements do not prescribe the manner in which exchanges record how they match applicants’ bona fide hedge positions to applicants’ underlying cash positions. Rather, final § 150.9(c)(1)(iv) requires that an exchange collect the necessary information regarding an applicant’s cash-market activity and offsetting cash positions, and final § 150.9(d) simply requires the exchange to keep a record of such application materials and information collected. However, an exchange’s records should be sufficient to demonstrate that any approved nonenumerated bona fide hedges meet the requirements of § 150.9(b). The Commission also reiterates, as explained in the 2020 NPRM, that exchanges are required to store and produce records pursuant to existing § 1.31,1098 and will 1097 See NGSA at 9 (noting that allowing matching on an aggregate basis would accommodate the practical needs of many market participants to hedge their risks on a portfolio basis). 1098 Consistent with existing § 1.31, the Commission expects that these records would be readily available during the first two years of the required five-year recordkeeping period for paper records, and readily accessible for the entire fiveyear recordkeeping period for electronic records. In addition, the Commission expects that records required to be maintained by an exchange pursuant to this section would be readily accessible during E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations be subject to requests for information pursuant to other applicable Commission regulations, including, for example, existing § 38.5.1099 7. Section 150.9(e)—Process for a Person To Exceed Federal Position Limits The following discussion summarizes proposed § 150.9(e), comments received, and the Commission’s determination according to each sub-section, or a combination of certain subsections, of § 150.9(e). i. Section 150.9(e)(1)–(2)—Notification to the Commission and Notification Requirements a. Summary of the 2020 NPRM— Notification to the Commission and Notification Requirements Under proposed § 150.9(e)(1), once an exchange recognizes a non-enumerated bona fide hedge with respect to its own exchange-set position limits established pursuant to § 150.5(a), the exchange would be required to notify the Commission concurrently with the approval notice it provides to the applicant. Under proposed § 150.9(e)(2), such notification to the Commission would need to include a copy of the application and any supporting materials, as well as certain basic information, outlined in § 150.9(e)(2)(i)– (vi), about the exemption. The exchange would only be required to provide this notice to the Commission with respect to its initial (and not renewal) determination for a particular application. khammond on DSKJM1Z7X2PROD with RULES2 b. Comments—Notification to the Commission and Notification Requirements While proposed § 150.9(e)(1) would require an exchange to notify the Commission upon making an initial determination to recognize a nonenumerated bona fide hedge, that rule would not require the exchange to notify the public of any such determination. Commenters submitted several general requests related to the publication of non-enumerated bona fide hedges and the future expansion of the list of enumerated bona fide hedges in Appendix A to the proposed regulatory text in the 2020 NPRM. Specifically, certain commenters requested that exchanges be required to the pendency of any application, and for two years following any disposition that did not recognize a derivative position as a bona fide hedge. 1099 See 17 CFR 38.5 (requiring, in general, that upon request by the Commission, a DCM must file responsive information with the Commission, such as information related to its business, or a written demonstration of the DCM’s compliance with one or more core principles). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 publicize approved non-enumerated bona fide hedge recognitions so that market participants are aware of the types of recognitions they can receive.1100 c. Discussion of Final Rule— Notification to the Commission and Notification Requirements The Commission has determined to finalize § 150.9(e)(1)–(2) as proposed. While the Final Rule does not require exchanges to publicize approved nonenumerated bona fide hedge recognitions, an exchange may elect, in its discretion, to provide such a list. The Commission understands, however, that in the past, exchanges and market participants have raised concerns that publicizing information about approved non-enumerated bona fide hedges could divulge confidential information (such as trade secrets, intellectual property, the market participant’s identity or position).1101 To the extent that an exchange elects to publicize descriptions of approved non-enumerated bona fide hedges, the Commission cautions that any such data published should not disclose the identity of, or confidential information about, the applicant. Rather, any published summaries are expected to be general (generic facts and circumstances). While the decision whether to publicize descriptions of approved non-enumerated bona fide hedges is at the discretion of the exchange, the exchange remains subject to all applicable laws and regulations (including exchange bylaws) governing the protection of confidential trade and trader information. The Commission also cautions exchanges to make clear that any descriptions or lists of approved non-enumerated bona fide hedges they elect to publish are for informational purposes only and do not bestow any rights upon applicants to a claim that a particular strategy is a nonenumerated bona fide hedge simply because it aligns with a published example or description provided by the exchange. 1100 See COPE at 5 (noting that such notice should provide market participants the facts upon which the recognition is based, and would save the Commission from repeatedly processing requests for the same hedging strategy); FIA at 15, 19 (requesting that exchanges be required to publish anonymized descriptions of non-enumerated hedging recognitions granted by the exchange); EPSA at 5–7. 1101 See 81 FR at 96824. PO 00000 Frm 00141 Fmt 4701 Sfmt 4700 3375 ii. Section 150.9(e)(3)–(4)—Exceeding Federal Speculative Position Limits and the Commission’s 10/2-Day Review Process a. Summary of the 2020 NPRM— Exceeding Federal Speculative Position Limits and the Commission’s 10/2-Day Review Process Under proposed § 150.9(e)(3), a person could exceed Federal position limits ten business days after the exchange notifies the Commission in accordance with proposed § 150.9(e)(2) that the exchange has approved the nonenumerated bona fide hedge application for purposes of exchange limits, provided that the Commission does not notify the exchange or applicant that the Commission has determined to stay or deny the application during its ten-day review. Under proposed § 150.9(e)(4), if a person exceeds Federal position limits due to sudden or unforeseen bona fide hedging needs and then files a retroactive application pursuant to proposed § 150.9(c)(2)(ii), then such application would be deemed approved by the Commission two business days after the exchange issues the required notification, provided that the Commission does not notify the exchange or applicant that the Commission has determined to stay or deny the application during its two-day review. Under the 2020 NPRM, once those ten (or two) business days have passed, the person could rely on the bona fide hedge recognition both for purposes of exchange-set and Federal position limits, with the certainty that the Commission (and not Commission staff) would only revoke that determination in the limited circumstances set forth in proposed § 150.9(f)(1) and (2) described further below. b. Comments—Exceeding Federal Speculative Position Limits and the Commission’s 10/2-Day Review Process The bulk of the comments the Commission received on proposed § 150.9 relate to the Commission’s proposed ten-day or two-day period for reviewing a non-enumerated bona fide hedge application after an exchange has already approved the application for purposes of the exchange-set limits (as noted above,1102 the 10/2-day review). In particular, the Commission received several comments on the sufficiency of the proposed review periods, including that the Commission’s proposed 10/21102 See E:\FR\FM\14JAR2.SGM supra Section II.G. 14JAR2 3376 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations day review period is: (1) Too long; 1103 (2) too short; 1104 and (3) just right.1105 In addition, several commenters suggested that the Commission permit applicants to exceed Federal position limits during the Commission’s ten-day review period (which occurs after an exchange issues its approval with respect to exchange-set limits).1106 Commenters also suggested that rather than the CFTC reviewing each nonenumerated bona fide hedge exemption application after each exchange determination, the CFTC should monitor exchanges at a higher level (such as through the rule enforcement review process).1107 khammond on DSKJM1Z7X2PROD with RULES2 c. Discussion of Final Rule—Exceeding Federal Speculative Position Limits and the Commission’s 10/2-Day Review Process The Commission is adopting § 150.9(e)(3)–(4) with certain revisions and clarifications as discussed below. First, regarding general comments on the length of the Commission’s 10/2-day review periods, the Commission acknowledges commenters’ concerns regarding whether the Commission will have enough time to review and act on non-enumerated bona fide hedge applications. However, the Commission will continue to develop internal processes and systems to respond to § 150.9 applications as needed and within those timeframes. In addition, 1103 ADM at 6 (suggesting a five/one business day review period); ICE at 9 (explaining that the 10-day review period would impose unnecessary burdens and delay and create uncertainty for market participants); IFUS at 14 (explaining that the 10-day review period potentially conflicts with the exchange’s spot-month exemption review process, as contracts could expire before the review period ends, and noting that a two day review, although not ideal, is preferred); NGFA at 9 (suggesting a two-business-day review period). 1104 IATP at 13–14 (contending that the 10/2-day review period would burden an under-resourced Commission); Better Markets at 3, 63 (asserting that, under proposed § 150.9, it is impossible for Commission staff to, within the prescribed amount of time: review and collect additional information on non-enumerated bona fide hedge applications; draft orders; receive the Chairman’s approval for a seriatim process; and secure the necessary Commissioner votes). 1105 CME Group at 7 (also agreeing that a timeline for exchanges’ review of applications should not be prescribed). 1106 ADM at 6; ICE at 9; IFUS at 7; CME Group at 7–8 (explaining that exchanges have ‘‘strong incentives to grant exemptions only after careful review’’ because they have statutory obligations to prevent manipulation); CMC at 12 (noting that it is currently unclear whether an applicant can enter into a position during the Commission’s 10/2-day review). 1107 ICE at 9; IFUS at 7 (questioning whether it is necessary for the Commission to routinely review each non-enumerated bona fide hedge application); CEWG at 26–27 (suggesting an annual exchange rule enforcement review process instead of the 10/ 2-day review). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 the § 150.9 process enables the Commission to leverage the exchange’s review and analysis, which would serve to inform the Commission’s own review. The Commission believes that this streamlined approach will reduce the amount of time required for the Commission’s review each application. In addition, regarding comments suggesting that the 10/2-day review periods are too long and will impose unnecessary delays on market participants, and the request that market participants be able to exceed Federal position limits during the Commission’s 10-day review, the Commission is revising proposed § 150.9(e)(3) to provided additional flexibility. Under § 150.9(e)(3), applicants may elect to exceed Federal position limits once they receive a notice of approval from the relevant exchange and during the Commission’s 10-day review period, but will do so at their own risk. That is, if an applicant exceeds Federal position limits before the Commission’s 10-day review period ends, the applicant bears market risk for that position, in that the Commission could, in accordance with § 150.9(e)(6) described below, deny the application for purposes of Federal position limits and require the applicant to bring its position back into compliance with the Federal position limits within a commercially reasonable amount of time, as determined by the Commission in consultation with the relevant exchange and applicant. As discussed below in connection with § 150.9(e)(6), in these circumstances where an applicant is required to lower its position, as a matter of policy, the Commission will not pursue an enforcement action against the applicant so long as the application was filed in good faith (meaning the applicant and exchange have a reasonable and good faith basis for determining that the position meets the requirements of § 150.9(b)) and the applicant brings its position into compliance within a commercially reasonable amount of time. Further, regarding general comments that the length of the 10/2-day review period is too long, the Commission believes allowing applicants to exceed Federal position limits during the Commission’s ten-day review period addresses many commenter concerns. As described above, the Final Rule also affords applicants the ability to file retroactive applications in certain limited circumstances, and to hold positions above Federal position limits during the Commission’s two-day review of such retroactive application. The Commission believes that these PO 00000 Frm 00142 Fmt 4701 Sfmt 4700 avenues adequately accommodate market participants’ needs to hedge in a timely manner, and are well-balanced with the Commission’s need to maintain adequate oversight of non-enumerated bona fide hedge applications through its limited 10/2-day review periods. Furthermore, the Commission would consider it to be a reasonable and helpful practice if exchanges elect to provide information to the Commission on non-enumerated bona fide hedge applications as the exchange is considering such applications. That is, the Commission would find it helpful to receive an advance courtesy copy of any § 150.9 applications the exchange receives. The exchange is not, however, required to provide such advance copies, and would not be required to obtain an opinion on such applications from the Commission before making its determination. Rather, providing such application information as the exchange receives it could facilitate a more rapid Commission evaluation of § 150.9 applications. This would help facilitate additional regulatory certainty for market participants and would aid the Commission in its review of applications processed under § 150.9. Also, while commenters requested that the Commission should not review each non-enumerated bona fide hedge application, the Commission is of the view that it must review each application in order to conform to the legal limits on what an agency may delegate to persons outside the agency.1108 Under the new model finalized herein, the Commission will be informed by the exchanges’ determinations to make the Commission’s own determination for purposes of Federal position limits before the 10/2-day review period expires. Accordingly, the Commission will retain its decision-making authority with respect to the Federal position limits and provide legal certainty to market participants of their determinations. Finally, in § 150.9(e)(3) and (4), the Commission is making one technical correction to clarify that a person may exceed Federal position limits or rely on 1108 In U.S. Telecom Ass’n v. FCC, the D.C. Circuit held ‘‘that, while Federal agency officials may sub-delegate their decision-making authority to subordinates absent evidence of contrary congressional intent, they may not sub-delegate to outside entities—private or sovereign—absent affirmative evidence of authority to do so.’’ U.S. Telecom Ass’n v. FCC, 359 F.3d 554, 565–68 (D.C. Cir. 2004) (citations omitted). Nevertheless, there are three circumstances that the agency may ‘‘delegate’’ its authority to an outside party because they do not involve sub-delegation of decisionmaking authority: (1) Establishing a reasonable condition for granting Federal approval; (2) fact gathering; and (3) advice giving. Id. at 568. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations an approved retroactive application after the 10/2-day review period, as applicable, unless the Commission notifies the person and relevant exchange that it has determined to stay or deny the application, pursuant to § 150.9(e)(5) or (e)(6). In the 2020 NPRM, the Commission only referred to its stay authority in § 150.9(e)(5), discussed in detail below. However, as clarified in the Final Rule, the Commission could also notify the applicant and exchange of its determination to deny the application for purposes of Federal position limits under § 150.9(e)(6), also discussed below. This change is a technical correction and does not change the substance of § 150.9(e)(3) or (4). iii. Section 150.9(e)(5)—Commission Stay of Pending Applications and Requests for Additional Information khammond on DSKJM1Z7X2PROD with RULES2 a. Summary of the 2020 NPRM— Commission Stay of Pending Applications and Requests for Additional Information Under proposed § 150.9(e)(5), the Commission could stay a nonenumerated bona fide hedge application that an exchange has approved, pursuant to § 150.9(e)(2), for purposes of exchange-set limits. Under the 2020 NPRM, if, during the ten (or two) business day timeframe in § 150.9(e)(3) or (4), the Commission notifies the exchange and applicant that the Commission (and not staff) has determined to stay the application, the applicant would not be able to rely on the exchange’s approval of the application for purposes of exceeding Federal position limits, unless the Commission approves the application after further review. The proposed stay provision did not include a time limitation on the duration of a Commission stay. Separately, under proposed § 150.9(e)(5), the Commission (or Commission staff) could request additional information from the exchange or applicant in order to evaluate the application, and the exchange and applicant would have an opportunity to provide the Commission with any supplemental information requested to continue the application process. Any such request for additional information by the Commission (or staff), however, would not stay or toll the ten (or two) business day application review period. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3377 b. Comments—Commission Stay of Pending Applications and Requests for Additional Information edits to improve readability, none of which impact the substance of the section. With respect to instances where the Commission has stayed an exchangegranted non-enumerated bona fide hedge application or elects to review a previously approved-application, several commenters requested that the Commission limit the duration of its review period, which was unlimited in the 2020 NPRM.1109 iv. Section 150.9(e)(6)—Commission Determination for Applications During the 10/2-Day Review The following discussion addresses § 150.9(e)(6), which deals with any Commission determinations that are issued for pending applications and during the Commission’s 10/2-day review. c. Discussion of Final Rule— Commission Stay of Pending Applications and Requests for Additional Information a. Summary of the 2020 NPRM— Commission Determination for Applications During the 10/2-Day Review Under proposed § 150.9(e)(6), if the Commission determined that an application does not meet the conditions set forth in proposed § 150.9(b), the Commission would notify the exchange and the applicant and provide an opportunity for the applicant to respond. After doing so, the Commission could, in its discretion, deny the application for purposes of Federal position limits, and require the person to reduce the position within a commercially reasonable amount of time, as determined by the Commission in consultation with the applicant and the exchange. In such a case, the applicant would not be subject to any finding of a position limits violation during the Commission’s review of a pending application or after the Commission makes its determination. A person would also not be subject to a violation if they already exceeded Federal position limits and filed a retroactive application, and the Commission then determined that the bona fide hedge is not approved for purposes of Federal position limits. In either case, the 2020 NPRM provided that the Commission would not find that the person had committed a position limits violation so long as the person brings the position into compliance within a commercially reasonable time. The Commission has determined to finalize § 150.9(e)(5) with certain modifications and clarifications in response to commenters and other considerations. In response to commenters’ requests, the Commission is modifying its stay authority under proposed § 150.9(e)(5). Under the Final Rule, any Commission stay issued pursuant to § 150.9(e)(5) will be limited to 45 days. The Commission has a long history of conducting other extensive regulatory reviews within a 45-day period.1110 The Commission has found that this timeframe provides sufficient time for the Commission to conduct an adequate review while also providing certainty to market participants that the review will not be indefinite. The Commission is also clarifying in final § 150.9(e)(5) that if the Commission stays a pending application where the applicant has not yet exceeded Federal position limits, then the applicant may not exceed Federal position limits until the Commission issues a final determination. Further, if the Commission stays a pending application and the applicant has already exceeded Federal position limits (either during the Commission’s 10-day review period or as part of a retroactive application), then the applicant may continue to maintain its position unless the Commission notifies the designated contract market or swap execution facility and the applicant otherwise, pursuant to § 150.9(e)(6). In addition to the changes above, the Commission is making several technical 1109 ICE at 9; FIA at 18; CME Group at 7 (suggesting that the Commission’s stay or review of an application should not exceed 30 calendar days); IFUS at 15 (noting that any Commission stay will almost certainly conflict with IFUS procedures for reviewing exemptions in the spot month, where certain exemptions may be in effect for less than 10 days). 1110 See 17 CFR 40.3 and 40.5 (providing the Commission’s 45-day review period for new product and rule approval applications). PO 00000 Frm 00143 Fmt 4701 Sfmt 4700 b. Comments—Commission Determination for Applications During the 10/2-Day Review Commenters requested that the Commission allow traders sufficient time to exit a position if the Commission denies an exchangeapproved non-enumerated bona fide hedge application before the end of the 10/2-day review period.1111 1111 CMC at 12 (requesting a commercially reasonably amount of time to exit positions); ADM at 6 (requesting, in addition, that the Commission consult exchanges on what is a commercially E:\FR\FM\14JAR2.SGM Continued 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3378 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations c. Discussion of Final Rule— Commission Determination for Applications During the 10/2-Day Review The Commission has determined to finalize § 150.9(e)(6) with certain modifications and clarifications in response to commenters and other considerations. First, for the avoidance of doubt and in response to comments, the Commission clarifies and reiterates how it will handle any determination to deny an application under final § 150.9(e)(6). Generally, if the Commission denies an application under § 150.9(e)(6), and the applicant consequently is required to reduce its position below the applicable Federal position limit, the Commission will allow the applicant a commercially reasonable amount of time to do so. The Commission will determine the commercially reasonable amount of time in consultation with the relevant exchange and the applicant. The Commission intends for the applicant and the relevant exchange to have input regarding what amount of time is sufficient. Further, the Commission is clarifying for final § 150.9(e)(6) that it expects all applicants to submit their applications in good faith. As part of that good faith submission, the Commission expects each applicant will have a reasonable basis for determining that the purported non-enumerated bona fide hedge meets the requirements of § 150.9(b). Accordingly, the Commission is revising § 150.9(e)(6) to clarify that the Commission will not pursue an enforcement action for a position limits violation for the applicant holding the position if the applicant exceeds Federal position limits during the 10/2-day review and the Commission subsequently determines to deny the application, so long as: (1) The application was submitted to the exchange pursuant to § 150.9 in good faith, and (2) if required, the applicant reduces its positions within a commercially reasonable amount of time. In addition, the Commission is making several non-substantive clarifications to final § 150.9(e)(6). The Commission is clarifying that this section deals with any Commission determination issued for pending applications during the 10/2-day review period (as opposed to Commission determinations issued under § 150.9(f) after the 10/2-day review period). The Commission is also adding language to clarify that the Commission must notify reasonable amount of time for an applicant to exit a position); CME Group at 7–8. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 the applicant and relevant exchange of any determination within the 10/2-day review period. In addition, the Commission is adding language to clarify that § 150.9(e)(6) is not limited to Commission denials of applications; rather, the Commission could also determine to issue an approval with certain conditions or limitations that may be different from the approval issued by the exchange for purposes of exchange-set limits. Finally, the Commission is making various nonsubstantive technical and organizational changes to make the section more readable. v. Section 150.9(e)—Recognition of Additional Enumerated Bona Fide Hedges a. Summary of the 2020 NPRM— Recognition of Additional Enumerated Bona Fide Hedges Proposed Appendix A to the Final Rule identified each of the enumerated bona fide hedges, and under the 2020 NPRM, the Commission’s recognition of a non-enumerated bona fide hedge, pursuant to § 150.3 or § 150.9, would not add new bona fide hedges to the list of enumerated bona fide hedges in Appendix A. b. Comments—Recognition of Additional Enumerated Bona Fide Hedges Commenters requested that the Commission codify a path to move commonly granted non-enumerated bona fide hedge recognitions to the list of enumerated bona fide hedge recognitions in Appendix A.1112 c. Discussion of Final Rule— Recognition of Additional Enumerated Bona Fide Hedges The Commission has determined to finalize the approach as proposed. Regarding a path forward for the Commission to expand the list of enumerated bona fide hedges to include certain non-enumerated bona fide hedges that are commonly granted, the Commission notes that it has an existing rulemaking process (which requires public notice and comment) to accomplish this. The Commission also clarifies, for the avoidance of doubt, that it remains open to expanding the list of enumerated hedges, as appropriate, but that the Commission would be required 1112 See MGEX at 4; EPSA at 5–7; COPE at 5; FIA at 19 (noting that the process should be subject to the notice and comment rulemaking process); ICE at 10; and IFUS at 7 (requesting that such process also require Commission staff to provide an annual report to the Commission recommending nonenumerated bona fide hedges that should be enumerated). PO 00000 Frm 00144 Fmt 4701 Sfmt 4700 to do so under its existing rulemaking process subject to public notice and comment. Market participants are welcome to request that the Commission take up future rulemakings to amend the list of enumerated bona fide hedges.1113 8. Section 150.9(f)—Commission Revocation of an Approved Application i. Summary of 2020 NPRM— Commission Revocation of an Approved Application Proposed § 150.9(f) set forth the limited circumstances under which the Commission would revoke a previouslyapproved non-enumerated bona fide hedge recognition granted pursuant to proposed § 150.9. First, under proposed § 150.9(f)(1), if an exchange limits, conditions, or revokes its recognition of a non-enumerated bona fide hedge that was previously approved under § 150.9, then such bona fide hedge would also be deemed limited, conditioned, or revoked for purposes of Federal position limits. Next, under proposed § 150.9(f)(2), if the Commission determines that an application that has been approved or deemed approved by the Commission is no longer consistent with the applicable sections of the Act and the Commission’s regulations, the Commission could revoke the nonenumerated bona fide hedge recognition and/or require the person to reduce its position within a commercially reasonable time, or otherwise come into compliance. Under proposed § 150.9(f)(2), if the Commission makes such determination, it would need to first notify the person holding the position and provide them with an opportunity to respond. The Commission would also provide a notification briefly explaining the nature of the issues raised and the regulatory provision with which the position is inconsistent. If the Commission requires the person to reduce the position, the Commission would allow the person a commercially reasonable amount of time to do so, as determined by the Commission in consultation with the applicable exchange and applicant. Finally, under the 2020 NPRM, the Commission would not find that the person has committed a position limit violation so long as the person comes into compliance within the commercially reasonable time. 1113 Market participants may petition the Commission to expand the list of enumerated bona fide hedges under existing § 13.1, which provides that any ‘‘person may file a petition with . . . the Commission . . . for the issuance, amendment or repeal of a rule of general application.’’ E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ii. Comments—Commission Revocation of an Approved Application Commenters’ views on proposed § 150.9(f) tended to overlap with their views on the Commission’s determination authority under § 150.9(e)(6) (discussed above). In particular, commenters requested that the Commission allow traders sufficient time to exit a position if the Commission revokes a previously approved non-enumerated bona fide hedge recognition.1114 Commenters also requested that the Commission further clarify that an applicant will not be penalized for relying on an approved non-enumerated bona fide hedge recognition if the Commission later revokes such approval after the 10/2-day review period.1115 khammond on DSKJM1Z7X2PROD with RULES2 iii. Discussion of Final Rule— Commission Revocation of an Approved Application The Commission has determined to finalize § 150.9(f) with certain modifications and clarifications in response to commenters and other considerations. First, under the Final Rule, if the Commission limits, conditions, or revokes a previously approved nonenumerated bona fide hedge recognition under § 150.9(f)(2), and the applicant consequently is required to reduce its position below the applicable Federal position limit, the Commission will allow the applicant a commercially reasonable amount of time to do so. The Commission will determine the commercially reasonable amount of time in consultation with the relevant exchange and the applicant. The Commission intends for the applicant and the relevant exchange to have input regarding what amount of time is sufficient. Further, if the Commission limits, conditions, or revokes a previously approved non-enumerated bona fide hedge recognition under § 150.9(f)(2), the Commission will not pursue an enforcement action for a position limits violation for the person holding the position in excess of Federal position limits so long as the person: (1) Submitted its application pursuant to § 150.9 in good faith,1116 and (2) if required, reduces the position within a 1114 CMC at 12 (requesting a commercially reasonable amount of time to exit positions); ADM at 6 (requesting, in addition, that the Commission consult exchanges on what is a commercially reasonably amount of time for an applicant to exit a position). 1115 CMC at 12; ADM at 6. 1116 See supra Section II.G.7. (providing additional discussion of the premise that a person submit their § 150.9 application in good faith). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 commercially reasonable amount of time as determined by the Commission in consultation with the person and the relevant exchange. The Commission is revising the title of final § 150.9(f) to clarify that this section is limited to revocations of nonenumerated bona fide hedges previously approved by the Commission. The Commission is also adding language to final § 150.9(f)(2)(i) (consistent with language in § 150.9(f)(1)) to clarify that, in addition to revoking a previouslygranted non-enumerated bona fide hedge recognition, the Commission could alternatively determine to limit or condition a previously-granted recognition. The Commission believes that there could be circumstances where it would not need to completely revoke a previously-granted recognition, but instead may determine a less drastic measure is more appropriate to enable a market participant to achieve compliance with the applicable requirements. Finally, the Commission is revising § 150.9(f)(2)(iii) to include the same language that it added to § 150.9(e)(6) to explicitly make clear an underlying premise that the Commission will not pursue Federal position limits violations so long as any applications are filed in good faith. Finally, the Commission is making a number of technical and grammatical corrections in § 150.9(f) that are not substantive revisions. In addition to the clarifications and modifications above, the Commission would like to reiterate the following explanations and guidance from the 2020 NPRM. The Commission expects for persons to be able to rely on nonenumerated bona fide hedge recognitions granted pursuant to § 150.9 with the certainty that the final determination would only be limited, conditioned, or revoked in very limited circumstances. The Commission expects that it (and not Commission staff) would only exercise such authority under rare circumstances where the disposition of an application has resulted, or is likely to result, in price anomalies, threatened manipulation, actual manipulation, market disruptions, or disorderly markets. The Commission also expects that any action compelling a market participant to reduce its position pursuant to § 150.9(f)(2) would be a rare Commission action, and such action is not delegated to Commission staff. In determining requirements for a person to reduce a position, the Commission may consult the person and relevant exchange, and may also consider factors such as current market conditions and the protection of price discovery in the market. Finally, for the avoidance of PO 00000 Frm 00145 Fmt 4701 Sfmt 4700 3379 doubt, the Commission expects that its exercise of its authorities under § 150.9(f)(2) would not be subject to the requirements of CEA section 8a(9), that is, the Commission would not be compelled to find that a CEA section 8a(9) emergency condition exists prior to requiring that a market participant reduce certain positions. 9. Section 150.9(g)—Delegation of Authority to the Director of the Division of Market Oversight i. Summary of the 2020 NPRM— Delegation of Authority to the Director of the Division of Market Oversight The Commission proposed to delegate certain of its authorities under proposed § 150.9 to the Director of the Commission’s Division of Market Oversight, or such other employee(s) that the Director may designate from time to time. Proposed § 150.9(g)(1) would delegate the Commission’s authority, in § 150.9(e)(5), to request additional information from the exchange and applicant. The Commission did not propose, however, to delegate its authority, in proposed § 150.9(e)(5) and (6) to stay or deny a non-enumerated bona fide hedge application. The Commission also did not delegate its authority in proposed § 150.9(f)(2) to revoke a non-enumerated bona fide hedge recognition granted pursuant to § 150.9, or to require an applicant to reduce its positions or otherwise come into compliance. The Commission stated that if an exchange’s disposition of an application raises concerns regarding consistency with the CEA, presents novel or complex issues, or requires remediation, then the Commission (and not Commission staff) would make the final determination, after taking into consideration any supplemental information provided by the exchange or the applicant. As with all authorities delegated by the Commission to staff, under the 2020 NPRM, the Commission would maintain the authority to consider any matter which has been delegated. The Commission stated in the 2020 NPRM that it intended to closely monitor staff administration of the proposed processes for granting non-enumerated bona fide hedge recognitions. ii. Comments and Summary of the Commission Determination—Delegation of Authority to the Director of the Division of Market Oversight The Commission did not receive comments on proposed § 150.9(g). The Commission is finalizing § 150.9(g) with one revision to reorganize certain text to improve readability. This update is not E:\FR\FM\14JAR2.SGM 14JAR2 3380 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations intended to change the substance of this section. 2. Elimination of Form 204 and CashReporting Elements of Form 304 H. Part 19 and Related Provisions— Reporting of Cash-Market Positions i. Summary of the 2020 NPRM— Elimination of Form 204 and CashReporting Elements of Form 304 The Commission proposed to eliminate existing Form 204. The Commission also proposed to eliminate Parts I and II of existing Form 304, which request information on cashmarket positions for cotton akin to the information requested in Form 204.1122 As discussed in the 2020 NPRM, the Commission believed that eliminating these forms would reduce duplicative reporting requirements for market participants without hindering the Commission’s ability to access cashmarket information, which the exchanges would be required to collect and provide to the Commission under proposed §§ 150.3, 150.5, and 150.9.1123 For a market participant accustomed to filing series ‘04 reports the 2020 NPRM would result in a slight change in practice. Under the 2020 NPRM, such participant’s bona fide hedge recognitions could still be selfeffectuating for purposes of Federal position limits, provided that the market participant also separately applies for a bona fide hedge exemption from exchange-set limits established pursuant to proposed § 150.5(a), discussed above, and provided further that the participant submits the requisite cashmarket information to the exchange as required by proposed § 150.5(a)(2)(ii)(A). 1. Background Key reports currently used for purposes of monitoring compliance with Federal position limits include Form 204 1117 and Parts I and II of Form 304,1118 known collectively as the ‘‘series ‘04’’ reports. Under existing § 19.01, market participants that hold bona fide hedging positions in excess of limits for the nine legacy agricultural contracts currently subject to Federal position limits must justify such overages by filing the applicable report each month: Form 304 for cotton, and Form 204 for the other commodities.1119 These reports are: Generally filed after exceeding the Federal position limit; show a snapshot of such trader’s cash positions on one given day each month; and are used by the Commission to determine whether a trader has sufficient cash positions to justify futures and options on futures positions above the speculative limits. The existing series ‘04 reports are both duplicative of, and inconsistent with, the processes market participants use to report cash-market information to the exchanges. When granting exemptions from their own limits, exchanges do not use a monthly cashmarket reporting framework akin to the ‘04 reports. Instead, exchanges generally require market participants who wish to exceed exchange-set limits, including for bona fide hedging positions, to submit an annual exemption application form in advance of exceeding the limits.1120 Such applications are typically updated annually and generally include a month-by-month breakdown of cash-market positions for the previous year supporting any position-limits overages during that period.1121 khammond on DSKJM1Z7X2PROD with RULES2 1117 CFTC Form 204: Statement of Cash Positions in Grains, Soybeans, Soybean Oil, and Soybean Meal, available at https://www.cftc.gov/sites/ default/files/idc/groups/public/@forms/documents/ file/cftcform204.pdf (existing Form 204). 1118 CFTC Form 304: Statement of Cash Positions in Cotton, available at https://www.cftc.gov/ucm/ groups/public/@forms/documents/file/ cftcform304.pdf (existing Form 304). Parts I and II of Form 304 address fixed-price cash positions used to justify cotton positions in excess of Federal position limits. As described below, Part III of Form 304 addresses unfixed-price cotton ‘‘on-call’’ information, which is not used to justify cotton positions in excess of limits, but rather to allow the Commission to prepare its weekly cotton on-call report. 1119 17 CFR 19.01. 1120 See, e.g., ICE Rule 6.29 and CME Rule 559. 1121 For certain physically-delivered agricultural contracts, some exchanges may require that spot VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 ii. Summary of the Commission Determination—Elimination of Form 204 and Cash-Reporting Elements of Form 304 The Commission has carefully considered the comments received and is eliminating existing Form 204 and Parts I and II of existing Form 304 as proposed. iii. Comments—Elimination of Form 204 and Cash-Reporting Elements of Form 304 Numerous commenters supported the elimination of the Form 204 and Parts I and II of the Form 304.1124 In month exemption applications be renewed several times a year for each spot month, rather than annually. 1122 Part III of Form 304, which addresses cottonon-call, is discussed below. 1123 78 FR at 11694, 11655–11656. 1124 See, e.g., ACSA at 3; AMCOT at 2–3; ACA at 3; Canale Cotton at 3; Cargill at 9–10; CCI at 2; CEWG at 4; Chevron at 3; CHS at 2, 6; CMC at 12; COPE at 3–4; DECA at 2; East Cotton at 3; Ecom at 1; EEI at 7; EPSA at 7; FIA at 3; IMC at 3; ISDA at 9–10; Jess Smith at 3; LDC at 2; Mallory Alexander at 2; McMeekin at 2–3; Memtex at 2–3; PO 00000 Frm 00146 Fmt 4701 Sfmt 4700 particular, several commenters supported the proposed streamlined process that eliminates duplicative reporting requirements to both the Commission and the exchanges.1125 ISDA additionally recommended that the Commission rely on its special call authority and relevant exchange authority to request additional information on an as-need basis.1126 Three commenters opposed the elimination of the series ‘04 reports. In particular, AFR and Rutkowski expressed concern that eliminating Form 204 will delegate position limit oversight and enforcement responsibilities to the exchanges.1127 These commenters contended that the exchanges are financially disincentivized from imposing limits on speculation because the exchanges profit from trading volume.1128 Similarly, Better Markets also opposed the elimination of the series ‘04 reports, contending that Federal law provides more substantial deterrents for misreporting information on a form provided to Federal agencies such as the Commission.1129 Better Markets also commented that the reporting changes would increase the industry’s overall reporting burdens because market participants would have to report information to multiple exchanges.1130 Better Markets suggested that the Commission should instead ‘‘ensure that all cash positions reporting is automated’’ and ‘‘amenable to aggregation’’ in order to provide such information to the exchanges.1131 iv. Discussion of Final Rule— Elimination of Form 204 and CashReporting Elements of Form 304 The Commission is eliminating Form 204 and Sections I and II of existing Form 304, as proposed. For the reasons described below and as discussed in the 2020 NPRM, the Commission believes that the elimination of these forms will reduce duplication and inefficiency resulting from market participants submitting cash-market information to both the Commission and the exchanges under the existing framework.1132 As described below, under the approach Moody Compress at 2; Namoi at 1; NCFC at 2; Olam at 3; Omnicotton at 2–3; Parkdale at 2; SEMI at 3; Shell at 4; SCA at 3; SW Ag at 2–3; Texas Cotton at 2–3; Toyo at 2–3; Walcot at 3; WCSA at 3; White Gold at 2–3. 1125 See, e.g., Cargill at 9–10; CCI at 2; CEWG at 4; COPE at 3–4; ISDA at 10. 1126 ISDA at 10. 1127 AFR at 2–3; Rutkowski at 2. 1128 Id. 1129 Better Markets at 59–60. 1130 Id. at 59. 1131 Id. at 60. 1132 85 FR at 11694. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations adopted herein, the Commission will receive any necessary information related to market participants’ recognized bona fide hedges by leveraging existing expertise and processes at the exchanges, as well as information that market participants will be required to submit to exchanges under the Final Rule. The Commission finds comments that the elimination of the series ‘04 reports would require the Commission to delegate authority to the exchanges to be misplaced for several reasons. First, by eliminating the series ‘04 reports, the Commission is not delegating any oversight or enforcement responsibilities to the exchanges. The CEA establishes the statutory framework under which the Commission operates.1133 Even without the series ‘04 reports, the Commission will continue to administer the CEA to monitor and protect the derivatives markets, market users, and the public from fraud, manipulation, and other abusive practices that are prohibited by the CEA and Commission regulations. The Commission will continue to do so through its market surveillance program,1134 rule enforcement reviews,1135 and other regulatory tools. The Commission will also continue to investigate and prosecute persons who violate the CEA and Commission regulations in connection with derivatives trading on exchanges and related conduct in cash-market commodities.1136 Second, the elimination of Form 204 and the cash-market reporting portions of Form 304 will not hinder the Commission’s access to the cash-market information needed for the Commission to effectuate its oversight and enforcement responsibilities. Instead, 1133 See 7 U.S.C. 2(a)(1). Market Surveillance Program, U.S. Commodity Futures Trading Commission website, available at https://www.cftc.gov/IndustryOversight/ MarketSurveillance/CFTCMarket SurveillanceProgram/index.htm#P5_912. The Commission’s Market Surveillance Program is responsible for collecting market data and position information from registrants and large traders, and for monitoring the daily activities of large traders, key price relationships, and relevant supply and demand factors in a continuous review for potential market problems. Id. 1135 The Commission conducts regular rule enforcement reviews of each exchange’s audit trail, trade practice surveillance, disciplinary, and dispute resolution programs for ongoing compliance with the Core Principles. See Rule Enforcement Reviews of Designated Contract Markets, U.S. Commodity Futures Trading Commission website, available at https:// www.cftc.gov/IndustryOversight/ TradingOrganizations/DCMs/dcmruleenf.html. 1136 Enforcement, U.S. Commodity Futures Trading Commission website, available at https:// www.cftc.gov/LawRegulation/Enforcement/ OfficeofDirectorEnforcement.html. khammond on DSKJM1Z7X2PROD with RULES2 1134 CFTC VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 the Commission is ensuring that it will continue to have access to sufficient cash-market information by adopting several reporting and recordkeeping requirements in final §§ 150.3, 150.5, and 150.9.1137 In particular, under § 150.5, an exchange will be required to collect applications, which must be updated at least on an annual basis, for purposes of granting bona fide hedge recognitions from exchange-set limits for contracts subject to Federal position limits,1138 and for recognizing bona fide hedging positions for purposes of Federal position limits.1139 Among other things, each application will be required to include: (1) Information regarding the applicant’s activity in the cash markets for the underlying commodity; and (2) any other information to enable the exchange and the Commission to determine whether the exchange may recognize such position as a bona fide hedge.1140 Additionally, consistent with existing industry practice for certain exchanges, exchanges will be required to file monthly reports to the Commission showing, among other things, for all bona fide hedges (whether enumerated or non-enumerated), a concise summary of the applicant’s activity in the cash markets.1141 Collectively, final §§ 150.5 and 150.9 will provide the Commission with the same substantive information from monthly reports about all recognitions granted for purposes of contracts subject to Federal position limits, including cash-market information supporting the applications, and annual information regarding all month-by-month cashmarket positions used to support a bona fide hedging recognition. These reports will help the Commission determine whether any person who claims a bona fide hedging position can demonstrate satisfaction of the relevant requirements. This information will also help the Commission perform market surveillance in order to detect and deter 1137 As discussed earlier in this Final Rule, Final § 150.9 also includes reporting and recordkeeping requirements pertaining to spread exemptions. Those requirements will not be discussed again in this Section of the Final Rule, which addresses cash-market reporting in connection with bona fide hedges. 1138 See Final § 150.5(a)(2)(ii)(A). 1139 As discussed above in connection with Final § 150.9, market participants who wish to request a bona fide hedge recognition under § 150.9 will not be required to file such applications with both the exchange and the Commission. They will only file the applications with the exchange, which will then be subject to recordkeeping requirements in Final § 150.9(d), as well as Final §§ 150.5 and 150.9 requirements to provide certain information to the Commission on a monthly basis and upon demand. 1140 See Final § 150.5(a)(2)(ii)(G). 1141 See Final § 150.5(a)(4). PO 00000 Frm 00147 Fmt 4701 Sfmt 4700 3381 manipulation and abusive trading practices in physical commodity markets. While the Commission will no longer receive the monthly snapshot data currently included on the series ‘04 reports, the Commission will have broad access, at any time, to the cash-market information described above, as well as any other data or information exchanges collect as part of their application processes.1142 This will include any updated application forms and periodic reports that exchanges may require applicants to file regarding their positions. To the extent that the Commission observes market activity or positions that warrant further investigation, § 150.9 will also provide the Commission with access to any supporting or related records the exchanges will be required to maintain.1143 Furthermore, the Final Rule will not impact the Commission’s existing provisions for gathering information through special calls relating to positions exceeding limits and/or to reportable positions. As discussed further below, under the Final Rule, all persons exceeding the Federal position limits set forth in final § 150.2, as well as all persons holding or controlling reportable positions pursuant to § 15.00(p)(1), must file any pertinent information as instructed in a special call.1144 In response to commenter concerns that elimination of the series ‘04 reports may increase reliance on exchanges which may lack incentives to impose position limits, the Commission does not view the question of whether exchanges impose speculative position limits in this context as a matter of incentives. Even with the elimination of the series ‘04 reports, exchanges will be under statutory and regulatory obligations, as they are today, to establish speculative position limits for all contracts subject to Federal position limits.1145 Additionally, as discussed above, the Commission does not believe that exchanges generally lack proper incentives to maintain the integrity of their markets; to the contrary, they are subject to various statutory core principles and regulatory obligations 1142 See, e.g., Final § 150.9(d) (requiring that all such records, including cash-market information submitted to the exchange, be kept in accordance with the requirements of § 1.31), and Final § 19.00(b) (requiring, among other things, all persons exceeding speculative position limits who have received a special call to file any pertinent information as specified in the call). 1143 See Final § 150.9(d). 1144 See Final § 19.00(b). 1145 See 7 U.S.C. 7(d)(5) and § 150.5(a). E:\FR\FM\14JAR2.SGM 14JAR2 3382 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations that require them to maintain integrity in their markets.1146 Further, exchanges will remain subject to regulatory oversight and enforcement responsibilities required for DCMs by CEA section 5(d) and part 38 of the Commission’s regulations and for SEFs by CEA section 5h and part 37 of the Commission’s regulations.1147 Specifically, several existing Commission regulations in parts 38 and 37 require exchanges to monitor for violations of exchange-set position limits,1148 and detect and prevent manipulation, price distortions and, where possible, disruptions of the physical-delivery or cash-settlement process.1149 In response to Better Markets’ concern that eliminating the ’04 reports will reduce deterrents for misreporting, the Commission believes that the false reporting provision in Section 9(a)(4) of the CEA, which makes it a felony to make any false statements to an exchange, is sufficient to deter market participants from misreporting cashmarket information to exchanges.1150 Further, the Commission disagrees with Better Markets’ concerns about increased burdens. Given that market participants are currently required both to file the series ‘04 reports with the Commission, and to submit cash-market information to the exchanges, eliminating the series ‘04 reports will reduce burdens on market participants.1151 In fact, the Commission did not receive any comments opposing the elimination of the series ‘04 reports from traders who currently have an obligation to file such forms. While the Commission supports streamlined and automated reporting requirements whenever possible, Better Markets has not identified any practicable method or program that would permit the automated reporting of the kinds of disparate cash-market information khammond on DSKJM1Z7X2PROD with RULES2 1146 For further discussion, see Section II.B.3.iii.b(3)(iii) (addressing comments from Better Markets related to conflicts-of-interest). 1147 See 7 U.S.C. 7(d); 17 CFR 38; 7 U.S.C. 7b– 3(f); 17 CFR 37. 1148 See 17 CFR 38.251(d); 17 CFR 37.205(b). 1149 See 17 CFR 38.251(a); 17 CFR 37.205(a). 1150 7 U.S.C. 13(a)(4). The Commission has not hesitated to impose severe penalties on market participants that mislead exchanges about cash positions. See, e.g., In the Matter of EMF Financial Products LLC, CFTC Docket No. 10–02, U.S. Commodity Futures Trading Commission website, available at https://www.cftc.gov/PressRoom/ PressReleases/5751-09 (imposing a $4,000,000 civil monetary penalty on a firm that misled an exchange about the firm’s cash positions in treasury futures). See also supra Section II.D.9. (discussing Commission enforcement of exchange-set position limits). 1151 See infra Section IV.A.5.iii. (discussing the benefits of elimination of Form 204 and amendment of Form 304). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 currently reflected in Forms 204 and 304. In addition to the justifications for eliminating the series ‘04 reports described above, the Commission has also determined that Form 204, including the timing and procedures for its filing, is inadequate for the reporting of cash-market positions relating to certain energy contracts, which will be subject to Federal position limits for the first time under the Final Rule. For example, when compared to agricultural contracts, energy contracts generally expire more frequently, have a shorter delivery cycle, and have significantly more product grades. The information required by Form 204, as well as the timing and procedures for its filing, reflects the way agricultural contracts trade, but is inadequate for purposes of reporting cash-market information involving energy contracts. Finally, the Commission understands that the exchanges maintain regular dialogue with their participants regarding cash-market positions, and that it is common for exchange surveillance staff to make informal inquiries of market participants, including if the exchange has questions about market events or a participant’s use of an exemption or recognition. The Commission encourages exchanges to continue this practice. Similarly, the Commission anticipates that its own staff will engage in dialogue with market participants, either through the use of informal conversations or, in limited circumstances, via special call authority. 3. Changes to Parts 15 and 19 To Implement the Elimination of Form 204 and Portions of Form 304 i. Background—Changes to Parts 15 and 19 To Implement the Elimination of Form 204 and Portions of Form 304 The market and large-trader reporting rules are contained in parts 15 through 21 of the Commission’s regulations. Collectively, these reporting rules effectuate the Commission’s market and financial surveillance programs by enabling the Commission to gather information concerning the size and composition of the commodity derivative markets and to monitor and enforce any established speculative position limits, among other regulatory goals. ii. Summary of the 2020 NPRM— Changes to Parts 15 and 19 To Implement the Elimination of Form 204 and Portions of Form 304 To effectuate the proposed elimination of Form 204 and the cash- PO 00000 Frm 00148 Fmt 4701 Sfmt 4700 market reporting components of Form 304, the Commission proposed to eliminate: (a) Existing § 19.00(a)(1), which requires persons holding reportable positions which constitute bona fide hedging positions to file a Form 204; and (b) existing § 19.01, which, among other things, sets forth the cash-market information required on Forms 204 and 304.1152 Based on the proposed elimination of existing §§ 19.00(a)(1) and 19.01 and Form 204, the Commission proposed conforming technical changes to remove related reporting provisions from: (i) The ‘‘reportable position’’ definition in § 15.00(p); (ii) the list of ‘‘persons required to report’’ in § 15.01; and (iii) the list of reporting forms in § 15.02. iii. Comments and Summary of the Commission Determination—Changes to Parts 15 and 19 To Implement the Elimination of Form 204 and Portions of Form 304 The Commission did not receive any comments on the conforming changes to parts 15 and 19 that implement the elimination of Form 204 and Sections I and II of Form 304, and is adopting the changes as proposed. 4. Special Calls i. Summary of the 2020 NPRM—Special Calls Notwithstanding the proposed elimination of the series ‘04 reports, the Commission did not propose to make any significant substantive changes to information requirements relating to positions exceeding limits and/or to reportable positions. Accordingly, in proposed § 19.00(b), the Commission proposed that all persons exceeding the proposed limits set forth in § 150.2, as well as all persons holding or controlling reportable positions pursuant to § 15.00(p)(1), must file any pertinent information as instructed in a special call. This proposed provision is similar to existing § 19.00(a)(3), but would require any such person to file the information as instructed in the special call, rather than to file the information on a series ‘04 report.1153 The Commission also proposed to add language to existing § 15.01(d) to clarify that persons who have received a special call are deemed ‘‘persons required to report’’ as defined in § 15.01.1154 The Commission proposed this change to clarify an existing requirement found in § 19.00(a)(3), which requires persons holding or controlling positions that are reportable 1152 17 CFR 19.01. CFR 19.00(a)(3). 1154 17 CFR 15.01. 1153 17 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations pursuant to § 15.00(p)(1) who have received a special call to respond.1155 The proposed changes to part 19 operate in tandem with the proposed additional language for § 15.01(d) to reiterate the Commission’s existing special call authority without creating any new substantive reporting obligations. Finally, proposed § 19.03 delegated authority to issue such special calls to the Director of the Division of Enforcement, and proposed § 19.03(b) delegated to the Director of the Division of Enforcement the authority in proposed § 19.00(b) to provide instructions or to determine the format, coding structure, and electronic data transmission procedures for submitting data records and any other information required under part 19. ii. Comments and Summary of the Commission Determination—Special Calls The Commission did not receive any comments on these changes and is adopting the changes to §§ 15.01(d), § 19.00(b), and 19.03(b) as proposed. 5. Form 304 Cotton On-Call Reporting i. Summary of the 2020 NPRM—Form 304 Cotton On-Call Reporting With the proposed elimination of the cash-market reporting portions of Form 304 as described above, Form 304 would be used exclusively to collect the information needed to publish the Commission’s weekly cotton on-call report, which shows the quantity of unfixed-price cash cotton purchases and sales that are outstanding against each cotton futures month.1156 While the Commission did not propose to eliminate the cotton on-call portions of Form 304, or to stop publishing the cotton on-call report, the Commission did request comment about the implications of doing so.1157 In addition to requesting comment regarding continued collection of the 1155 17 CFR 19.00(a)(3). On-Call, U.S. Commodity Futures Trading Commission website, available at https:// www.cftc.gov/MarketReports/CottonOnCall/ index.htm (weekly report). 1157 Specifically, the Commission requested comments on the following issues: To what extent, and for what purpose, do market participants and others rely on the information contained in the Commission’s weekly cotton on-call report; Whether publication of the cotton on-call report creates any informational advantages or disadvantages, and/or otherwise impact competition in any way; Whether the Commission should stop publishing the cotton on-call report, but continue to collect, for internal use only, the information required in Part III of Form 304 (Unfixed-Price Cotton ‘‘On-Call’’); Or alternatively, whether the Commission should stop publishing the cotton on-call report and also eliminate the Form 304 altogether, including Part III. See 85 FR at 11657. khammond on DSKJM1Z7X2PROD with RULES2 1156 Cotton VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Form 304 and publication of the cottonon-call report, the Commission proposed a number of technical changes to the Form 304. Under the 2020 NPRM, the requirements pertaining to that report would remain in proposed §§ 19.00(a) and 19.02, with minor modifications to existing provisions. In particular, the Commission proposed to update cross references (including to renumber § 19.00(a)(2) as § 19.00(a)) and to clarify and update the procedures and timing for the submission of Form 304. Specifically, proposed § 19.02(b) would require that each Form 304 report be made weekly, dated as of the close of business on Friday, and filed not later than 9 a.m. Eastern Time on the third business day following that Friday using the format, coding structure, and electronic data transmission procedures approved in writing by the Commission. The Commission also proposed some modifications to the Form 304 itself, including conforming and technical changes to the organization, instructions, and required identifying information.1158 ii. Summary of the Commission Determination—Form 304 Cotton OnCall Reporting The Commission has determined to maintain the status quo as proposed by not eliminating the cotton on-call portions (currently Part III) of the Form 304, and by continuing to publish the cotton on-call report. The Commission is also adopting the proposed technical changes described above. iii. Comments—Form 304 Cotton OnCall Reporting Commenters were divided on the questions posed by the Commission on whether to retain Part III of the Form 304 and to continue publishing the weekly cotton on-call report. CMC, along with numerous commenters from the cotton industry, believed the Commission should eliminate Form 304 in its entirety and stop publishing the cotton on-call report.1159 For example, Namoi and 1158 Among other things, the proposed changes to the instructions would clarify that traders must identify themselves on Form 304 using their Public Trader Identification Number, in lieu of the CFTC Code Number required on previous versions of Form 304. This change will help Commission staff to connect the various reports filed by the same market participants. This release includes a representation of the final Form 304, which is to be submitted in an electronic format published pursuant to this Final Rule, either via the Commission’s web portal or via XML-based, secure FTP transmission. 1159 ACA at 3; ACSA at 3, 9–11; Cargill at 10; CMC at 12; East Cotton at 3; McMeekin at 2–3; Namoi at 1–2; Omnicotton at 2–3; Texas Cotton at PO 00000 Frm 00149 Fmt 4701 Sfmt 4700 3383 ACSA both argued that the cotton oncall report allows market participants to see proprietary cash-market information for every other participant in the cotton market, which among other things, creates an opportunity for speculators to profit by trading against this publicly disclosed unfixed-price positions.1160 Additionally, Namoi and ACSA each highlighted that the Commission does not collect or publish similar information for any other commodities.1161 ACSA also argued that the cotton on-call report causes competitive harm to the U.S. cotton industry because, according to ACSA, foreign mills believe that the report imposes risks and costs and are therefore more likely to purchase cotton from outside of the United States in order to avoid completing Part III of Form 304.1162 The NCTO suggested that textile mills are particularly harmed when speculators trade against the cashmarket positions disclosed in the cotton on-call report because textile mills purchase the majority of their cotton on call.1163 Conversely, several commenters, including other cotton industry members, stated that the Commission should continue to collect the information required by Form 304 and to publish the cotton on-call report.1164 For example, Glencore argued that discontinuing the report would reduce transparency, open the market to more manipulation, and harm smaller participants due to asymmetrical information.1165 Similarly, AMCOT argued that without the report, large participants, who account for a significant amount of the cotton bought or sold on call, would have an informational advantage over small producers who have less visibility into a large portion of the cotton market.1166 iv. Discussion of Final Rule—Form 304 Cotton On-Call Reporting After reviewing the comments discussed above, the Commission has decided to retain the cotton on-call portions (currently Section III) of existing Form 304 and to continue publishing its weekly cotton on-call report. Because the comments from cotton industry firms were divided, and 2–3; Toyo at 2–3; Walcot at 3; and White Gold at 2. 1160 Namoi at 1–2; ACSA at 9–11. 1161 Namoi at 1–2. 1162 ACSA at 9–11. 1163 NCTO at 1–2. 1164 VLM Comment Text; Eric Matsen Comment Text; AMCOT at 2–3; Gerald Marshall at 3; Lawson/ O’Neill at 1; Glencore at 2; and Dunavant at 1. 1165 Glencore at 2; Dunavant at 1. 1166 AMCOT at 2. E:\FR\FM\14JAR2.SGM 14JAR2 3384 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations because the cotton on-call report has been a part of the cotton market for more than 80 years, the Commission believes that it would be imprudent to eliminate the report based solely on the information provided in the comment letters, which do not include any concrete data, studies, or quantifiable financial harms. The Commission further notes that continued publication of the cotton on-call report will not change the existing dynamics of the cotton market. In the future, the Commission may solicit comments to determine whether the cotton on-call report continues to benefit the market and whether the report hinders the competitiveness of U.S. firms in the global cotton market. The Commission may seek input from cotton market participants in the form of additional comments, data, studies, or information about specific financial harms that would warrant discontinuing the report. The Commission emphasizes that it remains open to continuing to discuss this important issue with market participants and to receive additional data and information that may more concretely demonstrate the competitive harms discussed by commenters above. 6. Proposed Technical Changes to Part 17 i. Summary of the 2020 NPRM— Proposed Technical Changes to Part 17 Part 17 of the Commission’s regulations addresses reports by reporting markets, FCMs, clearing members, and foreign brokers.1167 The Commission proposed to amend existing § 17.00(b), which addresses information to be furnished by FCMs, clearing members, and foreign brokers, to delete certain provisions related to position aggregation, because those provisions have become duplicative of aggregation provisions that were adopted in § 150.4 in the 2016 Final Aggregation Rulemaking.1168 The Commission also proposed to add a new provision, § 17.03(i), which delegates certain authority under § 17.00(b) to the Director of the Office of Data and Technology.1169 1167 17 CFR part 17. Final Aggregation Rulemaking, 81 FR at 91455. Specifically, the Commission proposes to delete paragraphs (1), (2), and (3) from § 17.00(b). 17 CFR 17.00(b). 1169 Under § 150.4(e)(2), which was adopted in the 2016 Final Aggregation Rulemaking, the Director of the Division of Market Oversight is delegated authority to, among other things, provide instructions relating to the format, coding structure, and electronic data transmission procedures for submitting certain data records. 17 CFR 150.4(e)(2). A subsequent rulemaking changed this delegation of authority from the Director of the Division of Market Oversight to the Director of the Office of khammond on DSKJM1Z7X2PROD with RULES2 1168 See VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 ii. Comments and Summary of the Commission Determination—Proposed Technical Changes to Part 17 The Commission did not receive any comments addressing these changes and is adopting these technical changes as proposed. I. Removal of Part 151 1. Summary of the 2020 NPRM— Removal of Part 151 Finally, the Commission proposed to remove and reserve part 151 in response to its vacatur by the U.S. District Court for the District of Columbia,1170 as well as in light of the proposed revisions to part 150 that conform part 150 to the amendments made to CEA section 4a by the Dodd-Frank Act. 2. Comments and Summary of the Commission Determination—Removal of Part 151 The Commission did not receive any comments regarding these changes and is adopting these conforming changes as proposed. III. Legal Matters This section of the release sets forth certain legal determinations by the Commission that underlie the determinations regarding the specifics of the Final Rule set forth previously in this preamble, as well as the reasons for those legal determinations and consideration of relevant comments. Specifically, Part A sets forth the Commission’s determination that, in a rulemaking pursuant to CEA section 4a(a)(2), the Commission must find position limits to be ‘‘necessary’’ within the meaning of paragraph 4a(a)(1). Part B sets forth the Commission’s interpretation of the criteria for finding position limits to be necessary within the meaning of the statute. Part C sets forth the Commission’s necessity findings for the 25 core referenced futures contracts. Part D sets forth the Commission’s necessity finding for futures contracts and options on futures contracts linked to a core referenced futures contract. Finally, Part E sets forth the Commission’s necessity finding for spot and non-spot months. Data and Technology, with the concurrence of the Director of the Division of Enforcement. See 82 FR at 28763 (June 26, 2017). The proposed addition of § 17.03(i) would conform § 17.03 to that change in delegation. 1170 See supra notes 10–11 and accompanying discussion. PO 00000 Frm 00150 Fmt 4701 Sfmt 4700 A. Interpretation of Statute Regarding Whether Necessity Finding Is Required for Position Limits Established Pursuant to CEA Section 4a(a)(2) 1. The Commission’s Preliminary Interpretation in the 2020 NPRM In the 2020 NPRM the Commission considered whether CEA section 4a, as amended, requires the Commission to issue Federal position limits for all physical commodities other than excluded commodities without making its own antecedent finding that such position limits are necessary. This was in response to ISDA, in which the U.S. District Court for the District of Columbia held that the CEA was ambiguous in that respect. Specifically, the court held that where CEA section 4a(a)(2) (‘‘paragraph 4a(a)(2)’’) states that the Commission shall issue such position limits ‘‘[i]n accordance with the standards set forth in paragraph (1),’’ 1171 it is unclear whether the ‘‘standards’’ include the requirement in paragraph (1) of CEA section 4a(a) (‘‘paragraph 4a(a)(1)’’) that the Commission establish such limits as it ‘‘finds are necessary to diminish, eliminate, or prevent’’ specified burdens on interstate commerce.1172 In the 2020 NPRM, the Commission preliminarily determined that paragraph 4a(a)(2) should be interpreted as incorporating the necessity requirement of paragraph 4a(a)(1).1173 For the Final Rule, the Commission herein adopts that determination as final, along with the reasoning set forth in the 2020 NPRM. 1171 Paragraph 4a(a)(1) of the CEA states, in relevant part: ‘‘Excessive speculation in any commodity under contracts of sale of such commodity for future delivery made on or subject to the rules of contract markets or derivatives transaction execution facilities, or swaps that perform or affect a significant price discovery function with respect to registered entities causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity. For the purpose of diminishing, eliminating, or preventing such burden, the Commission shall, from time to time, after due notice and opportunity for hearing, by rule, regulation, or order, proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person, including any group or class of traders, under contracts of sale of such commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility, or swaps traded on or subject to the rules of a designated contract market or a swap execution facility, or swaps not traded on or subject to the rules of a designated contract market or a swap execution facility that performs a significant price discovery function with respect to a registered entity as the Commission finds are necessary to diminish, eliminate, or prevent such burden.’’ 1172 Paragraphs 4a(a)(1) and 4a(a)(2)(A); ISDA, 887 F. Supp. 2d at 280–81. 1173 85 FR at 11659. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations The Commission’s preliminary determination was based on a number of considerations, set forth in detail in the 2020 NPRM.1174 Consistent with the district court’s instructions,1175 the Commission based its determination both on analysis of the CEA’s statutory language and on application of the Commission’s experience and expertise to relevant facts and policy concerns.1176 Among the most important factual and policy concerns relied upon by the Commission in the 2020 NPRM were: a. Absent the necessity-finding requirement, the language of paragraph 4a(a)(2) would evidently require the imposition of some level of position limits for a physical commodity even if limits at any level would be likely to do more harm than good, including with respect to public interests specifically identified in paragraph 4a(a)(1) and elsewhere in section 4a or the CEA generally.1177 In addition to being inconsistent with the thrust of section 4a taken as a whole, this approach makes little sense as a matter of policy.1178 b. Subparagraph 4a(a)(2)(A) requires that position limits be set ‘‘as appropriate.’’ At a minimum, this language requires the Commission to use its best judgment in determining the levels at which position limits are set. In addition, there is authority from case law that the word ‘‘appropriate’’ in a regulatory statute requires agencies to take into account the costs of regulation, if only in a rough or approximate way, and that consideration may preclude the considered action if the costs are highly disproportionate.1179 The statute thus allows for the possibility that, in establishing position limit levels for some commodities or contracts, the Commission, in its judgment, may determine that the optimal level is no limit at all. This possibility does not harmonize with a requirement to impose limits for all physical commodities, but is consistent with a 1174 Id. at 11659–11661. court directed the Commission, on remand, to resolve the ambiguity not by ‘‘rest[ing] simply on its parsing of the statutory language’’ but by ‘‘bring[ing] its experience and expertise to bear in light of the competing interests at stake.’’ 85 FR at 11659, quoting ISDA, 887 F. Supp. 2d at 281. 1176 85 FR at 11659–11661. 1177 Id. at 11659, citing as examples CEA sections 5, 4a(a)(2)(C), and 4a(a)(3)(B). 1178 Id. at 11660. 1179 See Michigan v. EPA, 132 S.Ct. 2699, 2707– 08, 2711 (2015) (agency could not disregard major costs under statute requiring that regulation be ‘‘appropriate,’’ but use of this word did not require formal cost-benefit analysis). khammond on DSKJM1Z7X2PROD with RULES2 1175 The VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 requirement to impose limits where they are necessary. c. Requiring position limits without a necessity finding would be a ‘‘sea change’’ in derivatives regulation since it would involve a shift from Federal limits on a small number of agricultural commodities to limits on all physical commodities.1180 The Commission was skeptical that Congress would have made such a change through ambiguous language.1181 The Commission noted that there are currently over 1,200 listed futures contracts on physical commodities and that there is no indication that Congress had concerns about, or even considered, all of them.1182 To the contrary, the legislative history suggests that enactment of paragraph 4a(a)(2) was driven, in part, by studies of potential excessive speculation in a small number of particularly important commodities.1183 This history is consistent with an interpretation of the statute as requiring position limits for commodities where controlling excessive speculation is most important, absent statutory language that unambiguously requires limits for all commodities. d. A necessity finding allows the Commission to apply its experience and expertise to impose position limits where they are likely to do the most good, taking into consideration the fact that even well-crafted position limits create compliance costs and potentially may have a negative effect on liquidity and forms of speculation that benefit the market.1184 In the 2020 NPRM, the Commission recognized that it was proposing to change its interpretation regarding whether paragraph 4a(a)(2) incorporates a requirement to find position limits necessary.1185 The Commission noted that, in the preamble to the 2011 Final Rulemaking as well as the Commission’s subsequent position limits proposals,1186 the Commission had interpreted paragraph 4a(a)(2) to mandate the imposition of position limits without the need for a necessity finding.1187 As part of its preliminary determinations in the 2020 NPRM that the CEA does require a necessity finding, the Commission explained in detail why the reasons it had previously given for the ‘‘mandate’’ approach do 1180 85 FR at 11660. 1181 Id. 1182 Id. 1183 85 FR at 1160 (discussing Congressional staff studies of potential excessive speculation in oil, natural gas, and wheat). 1184 85 FR at 11660. 1185 Id. at 11658. 1186 See supra Section I.A. 1187 85 FR at 11658. PO 00000 Frm 00151 Fmt 4701 Sfmt 4700 3385 not compel that interpretation of the statute. Taken as a whole, such reasons are insufficiently persuasive to outweigh the factors that favor a necessity finding.1188 2. Comments on the Commission’s Preliminary Interpretation in the 2020 NPRM and Commission Responses In response to the Commission’s preliminary interpretation provided in the 2020 NPRM, a number of commenters stated that the Commission must make a necessity finding before establishing position limits under paragraph 4a(a)(2).1189 These commenters generally asserted that this result was required by the language of the statute, although they did not provide a detailed analysis of that language beyond that set forth in the 2020 NPRM.1190 Some commenters also asserted that a necessity finding is important to avoid imposing unwarranted costs on market participants, a position consistent with the policy concerns that entered into the Commission’s preliminary determination that paragraph 4a(a)(2) requires a necessity finding.1191 A number of other commenters stated that the statute does not require a necessity finding for the establishment of position limits pursuant to paragraph 4a(a)(2).1192 These commenters made the following points: a. Some commenters asserted that the language of paragraph 4a(a)(2) requires the Commission to establish position limits for all physical commodities without first determining that limits are necessary.1193 Commenters making this point emphasized the language of subparagraph 4a(a)(2)(A) stating that the Commission ‘‘shall’’ impose position limits on physical commodities and the 1188 85 FR at 11661–64. CEA Section 4a(a)(2), which was enacted as part of the Dodd-Frank Act, directs the Commission to ‘‘establish’’ limits on positions. The Commission does not interpret this directive to apply to the nine legacy agricultural contracts included in the list of core referenced futures contracts because they are already subject to Federal position limits that have existed for decades based on prior necessity findings pursuant to CEA Section 4a(a)(1). Nevertheless, as discussed infra at Section III.C, the Commission has determined that such limits are necessary. 1189 E.g., Citadel at 2; EEI at 2–3; ISDA at 3; MFA/ AIMA at 1, 14; SIFMA AMG at 1–2. 1190 Id. 1191 E.g., EEI at 3. 1192 E.g., AFR at 1; Better Markets at 3–4, 64; IATP at 4; NEFI at 2–3. 1193 E.g., Better Markets at 64 (incorporating by reference amicus brief by Senators Levin et al. in the ISDA litigation). The statute applies to all physical commodities ‘‘other than excluded commodities.’’ 7 U.S.C. 6a(a)(2). The Commission here refers to ‘‘all physical commodities’’ for purposes of brevity only, and does not mean to imply that the statute covers excluded commodities. E:\FR\FM\14JAR2.SGM 14JAR2 3386 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 language of subparagraph 4a(a)(2)(B) referring to position limits ‘‘required’’ by subparagraph 4a(a)(2)(A).1194 However, while these words are suggestive of a mandatory requirement of some kind, they do not dictate the conclusion that paragraph 4a(a)(2) requires position limits across-the-board without a necessity finding, and to conclude otherwise would contradict the holding in ISDA that the statutory text is ambiguous.1195 The requirements of paragraph 4a(a)(2) are subject to the condition that position limits be imposed ‘‘[i]n accordance with the standards set forth in paragraph [4a(a)(1)].’’ The meaning of that text, and specifically the meaning of ‘‘the standards,’’ is the primary issue for the Commission to resolve here. For reasons explained above and in the 2020 NPRM, these standards are best interpreted as including the paragraph 4a(a)(1) necessity requirement.1196 b. Some commenters asserted that the legislative history of paragraph 4a(a)(2) supports imposing limits on all physical commodities without requiring a necessity finding.1197 Among the points emphasized by commenters were that (1) certain bill language that ultimately became paragraph 4a(a)(2) evolved from using the permissive word ‘‘may’’ to the mandatory word ‘‘shall’’; and (2) the House Committee on Agriculture voted out a predecessor bill containing language similar to that of paragraph 4a(a)(2), and there are indications that members of the committee viewed this language as requiring limits for all physical commodities.1198 In the view of the Commission, neither of these points is sufficient to resolve the ambiguity in the language of paragraph 4a(a)(2) or dictate the conclusion that the statute mandates position limits without a necessity finding. With regard to the first point, there is no question that the final version of paragraph 4a(a)(2) states that the Commission ‘‘shall’’ impose position 1194 E.g., Better Markets at 64; NEFI at 1. Better Markets stated that the Commission should adopt the legal views set forth in the amicus brief filed by certain U.S. Senators in the ISDA case. Better Markets at 64. However, in ISDA, the district court stated that ‘‘[g]iven the fundamental ambiguities in the statute,’’ it was ‘‘not persuaded by their arguments.’’ ISDA, 887 F. Supp. 2d at 283. 1195 ISDA, 887 F. Supp. 2d at 274. 1196 Other arguments against a necessity requirement made by commenters based on the statutory wording have previously been addressed in the 2020 NPRM. Compare Better Markets at 64 (incorporating by reference amicus brief by Senators Levin et al. in the ISDA litigation) with 85 FR at 11661–64. 1197 E.g., Better Markets at 64 (incorporating by reference amicus brief by Senators Levin et al. in the ISDA litigation). 1198 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 limits. But, as explained above, this mandatory language is explicitly subject to a requirement that limits be imposed in accordance with the standards of paragraph 4a(a)(1), and that condition is ambiguous. The commenters’ second point was addressed in detail in the 2020 NPRM.1199 Briefly, the House Committee on Agriculture bill described by commenters was never approved by the full House of Representatives.1200 Its language on position limits was included in the Dodd-Frank Act, but discussion of this language in the floor debate and conference committee report did not characterize it as requiring limits for all physical commodities.1201 And nothing in the legislative history specifies that the word ‘‘standards’’ in paragraph 4a(a)(2) excludes the paragraph 4a(a)(1) necessity requirement. As a result, the legislative history, taken as a whole, does not resolve the ambiguity in the statute. c. Some commenters asserted that to require a necessity finding construes the Dodd-Frank Act’s amendment to section 4a as narrowing the Commission’s power to impose position limits, which is implausible as an interpretation given the overall thrust of the Dodd-Frank Act and the legislative history of paragraph 4a(a)(2).1202 However, the CEA already required the Commission to find position limits necessary before the Dodd-Frank Act, so continuing to require such a finding is not a new constraint on the Commission.1203 And, even with a necessity requirement, paragraph 4a(a)(2) imposes an important new duty on the Commission: to affirmatively proceed to establish position limits for physical commodities where limits are necessary, within a specified period of time, including as to economically equivalent swaps, and to report to Congress on the effects of those limits, if any.1204 So the Commission’s preliminary interpretation of the statute is consistent with legislative history indicating that Congress wanted the Commission to take action on the subject of position limits. 1199 85 FR at 11663. 1200 Id. 1201 Id. 1202 E.g. AFR at 1. paragraph 4a(a)(1). The House Committee on Agriculture summarized this provision as giving the government ‘‘the power, after due notice and opportunity for hearing and a finding of a burden on interstate commerce caused by such speculation, to fix and proclaim limits on futures trading . . .’’ H.R. Rep. No. 421, 74th Cong., 1st Sess. 5 (1935), stated more specifically in the statutory text as authority to diminish, eliminate, or prevent burdens that are ‘‘undue and unnecessary.’’ Public Law 74– 675 section 5. 1204 See paragraphs 4a(a)(2) and 4a(a)(5), 7 U.S.C. 6a(a)(2), 6a(a)(5); Public Law 111–203 § 719(a). 1203 See PO 00000 Frm 00152 Fmt 4701 Sfmt 4700 d. Some commenters asserted that a necessity finding creates unnecessary administrative obstacles to establishing position limits.1205 In the view of the Commission, any extra needed administrative activity is a reasonable tradeoff for the flexibility and public policy benefits of imposing position limits only where they are economically justified as an efficient means of addressing the concerns Congress expressed in section 4a(a)(1). One commenter went further and suggested that a requirement to find necessity could make implementation and enforcement of position limits ‘‘nigh to impossible.’’ 1206 However, that commenter premised this assertion on a different necessity standard, that the Commission is not adopting in this rulemaking.1207 In the view of the Commission, the necessity standard it is adopting herein is both consistent with the statute and workable in practice, as demonstrated by the necessity findings below. The workability of the Commission’s standard is supported by a commenter who was opposed to a requirement to find necessity but nevertheless acknowledged that the necessity standard preliminarily adopted in the 2020 NPRM is ‘‘unlikely to limit the CFTC’s practical ability to impose Federal position limits.’’ 1208 Commenters who opposed a necessity-finding requirement also set forth a number of justifications for broad use of Federal position limits without asserting specifically that these concerns require limits for all physical commodities or justify imposing limits without finding them to be necessary. For example, commenters pointed out that unjustified volatility in derivatives markets can have negative consequences for price discovery and hedging in related non-financial markets.1209 The Commission agrees with this point and agrees that preventing these consequences is the major reason why the CEA provides for position limits.1210 However, this observation does not justify limits for all physical commodities since (a) the importance of the link between derivatives markets and associated cash markets can vary for 1205 E.g., Better Markets at 4. at 5. 1207 Id. IATP assumed the use of a necessity standard, which it attributed to an industry group, requiring the Commission to, among other things, ‘‘determine the likelihood that a specific limit would curtail excessive speculation in a specific market.’’ Id. The Commission has determined that the statute does not require that. 85 FR at 11664– 66 and infra. 1208 Better Markets at 4. 1209 Id. at 25–29. 1210 See Congressional finding in first sentence of paragraph 4a(a)(1), 7 U.S.C. 6a(a)(1). 1206 IATP E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations different commodities; and (b) good policy requires consideration of the costs and burdens associated with position limits as well as their potential preventative effects.1211 These points are discussed further in sections of this release dealing with the Commission’s legal standard for necessity, necessity findings, and consideration of costs and benefits pursuant to CEA section 15(a). Commenters opposed to a necessityfinding requirement also asserted that exchanges cannot always be relied upon to establish optimal position limits since they may benefit from revenue generated from high levels of speculation, including, in some instances, high levels of speculation by individual market participants.1212 To the extent that this is so, it is a reason for Congress to authorize, and the Commission to implement, position limits where needed. But it is not a reason to apply them to physical commodities across the board for the reasons just stated: The importance of unjustified volatility in derivatives markets for the non-financial economy can vary, and position limits have associated costs and burdens. Moreover, as discussed earlier in the preamble, exchanges are subject to statutory and regulatory obligations to establish position limits or position accountability and must do so in accordance with standards established by the Commission. Further, any incentives for exchanges to impose suboptimal position limits are reduced because an exchange that leaves itself open to an enhanced risk of excessive speculation, manipulation, or other forms of unjustified pricing is likely to lose business from traders seeking a stable market that reflects fundamental conditions.1213 khammond on DSKJM1Z7X2PROD with RULES2 3. Commission Determination Having reviewed the comments and further considered the issue, the Commission has determined that the interpretation of paragraph 4a(a)(2) as incorporating the requirement of paragraph 4a(a)(1) to find position limits necessary before imposing them is the best interpretation of the statute, and the Commission adopts this interpretation as its interpretation under the Final Rule. This determination is based on the 1211 In reaching this conclusion, the Commission draws upon its experience and expertise in considering costs and benefits before promulgating a rule, pursuant to 7 U.S.C. 19(a). The Commission believes that such consideration (which need not be mathematical) leads to better outcomes. 1212 Better Markets at 22–24. 1213 See supra Section II.B.2.iv.b., for additional discussion of exchange incentives and related statutory and regulatory obligations to maintain market integrity. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 reasons set forth above and in the relevant portion of the 2020 NPRM.1214 The Commission further recognizes that this determination is a change from the Commission’s earlier interpretation of paragraph 4a(a)(2) as not requiring a necessity finding. The Commission has determined that the reasons previously given for such an interpretation of paragraph 4a(a)(2) are not compelling for the reasons stated above and in the relevant portion of the 2020 NPRM.1215 The specifics of what the term ‘‘necessary’’ means in this context are discussed in the next section, followed by the Commission’s final necessity finding. B. Legal Standard for Necessity Finding For the reasons discussed above, paragraph 4a(a)(2) requires the Commission to establish position limits to the extent they are ‘‘necessary’’ to ‘‘diminish, eliminate, or prevent’’ the burden on interstate commerce in a commodity from ‘‘sudden or unreasonable fluctuations or unwarranted changes in the price’’ of the commodity caused by excessive speculation in futures contracts (and options thereon) or swaps.1216 In the 2020 NPRM the Commission preliminarily interpreted this requirement and preliminarily reached several conclusions about what sort of necessity finding the statute requires. This section of the preamble (1) reviews the preliminary conclusions set forth in the 2020 NPRM with some additional clarification and elaboration; 1217 (2) reviews and evaluates important points made in comments regarding the CEA’s statutory standard for finding necessity; and (3) sets forth the Commission’s conclusions for this Final Rule on the legal standard for finding position limits to be necessary within the meaning of CEA section 4a. 1214 85 FR at 11658–61. at 11661–64. 1216 The first sentence of paragraph 4a(a)(1) is a Congressional finding that ‘‘excessive speculation in any commodity’’ under futures contracts or certain swaps ‘‘causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity’’ is ‘‘an undue and unnecessary burden on interstate commerce in such commodity.’’ 7 U.S.C. 6a(a)(1). The second sentence of paragraph 4a(a)(1), referring back to the burden on interstate commerce found in the first sentence, states that the Commission shall establish such position limits ‘‘as the Commission finds are necessary to diminish, eliminate, or prevent such burden.’’ Id. 1217 Certain points relevant to the legal standard for necessity that were made in a number of different sections of the NPRM are integrated into the discussion of the legal standard here. 1215 Id. PO 00000 Frm 00153 Fmt 4701 Sfmt 4700 3387 1. Preliminary Legal Standard for Necessity in 2020 NPRM In the 2020 NPRM, the Commission reached a number of conclusions: First, the CEA does not require the Commission to determine whether excessive speculation in general may create a risk of sudden or unreasonable fluctuations or unwarranted changes in the price of a commodity or whether position limits are an effective tool for controlling or preventing these potential effects.1218 Section 4a(a)(1) of the CEA contains a Congressional finding that ‘‘[e]xcessive speculation . . . causing sudden or unreasonable fluctuations or unwarranted changes in . . . price . . . is an undue and unnecessary burden on interstate commerce in such commodity’’ and prescribes position limits for the purpose of ‘‘diminishing, eliminating, or preventing’’ that burden.1219 The analysis in the 2020 NPRM accepted those premises as established by Congress. Second, the word ‘‘necessary’’ has a spectrum of legal meanings from absolute physical necessity to merely useful or convenient.1220 The 2020 NPRM explained that it is unlikely Congress intended either extreme.1221 The Commission preliminarily determined in the 2020 NPRM that the necessity requirement is best interpreted as a directive to establish position limits where they are economically justified as an efficient mechanism to advance the Congressional goal of preventing undue burdens on commerce in an underlying commodity caused by excessive speculation in the associated futures or swaps markets.1222 Under this approach, the Commission explained, position limits are necessary where diminishing, eliminating, or preventing burdens on commerce in a commodity caused by excessive speculation in the associated derivatives market is likely to offer the greatest benefits to the cash market for the commodity and the economy, and not where the benefit of controlling or preventing such burdens is likely to be less significant or to be accompanied by disproportionate costs or negative consequences, including negative 1218 85 FR at 11664. Commodity Futures Trading Com’n v. Hunt, 592 F.2d 1211, 1215 (7th Cir. 1979) (‘‘Congress concluded that excessive speculation in commodity contracts for future delivery can cause adverse fluctuations in the price of a commodity, and authorized the Commission to restrict the positions held or trading done by any individual person or by certain groups of people acting in concert.’’). 1220 85 FR at 11664. 1221 Id. 1222 Id. at 11665. 1219 See E:\FR\FM\14JAR2.SGM 14JAR2 3388 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations consequences with respect to Congress’s stated purpose, to prevent the burdens of sudden or unreasonable fluctuations or unwarranted changes in price that burden interstate commerce.1223 For example, it may be that for a given commodity, high levels of sudden or unreasonable fluctuation or unwarranted changes in the price of a commodity would have little overall impact on commerce in the cash commodity market or the national economy. If the burdens or negative economic consequences associated with position limits for that commodity, as discussed in the Commission’s consideration of costs and benefits, are out of proportion to the likely economic benefits of position limits, it would be unwarranted to impose them.1224 However, there are markets in which sudden or unreasonable fluctuations or unwarranted changes in the price of a commodity caused by excessive speculation would have significantly negative effects on the cash commodity market or the broader economy. Even if such disruptions would be unlikely due to the particular characteristics of the relevant derivatives market, the Commission may nevertheless determine that position limits are necessary as a prophylactic measure given the potential magnitude or impact of the unlikely event.1225 The Commission’s proposed test in the 2020 NPRM thus focused on the Congressional purpose implicit in the finding in the first sentence of paragraph 4a(a)(1): Protecting the cash commodity markets from such sudden or unreasonable fluctuations or unwarranted changes in the price. The Commission specified that this standard cannot be determined by a mathematical formula, but requires judgment by the Commission, taking into account available facts but also based on the Commission’s experience and expertise.1226 The Commission further specified that this standard includes consideration of costs and benefits under CEA section 15(a), insofar as the Commission is required by that section to consider the costs and benefits of its discretionary choices.1227 In applying this necessity standard in the 2020 NPRM, the Commission khammond on DSKJM1Z7X2PROD with RULES2 1223 85 FR at 11665. 1224 Id. 1225 Id. 1226 85 FR at 11665. For further discussion of the cost-benefit implications of the Commission’s necessity finding with respect to the 25 core referenced futures contracts, see infra Section IV.A.2. For further discussion of the cost-benefit implications of Federal position limits in light of existing exchangeset limits, see infra Section IV.A.6. 1227 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 identified two primary factors to be used in identifying commodities where using position limits in derivatives markets to control or prevent injury to the underlying commodity market would be most valuable: The first primary factor is the importance of the derivatives market for a commodity to the operation of the market for the cash commodity itself.1228 Examples of links between derivatives markets and cash markets that exemplify this factor include: a. The extent to which volatility in the derivatives market is likely to result in sudden or unreasonable fluctuations or unwarranted changes in the price in the cash commodity market including, in particular, the extent to which participants in the cash market rely on the derivatives market as a price discovery mechanism. This includes the use of futures prices for pricing cashmarket transactions and the use of futures prices for planning purposes, such as when farmers decide what crops to plant or manufacturers estimate the cost of inputs to their production processes.1229 b. The extent to which participants in the cash market use the derivatives market for hedging.1230 The second primary factor specified in the 2020 NPRM is the importance of the underlying commodity to the economy as a whole.1231 In the view of the Commission, evidence demonstrating either one of these primary factors is sufficient to establish that position limits are necessary. This is so because each primary factor identifies circumstances that present an undue risk that disruptions to derivatives markets for a commodity will have consequences for industries that produce and use the relevant commodity and, ultimately, the general public that invests in and is employed by those industries and purchases their end-products.1232 Thus, each of the primary factors relates to the statutory objective of diminishing, eliminating, or preventing undue and unnecessary burdens on interstate commerce in a commodity arising from excessive speculation in associated derivatives contracts. Of course, to the extent that both factors are present, a necessity finding will be strengthened. In the 2020 NPRM, the Commission emphasized that a necessity determination cannot be reduced to a 1228 85 FR at 11665, 11666. FR at 11665, 11666. 1230 Id. at 11666. 1231 Id. at 11665, 11666. 1232 See Id. at 11664, fn. 471, 11666–11670 (giving examples as part of necessity finding). 1229 85 PO 00000 Frm 00154 Fmt 4701 Sfmt 4700 mathematical formula, though data may of course be highly relevant. To the extent that the primary factors identified by the Commission cannot be directly measured, the Commission, in the exercise of its judgment, may look to market data or qualitative information that correlates with these factors for guidance in applying them.1233 With respect to futures contracts and options contracts linked to core referenced futures contracts, the Commission determined that position limits are necessary for linked contracts because such position limits are likely to make position limits for core referenced futures contracts more effective in preventing manipulation and other sources of sudden or unreasonable fluctuations or unwarranted changes in the price in the underlying commodity.1234 The Commission’s preliminary necessity finding in the 2020 NPRM also took into consideration economic differences between derivatives positions held during spot months and those held during other months that affect the extent to which position limits are an efficient mechanism for controlling or preventing sudden or unreasonable fluctuations or unwarranted changes in the price in underlying commodities. Specifically, the Commission stated that corners and squeezes can occur only during the spot month.1235 Thus, certain important sources of sudden or unreasonable fluctuations or unwarranted changes in the price are present only during the spot month. While the fact that certain types of disruptions in a given market may be unlikely is not dispositive of the necessity question,1236 the Commission judged that the impossibility of corners and squeezes in non-spot months diminished the likelihood of excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price in underlying commodities to such an extent as to reduce the benefit of position limits for those months below the point where, in the Commission’s judgment, position limits would be justified under the necessity standard.1237 Nevertheless, the Commission did not rescind existing non-spot month limits for legacy 1233 See discussion in findings section below. FR at 11619–11620. See also supra at Section II.A.16.iii. 1235 85 FR at 11629. 1236 Id. at 11665. 1237 85 FR at 11628. The Commission also believes that the relevant benefits and burdens indicate that no level of new non-spot-month limits is ‘‘appropriate’’ as that term is used in Section 4a(a)(2)(A). See discussion at Section IV.A.6.iii.b. 1234 85 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations agricultural contracts, because it did not observe problems that would give a reason to eliminate them at this time.1238 2. Comments and Commission Responses khammond on DSKJM1Z7X2PROD with RULES2 Relatively few commenters addressed the substance of the Commission’s legal interpretation of what CEA section 4a requires in order for the Commission to determine that position limits are necessary for a particular commodity or contract. Major points made by commenters, and the Commission’s evaluation of these points include: a. Several commenters stated that the necessity finding must be ‘‘robust and data-driven.’’ 1239 The Commission agrees that the agency is required to consider available data, to the extent that it is relevant, in determining whether to establish position limits. At the same time, the Commission interprets the statute as requiring it to exercise judgment regarding the need for position limits where data is not available. The statute does not specify the use of any particular methodology, quantitative or otherwise, in determining whether position limits are necessary. In addition, the Commission must implement CEA section 4a in a fashion consistent with the finding regarding excessive speculation and its effects on commerce in the first sentence of paragraph 4a(a)(1) and the directive in paragraph 4a(a)(2) that the Commission ‘‘shall’’ promptly establish position limits for physical commodities, albeit subject to the necessity-finding requirement. These provisions imply that the Commission must act on position limits, even if available data is imperfect, so long as it has a reasonable basis for determining limits to be necessary. Other language of CEA section 4a further supports the conclusion that Congress intended the Commission to consider available data but also to exercise judgment in establishing position limits. For example, paragraph 4a(a)(2) requires that limits be established ‘‘as appropriate,’’ which implies consideration of a broad range of relevant factors, but subject to the reasonable exercise of subjective 1238 85 FR at 11628. Specifics of the Commission’s findings with regard to the need for limits during spot and non-spot months are in the 2020 NPRM at 85 FR 11596, 11628, and supra at Sections II.B.3. and II.B.4. 1239 E.g. ISDA at 3; SIFMA AMG at 2. See also MFA/AIMA at 4 (advocating for individualized necessity findings based on detailed analyses for each contract). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 judgment.1240 Similarly, paragraph 4a(a)(3)(B) lists policy objectives for position limits that the Commission must achieve ‘‘to the maximum extent possible’’ but specifies that the Commission must do this ‘‘in its discretion.’’ The Commission also believes it is better policy to interpret ‘‘as necessary’’ to permit flexibility in response to imperfect available data, so long as there is a reasonable basis for its decisions.1241 Such flexibility may facilitate achieving the objectives of the statute, whether by determining that position limits either are necessary or not necessary in particular circumstances. b. One commenter, MGEX, supported the Commission’s general approach of focusing on the relationship between the derivatives market and the underlying commodity in making necessity determinations.1242 This commenter stated, ‘‘As the Commission appropriately points out, it is important to focus on derivatives that are vital to price discovery and distribution of the underlying commodity so that any excessive speculation may have a small impact.’’ 1243 The Commission agrees with that statement. c. One commenter, Citadel, asserted that the statute required a different test for a finding of necessity than that used by the Commission.1244 According to this commenter, for each commodity subject to position limits, the Commission must establish ‘‘when and how holding a large position in a given commodity could allow a market participant to exert undue market power or influence.’’ 1245 The commenter criticized the Commission for relying on the role core referenced futures contracts play in price discovery and the fact that they require physical delivery.1246 According to the commenter, the Commission proposed position limits on certain commodities ‘‘based merely on their size or importance’’ and ‘‘did not explain why size or importance, without more’’ justifies position limits.1247 The commenter expressed concern that the Commission’s standard could set a precedent for the establishment of 1240 See Michigan v. EPA, 576 U.S.C. 743, 752 (2015). 1241 7 U.S.C. 6a(a)(3)(B). 1242 MGEX at 1. 1243 Id. 1244 Citadel at 2–4. Somewhat similar views have been expressed by other commenters in earlier phases of the Commission’s efforts to promulgate a position limits rule under paragraph 4a(a)(2). See, e.g., IATP at 5 (describing views of ISDA/SIFMA AMG in connection with ISDA litigation). 1245 Citadel at 2. 1246 Id. 1247 Id. PO 00000 Frm 00155 Fmt 4701 Sfmt 4700 3389 position limits for additional commodities in the future without adequate justification and therefore could reduce investor participation in commodity markets in a fashion that would impair the use of those markets for risk management and commercial decision making.1248 The Commission disagrees with Citadel’s interpretation of the CEA section 4a necessity requirement and criticism of the Commission’s interpretation for several reasons, most of which have been stated previously. i. The statutory language does not state a requirement to make the particular findings Citadel claims are necessary. To the contrary, it includes a Congressional finding that excessive speculation can cause sudden or unreasonable fluctuations or unwarranted changes in the price that are a burden on interstate commerce in commodities. The Commission is required to establish position limits in light of that finding, and neither Congress nor the Commission have ever required the sort of showing Citadel suggests here with respect to individual commodities.1249 It is not reasonable to surmise that Congress intended Citadel’s test to apply without saying so, particularly under the Dodd-Frank Act’s amendments, which reflect a Congressional intent, or at least expectation, that the position limits regime be expanded. The Commission also notes that Citadel set forth its proposed standard for necessity in just a few sentences and did not spell out what sort of data would be needed to comply with it in practice and how such data would be used.1250 If there were any evidence that Congress intended Citadel’s approach, or if a case could be made that the Commission should prefer it, such specifics would have been readily available. 1248 Id. 1249 The Commission has made similar determinations in connection with requirements for DCMs to impose position limits or position accountability levels by DCM rule. E.g., Establishment of Speculative Position Limits, 46 FR 50938, 50940 (Oct. 16, 1981) (‘‘it appears that the capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions, i.e., the capacity of the market is not unlimited’’). See also 2020 NPRM, 85 FR at 11665–11666 (Commission has repeatedly found that all markets in physical commodities are ‘‘susceptible to the burdens of excessive speculation’’ because they ‘‘have a finite ability to absorb the establishment and liquidation of large speculative positions in an orderly manner,’’ but this characteristic of these markets is not sufficient to establish that limits are necessary within the meaning of paragraph 4a(a)(1) for all physical commodities). 1250 Citadel at 2–3. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3390 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ii. The Congressional finding at the beginning of paragraph 4a(a)(1) makes clear that Congress’s primary concern was the effect of excessive speculation in derivatives markets on the related cash markets for the associated commodities. The Commission’s focus on the role the core referenced futures contracts play in price discovery and hedging and the importance of certain commodities to the economy as a whole therefore is directly responsive to the statutory purpose of position limits. The Commission’s focus on hedging and price discovery is further supported by CEA section 3, which sets forth the purpose of the CEA. Subsection 3(a) contains a Congressional finding that the transactions subject to the CEA serve a ‘‘national public interest’’ by providing a means for ‘‘managing and assuming price risks’’ (i.e., hedging and supporting hedging) ‘‘discovering prices’’ and ‘‘disseminating pricing information.’’ Subsection 3(b) states that the purpose of the CEA, among other things, is to ‘‘serve the public interests’’ described in subsection 3(a).1251 The Commission’s focus is thus consistent with the Congressional intent. The Commission’s consideration of the size of the futures market for the core referenced futures contracts also is consistent with the statutory purpose. As explained below,1252 contracts with a large volume of trading, generally speaking, are contracts that are likely to be heavily used for price discovery and hedging by participants in the cash market. It is rational to conclude that position limits are unnecessary for contracts that play little role in price discovery or for commodities that have a lesser economic footprint. In addition, imposing position limits based on the size or importance of futures markets is a rational way to avoid imposing compliance costs related to position limits on futures contracts and related options contracts that are relatively inactive or otherwise a minor part of the market. iii. As for Citadel’s claim that the Commission’s standard for necessity will set a precedent for imposing position limits on additional commodities in the future without adequate justification, if the Commission were to establish additional position limits in the future, it would need to justify that decision through reasoned decision making in a new rulemaking, which would be subject to public comment and judicial review to the same extent as other rules. 1251 7 U.S.C. 5(a), (b). infra Section III. (discussing necessity finding). 1252 See VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 iv. Citadel’s concern with adequate investor participation in the derivatives markets applies to varying degrees with respect to all position limits. The Commission has considered such effects, including on liquidity and bona fide hedging, throughout this rulemaking, including in its consideration of costs and benefits and in connection with the determination of position limit levels.1253 c. One commenter, IATP, endorsed a dissenting Commissioner’s criticism of the necessity standard set forth in the 2020 NPRM.1254 The criticism was to the effect that the standard ‘‘boils down’’ to the assertion that the core referenced futures contracts are large and critically important to the underlying cash markets.1255 However, for reasons set forth above and in the 2020 NPRM, this is an incomplete characterization of the Commission’s standard. Moreover, as also explained above and in the 2020 NPRM, importance to the cash market is a criterion for necessity that flows directly from the statutory purpose and, for reasons explained in the necessity findings section, the amount of trading in a contract, generally speaking, is likely to correlate with factors relevant to the statutory purpose, including use of the contract for price discovery and hedging. While critical of the Commission’s standard, IATP was even more critical of a standard like that proposed by Citadel that would require the Commission to ‘‘determine the likelihood that a specific limit would curtail excessive speculation in a specific market.’’ 1256 According to IATP, such a standard, in combination with a requirement to avoid undue costs, would make implementation of position limits ‘‘nigh to impossible.’’ 1257 However, whether or not such a standard is possible to apply, the Commission has determined that the statute does not require it, and that the Commission’s approach to the necessity finding is the one most consistent with the statutory language and purpose. d. Many commenters asserted that necessity findings needed to be made for each contract or commodity subject 1253 See 7 U.S.C. 6a(a)(3)(B)(iii) (position limits should be set at level that ensures sufficient market liquidity for bona fide hedgers to the maximum extent practicable in the discretion of the Commission). 1254 IATP at 4 (quoting dissenting statement of Commissioner Berkovitz). 1255 Id. 1256 IATP at 5. IATP did not refer specifically to Citadel’s comment but to similar concepts in connection with the ISDA litigation. 1257 IATP at 5. PO 00000 Frm 00156 Fmt 4701 Sfmt 4700 to position limits.1258 The Commission agrees with this interpretation of the statute, subject to a number of clarifications and provisos. i. While the Commission must find position limits necessary for each contract, it may do so based on different criteria for different types of contracts so long as the criteria are reasonable and consistent with the Commission’s overall interpretation of the necessity provision. For example, as described above, the Commission has determined that, where limits are necessary for a core referenced futures contract, position limits for contracts linked to the core referenced futures contract are also necessary to enable position limits on the associated core referenced futures contract to function as intended.1259 ii. The statute does not require a necessity finding for economically equivalent swaps for which position limits are required pursuant to paragraph 4a(a)(5) of the CEA.1260 While a necessity finding is required for position limits established under paragraph 4a(a)(2) because the Commission must apply ‘‘the standards set forth in paragraph [4a(a)(1)],’’ no similar language appears in paragraph 4a(a)(5). To the contrary, paragraph 4a(a)(5)(A) states that position limits for economically equivalent swaps must be established ‘‘[n]otwithstanding any other provision of this section.’’ Moreover, the statute requires the Commission to develop position limits for economically equivalent swaps ‘‘concurrently’’ with position limits established under paragraph 4a(a)(2), and establish those limits ‘‘simultaneously’’ with those established under paragraph 4a(a)(2).1261 The necessity finding provision of paragraph 4a(a)(1) therefore does not apply to economically equivalent swaps. Rather, when position limits are necessary under paragraph 4a(a)(2), the requirement to establish them for economically equivalent swaps is automatically triggered under CEA section 4a(a)(5). In addition to being compelled by the statutory language, this is a reasonable 1258 E.g., ISDA at 3 (necessity determination must be made ‘‘in connection with any specific position limits that are adopted’’); PIMCO at 3 (necessity determination should be made on a ‘‘commodityby-commodity and product-by-product basis’’); MFA/AIMA at 4 (advocating ‘‘for individualized necessity findings based on detailed analyses for each contract . . . including a more specific necessity finding for each contract’’). 1259 For further discussion on contracts linked to core referenced futures contracts, see Sections II.A.16. and III.D. 1260 7 U.S.C. 6a(a)(5). 1261 7 U.S.C. 6a(a)(5)(B). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 interpretation of the statute in policy terms because Congress could reasonably have determined that the necessity finding for position limits for futures contracts (and options thereon) carries over to economically equivalent swaps by virtue of the fact that they are economically equivalent.1262 The Commission notes that, while paragraph 4a(a)(5) does not require the Commission to make a necessity finding for economically equivalent swaps, it requires the Commission to make policy judgments with respect to such swaps in connection with the definition of what swaps are economically equivalent and the requirement that limit levels be established ‘‘as appropriate.’’ 1263 The relevant discussion with respect to the determination of what swaps that are deemed to be ‘‘economically equivalent swaps’’ is set forth elsewhere in this preamble.1264 e. Some commenters asked the Commission to clarify that it finds position limits not to be necessary for futures contracts other than the referenced contracts specified in the rule.1265 The Commission agrees that, for commodities falling within the scope of this rulemaking, i.e., ‘‘physical commodities other than excluded commodities’’ for which position limits are required by paragraph 4a(a)(2), the Commission has determined that position limits are necessary only for the 25 core referenced futures contracts and any associated referenced contracts on futures contracts or options on futures contracts, but not for other futures contracts or options on futures contracts.1266 As with any rulemaking, the necessity determinations made in connection with this rule may change in the future based on market developments, new information or analysis, or changes in Commission policy. 1262 Some commenters stated that the statute requires a necessity finding for swaps. E.g., ISDA at 4. The Commission generally agrees with this position for swaps, but not for economically equivalent swaps for the reasons stated herein. 1263 7 U.S.C. 6a(a)(5)(A), (B). 1264 See Section II.A.4. 1265 E.g. SIFMA AMG at 5 (‘‘spot month limits should apply only to physically settled futures contracts (i.e., the core referenced futures contracts), and the Commission should not make any determinations on, or adopt final rules applicable to, financially settled futures at this time.’’); ISDA at 4 (stating that the Commission should start with final rules only for physicallysettled contracts during the spot month.) 1266 As discussed above, while economically equivalent swaps are encompassed within the ‘‘referenced contract’’ definition, such swaps are subject to Federal position limits pursuant to 7 U.S.C. 6a(a)(5) and therefore are not subject to a necessity determination. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3. Commission Determination Regarding Necessity Standard For these reasons and those set forth in the 2020 NPRM, the Commission adopts the interpretation of ‘‘necessity’’ set forth in the 2020 NPRM and clarified and elaborated upon here. C. Necessity Finding as to the 25 Core Referenced Futures Contracts 1. Introduction This Final Rule imposes Federal position limits on 25 core referenced futures contracts, any futures contracts or options on futures contracts directly or indirectly linked to the core referenced futures contracts, and any economically equivalent swaps. As discussed above, the Commission bases its necessity analysis on the following propositions reflected in the text of CEA section 4a(a)(1). First, that excessive speculation in derivatives markets can cause sudden or unreasonable fluctuations or unwarranted changes in the price of an underlying commodity. Second, that such price fluctuations and changes are an undue and unnecessary burden on interstate commerce in that commodity. Third, that position limits can diminish, eliminate, or prevent that burden. With these propositions established by Congress, the Commission makes a further determination of whether it is necessary to use position limits, Congress’s prescribed tool to address those burdens on interstate commerce, in light of the facts and circumstances. The Commission finds that position limits on the 25 core referenced futures contracts identified in the 2020 NPRM are necessary to prevent the economic burdens on interstate commerce associated with excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of the commodities underlying these contracts.1267 As in the 2020 NPRM, this necessity determination is based on two interrelated factors: The importance of the 25 core referenced futures contracts to their respective underlying cash markets, including that they require physical delivery of the underlying commodity; and the particular importance to the national economy of the commodities underlying the 25 core referenced futures contracts. The Commission analyzes both factors in turn below. 1267 See PO 00000 2. Importance of the 25 Core Referenced Futures Contracts to Their Respective Underlying Cash Markets a. Link Between the Derivatives Market and Its Underlying Cash-Market As explained in the 2020 NPRM, the Commission has determined that position limits are necessary for physical commodities only where there exists a physically-settled futures contract for two reasons. First, physical settlement establishes a direct link between the futures market and the cash market since futures contracts, while normally closed out by offset, may be settled by delivery of the commodity itself. This link helps to force convergence between futures contract settlement prices and cash-market prices by ensuring that futures prices in the delivery period reflect supply and demand in the cash-market, whereas cash-settled futures contracts do not provide a direct link because physicaldelivery is not an option.1268 As a result, in many circumstances, commercial participants use physicallysettled futures contracts for price discovery. Illustrative of this point, at the May 2020 public meeting of the Commission’s Energy and Environmental Markets Advisory Committee, an industry representative discussing application of position limits to power markets observed, ‘‘In futures markets, where physically-settled contracts are established, such as natural gas or crude oil, these physical contracts effectively serve as the most important price discovery tool for the spot market at baseload supply and demand for the delivery month is managed with the physical futures or physical deals linked to it.’’ 1269 Second, physically-settled contracts may be at risk of corners and squeezes, because the settlement mechanism of the contract requires participants with short positions to deliver the underlying commodity at expiration.1270 Physical 1268 See 85 FR at 11667. Many participants rely on the possibility of settlement by physical delivery to foster convergence at expiration of the futures contract. Id. Because of imperfect contract design or other factors, the convergence mechanism does not always work as hoped in practice. Id. at 11676, fn. 575. Such malfunctions are considered to be a public policy concern because bona fide hedgers and other participants seek to hedge cash-market prices with futures contract prices. Id. at 11667. 1269 See Transcript of Committee Meeting at 46:19–47:06, Comment by Nodal Exchange, Inc., U.S. Commodity Futures Trading Commission Energy and Environmental Markets Advisory Committee (2020), https://www.cftc.gov/sites/ default/files/2020/06/1591218221/ eemactranscript050720.pdf. 1270 85 FR at 11672. For example, based on its general experience, the Commission recognizes that if the underlying commodity is ‘‘cornered’’ and the supra Section III.B. Frm 00157 Fmt 4701 Sfmt 4700 3391 Continued E:\FR\FM\14JAR2.SGM 14JAR2 3392 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations settlement therefore may increase the sources of the risk of sudden or unreasonable fluctuations or unwarranted changes in the price of the underlying commodity arising from excessive speculation.1271 Applying position limits to commodities where there is a physically-settled core referenced futures contract therefore is consistent with the Commission’s interpretation of the paragraph 4a(a)(1) necessity requirement as directing the Commission to impose limits where they are most likely to be an efficient mechanism for achieving the statutory objectives.1272 b. The 25 Core Referenced Futures Contracts Are Used for Hedging and Price Discovery In the 2020 NPRM, the Commission presented information supporting its determination that the proposed 25 core referenced futures contracts are used extensively for hedging and price discovery, thus establishing a close link between the markets for these futures contracts and commerce in the relevant commodities.1273 The Commission’s conclusions on this point are further supported by comments discussing the use of particular core referenced futures contracts for hedging and price discovery, or discussing more generally the use of futures contracts for hedging khammond on DSKJM1Z7X2PROD with RULES2 participant with the short position does not already have the commodity to deliver, then the short participant must exit its position through an offsetting long position. As a consequence, the participant will likely have to bid up the price of the futures contract to exit the market, thus ‘‘squeezing’’ the short to pay a higher price for the offsetting long position. Conversely, for a cashsettled contract, a market participant who has cornered the cash market for an underlying commodity cannot squeeze someone who is short the cash-settled futures contract because the short does not have to acquire the underlying commodity to make delivery to the long in a cash-settled contract. 1271 See 7 U.S.C. 6a(a)(3)(B)(ii) (identifying deterrence and prevention of corners and squeezes as one of the objectives of position limits required by 7 U.S.C. 6a(a)(2)). 1272 See ISDA at 3–4 (suggesting that the Commission ‘‘finalize the proposed Federal position limits rules only for physically delivered spot month futures contracts, in the first phase . . . as the Commission finds are necessary to . . . prevent [e]xcessive speculation . . . .’’) 1273 85 FR at 11666–71. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 and price discovery in the context of the Commission’s proposed rule.1274 The 25 core referenced futures contracts also serve as key benchmarks for use in pricing cash-market and other transactions.1275 For example, NYMEX 1274 See, e.g., ASR at 1 (stating that ICE Sugar No. 11 and ICE Sugar No. 16 are commonly used by commercial participants for hedging.); NGSA at 12 (‘‘Physical market participants currently hedge Henry Hub price risk through both physically settled and financially-settled futures contracts.’’); Cargill at 2 (‘‘Commercial end-users . . . rely on the futures and derivatives markets to perform vital functions including price discovery and risk management related to significant physical commodity origination, production and processing, transportation, purchasing and sales, among other things.’’); EEI/EPSA at 2 (‘‘The Joint Associations members are not financial entities. Rather, they are physical commodity market participants that rely on futures and swaps to hedge and mitigate their commercial risk.’’); ADM at 2 (‘‘Many . . . [futures] transactions are critical elements of risk management, price discovery and hedging while also playing a role in the acquisition of physical commodities.’’); CMC at 1 (noting that commercial participants ‘‘use futures markets to hedge risk exposures related to commercial activities in physical commodities.’’); DECA at 2 (‘‘The [Cotton] CT contract plays an indispensable role in the global cotton ecosystem and it is needed to provide price discovery for all market participants.’’); AFIA at 2 (‘‘As commercial end-users, AFIA’s members prioritize the need for [futures] markets to work well for their primary function of price discovery and risk management.); NGFA at 2 (‘‘The NGFA’s member firms are bona fide hedgers who hedge physical commodity risk and depend on futures markets for price discovery and risk management.’’); ACSA at 5 (‘‘. . . the futures delivery process is essential to maintaining functioning agricultural markets, price discovery, and convergence.’’); PMAA at 1 (‘‘For decades, petroleum marketers have been utilizing oil and refined product futures markets for their hedging needs to protect customers from volatility and price spikes. Well-functioning markets are critical to commodity price discovery.’’); CCI at 3 (‘‘In addition to covering timing differentials in commodity prices, intra-commodity spreads perform an important function in energy markets by, among other things, promoting price discovery and convergence as well as providing liquidity for priced-linked, physically-settled and cash-settled Referenced Contracts in the same underlying commodity during the spot month as market participants manage their risks across markets.’’). See also NFP Electric Associations, Comment Letter on Proposed Rule on Position Limits for Derivatives and Aggregation of Positions (July 3, 2014), https:// comments.cftc.gov/PublicComments/ ViewComment.aspx?id=59934&SearchText= (noting that the ‘‘[energy] markets . . . provide commercial risk management opportunities and achieve price convergence between futures and cash-market prices for the benefit of commercial hedgers and their counterparties.’’). 1275 See, e.g., USDA Economic Research Service, Contracts, Markets, and Prices: Organizing the PO 00000 Frm 00158 Fmt 4701 Sfmt 4700 NY Harbor RBOB Gasoline (RB) is the main benchmark used for pricing gasoline in the U.S. petroleum products market, a huge physical market with total U.S. refinery capacity of approximately 9.5 million barrels per day of gasoline.1276 Similarly, the NYMEX NY Harbor ULSD Heating Oil (HO) contract is the main benchmark used for pricing the distillate products market, which includes diesel fuel, heating oil, and jet fuel.1277 The utility of the price discovery function for these futures contracts is thus impactful for commercial participants regardless of whether they are actively trading in the futures market. There is also evidence that the 25 core referenced futures contracts are the physically-settled contracts in physical commodities traded on U.S. exchanges that, by and large, are most used for hedging and price discovery by cashmarket participants. Unfortunately, the Commission does not have information that permits a direct comparative measurement of the extent to which each of the actively traded futures contracts is used for hedging and price discovery. However, available statistics from exchanges show that the 25 core referenced futures contracts, with the partial exception of CBOT Oats (O), a legacy contract, are the most actively traded physically-settled contracts in physical commodities, as measured by open interest and trading volume. As discussed in detail further below, the most actively traded futures contracts will usually be the contracts that are most used for hedging and price discovery. Production and Use of Agricultural Commodities, Agricultural Economic Report No. 837, at 6 (Nov. 2004), https://www.ers.usda.gov/webdocs/ publications/41702/14700_aer837_1_.pdf?v.=41061 (one-third of all U.S. agricultural production is produced under contracts using pricing formulas determined by reference to futures prices); see also Paul Peterson, Fixing Prices and Fixing Markets, farmdoc daily (4): 118, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign (June 25, 2014), https:// farmdocdaily.illinois.edu/2014/06/fixing-pricesand-fixing-markets.html (explaining that futures markets provide price discovery for cash grain spot markets and how price discovery through negotiated prices has diminished over time). 1276 See 85 FR at 11669. 1277 Id. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations To follow up on the discussion of trading activity in the 2020 NPRM,1278 the Commission analyzed average total open interest 1279 and average notional open interest 1280 for all physicallysettled futures contracts for the period between January 2019 and December 2019.1281 From that data, the Commission assessed the 30 largest physically-settled contracts in terms of average total open interest and average notional open interest for comparison.1282 These 30 contracts comprised the 25 core referenced futures contracts, and the five physically-settled physical commodity contracts with the next-highest amounts of average total open interest and average notional open interest. As 1278 See id. at 11666, 11668–70. interest refers to the total number of outstanding futures contracts that have not been offset at the end of the trading day. 1280 Notional value means the value of average open interest without adjusting for delta in options. 1281 The 25 core referenced futures contract are all long-standing, established contracts. Generally speaking, for purposes of this Final Rule, the Commission focused on mature contract markets with at least five years of reported open interest and volume. For example, the Commission notes that the ICE Canola Futures (RS) and NYMEX WTI Houston Crude Oil Futures (HCL) contracts appear to have characteristics similar to those which the Commission has found support a necessity finding, but these contracts are both much newer, and the Commission finds that this militates against finding a position limit necessary until their respective markets mature further. The Commission may consider a position limit necessary for one or both in the future, as it revisits these issues from time to time as required by statute. 1282 As discussed in the 2020 NPRM, the Commission also analyzed FIA end of month open interest data for December 2019 and FIA 12-month total trading volume data (January 2019 through December 2019) and reached the same conclusion as discussed herein. See 85 FR at 11670. khammond on DSKJM1Z7X2PROD with RULES2 1279 Open VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 shown in the tables below, there is a significant drop in open interest between CBOT Oats (O), which has the lowest open interest of the core referenced futures contracts, and CME Random Length Lumber (LBS), which is the 27th largest physically-settled futures contract and has the second highest open interest of the five contracts not selected from the group of 30 contracts.1283 Specifically, average total open interest in CBOT Oats (O) (5,630 OI) is almost twice the size of average total open interest in CME Random Length Lumber (LBS) (3,025 OI).1284 1283 Many commenters suggested that the Commission’s final rule should demonstrate that position limits are necessary on a ‘‘commodity-bycommodity basis’’ as supported by empirical evidence or data. See, e.g. PIMCO at 3; ISDA at 3; SIFMA AMG at 2; MFA/AIMA at 4. As discussed in Section III.B.2.a., supra, the Commission agrees that the agency is required to consider relevant data, where available, in determining whether to establish position limits. The Commission however notes that the CEA does not specify the use of any particular methodology, quantitative or otherwise, in determining whether position limits are necessary. 1284 During the period January 1, 2019 through December 31, 2019, the NYMEX Loop Crude Oil Storage (LPS) futures contract had higher open interest than four of the 25 core referenced futures contracts and the remaining largest contracts that were not selected, as shown in the chart below. The Commission, however, notes that the contract is a capacity allocation contract, which gives the buyer of the contract the legal right to store crude oil at a storage facility in Louisiana for a specified calendar month. The Commission further notes that the contract is a newer one, has fewer reportable traders, and significantly lower average daily trading volume (NYMEX Loop Crude Oil Storage (LPS) 131 Vol.) and average notional value than any of the 25 core referenced futures contracts during this same period. In addition, open interest in the contract has dropped precipitously between January 1, 2020 and September 30, 2020. The Commission PO 00000 Frm 00159 Fmt 4701 Sfmt 4700 3393 With the exception of CBOT Oats (O),1285 as shown in the tables below, the average notional open interest values for the 25 core referenced futures contracts are all substantially larger and more valuable than the five contracts that were not selected. Specifically, outstanding futures average notional values range from approximately $ 33 billion for CBOT Corn (C) to approximately $ 80 million for CBOT Oats (O), with the other core referenced futures contracts on agricultural commodities all falling somewhere in between.1286 Outstanding futures average notional values of the core referenced futures contracts on metal commodities range from approximately $ 80 billion in the case of COMEX Gold (GC), to approximately $ 3.6 billion in the case of NYMEX Platinum (PL), with the other metals core referenced futures contracts all falling somewhere in between.1287 With regard to energy commodities, futures average notional values range from $ 116.7 billion in the case of NYMEX Light Sweet Crude Oil (CL) to $ 28.3 billion in the case of NYMEX NY Harbor RBOB Gasoline (RB).1288 finds that all of these reasons militate against finding a position limit necessary for this contract until its market matures further. The Commission may consider a position limit necessary for this contract in the future, as it revisits these issues from time to time as required by statute. 1285 See supra Section II.B.1. (discussing CBOT Oats (O) legacy contract status). 1286 Calculations are based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations. 1287 Id. 1288 Id. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations In addition to open interest and notional value, the Commission analyzed average daily trading volume 1290 for the period January 1, 2019 through December 31, 2019 and notes that trading volume on the 25 core referenced futures contracts is also generally larger than trading volume on the five contracts that were not selected. For example, the CBOT Corn (C) and CBOT Soybean (S) contracts trade over 409,000 and 211,000 contracts respectively per day.1291 The COMEX 1289 Id. 1290 Daily trading volume represents the total quantity of futures contracts traded within a day. 1291 Calculations are based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Gold (GC) contract trades approximately 343,288 contracts daily.1292 The NYMEX Light Sweet Crude Oil (CL) contract, which is the world’s most liquid and actively traded crude oil contract, trades nearly 1.2 million contracts a day, and the NYMEX Henry Hub Natural Gas (NG) contract trades on average approximately 409,480 contracts daily.1293 In contrast, the CME Random Length Lumber (LBS), CBOT Ethanol (EH), COMEX Aluminum (ALI), and NYMEX Mont Belvieu Spot Ethylene In-Well (MBE) contracts, which were not selected, trade 1292 Id. 1293 Id. PO 00000 Frm 00160 Fmt 4701 Sfmt 4700 approximately 645, 315, 123, and 15.7 contracts respectively per day.1294 1294 Id. The average daily trading volume for CBOT Oats (O) (645.04 Vol) is approximately the same as the average daily trading volume for CME Random Length Lumber (LBS) (645.56 Vol), which is the largest contract in terms of volume of the five contracts that were not selected. While the average daily trading volume for ICE Sugar No. 16 (SF) (307.32 Vol), which is the smallest of the 25 core contracts in terms of volume, is less than the average daily trading volume for both CME Random Length Lumber (LBS) (645.56 Vol) and CBOT Ethanol (EH) (315.7 Vol), the Commission notes that many commercial participants frequently use both ICE Sugar No. 16 (SF) and ICE Sugar No. 11 (SB) together for hedging and price discovery because the underlying commodity is the same for both contracts. See infra Section III.C.5. (discussing the ICE Sugar No. 16 (SF) and ICE Sugar No. 11 (SB) contracts). E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.013</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3394 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations There are a number of reasons to expect that, generally speaking, the most actively traded futures contracts will usually be the contracts that are most used for hedging and price discovery. First, it is generally accepted that successful futures contracts usually require active market participation by hedgers as well as speculators.1295 It is therefore reasonable to expect that some significant proportion of the activity in the most active futures contracts will normally consist of hedging and not solely consist of purely speculative trading. In addition, the most active futures contracts are likely to be the most liquid, at least most of the time. Such contracts are likely to be heavily relied upon as sources of price information because their prices reflect the collective opinion of more traders and are therefore likely to be a more accurate representation of the underlying cash-market price conditions.1296 While the correlation between the magnitude of trading activity and use of a contract for hedging and price discovery is likely imperfect, it provides reason to expect that the 25 core referenced futures contracts are, on the whole, the physically-settled contracts in physical commodities traded on U.S. exchanges that are most used for hedging and price discovery. This is particularly true given the very large gap in activity levels between most of the 25 core referenced futures contracts and physically-settled contracts not included as core referenced futures contracts. khammond on DSKJM1Z7X2PROD with RULES2 c. Conclusion Regarding Importance of the 25 Core Referenced Futures Contracts to Their Respective Underlying Cash Markets Based on the information set forth in the NPRM and supplemented here, the Commission concludes that the importance of the 25 core referenced futures contracts to their respective underlying cash markets supports the conclusion that position limits are necessary for these contracts. 1295 See, e.g., Holbrook Working, Futures Trading and Hedging, 43 a.m. Econ. Rev. 314, 319–320 (June 1953), https://www.jstor.org/stable/ 1811346?seq=1&cid=pdf-reference#references_tab_ contents. See also William L. Silber, Innovation, Competition, and New Contract Design in Futures Markets, 1 J. of Futures Markets 129, 131 (Summer 1981), https://onlinelibrary.wiley.com/doi/abs/ 10.1002/fut.3990010205. 1296 See, e.g., 85 FR at 11669, fn. 522–523. See generally William L. Silber, The Economic Role of Financial Futures, in Futures Markets: Their Economic Role 83, 89–90 (A. Peck ed., Am. Enter. Inst. for Pub. Pol’y Rsch. 1985), https:// legacy.farmdoc.illinois.edu/irwin/archive/books/ Futures-Economic/Futures-Economic_chapter2.pdf (discussing the price discovery and hedging functions of futures markets). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3. Importance of the Commodities Underlying the 25 Core Referenced Futures Contracts to the National Economy With respect to the second factor, importance of the cash commodity to the U.S. economy as a whole, the 2020 NPRM set forth information demonstrating that each of the 25 core referenced futures contracts is important to the U.S. economy in various ways.1297 Many of the 25 core referenced futures contracts involve commodities that are among the most important physical commodities for the U.S. economy, among those commodities for which physicallysettled contracts are traded on U.S. exchanges.1298 For example, in the agricultural sector, three of the top five commodities in the United States, as measured by cash receipts, underlie core referenced futures contracts, including cattle, corn, and soybeans.1299 An additional commodity that underlies several core referenced contracts, wheat, is in the top ten.1300 Primary energy commodities that underlie core referenced futures contracts, specifically crude oil and natural gas, account for over half of U.S. energy production.1301 Two additional core referenced futures contracts in the energy space, NYMEX New York Harbor ULSD Heating Oil (HO) and NYMEX New York Harbor RBOB Gasoline (RB), relate, in turn, to commodities that are among the most widely used byproducts of crude oil.1302 Thus, based on the information set forth in the NPRM and supplemented here, the importance of the underlying commodity to the national economy supports the conclusion that position limits are necessary for the 25 core referenced futures contracts. 3395 commodities included in several widely-tracked third-party commodity indices: The Bloomberg Commodity Index, the S&P GSCI index, and the Rogers International Commodity Index. Based on the criteria used to create these indices, inclusion of a commodity in the index is an indication that the commodity is important to the world or U.S. economy, and that futures prices for the commodity are considered to be an important source of price information. In particular, Bloomberg states that it selects commodities for its Bloomberg Commodity Index that in its view are ‘‘sufficiently significant to the world economy to merit consideration,’’ that are ‘‘tradeable through a qualifying related futures contract’’ and that generally are the ‘‘subject of at least one futures contract that trades on a U.S. exchange.’’ 1303 Similarly, S&P’s GSCI index is, among other things, ‘‘designed to reflect the relative significance of each of the constituent commodities to the world economy.’’ 1304 Likewise, the Rogers International Commodity Index ‘‘represents the value of a basket of commodities consumed in the global economy’’ that are ‘‘tracked via futures contracts on 38 different exchangetraded physical commodities’’ and that ‘‘aims to be an effective measure of the price action of raw materials not just in the United States but also around the world.’’ 1305 Applying these criteria, Bloomberg, S&P, and Rogers have all deemed eligible for inclusion in their indices lists of commodities that overlap significantly with the Commission’s 25 core referenced futures contracts. In particular, Bloomberg, S&P, and Rogers include 17, 15, and 22 contracts respectively per index of the 25 contracts selected by the Commission.1306 Independent index 4. Commodity Indices As an independent check on its selection of core referenced futures contracts, the Commission has compared its list with the lists of 1297 See 85 FR at 11666–11671. e.g., 85 FR at 11668 (discussing agricultural commodities and their downstream uses), id. at 11669–70 (discussing energy contracts). 1299 USDA Economic Research Service, Cash receipts by State, commodity ranking and share of U.S. total, 2019 Nominal (current dollars), https:// data.ers.usda.gov/reports.aspx?ID=17843. 1300 Id. 1301 U.S. Energy Information Administration, Annual Energy Review, Primary Energy Production by Source, Table 1.2 (last updated Sept. 2020), https://www.eia.gov/totalenergy/data/monthly/pdf/ sec1_5.pdf. 1302 See, e.g., U.S. Energy Information Administration, U.S. petroleum flow, 2018, https:// www.eia.gov/totalenergy/data/monthly/pdf/flow/ petroleum.pdf. 1298 See, PO 00000 Frm 00161 Fmt 4701 Sfmt 4700 1303 The Bloomberg Commodity Index Methodology, Bloomberg, at 16–17 (Jan. 2020), https://data.bloomberglp.com/professional/sites/ 10/BCOM-Methodology.pdf. 1304 S&P GSCI Methodology, S&P Dow Jones Indices, at 8 (May 2020), https://www.spglobal.com/ spdji/en/indices/commodities/sp-gsci/#overview. 1305 The RICI Handbook, The Guide to the Rogers International Commodity Index, at 4–5 (Aug. 2020), https://www.rogersrawmaterials.com/documents/ RICIHndbk_01.31.19.pdf. 1306 The 17 Bloomberg contracts are ICE Coffee C (KC), COMEX Copper (HG), CBOT Corn (and MiniCorn) (C), ICE Cotton No. 2 (CT), COMEX Gold (GC), NYMEX New York Harbor ULSD Heating Oil (HO), CME Live Cattle (LC), NYMEX Henry Hub Natural Gas (NG), NYMEX New York Harbor RBOB Gasoline (RB), COMEX Silver (SI), CBOT Soybeans (and Mini-Soybeans) (S), CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), ICE Sugar No. 11 (SB), CBOT Wheat (and Mini-Wheat) (W), CBOT KC HRW Wheat (KW), and NYMEX Light Sweet Crude Oil (CL). See https://data.bloomberglp.com/ professional/sites/10/BCOM-Methodology.pdf. E:\FR\FM\14JAR2.SGM Continued 14JAR2 3396 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations providers thus appear to have arrived at similar conclusions to the Commission’s necessity finding regarding the relative importance of certain commodity markets for the economy and price discovery. The indices, taken individually or as a whole, support the Commission’s conclusion that position limits are necessary for the 25 core referenced futures contracts. khammond on DSKJM1Z7X2PROD with RULES2 5. Comments on Proposed Necessity Finding for Core Referenced Futures Contracts While some commenters asserted that position limits are mandatory for all physical commodities, no commenter argued that the necessity finding should apply to any particular contract other than the 25 core referenced futures contracts.1307 Only one commenter advocated that the Commission remove commodities from the proposed list of 25 core referenced futures contracts. That commenter, IFUS, objected to imposing Federal position limits on its Sugar No. 11 (SB) contract.1308 IFUS argued that the Sugar No. 11 (SB) contract does not have ‘‘a major significance to U.S. interstate commerce’’ because the The 15 S&P GSCI contracts are ICE Cocoa (CC), ICE Coffee C (KC), CBOT Corn (and Mini-Corn) (C), ICE Cotton No. 2 (CT), COMEX Gold (GC), NYMEX New York Harbor ULSD Heating Oil (HO), CME Live Cattle (LC), NYMEX Henry Hub Natural Gas (NG), NYMEX New York Harbor RBOB Gasoline (RB), COMEX Silver (SI), CBOT Soybeans (and Mini-Soybeans) (S), ICE Sugar No. 11 (SB), CBOT Wheat (and Mini-Wheat) (W), CBOT KC HRW Wheat (KW), and NYMEX Light Sweet Crude Oil (CL). See S&P GSCI Methodology, S&P Dow Jones Indices, at 26 (May 2020), https:// www.spglobal.com/spdji/en/indices/commodities/ sp-gsci/#overview. The 22 Rogers contracts are ICE Cocoa (CC), ICE Coffee C (KC), COMEX Copper (HG), CBOT Corn (and Mini-Corn) (C), ICE Cotton No. 2 (CT), COMEX Gold (GC), NYMEX New York Harbor ULSD Heating Oil (HO), CME Live Cattle (LC), NYMEX Henry Hub Natural Gas (NG), CBOT Oats (O), ICE FCOJ–A (OJ), NYMEX Palladium (PA), NYMEX Platinum (PL), NYMEX New York Harbor RBOB Gasoline (RB), CBOT Rough Rice (RR), COMEX Silver (SI), CBOT Soybeans (and MiniSoybeans) (S), ICE Sugar No. 11 (SB), CBOT Wheat (and Mini-Wheat) (W), CBOT KC HRW Wheat (KW), MGEX Hard Red Spring Wheat (MWE), and NYMEX Light Sweet Crude Oil (CL). See https:// www.rogersrawmaterials.com/weight.asp. 1307 E.g., NEFI at 2 (supporting Federal position limits for all 25 core referenced futures contracts, but stating that the list is too limited because it included only four energy contracts and that Congress imposed a clear mandate to establish limits on all commercially-traded energy derivatives); Better Markets at 64. 1308 IFUS at 3. The ICE Sugar No. 11 (SB) ‘‘contract prices the physical delivery of raw cane sugar free-on-board the receiver’s vessel to a port within the country of origin of the sugar.’’ See Sugar No. 11 Futures Product Specs, Intercontinental Exchange website, available at https:// www.theice.com/products/23/Sugar-No-11-Futures. The United States is one of the delivery points for the ICE Sugar No. 11 (SB) contract because U.S. origin raw cane sugar is one of the 29 deliverable origins under the contract. Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 contract prices the physical delivery of raw cane sugar for more than 30 delivery points around the world and only a de minimis amount of the raw sugar represented by the contract can be imported into the U.S. under U.S. sugar tariff-rate quotas.1309 In addition, IFUS stated that the Commission’s necessity finding does not establish that ICE Sugar No. 11 (SB) is used for price discovery for sugar produced and consumed in the United States.1310 The Commission has considered the comments and is adopting the list of the 25 core referenced futures contracts as proposed, including incorporating the ICE Sugar No. 11 (SB) contract as a core referenced futures contract. In response to IFUS’ comment, the Commission recognizes that ‘‘Sugar No. 11 (SB) is primarily an international benchmark.’’ 1311 The Commission, however, disagrees with IFUS’ comment that the Sugar No. 11 (SB) contract does not have a major significance to U.S. interstate commerce or play a role in price discovery for sugar produced and consumed in the United States.1312 For several reasons, the Commission finds that the ICE Sugar No. 11 (SB) contract has sufficient connection to the domestic sugar market to warrant Federal position limits. First, USDA data reflects that roughly one-quarter of the annual U.S. raw sugar supply is imported.1313 While U.S. imports may be a small percentage of the total sugar represented by open interest in the ICE 1309 IFUS at 3–4. at Exhibit 1, No. 52. 1311 85 FR at 11668, fn. 507. 1312 The Commission notes that IFUS did not object to the inclusion of ICE Sugar No. 16 (SF) as a core referenced futures contract in the 2020 NPRM. The ICE Sugar No. 16 (SF) ‘‘contract prices physical delivery of US-grown (or foreign origin with duty paid by deliverer) raw cane sugar at one of five U.S. refinery ports as selected by the receiver.’’ See Sugar No. 16 Futures Product Specs, Intercontinental Exchange website, available at https://www.theice.com/products/914/Sugar-No-16Futures. The same commodity, raw centrifugal cane sugar based on 96 degrees average polarization, underlies both ICE Sugar No. 16 (SF) and ICE Sugar No. 11 (SB) contracts. Id. See also Sugar No. 11 Futures Product Specs, Intercontinental Exchange website, available at https://www.theice.com/ products/23/Sugar-No-11-Futures. Both contracts also trade on IFUS in units of 112,000 pounds per contract. Id. 1313 USDA Economic Research Service, Sugar and Sweeteners Yearbook Tables, World Production, Supply, and Distribution, at Table 1 (July 19, 2018), https://www.ers.usda.gov/data-products/sugar-andsweeteners-yearbook-tables. For example, between 2009 and 2019, the United States has imported between 22.7% and 28.6% of its raw sugar from other countries. Id. In 2019, the United States imported approximately 3 million metric tons of sugar from other countries whose sugar is deliverable under the ICE Sugar No. 11 (SB) contract. See USDA, U.S. Sugar Monthly Import and Re-Exports, Final Report, Fiscal Year 2019 (Oct. 2019), https://www.fas.usda.gov/sites/default/ files/2020-01/fy_2019_final_sugar_report.pdf. 1310 IFUS PO 00000 Frm 00162 Fmt 4701 Sfmt 4700 Sugar No. 11 (SB) contract, U.S. imports still account for a significant percentage of the total U.S. raw sugar supply. As described below, Commission data suggests that the ICE Sugar No. 11 (SB) contract is used for price discovery and hedging within the United States. Thus, when the contract is being used by commercial participants for price discovery or hedging in the domestic raw sugar market, it is therefore reasonable to expect that any sudden or unreasonable fluctuations or unwarranted changes in the global price of raw sugar could impose significant disruptions or harms to the domestic raw sugar markets. Because the ICE Sugar No. 11 (SB) contract represents a material portion of the U.S. sugar market, the Commission determines that it is necessary to include it as a core referenced futures contract to protect against any sudden or unreasonable fluctuations or unwarranted changes, which could result in undue burdens on the U.S. economy. Additionally, as further discussed below, since the ICE Sugar No. 11 (SB) contract represents a material portion of the U.S. raw sugar supply, the Commission concludes that disruptions to this contract potentially could harm both the price discovery process for the domestic sugar markets as well as the physical delivery of the underlying commodity. Second, the ICE Sugar No. 11 (SB) contract is listed on IFUS, a DCM registered with the Commission that lists derivatives contracts for trading by U.S. participants in the United States, among others. Data reported to the Commission through Form 102s reflects that domestic firms account for approximately 20% of commercial market participants and 65%–70% of the non-commercial market participants trading in the ICE Sugar No. 11 (SB) contract.1314 This data supports the Commission’s finding that the ICE Sugar No. 11 (SB) contract is ‘‘used for price discovery and hedging within the United States.’’ 1315 Finally, as the Commission noted in the 2020 NPRM, the Commission believes that the ICE Sugar No. 11 (SB) and ICE Sugar No. 16 (SF) contracts together ‘‘[a]s a pair’’ are ‘‘crucial tools for risk management and for ensuring reliable pricing.’’ 1316 The Commission’s view is informed by the fact that both ICE Sugar No. 11 (SB) and ICE Sugar No. 16 (SF) call for delivery of the same size and quality of raw cane sugar, with the 1314 See also ASR at 1 (stating that the ICE Sugar No. 11 (SB) and ICE Sugar No. 16 (SF) contracts are commonly used by commercial participants for hedging). 1315 85 FR at 11668, fn. 507. 1316 Id. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations former contract calling for delivery from 29 different country origins of growth, including the United States, and the latter contract calling for delivery of domestic origin.1317 This implies that there is likely to be a common group of market participants trading in both contracts. Based on its experience in other markets, the Commission understands that U.S. firms may utilize both contract markets to hedge cash positions and offset other related risks even if their inventories cannot be delivered against both contracts. In that regard and as discussed above in Section III.C.2.b, the Commission analyzed average open interest and average notional values for ICE Sugar No. 11 (SB) and ICE Sugar No. 16 (SF) for the period January 1, 2019 through December 31, 2019. Specifically, average open interest in ICE Sugar No. 11 (SB) (947,198 OI) is more than 100 times the size of average open interest in ICE Sugar No. 16 (SF) (8,485 OI).1318 Similarly, the average notional value for ICE Sugar No. 11 (SB) ($13,535,036,765 Notional OI) is roughly 54 times greater than the average notional value for ICE Sugar No. 16 (SF) ($250,447,669 Notional OI).1319 In terms of average trading volume for the same time period, the ICE Sugar No. 11 (SB) contract trades approximately 146,077 contracts per day, whereas the ICE Sugar No. 16 (SF) contract trades approximately 307 contracts per day.1320 Accordingly, the Commission believes, and the data supports, that U.S. commercial participants use the more-liquid ICE Sugar No. 11 (SB) contract to hedge domestically sourced raw sugar or domestic inventories and for price discovery for sugar produced and consumed in the United States. 1321 6. Commission Determination khammond on DSKJM1Z7X2PROD with RULES2 For the reasons stated in the 2020 NPRM and further discussed here, the Commission finds that position limits are necessary for the 25 core referenced futures contracts. 1317 See ICE Sugar No. 16 Futures Product Specs, Intercontinental Exchange website, available at https://www.theice.com/products/914/Sugar-No-16Futures; see also Sugar No. 11 Futures Product Specs, Intercontinental Exchange website, available at https://www.theice.com/products/23/Sugar-No11-Futures. 1318 Calculations are based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations and does not include delta adjusted option on futures contracts. 1319 Id. 1320 Id. 1321 USDA data reflects that each year, U.S. commercial firms hold over 1 million metric tons of raw sugar as inventory (after accounting for all imports, production, and use during the year). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3397 D. Necessity Finding as to Linked Contracts E. Necessity Finding for Spot/Non-Spot Month Position Limits The Commission finds that position limits on futures and options on futures contracts that are linked to core referenced futures contracts are necessary to enable position limits to function effectively for commodities where position limits have been found to be necessary in connection with the relevant core referenced futures contracts. As explained in detail above at Section II.A.16, due to the nature of the linkages specified in the definition of ‘‘referenced contract’’ in § 150.1, and the resulting possibilities for arbitrage, contracts linked to core referenced futures contracts, including cash-settled linked contracts, function together with the linked core referenced futures contract as part of one market.1322 As a result, without position limits on such linked contracts, excessive speculative positions in these contracts can affect associated core referenced futures contracts and cash commodity markets in a variety of ways that undermine the effectiveness of position limits on the core contracts. For example, large positions in linked contracts can serve as a vehicle for profiting from manipulation of the prices of core referenced futures contracts and cash commodities.1323 Conversely, excessive speculation that artificially affects the price of a linked contract can distort pricing, liquidity, and delivery in the market for the core referenced futures contract and cash commodity to which the contract is linked.1324 Finally, physically-settled indirectly linked contracts, if not subject to position limits, can serve as a vehicle for evasion through the creation of contracts that are economically equivalent to core referenced futures contracts.1325 The Commission therefore finds that position limits for futures contracts and options on futures contracts that are linked to core referenced futures contracts are necessary within the meaning of paragraph 4a(a)(1) where limits are necessary for the associated core referenced futures contracts. As discussed above in Section II.B.2. and in the 2020 NPRM, the Commission preliminarily determined that Federal position limits should only apply to spot month positions except with respect to the nine legacy agricultural contracts, where non-spot month position Federal position limits have been in place for many years. As discussed above, the Commission is adopting this aspect of the rule as proposed. Consistent with this policy determination, the Commission finds that position limits are necessary during all months for the nine legacy agricultural contracts. The Commission further finds that position limits are necessary only during the spot month for the 16 non-legacy core referenced futures contracts and unnecessary outside of the spot month.1326 The Commission makes this necessity finding for substantially the reasons set forth above, including in responses to comments on the spot/non-spot month issue. Briefly, certain potential sources of sudden or unreasonable fluctuations or unwarranted changes in commodity prices caused by excessive speculation, particularly corners, squeezes, and certain convergence problems, are associated primarily with large positions held during spot months.1327 And, to the extent that these problems may arise in prior months, they are mitigated by exchange policies including exchange-set position limits and position accountability.1328 As a result, even if position limits may have benefits outside the spot month, restricting Federal position limits to spot months for most commodities is consistent with the Commission’s interpretation of the paragraph 4a(a)(1) necessity requirement as directing the Commission to impose position limits where they are most economically justified as an efficient mechanism for achieving the statutory objectives. The Commission similarly finds position limits in non-spot months to be necessary for the legacy agricultural contracts for substantially the reasons discussed above.1329 These limits were put in place pursuant to past statutory necessity findings and have been in place for decades without the Commission observing problems that 1322 For further discussion of referenced contracts and linked contracts, see supra Section II.A.16. 1323 Id. (discussing the use of linked contracts to manipulate prices of physically-settled contracts and the use of cash-market transactions to affect prices of physically-settled futures contracts and their linked counterparts). 1324 Id. 1325 See supra Section II.A.16. (discussing referenced contracts). PO 00000 Frm 00163 Fmt 4701 Sfmt 4700 1326 At least one commenter asked to Commission to explicitly clarify this point, see ISDA at 3. 1327 See supra Section II.B.2. (discussing Final Rule provisions). 1328 Id. 1329 See supra Section II.B.2. (discussing Final Rule provisions). E:\FR\FM\14JAR2.SGM 14JAR2 3398 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations would give reasons to remove them.1330 And they are generally supported by many market participants.1331 Because no commenters argued that the Commission should eliminate Federal non-spot month position limits for the nine legacy agricultural contracts and because these limits have been in existence for decades, the Commission believes that it would be imprudent to eliminate them absent any specific reason in support thereof, particularly insofar as maintaining them, by definition, will result in no new costs or burdens. The Commission further notes that maintaining non-spot month limits for the nine legacy agricultural contracts will not change the existing dynamics of these markets. The Commission is therefore satisfied that these limits remain an efficient mechanism for achieving the objectives of CEA section 4a. IV. Related Matters A. Cost-Benefit Considerations khammond on DSKJM1Z7X2PROD with RULES2 1. Introduction Section 15(a) of the Commodity Exchange Act (‘‘CEA’’ or ‘‘Act’’) requires the Commodity Futures Trading Commission (‘‘Commission’’) to consider the costs and benefits of its actions before promulgating a regulation under the CEA.1332 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations (collectively, the ‘‘section 15(a) factors’’).1333 The Commission interprets section 15(a) to require the Commission to consider only those costs and benefits of its changes that are attributable to the Commission’s discretionary determinations (i.e., changes that are not otherwise required by statute) compared to the existing status quo baseline requirements. For this purpose, the status quo requirements, which serve as the baseline for the consideration of the costs and benefits of the regulations adopted in this final position limits 1330 Id. 1331 Id. The Commission notes that while ISDA did not specifically address the nine legacy agricultural contracts, it suggested that the Commission ‘‘should finalize the proposed Federal position limits rules only for physically delivered spot month futures contracts, in the first phase.’’ See ISDA at 3–4. 1332 7 U.S.C. 19(a). 1333 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 rulemaking (‘‘Final Rule’’), include the CEA’s statutory requirements as well as any applicable existing Commission regulations.1334 As a result, any changes to the Commission’s regulations that are required by the CEA or other applicable statutes are not deemed to be discretionary changes for purposes of discussing related costs and benefits of the Final Rule. The Commission anticipates that the Final Rule will affect market participants differently depending on their business models and scale of participation in the commodity contracts that are covered by the Final Rule.1335 The Commission also anticipates that the Final Rule may result in ‘‘programmatic’’ costs to some market participants. Generally, affected market participants may incur increased costs associated with developing or revising, implementing, and maintaining compliance functions and procedures. Such costs might include those related to the monitoring of positions in the relevant referenced contracts; related filing, reporting, and recordkeeping requirements; and the costs of changes to information technology systems. The Commission has determined that it is not feasible to quantify the costs or benefits with reasonable precision and instead has identified and considered the costs and benefits qualitatively.1336 The Commission believes that, for many of the costs and benefits, quantification is not feasible with reasonable 1334 This cost-benefit consideration section is divided into seven parts, including this introductory section, with respect to any applicable CEA or regulatory provisions. 1335 For example, the Final Rule could result in increased costs to market participants who may need to adjust their trading and hedging strategies to ensure that their aggregate positions do not exceed Federal position limits, particularly those who will be subject to Federal position limits for the first time (i.e., those who may trade contracts for which there are currently no Federal position limits). On the other hand, existing costs could decrease for those existing market participants whose positions would fall below the new Federal position limits and therefore such market participants would not be required to adjust their trading strategies and/or apply for exemptions from the limits, particularly if the Final Rule improves market liquidity or other metrics of market health. Similarly, for those market participants who would become subject to the Federal position limits, general costs would be lower to the extent such market participants can leverage their existing compliance infrastructure in connection with existing exchange position limit regimes, relative to those market participants that do not currently have such systems. 1336 With respect to the Commission’s analysis under its discussion of its obligations under the Paperwork Reduction Act (‘‘PRA’’), the Commission has endeavored to quantify certain costs and other burdens imposed on market participants related to collections of information as defined by the PRA. See generally Section IV.B. (discussing the Commission’s PRA determinations). PO 00000 Frm 00164 Fmt 4701 Sfmt 4700 precision, because quantification requires understanding all market participants’ business models, operating models, cost structures, and hedging strategies, including an evaluation of the potential alternative hedging or business strategies that could be adopted under the Final Rule. Further, while Congress has tasked the Commission with establishing such Federal position limits as the Commission finds are ‘‘necessary,’’ some of the benefits, such as mitigating or eliminating manipulation or excessive speculation, may be very difficult or infeasible to quantify. These benefits, moreover, will likely manifest over time and be distributed over the entire market. In light of these limitations, to inform its consideration of costs and benefits of the Final Rule, the Commission in its discretion relies on: (1) Its experience and expertise in regulating the derivatives markets; (2) information gathered through public comment letters 1337 and meetings with a broad range of market participants; and (3) certain Commission data, such as the Commission’s Large Trader Reporting System and data reported to swap data repositories. The Commission considers the benefits and costs discussed below in the context of international markets, because market participants and exchanges subject to the Commission’s jurisdiction for purposes of position limits may be organized outside of the United States; some industry leaders typically conduct operations both within and outside the United States; and market participants may follow substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the discussion of benefits and costs below refers to the effects of the Final Rule on all activity subject to it, whether by virtue of the activity’s physical location in the United States or by virtue of the activity’s connection with, or effect on, U.S. commerce under CEA section 2(i).1338 The Commission sought comments on all aspects of the cost and benefit considerations in the 2020 NPRM, including: (1) Identification and assessment of any costs and benefits not discussed in the 2020 NPRM; (2) data and any other information to assist or otherwise inform the Commission’s 1337 While the general themes contained in comments submitted in response to prior proposals informed this rulemaking, the Commission withdrew the 2013 Proposal, the 2016 Supplemental Proposal, and the 2016 Reproposal. See supra Section I.A. 1338 7 U.S.C. 2(i). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 ability to quantify or qualify the costs and benefits of the 2020 NPRM; and (3) substantiating data, statistics, and any other information to support positions posited by comments with respect to the Commission’s consideration of costs and benefits.1339 The Commission also requested specific comments regarding its considerations of the benefits and costs of proposed §§ 150.3 and 150.9, as well as comments on whether a Commission-administered exemption process, such as the process in proposed § 150.3, would promote more consistent and efficient decision-making or whether an alternative to proposed § 150.9 would result in a superior costbenefit profile.1340 Last, the Commission requested comment on all aspects of the Commission’s discussion of the 15(a) factors for the 2020 NPRM.1341 The Commission identifies and discusses the costs and benefits of the Final Rule organized conceptually by topic, and certain topics may generally correspond with a specific regulatory section. The Commission’s discussion is organized as follows: (1) This introduction discussion section; (2) a discussion of the Commission’s necessity finding with respect to the 25 core referenced futures contracts that are subject to the Federal position limits framework; (3) the Federal position limit levels (final § 150.2), and the definitions of ‘‘referenced contract’’ and ‘‘economically equivalent swap’’; (4) the Commission’s exemptions from Federal position limits (final § 150.3), including the Federal bona fide hedging definition (final § 150.1); (5) the streamlined process for the Commission to recognize non-enumerated bona fide hedges (final § 150.9) and to grant other exemptions for purposes of Federal position limits (final § 150.3) and related reporting changes to part 19 of the Commission’s regulations; (6) the exchange-set position limits framework and exchange-granted exemptions thereto (final § 150.5); and (7) the section 15(a) factors. 2. Costs and Benefits of Commission’s Necessity Finding for the 25 Core Referenced Futures Contracts With Respect to Liquidity and Market Integrity and Resulting Impact on Market Participants and Exchanges Rather than discussing the general costs and benefits of the Federal position limits framework in this section, the Commission will instead address the potential costs and benefits resulting from the Commission’s 1339 85 FR 11671, 11698. FR 11693. 1341 85 FR 11700. 1340 85 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 necessity finding with respect to the 25 core referenced futures contracts.1342 The discussion in this section begins with an overview of the Commission’s Federal position limits framework in part one followed by an overview of the Commission’s interpretation of the criteria for finding position limits necessary within the meaning of CEA section 4a(a)(1) in part two. An overview of the Commission’s necessity finding for the 25 core referenced futures contracts, linked ‘‘referenced contracts,’’ and spot/non-spot month position limits is discussed in part three. Finally, part four includes a discussion of the potential costs and benefits of the Commission’s necessity finding for the 25 core referenced futures contracts with respect to (a) the liquidity and integrity of the futures and related options markets; and (b) market participants and exchanges. i. Federal Position Limits Framework The Commission currently enforces and sets Federal spot and non-spot month position limits only for futures and options on futures contracts on the nine legacy agricultural commodities.1343 The Final Rule expands the scope of commodity derivative contracts subject to the Commission’s existing Federal position limits framework 1344 to include (a) 1342 This Section does not address the cost-benefit implications for imposing position limits on futures contracts and options thereon that are directly or indirectly linked to a core referenced futures contract. That discussion is below in Section IV.A.4. Further, this Section does not address the cost-benefit implications for maintaining non-spot month position limits on the nine legacy agricultural contracts. The Commission is of the view that the Final Rule should not have any costbenefit consideration impacts due to the existence of Federal non-spot month position limits on the nine legacy agricultural commodities since the Commission is maintaining the status quo with respect to the existence of such limits for those contracts. As a result, the Commission does not expect there to be a change with respect to the costs and benefits of its approach by simply finding that Federal position limits continue to be necessary during the non-spot months for the nine legacy agricultural commodities. However, with the exception of CBOT Oats (O), CBOT KC HRS Wheat (KW), and MGEX HRS Wheat (MWE), the final rule will result in higher non-spot month position limit levels for the remaining legacy agricultural commodities. See infra Section IV.A.4. (addressing the costs and benefits of generally increased nonspot month position limit levels for the legacy agricultural contracts). 1343 The nine legacy agricultural contracts currently subject to Federal spot and non-spot month limits are: CBOT Corn (C), CBOT Oats (O), CBOT Soybeans (S), CBOT Wheat (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), ICE Cotton No. 2 (CT), and CBOT KC Hard Red Winter Wheat (KW). 1344 17 CFR 150.2. Because the Commission had not yet implemented the Dodd-Frank Act’s amendments to the CEA regarding position limits, PO 00000 Frm 00165 Fmt 4701 Sfmt 4700 3399 futures contracts and options on futures contracts on 16 additional contracts during the spot month only, for a total of 25 core referenced futures contracts,1345 (b) futures contracts and options on futures contracts directly or indirectly linked to one of the 25 core referenced futures contracts, and (c) swaps that are ‘‘economically equivalent’’ to certain referenced contracts.1346 Under this Final Rule, Federal non-spot month position limits will continue to apply only to futures and options on futures on the nine legacy agricultural commodities. As discussed above in Section III.B.2., while economically equivalent swaps are encompassed within the ‘‘referenced contract’’ definition, such swaps are subject to Federal position limits pursuant to CEA section 4a(a)(5) and therefore not subject to a necessity determination. The cost-benefit implications of the Commission’s ‘‘economically equivalent swap’’ definition are discussed further below. ii. The Commission’s Interpretation of Section 4a As previously discussed, the Commission interprets CEA section 4a to require that the Commission make an antecedent ‘‘necessity’’ finding that establishing Federal position limits is ‘‘necessary’’ to diminish, eliminate, or prevent certain burdens on interstate commerce with respect to the physical commodities in question.1347 As the statute does not define the term ‘‘necessary,’’ the Commission must apply its expertise in construing this term, and, as discussed further below, must do so consistent with the policy except with respect to aggregation (see generally Final Aggregation Rulemaking, 81 FR at 91454) and the vacated 2011 Position Limits Rulemaking’s amendments to 17 CFR 150.2 (see ISDA, 887 F. Supp. 2d 259 (2012)), the existing baseline or status quo consisted of the provisions of the CEA relating to position limits immediately prior to effectiveness of the Dodd-Frank Act amendments to the CEA and the relevant provisions of existing parts 1, 15, 17, 19, 37, 38, 140, and 150 of the Commission’s regulations, subject to the aforementioned exceptions. 1345 The 16 new products that are subject to Federal spot month position limits for the first time include seven agricultural (CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ–A (OJ), ICE Sugar No. 11 (SB), and ICE Sugar No. 16 (SF)), four energy (NYMEX Light Sweet Crude Oil (CL), NYMEX New York Harbor ULSD Heating Oil (HO), NYMEX New York Harbor RBOB Gasoline (RB), NYMEX Henry Hub Natural Gas (NG)), and five metals (COMEX Gold (GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL)) contracts. 1346 See supra Section II.A.4. (defining the term ‘‘economically equivalent swap’’ for purposes of the Federal position limits framework under the Final Rule). 1347 See supra Section III.B. (discussing legal standard for necessity finding). E:\FR\FM\14JAR2.SGM 14JAR2 3400 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations goals articulated by Congress, including in CEA sections 4a(a)(2)(C) and 4a(a)(3), as noted throughout this discussion of the Commission’s cost-benefit considerations.1348 Under this Final Rule, the Commission is establishing position limits on 25 core referenced futures contracts 1349 and any futures contracts or options on futures contracts directly or indirectly linked to the core referenced futures contracts,1350 on the basis that position limits on such contracts are ‘‘necessary’’ to achieve the purposes of the CEA. In reaching this conclusion, the Commission analyzed (1) the importance of these contracts to the operation of the underlying cash commodity market, including that they require physical delivery; and (2) the importance of the underlying commodity to the economy as a whole.1351 As discussed above, the Commission is of the view that evidence demonstrating one or both of these factors is sufficient to establish that position limits are necessary because each factor relates to the statutory objective identified in paragraph 4a(a)(1).1352 As a result, the Commission has concluded that it must exercise its judgment in light of facts and circumstances, including its experience and expertise, in determining whether Federal position limit levels are economically justified.1353 khammond on DSKJM1Z7X2PROD with RULES2 iii. The Commission’s Necessity Finding With respect to the first factor of the Commission’s necessity analysis, the Commission focused on physicallysettled futures contracts because they perform an important price discovery function for many cash-market participants and may be affected by corners and squeezes, which can occur near the expiration of these contracts, 1348 In promulgating the position limits framework, Congress instructed the Commission to consider several factors: First, CEA section 4a(a)(3) requires the Commission when establishing position limits, to the maximum extent practicable, in its discretion, to (i) diminish, eliminate, or prevent excessive speculation; (ii) deter and prevent market manipulation, squeezes, and corners; (iii) ensure sufficient market liquidity for bona fide hedgers; and (iv) ensure that the price discovery function of the underlying market is not disrupted. Second, CEA section 4a(a)(2)(C) requires the Commission to strive to ensure that any limits imposed by the Commission will not cause price discovery in a commodity subject to position limits to shift to trading on a foreign exchange. 1349 See supra Section III.C. (discussing necessity finding for the 25 core referenced futures contracts). 1350 See supra Section III.D. (discussing necessity finding for linked contracts). 1351 See supra Section III.B. (discussing and adopting legal standard for necessity finding in 2020 NPRM). 1352 Id. 1353 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 compared to cash-settled contracts.1354 Based on the above discussion, the Commission determined that the 25 core referenced futures contracts are important to their respective underlying cash markets because they (1) are the physically-settled contracts in physical commodities traded on U.S. exchanges that are the most used for hedging and price discovery by commercial participants, as measured by open interest, notional value, and trading volume; and (2) serve as key benchmarks for use in pricing cashmarket and other transactions.1355 Upon consideration of the second factor, as discussed in further detail above, the Commission has determined that the cash markets underlying the 25 core referenced futures contracts are all, to varying degrees, vitally important to the U.S. economy because many of the commodities underlying the 25 contracts are among the most important physical commodities, as measured by production and use, for commodities for which physically-settled futures contracts are traded on U.S. exchanges.1356 For these reasons, the Commission finds that position limits are necessary for the 25 core referenced futures contracts to achieve the purposes of the CEA.1357 As noted previously, the Commission has determined that position limits for futures and options on futures contracts that are linked to core referenced futures contracts are necessary within the meaning of paragraph 4a(a)(1) because such position limits are likely to make position limits for core referenced futures contracts more effective in preventing manipulation and other sources of sudden or unreasonable fluctuations or unwarranted changes in the price of the underlying commodity.1358 Further, the Commission has determined that position limits are necessary during all months for the nine legacy agricultural contracts, where non-spot month Federal position limits have been in place for decades, and only necessary during the spot month for the 16 additional core referenced futures 1354 See supra Section III.C.2.a. (discussing the link between the derivatives markets and underlying cash-markets). 1355 See supra Section III.C.2.b. (discussing the Commission’s determination that the 25 core referenced futures contracts are used extensively for hedging and price discovery, thus establishing a close link between both markets). 1356 See supra Section III.C.3. (discussing second factor of necessity analysis). 1357 See supra Section III.C. (discussing necessity finding for 25 core referenced futures contracts). 1358 See supra Section III.D. (discussing necessity finding for linked contracts). PO 00000 Frm 00166 Fmt 4701 Sfmt 4700 contracts.1359 Specifically, the Commission found that certain potential sources of sudden or unreasonable fluctuations or unwarranted changes in commodity prices caused by excessive speculation, particularly corners, squeezes, and certain convergence problems, are associated primarily with large positions held during spot months.1360 And, to the extent that these problems may arise in prior months, they are mitigated by exchange policies including exchange-set position limits and position accountability.1361 As a result, even if position limits may have benefits outside the spot month, restricting Federal position limits to spot months for most commodities is consistent with the Commission’s interpretation of the CEA section 4a(a)(1) necessity requirement as directing the Commission to impose position limits where they are economically justified as an efficient mechanism for achieving the statutory objectives. The Commission similarly found position limits in non-spot months to be necessary for the nine legacy agricultural contracts for the reasons previously stated above.1362 Briefly, these limits were put in place pursuant to past statutory necessity findings and have been in place for decades without the Commission observing problems or concerns by market participants that would give reasons to remove them.1363 For these reasons, the Commission has determined that it would be imprudent to eliminate them absent any specific reason in support thereof. iv. Potential Costs and Benefits of the Commission’s Necessity Finding for the 25 Core Referenced Futures Contracts In this section, the Commission will discuss potential costs and benefits resulting from the Commission’s necessity finding with respect to: (1) The liquidity and integrity of the futures and related options markets; and (2) market participants and exchanges. The Commission discusses each factor in turn below. a. Potential Impact of the Scope of the Commission’s Necessity Findings on Market Liquidity and Integrity The Commission has determined that the 25 core referenced futures contracts included in its necessity finding are 1359 See supra Section III.E. (discussing necessity finding for spot/non-spot month position limits). 1360 See supra Section III.C.2.a. (discussing link between derivatives market and cash markets). 1361 See supra Section III.E. (discussing necessity finding for spot/non-spot month position limits). 1362 Id. 1363 Id. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations among the most liquid physical commodity contracts, as measured by open interest and trading volume,1364 and, therefore, imposing positions limits on these contracts may impose costs on market participants by constraining liquidity because a trader may be prevented from trading due to a position limit reducing liquidity on the other side of the contract. However, to the extent that the nine legacy agricultural contracts already are subject to existing Federal position limits, the Final Rule does not represent a change to the status quo baseline (although, as noted below, the applicable Federal position limits will increase under the Final Rule for most of the nine legacy agricultural contracts and the associated costs and benefits are discussed thereunder). Nonetheless, the Commission believes that any potential harmful effect on liquidity will be muted, as a result of the generally high levels of open interest and trading volumes of the respective 25 core referenced futures contracts. This is so because, all other things being equal, large, liquid markets tend to have more participants and tend to be less concentrated. As a result, in such markets, if position limits on some occasion restrict trading by one or a small number of large traders, it is highly likely that other traders will be participating in the market in sufficient volume for the purpose of providing liquidity on reasonable terms. The Commission has determined that, as a general matter, focusing on the 25 core referenced futures contracts may benefit market integrity since these contracts generally are amongst the largest physically-settled contracts with respect to relative levels of open interest and trading volumes.1365 The Commission therefore believes that excessive speculation or potential market manipulation in such contracts is more likely to affect additional market participants and therefore potentially more likely to cause an undue and unnecessary burden (e.g., potential harm to market integrity or liquidity) on interstate commerce. Because each core referenced futures contract is physically-settled, as opposed to cashsettled, the Final Rule focuses on preventing corners and squeezes in those contracts where such market manipulation could cause significant harm in the price discovery process for 1364 See supra Section III.C.2.b. (discussing average open interest and average daily trading volume for the 25 core referenced futures contracts for the period January 1, 2019 through December 31, 2019). 1365 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 their respective underlying commodities.1366 While the Commission recognizes that market participants may engage in market manipulation through cashsettled futures contracts and options on futures contracts, the Commission has determined that focusing on the physically-settled core referenced futures contracts will benefit market integrity by reducing the risk of corners and squeezes in particular. In addition, not imposing position limits on additional commodities may foster nonexcessive speculation, leading to better prices and more efficient resource allocation in these commodities. This may ultimately benefit commercial end users and possibly be passed on to the general public in the form of better pricing. As noted above, the scope of the Commission’s necessity finding with respect to the 25 core referenced futures contracts allows the Commission to focus on those contracts that, in general, the Commission recognizes as having particular importance in the price discovery process for their respective underlying commodities as well as potentially acute economic burdens that would arise from excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the commodity prices underlying these contracts.1367 To the extent the Commission did not include additional commodities in its necessity finding, those markets will not receive the benefits intended from the Final Rule’s Federal position limits framework. It is conceivable that this could entice bad actors to turn to those markets for illegal schemes. On the other hand, markets outside the 25 core referenced futures contracts are not left totally exposed. Some of the potential harms to market integrity associated with not including additional commodities within the Federal position limits framework could be mitigated to an extent by exchanges, which can use tools other than position limits, such as margin requirements or position accountability at lower levels than the Federal position limits adopted in the Final Rule, to defend against certain market behavior. Further, burdens related to potential market manipulation for markets outside the 25 core referenced futures contracts may be mitigated through exchanges also establishing exchange1366 The Commission must also make this determination in light of its limited available resources and responsibility to allocate taxpayer resources in an efficient manner to meet the goals of CEA section 4a(a)(1), 7 U.S.C. 6a(a)(1), and the CEA generally. 1367 See supra Section III.C.2.b. PO 00000 Frm 00167 Fmt 4701 Sfmt 4700 3401 set position limits. Under final § 150.5(a) and (b), exchanges are required to adopt exchange-set position limits both (i) for contracts subject to Federal position limits and (ii) during the spot month for physical commodity contracts not subject to Federal position limits.1368 Final § 150.5(b) also requires exchanges to adopt position limits or position accountability outside the spot month for those physical commodity contracts not subject to Federal position limits outside of the spot month. Exchange-set position limits, including amendments to existing limits, are reviewed by Commission staff via submissions under part 40 of the Commission’s regulations, and must meet standards established by the Commission, including in §§ 150.1 and 150.5.1369 While the review of exchange-set limits is focused on the adequacy of the exchange-set position limit to minimize the potential for manipulation, it isn’t reviewed considering all of the CEA section 4a(a)(3)(B) factors as Federal position limits require. Thus, exchange-set limits may be set at a more restrictive level than a Federal speculative position limit might be set for the same contract if it were subject to Federal limits and therefore may have higher compliance and liquidity costs than Federal limits on the same contract for periods of time. Exchange limits may be updated much faster and more frequently than Federal limits can be updated.1370 Therefore, any added compliance and liquidity costs may only be realized in the shortterm relative to any compliance and liquidity costs from a Federal limit on the same contract. 1368 As discussed earlier in this release, final § 150.5(a) requires exchange-set limits for contracts subject to Federal limits to be no higher than the Federal limit. Final § 150.5(b)(1) requires exchanges to establish position limits for spot-month contracts in physical commodities that are not subject to Federal position limits at a level that is ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ See supra Section II.D. (discussing Final § 150.5). 1369 Further, as part of the submission process, exchanges are encouraged to determine exchangeset limits based on the guidance in Appendix C to part 38 (‘‘Demonstration of compliance that a contract is not readily susceptible to manipulation’’). See 17 CFR part 38, Appendix C. Appendix C provides guidance on calculating deliverable supply for physical commodity contracts based on the terms and conditions of the futures contract and also refers to part 150 for specific information regarding the establishment of speculative position limits including exchange-set speculative position limits. 1370 Exchanges can self-certify amendments to exchange-set limits under § 40.6. Federal position limits are updated only through the rulemaking process. E:\FR\FM\14JAR2.SGM 14JAR2 3402 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Although the Commission does not find that exchange-set limits render Federal position limits unnecessary for the 25 core referenced futures contracts and associated markets, due to their overall importance, these tools do diminish the potential costs of refraining from imposing Federal position limits outside of the 25 core referenced futures contracts. Bad actors may also be deterred by the Commission’s anti-manipulation authority and the Commission’s authority to purse violations of exchange-set limits.1371 khammond on DSKJM1Z7X2PROD with RULES2 b. Potential Impact of the Scope of the Commission’s Necessity Findings on Market Participants and Exchanges The Commission acknowledges that the Final Rule’s Federal position limits framework could impose certain administrative, logistical, technological, and financial burdens on exchanges and market participants, especially with respect to developing or expanding compliance systems and the adoption of monitoring policies.1372 The Commission, however, believes that these burdens will be mostly incremental as many of the fixed costs have already been incurred by exchanges and market participants. For example, exchanges are currently required to comply with comparable requirements such as calculating average daily trading volume. Further, market participants are required to comply with existing requirements such as existing Federal position limits and exchange-set limits and accountability levels.1373 The Commission further believes that these potential burdens are mitigated by 1371 See, e.g., In the Matter of Sukarne SA de CV, CFTC No. 20–60, 2020 WL 5701586 (Sept. 18, 2020) (imposing a $35,000 civil monetary penalty for a one-day violation of exchange-set position limits in CME live cattle futures). 1372 See, e.g., ISDA at 4 (‘‘new Federal position limits rulemaking will involve significant compliance costs and burdens . . . that the CFTC can mitigate . . . by starting with final rules only for physically-delivered spot month futures contracts in a first phase.’’). 1373 See NFPEA at 6 and 14 (explaining that the Federal position limits framework would ‘‘place unnecessary regulatory burdens and costs on the NFP Energy Entities, without providing the Commission with useful or usable information about speculators, speculative transactions or speculative positions’’ and asserting that ‘‘[t]here is no regulatory benefit in terms of reducing the burdens of excessive speculation on CFTCregulated markets to balance against the costs and burdens for NFP Energy Entities (on-speculators) to study, understand and apply the Commission’s Speculative Position Limits rules to their transactions and positions’’). See also supra Section II.C.14.i. (discussing NFPEA’s request for an exemption from the Federal position limits framework and how the Final Rule addresses many of the concerns raised by NFPEA). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (1) the compliance date of January 1, 2022 in connection with the Federal position limits for the 16 non-legacy core referenced futures contracts, and (2) the compliance date of January 1, 2023 for both (a) economically equivalent swaps that are subject to Federal position limits under the Final Rule and (b) the elimination of previously-granted risk management exemptions (i.e., market participants may continue to rely on their previously-granted risk management exemptions until January 1, 2023).1374 These delayed compliance deadlines should mitigate compliance costs by permitting the update and build out of technological and compliance systems more gradually. They may also reduce the burdens on market participants not previously subject to position limits, who will have a longer period of time to determine whether they may qualify for certain bona fide hedging recognitions or other exemptions, and to possibly alter their trading or hedging strategies.1375 Further, the delayed compliance dates will reduce the burdens on exchanges, market participants, and the Commission by providing each with more time to resolve technological and other challenges for compliance with the new regulations. In turn, the Commission anticipates that the extra time provided by the delayed compliance dates will result in more robust systems for market oversight, which should better facilitate the implementation of the Final Rule and avoid unnecessary market disruptions while exchanges and market participants prepare for its implementation. However, the delayed compliance deadlines will extend the time it will take to realize the benefits identified above. This January 1, 2022 compliance date also applies to exchange obligations under final § 150.5, and market participants’ related obligation to temporarily continue providing Forms 204/304 in connection with bona fide hedges. Furthermore, with respect to exchanges’ implementation of § 150.9, the Commission is clarifying that exchanges may choose to implement the streamlined process for non-enumerated bona fide hedge applications as soon as 1374 See supra Section I.D. (discussing effective date and compliance date of the Final Rule). 1375 Commenters on the Commission’s notice of a proposed rulemaking for a new position limits proposal issued on February 27, 2020 (‘‘2020 NPRM’’) and prior proposals have requested a sufficient phase-in period. See supra Section I.D.iv. (discussing comments regarding compliance period of Final Rule); see also 81 FR at 96815 (implementation timeline). PO 00000 Frm 00168 Fmt 4701 Sfmt 4700 the Final Rule’s effective date,1376 or anytime thereafter (or not at all). CME expressed concern that it may receive an influx of exemption applications at the end of the compliance period, and therefore suggested a rolling process where market participants are grandfathered into their current exemptions, permitting them to file for those exemptions on the same annual schedule.1377 ISDA urged the Commission to recognize the burdens associated with implementing a new set of rules, and adopt a phase-in to minimize market disruptions and increases in compliance costs.1378 As noted above, the Commission seeks to alleviate the compliance burdens on exchanges associated with the Final Rule by providing for a compliance date of January 1, 2022 for exchanges with respect to their obligations under § 150.5. The Commission believes CME’s concern is mitigated since exchanges, at their discretion, may implement final § 150.9 as soon as the Effective Date, which will allow exchanges to review non-enumerated bona fide hedges on a rolling basis between the Effective Date and the end of the compliance period rather than having to process a large number of applications at once. Furthermore, market participants with existing Commission-granted non-enumerated or anticipatory bona fide hedge recognitions are not required to reapply to the Commission for a new recognition under the Final Rule. The delayed compliance should better facilitate the implementation of the Final Rule by preventing unnecessary market disruptions and reducing the burdens on exchanges, market participants, and the Commission by providing each with more time to resolve technological and other challenges for compliance with the new regulations. The 2020 NPRM did not provide a specific date as the compliance date but rather stated ‘‘365 days after publication . . . in the Federal Register,’’ and did not provide a separate compliance date for economically equivalent swaps or related to previously-granted risk management exemptions. In response, several commenters requested the that Commission further extend the compliance date for swaps to provide market participants additional time to identify which swaps would be deemed economically equivalent to a referenced contract, refine their compliance 1376 The Final Rule’s effective date is March 15, 2021 (the ‘‘Effective Date’’). 1377 CME Group at 8. 1378 ISDA at 2. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations systems, and manage other operational and administrative challenges.1379 These commenters generally stressed that burdens related to economically equivalent swaps may be greater than related futures contracts and options thereon.1380 The Commission generally agrees with commenters that additional time would reduce burdens associated with establishing compliance and monitoring systems, and has therefore extended the compliance date for economically equivalent swaps until January 1, 2023. Because the Commission understands that risk management positions tend to also involve OTC swap positions, the Commission believes that having the same compliance date as economically equivalent swaps in connection with the elimination of the risk management exemption would similarly reduce burdens. 3. Federal Position Limit Levels (Final § 150.2) i. General Approach khammond on DSKJM1Z7X2PROD with RULES2 Existing § 150.2 establishes Federal position limit levels that apply net long or net short to futures and, on a futuresequivalent basis, to options on futures contracts on nine legacy physicallysettled agricultural contracts.1381 The Commission has previously set separate Federal position limits for: (i) The spot month, and (ii) a single month and allmonths-combined (i.e., ‘‘non-spot months’’).1382 For the existing spot month Federal position limit levels, the contract levels are based on, among other things, 25% or lower of the estimated deliverable supply (‘‘EDS’’).1383 For the existing non-spot month position limit levels, the levels are generally set at 10% of open interest for the first 25,000 contracts of open interest, with a marginal increase of 1379 MFA/AIMA at 8; NCFC at 6; NGSA at 15–16; SIFMA AMG at 9–10; and Citadel at 9. 1380 Id. 1381 The nine legacy agricultural contracts subject to existing Federal spot and non-spot month position limits were: CBOT Corn (C), CBOT Oats (O), CBOT Soybeans (S), CBOT Wheat (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), ICE Cotton No. 2 (CT), and CBOT KC Hard Red Winter Wheat (KW). 1382 For clarity, limits for single and all-monthscombined apply separately. However, the Commission previously has applied the same limit levels to the single month and all-monthscombined. Accordingly, the Commission will discuss the single and all-months limits, i.e., the non-spot month limits, together. 1383 See supra Section II.B.1—Existing § 150.2 (discussing that establishing spot month levels at 25% or less of EDS is consistent with past Commission practices). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 2.5% of open interest thereafter (the ‘‘10/2.5% formula’’). Final § 150.2 revises and expands the existing Federal position limits framework as follows. First, during the spot month, § 150.2: (i) Subjects 16 additional core referenced futures contracts and their associated referenced contracts to Federal spot month position limits, which are based on, among other things, the Commission’s existing approach of establishing limit levels at 25% or lower of EDS, for a total of 25 core referenced futures contracts (and their associated referenced contracts) subject to Federal spot month position limits (i.e., the nine legacy agricultural contracts plus the 16 additional contracts); 1384 and (ii) updates the existing spot month levels for the nine legacy agricultural contracts based on, among other things, revised EDS.1385 Second, for non-spot month position limit levels, final § 150.2 revises the 10/ 2.5% formula so that: (i) The incremental 2.5% increase takes effect after the first 50,000 contracts of open interest, rather than after the first 25,000 contracts under the existing rule (the ‘‘marginal threshold level’’); and (ii) the limit levels are calculated by applying the updated 10/2.5% formula to open interest data for the two 12-month periods from July 2017 to June 2018 and July 2018 to June 2019 of the applicable futures contracts and delta-adjusted options on futures contracts.1386 The 12month period yielding the higher limit 1384 The 16 new products that are subject to Federal spot month position limits for the first time include seven agricultural (CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ–A (OJ), ICE Sugar No. 11 (SB), and ICE Sugar No. 16 (SF)), four energy (NYMEX Light Sweet Crude Oil (CL), NYMEX NY Harbor ULSD Heating Oil (HO), NYMEX NY Harbor RBOB Gasoline (RB), and NYMEX Henry Hub Natural Gas (NG)), and five metals (COMEX Gold (GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL)) contracts. 1385 The Final Rule maintains the current spot month limits on CBOT Oats (O). 1386 As discussed below, for most of the legacy agricultural commodities, this results in a higher non-spot month limit. However, the Commission is not changing the non-spot month limits for either CBOT Oats (O) or MGEX Hard Red Spring Wheat (MWE) based on the revised open interest since this would result in a reduction of non-spot month limits from 2,000 to 700 contracts for CBOT Oats (O) and 12,000 to 5,700 contracts for MGEX HRS Wheat (MWE). Similarly, the Commission also is maintaining the current non-spot month limit for CBOT KC Hard Red Winter Wheat (KW). Furthermore, the Commission is adopting a separate single month position limit level of 5,950 contracts for ICE Cotton No. 2 (CT). The all-months-combined position limit level for ICE Cotton No. 2 (CT) is set at 11,900 contracts, based on the modified 10/2.5% formula and updated open interest figures. PO 00000 Frm 00169 Fmt 4701 Sfmt 4700 3403 is selected as the non-spot month limit for that legacy agricultural commodity. Third, the final Federal position limits framework expands to cover (i) any cash-settled futures and related options on futures contracts directly or indirectly linked to any of the 25 proposed physically-settled core referenced futures contracts as well as (ii) any economically equivalent swaps. For spot month positions, the Federal position limits in final § 150.2 apply separately, net long or short, to cashsettled referenced contracts and to physically-settled referenced contracts in the same commodity. This results in a separate net long/short position for each category so that cash-settled contracts in a particular commodity are netted with other cash-settled contracts in that commodity, and physicallysettled contracts in a given commodity are netted with other physically-settled contracts in that commodity; a cashsettled contract and a physically-settled contract may not be netted with one another during the spot month. Outside the spot month, cash and physicallysettled contracts in the same commodity are netted together to determine a single net long/short position. Fourth, final § 150.2 subjects preexisting positions, other than preenactment swaps and transition period swaps, to Federal position limits during the spot month and non-spot months. In setting the Federal position limit levels, the Commission seeks to advance the enumerated statutory objectives with respect to position limits in CEA section 4a(a)(3)(B).1387 The Commission recognizes that relatively high Federal position limit levels may be more likely to support some of the statutory goals and less likely to advance others. For instance, a relatively higher Federal position limit level may be more likely to benefit market liquidity for hedgers or ensure that the price discovery of the underlying market is not disrupted, but may be less likely to benefit market integrity by being less effective at diminishing, eliminating, or preventing excessive speculation or at deterring and preventing market manipulation, corners, and squeezes. In particular, setting relatively high Federal position limit levels may result in excessively large speculative positions and/or increased volatility, especially during speculative showdowns (when two market participants disagree about the proper market price and trade aggressively in large quantities 1387 See supra Sections II.B.3.ii.a(1) and II.B.4.iii.a(4) (further discussing the CEA’s statutory objectives for the Federal position limits framework). E:\FR\FM\14JAR2.SGM 14JAR2 3404 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 expressing their view causing the market price to be volatile), which may cause some market participants to retreat from the commodities markets due to perceived decreases in market integrity. In turn, fewer market participants may result in lower liquidity levels for hedgers and harm to the price discovery function in the underlying markets. Conversely, setting a relatively lower Federal position limit level may be more likely to diminish, eliminate, or prevent excessive speculation, but may also limit the availability of certain hedging strategies, adversely affect levels of liquidity, and increase transaction costs.1388 Additionally, setting Federal position limits too low may cause nonexcessive speculation to exit a market, which could reduce liquidity, cause ‘‘choppy’’ 1389 prices and reduced market efficiency, and increase option premia to compensate for the more volatile prices. The Commission in its discretion has nevertheless endeavored to set Federal position limit levels, to the maximum extent practicable, to benefit the statutory goals identified by Congress. As discussed above, the contracts that are subject to the Federal position limits adopted in the Final Rule are currently subject to either Federal or exchange-set position limits (or both). To the extent that the Federal position limit levels in final § 150.2 are higher than the existing Federal position limit levels for either the spot or non-spot month, market participants currently trading these contracts could engage in additional trading under the Federal position limit levels in final § 150.2 that otherwise would be prohibited under existing § 150.2.1390 On the other hand, to the extent an exchange—set position limit level is lower than its corresponding Federal position limit level in final 1388 For example, relatively lower Federal position limits may adversely affect potential hedgers by reducing liquidity. In the case of reduced liquidity, a potential hedger may face unfavorable spreads and prices, in which case the hedger must choose either to delay implementing its hedging strategy and hope for more favorable spreads in the near future or to choose immediate execution (to the extent possible) at a less favorable price. 1389 ‘‘Choppy’’ prices often refer to illiquidity in a market where transacted prices bounce between the bid and the ask prices. Market efficiency may be harmed in the sense that transacted prices might need to be adjusted for the bid-ask bounce to determine the fundamental value of the underlying contract. 1390 For the spot month, all the legacy agricultural contracts other than CBOT Oats (O) have higher Federal position limit levels. For the non-spot months, all the legacy agricultural contracts other than CBOT Oats (O), MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat (KW), have higher Federal position limit levels. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 § 150.2, the Federal position limit does not affect market participants since market participants are required to comply with the lower exchange—set position limit level (to the extent that the exchanges maintain their current levels).1391 ii. Spot Month Levels The Commission is maintaining 25% of EDS as a ceiling for Federal spot month position limits, except for cashsettled NYMEX Henry Hub Natural Gas (‘‘NYMEX NG’’) referenced contracts, which is discussed below. Based on the Commission’s experience overseeing Federal position limits for decades, and overseeing exchange-set position limits submitted to the Commission pursuant to part 40 of the Commission’s regulations, none of the Federal spot month position limit levels listed in final Appendix E of part 150 of the Commission’s regulations: (i) Are so low as to reduce liquidity for bona fide hedgers or disrupt the price discovery function of the underlying market; 1392 or (ii) so high as to invite excessive speculation, manipulation, corners, or squeezes because, among other things, any potential economic gains resulting from the manipulation may be insufficient to justify the potential costs, including the costs of acquiring, and ultimately offloading, the positions used to effect the manipulation.1393 The Commission considered alternative Federal spot month position limit levels provided by Better Markets, which requested a standard Federal spot month position limit level of 10% of EDS, which could be adjusted as 1391 While the Final Rule generally either increases or maintains the Federal position limits for both the spot months and non-spot months compared to existing Federal position limits, where applicable, and exchange limits, the Federal spot month position limit level for COMEX Copper (HG) is below the existing exchange-set level. Accordingly, market participants may have to change their trading behavior with respect to COMEX Copper (HG), which could impose compliance and transaction costs on these traders, to the extent their existing trading exceeds the lower Federal spot month position limit levels. 1392 The Federal spot month position limit levels adopted in the Final Rule are set at, or higher than, existing Federal spot month position limit levels (for the nine legacy agricultural contracts) or at, or higher than, existing exchange-set spot month position limit levels (for the 16 non-legacy core referenced futures contracts). As a result, the Commission does not believe that liquidity will be reduced with respect to the core referenced futures contracts and their associated referenced contracts. Consequently, the Commission also believes that the Federal spot month position limit levels will be less burdensome on market participants. See AFIA at 1. 1393 This is driven primarily by the Federal spot month position limit levels being set at or below 25% of EDS. PO 00000 Frm 00170 Fmt 4701 Sfmt 4700 needed.1394 The Commission believes that this across-the-board approach fails to take into account the differences between the core referenced futures contracts and could result in material costs to certain types of referenced contracts without concomitant benefits. For example, the Commission has determined to set the Federal spot month position limit levels for eight core referenced futures contracts below 10% of EDS. Raising the levels to 10% of EDS for some of these contracts could increase the risk of market manipulation. As an example, raising the Federal position limit level to 10% of EDS would result in an increase of approximately 46% over the proposed and final Federal spot month position limit level for CBOT KC HRS Wheat (KW). The Commission believes that, despite the increased potential for market manipulation, this would result in a negligible improvement in liquidity, because the level for CBOT KC HRS Wheat (KW) is being set as a ceiling within the Federal position limits framework. On the other end of the spectrum, for some core referenced futures contracts with proposed and final Federal position limit levels higher than 10% of EDS, decreasing the levels to 10% of EDS could have a material negative impact on liquidity. For example, this would result in a reduction in the Federal spot month position limit levels by approximately 60% for the seven core referenced futures contracts for which the Commission is adopting a Federal spot month position limit level of 25% of EDS.1395 This could cause a significant decrease in liquidity in those markets, as speculative traders may not be of sufficient size and quantity to take the other side of bona fide hedgers’ positions. This may impact the price discovery function and hedging utility of those contracts because hedgers could not transact at better prices provided by the presence of the speculative traders. Furthermore, it could severely restrict the breadth of exchange-set spot month position limit levels that an exchange may set, which would provide less 1394 Better Markets at 41. Other commenters, such as PMAA and AFR, generally suggested lowering Federal spot month position limit levels. However, neither provided specific levels or a formula for determining alternative levels. As a result, the Commission is unable to engage in a cost-benefit analysis with respect to their suggestions. 1395 The seven such core referenced futures contracts are: (1) MGEX HRS Wheat (MWE); (2) ICE Cocoa (CC); (3) ICE Coffee C (KC); (4) ICE FCOJ–A (OJ); (5) ICE Sugar No. 11 (SB); (6) ICE Sugar No. 16 (SF); and (7) NYMEX Henry Hub Natural Gas (NYMEX NG). E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations flexibility to the exchanges to respond to rapidly changing market conditions. The Commission also considered PMAA’s statement that ‘‘the spot-month limit of 25 percent of deliverable supply is not sufficiently aggressive to deter excessive speculation.’’ 1396 However, PMAA provides no defined alternative for the Commission to consider, which makes it difficult to compare the costs and benefits of PMAA’s suggested approach. Nonetheless, the Commission acknowledges that, as a general principle, lowering position limit levels may decrease the likelihood of excessive speculation.1397 However, that may come at the cost of liquidity for bona fide hedgers. The Commission notes that PMAA’s suggestion would apply to only seven of the 25 core referenced futures contracts that have Federal spot month position limit levels set at 25% of EDS in the Final Rule.1398 The others are all set well below 25% of EDS, with the highest being 19.29% of EDS for CBOT Oats (O). For all core referenced futures contracts, including ones that have Federal spot month position limit levels set at 25% of EDS, the Commission reviewed the methodology underlying the EDS figures and the Federal spot month position limit levels, and determined that they advance the objectives of CEA section 4a(a)(3), including preventing excessive speculation and manipulation, while also ensuring sufficient market liquidity for bona fide hedgers. Finally, the Final Rule’s position limits framework also leverages the exchanges’ expertise and ability to quickly set and adjust their exchange-set spot month position limits at any level lower than the Federal spot month position limit levels in response to market conditions, which relieves some of the potential costs of setting the Federal spot month position limit levels at 25% of EDS (i.e., a higher likelihood of excessive speculation compared to lower levels) for the seven core referenced futures contracts discussed above. The Commission also considered CME Group’s recommendation with respect to the non-CME Group-listed core referenced futures contracts ‘‘that the Commission not adopt final spot 1396 PMAA at 2. based on the Commission’s past experience in setting Federal speculative position limits, the Commission notes that it is very unlikely that there will be excessive speculation if the Federal spot month position limit level is set at 25% or less of EDS. 1398 The seven such core referenced futures contracts are: (1) MGEX HRS Wheat (MWE); (2) ICE Cocoa (CC); (3) ICE Coffee C (KC); (4) ICE FCOJ–A (OJ); (5) ICE Sugar No. 11 (SB); (6) ICE Sugar No. 16 (SF); and (7) NYMEX Henry Hub Natural Gas (NYMEX NG). khammond on DSKJM1Z7X2PROD with RULES2 1397 However, VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 month position limit levels at 25% of deliverable supply as a rigid formula and, based on the factors previously described above, work with the exchange to determine an appropriate limit based on the market dynamics previously described.’’ 1399 CME Group commented that, ‘‘[t]aking an across-theboard approach by setting a Federal limit at the full 25 percent of deliverable supply could have a significant negative impact on many markets across all asset classes. . . . For example, setting a uniform and high Federal limit without regard to the unique characteristics of a particular contract market can encourage exchanges to set limits for competitive reasons rather than for regulatory purposes . . . [and] that perverse incentive structure could lead to a race to the bottom and undermine the statutory goals of deterring manipulation and excessive speculation through position limits.’’ 1400 The Commission agrees that mechanically applying a Federal spot month position limit level of 25% of EDS can undermine the statutory goals of CEA section 4a(a)(3). However, in proposing the Federal spot month position limit levels, the Commission did not mechanically apply 25% of EDS as a rigid formula for the non-CME Grouplisted core referenced futures contracts. Instead, as it did for the CME Grouplisted core referenced futures contracts, the Commission reviewed the methodology underlying the EDS figures and the Federal spot month position limit levels, and determined that they advance the objectives of CEA section 4a(a)(3), including preventing excessive speculation and manipulation, while also ensuring sufficient market liquidity for bona fide hedgers. The Commission also considered the Federal spot month position limit levels in the context of the Final Rule’s position limits framework, which leverages the exchanges’ expertise and ability to quickly set and adjust their exchange-set spot month position limits at any level lower than the Federal spot month position limit levels in response to market conditions, which relieves some of the potential costs of setting the Federal spot month position limit levels at 25% of EDS. Furthermore, the Commission considered comments received in response to the 2020 NPRM before finalizing the Federal spot month position limit levels. This is evidenced 1399 CME Group at 5. CME considered the following factors: contract specifications, market participation, physical market fundamentals, delivery process, convergence, market liquidity, volatility, market participant concentration, and market participant feedback. 1400 CME Group at 5. PO 00000 Frm 00171 Fmt 4701 Sfmt 4700 3405 in the changes to the Federal spot month position limit levels with respect to NYMEX Henry Hub Natural Gas (NG) and ICE Cotton No. 2 (CT), the latter of which is set at 12.95% of EDS in the Final Rule. The Commission also recognizes comments from Better Markets and NEFI, which state that exchanges have incentives to maximize shareholder profits, which could be accomplished by, among other things, maximizing trading.1401 One way exchanges could spur trading in the context of setting Federal spot month position limit levels in this rulemaking is by taking steps to ensure that the Federal spot month position limit levels are set as high as possible by providing higher EDS figures and recommending higher Federal spot month position limit levels. A potential cost of extremely high Federal spot month position limit levels is harm to market integrity through excessive speculation and manipulation. However, the Commission believes that these costs are mitigated through a number of mechanisms. First, the Commission independently assessed and verified the exchanges’ EDS estimates, which included: (1) Working closely with the exchanges to independently verify that all EDS methodologies and figures are reasonable; 1402 and (2) reviewing each exchange-recommended level for compliance with the requirements established by the Commission and/or by Congress, including those in CEA section 4a(a)(3)(B).1403 Second, the Commission conducted its own analysis of the exchange-recommended Federal spot month position limit levels and determined that the levels adopted herein are: (1) Low enough to diminish, eliminate, or prevent excessive speculation and also protect price discovery; (2) high enough to ensure that there is sufficient market liquidity for bona fide hedgers; (3) fall within a range of acceptable limit levels; and (4) are properly calibrated to account for differences between markets. Third, the Commission notes that exchanges have significant incentives and obligations to maintain well-functioning markets as self-regulatory organizations that are themselves subject to regulatory requirements. Specifically, the DCM and 1401 Better Markets at 22–23; NEFI at 3. discussed in detail in Section II.B.3.iii.b., the verification involved: confirming that the methodology and data for the underlying commodity reflected the commodity characteristics described in the core referenced futures contract’s terms and conditions; replicating exchange EDS figures using the methodology provided by the exchange; and working with the exchanges to revise the methodologies as needed. 1403 See supra Section II.B.3.ii.a(1). 1402 As E:\FR\FM\14JAR2.SGM 14JAR2 3406 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations SEF Core Principles require exchanges to, among other things, list contracts that are not readily susceptible to manipulation, and surveil trading on their markets to prevent market manipulation, price distortion, and disruptions of the delivery or cashsettlement process.1404 Fourth, exchanges also have significant incentives to maintain well-functioning markets to remain competitive with other exchanges. Market participants may choose exchanges that are less susceptible to sudden or unreasonable fluctuations or unwarranted changes caused by corners, squeezes, and manipulation, which could, among other things, harm the price discovery function of the commodity derivative contracts and negatively impact the delivery of the underlying commodity, bona fide hedging strategies, and market participants’ general risk management.1405 In addition, several academic studies, including one concerning futures exchanges and another concerning demutualized stock exchanges, support the conclusion that exchanges are able to both satisfy shareholder interests and meet their self-regulatory organization responsibilities.1406 Finally, the Commission itself conducts general market oversight through, among other things, its own surveillance program to ensure well-functioning markets. khammond on DSKJM1Z7X2PROD with RULES2 a. NYMEX Henry Hub Natural Gas (NYMEX NG) Cash-Settled Referenced Contracts Based on comments received 1407 and based on the existing exchange-set practices with respect to the NYMEX NG core referenced futures contract and its associated cash-settled referenced contracts, the Commission is permitting 1404 17 CFR 38.200; 17 CFR 38.250; 17 CFR 37.300; and 17 CFR 37.400. 1405 Kane, Stephen, Exploring price impact liquidity for December 2016 NYMEX energy contracts, n.33, U.S. Commodity Futures Trading Commission website, available at https:// www.cftc.gov/sites/default/files/idc/groups/public/ @economicanalysis/documents/file/oce_ priceimpact.pdf. 1406 See David Reiffen and Michel A. Robe, Demutualization and Customer Protection at SelfRegulatory Financial Exchanges, Journal of Futures Markets, Vol. 31, 126–164 (in many circumstances, an exchange that maximizes shareholder (rather than member) income has a greater incentive to aggressively enforce regulations that protect participants from dishonest agents); and Kobana Abukari and Isaac Otchere, Has Stock Exchange Demutualization Improved Market Quality? International Evidence, Review of Quantitative Finance and Accounting, Dec 09, 2019, https:// doi.org/10.1007/s11156-019-00863-y (demutualized exchanges have realized significant reductions in transaction costs in the post-demutualization period). 1407 See MFA/AIMA at 11–12; Citadel at 7–8; and SIFMA AMG at 10–11. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 market participants to hold a position in cash-settled NYMEX NG referenced contracts up to the Federal spot month position limit level of 2,000 referenced contracts per exchange and another position in cash-settled economically equivalent NYMEX NG OTC swaps that has a notional amount of up to 2,000 equivalent-sized contracts. This is: (i) A modification from the proposed Federal spot month position limit level for NYMEX NG referenced contracts, in which market participants would be able to hold only 2,000 cash-settled NYMEX NG referenced contracts aggregated between all exchanges and the OTC swaps market; but (ii) a continuation of the existing exchangeset spot month position limit framework that has been in place for over a decade. The Commission believes that this modification from the 2020 NPRM will, relative to the proposed approach, help minimize liquidity costs for market participants trading in both cash and physically-settled natural gas derivatives markets, in which the markets for cash-settled NYMEX NG referenced contracts is significantly more liquid than the market for the physically-settled NYMEX NG core referenced futures contract during the spot month. This is, in part, because this modification will continue to allow existing market participants ‘‘to optimize the proportion of physicallysettled and cash-settled natural gas contracts that they wish to hold.’’ 1408 Finally, although the Commission acknowledges that market participants may hold an aggregate position in the cash-settled NYMEX NG referenced contracts that is in excess of 25% of EDS, the Commission does not believe that this will lead to excessive speculation and volatility in the natural gas markets, because of the highly liquid nature of the cash-settled natural gas markets and the Commission’s experience in overseeing the exchangeset framework with respect to cashsettled natural gas contracts. b. ICE Cotton No. 2 (CT) The Commission also modified the Federal spot month position limit level for ICE Cotton No. 2 (CT) by adopting a level of 900 contracts, instead of 1,800 contracts as proposed. The Commission is adopting the level of 900 contracts based on its analysis of the alternatives suggested by bona fide hedgers using the ICE Cotton No. 2 (CT) core referenced futures contract.1409 The 1408 MFA/AIMA at 11–12. at 1–2; ACSA at 8; Ecom at 1; Southern Cotton at 2; NCC at 1; Mallory Alexander at 2; Canale Cotton at 2; IMC at 2; Olam at 3; DECA 1409 AMCOT PO 00000 Frm 00172 Fmt 4701 Sfmt 4700 Commission received two defined alternatives to the proposed level of 1,800 contracts—300 contracts and 900 contracts. Specifically, based on those comments, the Commission believes that it could further improve protections against corners and squeezes without materially sacrificing liquidity for bona fide hedgers by reducing the Federal spot month position limit level from the proposed 1,800 contracts to 900 contracts. However, the Commission believes that retaining the existing Federal spot month limit level of 300 contracts may cause concerns about adequate liquidity, especially because it would be the lowest Federal spot month position limit level, by far, in terms of percent of EDS, among all core referenced futures contracts, and the Commission has observed illiquidity during the early part of the spot month.1410 iii. Levels Outside of the Spot Month a. The 10/2.5% Formula The Commission has determined that the existing 10/2.5% formula generally has functioned well for the existing nine legacy agricultural contracts, and has successfully benefited the markets by taking into account the competing goals of facilitating both liquidity formation and price discovery, while also protecting the markets from harmful market manipulation and excessive speculation. However, since the existing Federal non-spot month position limit levels are based on open interest levels from 2009 (except for CBOT Oats (O), CBOT Soybeans (S), and ICE Cotton No. 2 (CT), for which existing levels are based on the respective open interest from 1999), the Commission is revising the levels based on the periods from July 2017 to June 2018 and July 2018 to June 2019 to reflect the general increases in open interest 1411 that have at 2; Moody Compress at 1; ACA at 2; Choice at 1; East Cotton at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; NCC at 2; Omnicotton at 2; Toyo at 2; Texas Cotton at 2; Walcot at 2; White Gold at 1; LDC at 1; SW Ag at 2; NCTO at 2; Parkdale at 2; and IFUS—Estimated Deliverable Supply—Cotton Methodology, August 2020, IFUS Comment Letter (Aug. 14, 2020). 1410 At 300 contracts, the Federal spot month position limit level for ICE Cotton No. 2 (CT) would be set at 4.32% of EDS. CBOT KC HRS Wheat (KW) generally has the lowest Federal spot month position limit level in terms of percentage of EDS at 6.82%, which is 58% higher than 4.32%. However, following the close of trading on the business day prior to the last two trading days of the contract month, CME Live Cattle (LC) has the lowest Federal spot month position limit level in terms of percentage of EDS at 5.29%, which is 22% higher than 4.32%. 1411 The Commission notes that NGFA commented ‘‘NGFA still is not completely convinced that open interest is the best yardstick for this exercise,’’ because ‘‘[a]s volume and open E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 occurred over time in the nine legacy agricultural contracts (other than CBOT Oats (O), MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat (KW)).1412 Since the increase for most of the Federal non-spot position limits is predicated on the increase in open interest, as reflected in the revised data reviewed by the Commission, the Commission believes that the increases may enhance, or at least should maintain, general liquidity, which the Commission believes may benefit those with bona fide hedging positions, and commercial end users in general. On the other hand, the Commission believes that many market participants, especially commercial end users, generally accept that the existing Federal non-spot month position limit levels for the nine legacy agricultural commodities function well, including promoting liquidity and facilitating bona fide hedging in the respective markets. As a result, the Final Rule may in some cases result in higher Federal non-spot month position limits, which could increase speculation without achieving any concomitant benefits of increased liquidity for bona fide hedgers compared to the status quo. The Commission also recognizes that there could be potential costs to keeping the existing 10/2.5% formula (even if revised to reflect current open interest levels) compared to alternative formulae interest grow, Federal non-spot limits expand correspondingly . . . which leads to yet higher volume and open interest . . . which again prompts expanded Federal non-spot limits . . . and so on.’’ However, NGFA did not provide any alternatives to utilizing open interest for determining Federal nonspot month position limit levels. As discussed previously in the Final Rule, the Commission believes that open interest is an appropriate way of measuring market activity for a particular contract and that a formula based on open interest, such as the 10/2.5% formula: (1) Helps ensure that positions are not so large relative to observed market activity that they risk disrupting the market; (2) allows speculators to hold sufficient contracts to provide a healthy level of liquidity for hedgers; and (3) allows for increases in position limits and position sizes as markets expand and become more active. Furthermore, the Commission notes that under the Final Rule, Federal non-spot month position limit levels do not automatically increase with higher open interest levels. In order to make any amendments to the Federal position limit levels, the Commission is required to engage in notice-and-comment rulemaking. 1412 For most of the legacy agricultural commodities, this results in a higher non-spot month limit. However, the Commission is not changing the non-spot month limits for either CBOT Oats (O) or MGEX HRS Wheat (MWE) based on the revised open interest since this would result in a reduction of non-spot month limits from 2,000 to 700 contracts for CBOT Oats (O) and 12,000 to 5,700 contracts for MGEX HRS Wheat (MWE). Similarly, the Commission also is maintaining the current non-spot month limit for CBOT KC HRW Wheat (KW). See supra Section II.B.4.—Federal Non-Spot Month Position Limit Levels for further discussion. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 that would result in even higher Federal position limit levels. First, while the 10/ 2.5% formula may have reflected ‘‘normal’’ observed market activity through 1999 when the Commission adopted it, there have been changes in the markets themselves and the entities that participate in those markets. When adopting the 10/2.5% formula in 1999, the Commission’s experience in these markets reflected aggregate futures and options open interest well below 500,000 contracts, which no longer reflects market reality.1413 As the nine legacy agricultural contracts (with the exception of CBOT Oats (O)) all have open interest well above 25,000 contracts, and in some cases above 500,000 contracts, the existing formula may act as a negative constraint on liquidity formation relative to the higher revised formula. Further, if open interest continues to increase over time, the Commission anticipates that the existing 10/2.5% formula could impose even greater marginal costs on bona fide hedgers by potentially constraining liquidity formation (i.e., as the open interest of a commodity contract increases, a greater relative proportion of the commodity’s open interest is subject to the 2.5% limit level rather than the initial 10% limit). In turn, this may increase costs to commercial firms, which may be passed to the public in the form of higher prices. Further, to the extent there may be certain liquidity constraints, the Commission has determined that this potential concern could be mitigated, at least in part, by the Final Rule’s change to increase the marginal threshold level from 25,000 contracts to 50,000 contracts, which the Commission believes should provide an appropriate increase in the Federal non-spot month position limit levels for most contracts to better reflect the general increase observed in open interest across futures markets. The Commission acknowledges that, as an alternative, the Commission could have adopted a marginal threshold level above 50,000 contracts, but notes that each increase of 25,000 1413 See 64 FR at 24038, 24039 (May 5, 1999). As discussed in the preamble, the data show that by the 2015–2018 period, five of the nine legacy agricultural contracts had maximum open interest greater than 500,000 contracts. The contracts for CBOT Corn (C), CBOT Soybeans (S), and CBOT KC HRW Wheat (KW) saw increased maximum open interest by a factor of four to five times the maximum open interest during the years leading up to the Commission’s adoption of the 10/2.5% formula in 1999. Similarly, the contracts for CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), CBOT Wheat (W), and MGEX HRS Wheat (MWE) saw increased maximum open interest by a factor of three to four times. See supra Section II.B.4., Federal Non-Spot Month Position Limit Levels, for further discussion. PO 00000 Frm 00173 Fmt 4701 Sfmt 4700 3407 contracts in the marginal threshold level would only increase the permitted nonspot month level by 1,875 contracts (i.e., (10% of 25,000 contracts)¥(2.5% of 25,000 contracts) = 1,875 contracts). The Commission has observed based on current data that changing the marginal threshold to 50,000 contracts could benefit several market participants per legacy agricultural commodity who otherwise would bump up against the non-spot month position limit levels based on the status quo threshold of 25,000 contracts. As a result, the Commission has determined that changing the marginal threshold level could result in marginal benefits and costs for many of the legacy agricultural commodities, but the Commission acknowledges the change is relatively minor compared to revising the existing 10/2.5% formula based on updated open interest data. Second, the Commission recognizes that an alternative formula that allows for higher Federal non-spot month position limit levels, compared to the existing 10/2.5% formula, could benefit liquidity and market efficiency by creating a framework that is more conducive to the larger liquidity providers that have entered the market over time.1414 Compared to when the Commission first adopted the 10/2.5% formula, today there are relatively more large non-commercial traders, such as banks, managed money traders, and swap dealers, which generally hold long positions and act as aggregators or market makers that provide liquidity to short positions (e.g., commercial hedgers).1415 These dealers also function in the swaps market and use the futures market to hedge their exposures. Accordingly, to the extent that larger non-commercial market makers and liquidity providers have entered the market—particularly to the extent they are able to take offsetting positions to commercial short interests—a hypothetical alternative formula that would permit higher Federal non-spot month position limit levels might provide greater market liquidity, and possibly increased market efficiency, by allowing for greater market-making activities.1416 1414 See supra Section II.B.4., Federal Non-Spot Month Position Limit Levels, for further discussion. 1415 Id. 1416 For example, the Commission is aware of several market makers that either have left particular commodity markets, or reduced their market making activities. See, e.g., McFarlane, Sarah, Major Oil Traders Don’t See Banks Returning to the Commodity Markets They Left, The Wall Street Journal (Mar. 28, 2017), available at https:// www.wsj.com/articles/major-oil-traders-dont-seebanks-returning-to-the-commodity-markets-they- E:\FR\FM\14JAR2.SGM Continued 14JAR2 3408 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 However, the Commission believes that any purported benefits related to a hypothetical alternative formula, or a suggested alternative such as the one provided by ISDA,1417 that would allow for higher Federal non-spot month position limits would be minimal at best. Liquidity providers are still able to maintain, and possibly increase, market making activities under the Final Rule since the Federal non-spot month position limits are generally still increasing under the existing 10/2.5% formula to reflect the increase in open interest. Further, to the extent that the Final Rule’s elimination of the risk management exemption could theoretically force liquidity providers to reduce their trading activities, the Commission believes that certain liquidity-providing activity of the existing risk management exemption holders may still be permitted under the Final Rule, either as a result of the passthrough swap provision or because of the general increase in limits based on the revised open interest levels.1418 Furthermore, bona fide hedgers and end-users generally have not requested a revised formula to allow for significantly higher Federal non-spot month position limits. The Commission also recognizes an additional benefit to market integrity of the Final Rule compared to a hypothetical alternative formula: While the Commission believes that the pass-through swap provision is narrowly-tailored to enable liquidity providers to continue providing liquidity to bona fide hedgers, in contrast, an alternative formula that would allow higher limit levels for all market participants would potentially permit increased excessive speculation and increase the probability of market manipulation or harm the underlying price discovery function.1419 left-1490715761?mg=prod/com-wsj (describing how ‘‘Morgan Stanley sold its oil trading and storage business . . . and J.P. Morgan unloaded its physical commodities business . . . .’’); Decambre, Mark, Goldman Said to Plan Cuts to Commodity Trading Desk: WSJ (Feb. 5, 2019), available at https:// www.marketwatch.com/story/goldman-said-toplan-cuts-to-commodity-trading-desk-wsj-2019-0205 (describing how Goldman Sachs ‘‘plans on making cuts within its commodity trading platform . . . .’’). 1417 ISDA at 7. 1418 See supra Sections II.A.1.x. (discussing passthrough swap provision), II.B.4.iii.a(1)(i) (discussing increases in open interest); see also NCFC at 7 (stating that NCFC is ‘‘confident that the substantial increase in the overall speculative position limits and allowances for pass-through swaps will limit any potential loss of liquidity’’ that might be associated with the elimination of the risk management exemption). 1419 See Section II.B.4.iv.a(2)(iii). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Additionally, some 1420 have voiced general concern that permitting increased Federal non-spot month limits in the nine legacy agricultural contracts (at any level), especially in connection with commodity indices, could disrupt price discovery and result in a lack of convergence between futures and cash prices, resulting in increased costs to end users, which ultimately could be borne by the public. The Commission has not seen data demonstrating this causal connection, but acknowledges arguments to that effect.1421 Third, if the Final Rule’s Federal nonspot position limits are too high for a commodity, the Final Rule might be less effective in deterring excessive speculation and market manipulation for that commodity’s market. Conversely, if the Commission’s Federal position limit levels are too low for a commodity, the Final Rule could unduly constrain liquidity for bona fide hedgers or result in a diminished price discovery function for that commodity’s underlying market. In either case, the Commission would view these as costs imposed on market participants. However, to the extent the Commission’s Federal non-spot month position limit levels could be too high, 1420 AMCOT at 1–2; Moody Compress at 1; ACA at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; Mallory Alexander at 2; Walcot at 2; White Gold at 2; LDC at 2; Southern Cotton at 2–3; and Better Markets at 44–48. 1421 IECA expressed similar concerns with respect to commodity index funds. IECA at 4 (stating that a June 2009 bipartisan report of the Senate Permanent Subcommittee for Investigation concluded that the ‘‘activities of commodity index traders, in the aggregate, constituted ‘excessive speculation,’ ’’ and that index funds have caused an ‘‘unwarranted burden on commerce.’’). The Commission notes that one of the concerns that prompted the 2008 moratorium on granting risk management exemptions was a lack of convergence between futures and cash prices in wheat. Some at the time hypothesized that perhaps commodity index trading was a contributing factor to the lack of convergence, and, some have argued that this could harm price discovery since traders holding these positions may not react to market fundamentals, thereby exacerbating any problems with convergence. However, the Commission has determined for various reasons that risk management exemptions did not lead to the lack of convergence since the Commission understands that many commodity index traders vacate contracts before the spot month and therefore would not influence convergence between the spot and futures price at expiration of the contract. Further, the risk-management exemptions granted prior to 2008 remain in effect, yet the Commission is unaware of any significant convergence problems relating to commodity index traders at this time. Additionally, there did not appear to be any convergence problems between the period when Commission staff initially granted risk management exemptions and 2007. Instead, the Commission believes that the convergence issues that started to occur around 2007 were due to the contract specification underpricing the option to store wheat for the long futures holder making the expiring futures price more valuable than spot wheat. PO 00000 Frm 00174 Fmt 4701 Sfmt 4700 the Commission believes these costs could be mitigated because exchanges would potentially be able to establish lower non-spot month position limit levels.1422 Moreover, these concerns may be mitigated further to the extent that exchanges use other tools for protecting markets aside from position limits, such as establishing position accountability levels below Federal position limit levels or imposing liquidity and concentration surcharges to initial margin if vertically integrated with a derivatives clearing organization. Further, as discussed below, the Commission is maintaining current Federal non-spot month position limit levels for CBOT Oats (O), MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat (KW), which otherwise would be lower based on current open interest levels for these contracts. b. Setting a Lower Single Month Position Limit Level for ICE Cotton No. 2 (CT) The Commission is adopting a single month position limit level of 5,950 contracts, which is 50% of the proposed level of 11,900 contracts, which, in turn, was based on the modified 10/2.5% formula. This was in response to numerous comments from end-users suggesting that the Commission set the single month position limit level lower than the all-months-combined position limit level.1423 The Commission notes that there could be a benefit to setting the single month position limit level lower than the all-months-combined position limit level, because it could help diminish excessive speculation or prevent price distortions if traders hold unusually large positions in contracts outside of the spot month and those traders simultaneously exit those positions immediately before the spot month. However, the Commission acknowledges that there could be a cost to adopting a single month limit that is half of the all-months-combined position limit levels. Specifically, it 1422 The Commission notes that several commenters, including Better Markets, stated that exchanges may have financial incentives to increase trading volume, which could incentivize exchanges to set the highest possible exchange-set position limit levels. See, e.g., Better Markets at 22–24, 46– 47. While the Commission acknowledges that this is the case, the Commission also believes that such costs are sufficiently mitigated through exchange statutory and regulatory obligations, the Commission’s oversight of the exchanges, and the exchanges’ own financial incentives to maintain well-functioning markets. This is discussed more in depth in Sections II.B.2.iv.b and III.B.3.iii.b(3)(iii). 1423 E.g., LDC at 2; Moody Compress at 1; ACA at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; Mallory Alexander at 2; Walcot at 2; and White Gold at 1. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 would restrict a speculative trader’s ability to take opposite positions to bona fide hedgers by, for example, entering into calendar spread transactions that would normally provide liquidity to bona fide hedgers. Thus, by adopting the lower single month limit, liquidity in deferred month contracts would be reduced because the speculative trader would not be able to hold positions in excess of the single month limit. Nonetheless, the Commission believes that, based on the unanimous comments from the end-users of the ICE Cotton No. 2 (CT) contract requesting a lower single month position limit level, such costs may not materially negatively impact liquidity for bona fide hedgers. c. Exceptions to the 10/2.5% Formula for CBOT Oats (O), MGEX Hard Red Spring Wheat (MWE), and CBOT Kansas City Hard Red Winter Wheat (KW) Based on the Commission’s experience since 2011 with Federal nonspot month position limit levels for the MGEX HRS Wheat (‘‘MWE’’) and CBOT KC HRW Wheat (‘‘KW’’) core referenced futures contracts, the Commission is maintaining the Federal non-spot month position limit levels for MWE and KW at the existing level of 12,000 contracts, rather than reducing them to the lower level that would result from applying the proposed updated 10/2.5% formula. Maintaining the status quo for the MWE and KW Federal non-spot month position limit levels results in partial wheat parity between those two wheat contracts, but not with CBOT Wheat (‘‘W’’), which increases to 19,300 contracts under the Final Rule. The Commission believes that this benefits the MWE and KW markets since the two species of wheat are similar to one another; accordingly, decreasing the Federal non-spot month position limit levels for MWE could impose liquidity costs on the MWE market and harm bona fide hedgers, which could further harm liquidity for bona fide hedgers in the KW market. On the other hand, although commenters requested raising the Federal non-spot month position limit level for KW to match the level for W,1424 the Commission has determined not to raise the Federal non-spot month position limit levels for KW and for MWE as well to the Federal non-spot month position limit level for W. This is because the limit level for W appears to be extraordinarily large in comparison to open interest in KW and MWE markets, and the limit levels for both the KW and the MWE contracts are already larger 1424 SIFMA AMG at 3–4; ISDA at 12; PIMCO at 4–5; MFA/AIMA at 12; and Citadel at 6–7. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 than the limit levels would be based on the 10/2.5% formula. While W is a potential substitute for KW and MWE, it is not similar to the same extent that MWE and KW are to one another, and so the Commission has determined that partial wheat parity outside of the spot month will maintain liquidity and price discovery while not unnecessarily inviting excessive speculation or potential market manipulation in the MWE and KW markets. Likewise, based on the Commission’s experience since 2011 with the Federal non-spot month speculative position limit for CBOT Oats (O), the Commission is maintaining the limit level at the current 2,000 contracts level, rather than reducing it to the lower level that would result from applying the updated 10/2.5% formula based on current open interest. The Commission has determined that there is no evidence of potential market manipulation or excessive speculation, and so there would be no perceived benefit to reducing the Federal non-spot month position limit for the CBOT Oats (O) contract, while reducing the level could impose liquidity costs. iv. Subsequent Spot and Non-Spot Month Position Limit Levels The Commission received several comments concerning updates to the Federal position limit levels, with commenters requesting that the Commission periodically review the levels and revise them if appropriate.1425 One commenter was concerned that the Federal position limit levels could become too high over time,1426 while the rest were concerned that the levels could become too low.1427 In addition, CME Group also suggested that exchanges should update 1425 MFA/AIMA at 5 (stating that ‘‘the Commission should direct exchanges to periodically monitor the proposed new position limit levels’’); PIMCO at 6 (urging the CFTC ‘‘to include . . . a mandatory requirement to regularly (and at least annually) review and update limits as markets grow and change’’); SIFMA AMG at 10 (suggesting the Final Rule should require ‘‘that the Commission regularly consult with exchanges and review and adjust position limits when it is necessary to do so based on relevant market factors’’); ISDA at 10 (stating that ‘‘the Commission must regularly convene and consult with exchanges on deliverable supply and, if appropriate, propose notice and comment rulemaking to adjust limit levels’’); and IATP at 16–17 (proposing that the Commission should engage in ‘‘an annual review of position limit levels to give [commercial hedgers] legal certainty over that period’’ and also retain ‘‘the authority to revise position limits . . . if data monitoring and analysis show that those annual limit levels are failing to prevent excessive speculation and/or various forms of market manipulation’’). 1426 IATP at 16–17. 1427 MFA/AIMA at 5–6; PIMCO at 6; SIFMA AMG at 10; and ISDA at 10. PO 00000 Frm 00175 Fmt 4701 Sfmt 4700 3409 the EDS figures ‘‘every two years [and] . . . DCMs should be provided the opportunity to submit data voluntarily to the Commission on a more frequent basis.’’ 1428 The Commission recognizes that there may be costs if Federal position limit levels become too high or low over time. For example, levels that become too high may permit excessive speculation; levels that become too low may negatively impact liquidity. However, the Commission believes that the Final Rule’s position limits framework, which utilizes Federal position limit levels as ceilings and allows exchange-set position limits to operate under that ceiling, will mitigate such potential costs. Specifically, because the Federal position limits are utilized as ceilings, this framework will enable exchanges to respond to market conditions through a greater range of acceptable exchange-set position limit levels than if the Federal position limit levels did not operate as ceilings. Furthermore, because such exchange actions can be effectuated significantly faster than modifying Federal position limits, the Final Rule’s position limits framework is able to quickly respond to rapidly evolving market conditions through exchangeaction as well.1429 v. Phase-In of Federal Position Limit Levels The Commission received comments requesting that the Commission ‘‘consider phasing in these adjustments for agricultural commodities to assess the impacts of increasing limits on contract performance.’’ 1430 CMC also noted that, ‘‘[a] phased approach could provide market participants, exchanges, and the Commission a way to build in scheduled pauses to evaluate the effects of increased limits, thereby fostering confidence and trust in the markets.’’ 1431 1428 CME Group at 5. the Commission notes that updating EDS figures and Federal position limit levels is a resource-intensive endeavor for both the Commission and the exchanges. Also, periodic, predetermined review intervals may not always align with market changes or other events resulting in material changes to deliverable supply that would warrant adjusting Federal spot month position limit levels. As a result, the Commission believes that it would be more efficient, timely, and effective to review the EDS figure and the Federal position limit level for a core referenced futures contract if warranted by market conditions, including changes in the underlying cash market, which the Commission and exchanges continually monitor. 1430 AFIA at 2; CMC at 6. 1431 CMC at 6. Although commenters did not provide specific details about what they meant by ‘‘phase-in,’’ the Commission understands these comments to mean that they are requesting a 1429 Furthermore, E:\FR\FM\14JAR2.SGM Continued 14JAR2 3410 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 The Commission acknowledges that there could be some benefit in implementing a formal, gradual phasein for the Federal position limit levels, because this could allow the Commission to more incrementally assess whether there are any issues with respect to the referenced contract markets.1432 However, the Commission believes that the position limits framework that is implemented in the Final Rule effectively provides a similar, but more flexible result. Specifically, market participants will still be subject to the exchange-set spot month position limit levels even after the Final Rule’s Federal spot month position limit levels go into effect. The existing exchange-set position limit levels are lower than the corresponding Federal levels as adopted in this Final Rule for most core referenced futures contracts 1433 and, unless and until exchanges affirmatively modify their exchange-set spot month position limit levels pursuant to part 40 of the Commission’s regulations,1434 the operative spot month position limit levels for market participants trading exchange-listed referenced contracts will be the exchange-set ones. So, if an exchange deems it appropriate to gradual, step-up increase in Federal spot month and non-spot month position limit levels over time for agricultural core referenced futures contracts, instead of having the new Federal position limit levels apply all at once. 1432 As a preliminary matter, the Commission believes that the referenced contract markets will be able to function in an orderly fashion when the final Federal position limit levels go into effect. This is because, among other things, the final Federal spot month position limit levels are supported by the updated EDS figures and are set at or below 25% of EDS, and the final Federal nonspot month position limit levels are supported by increased open interest and are generally set pursuant to the modified 10/2.5% formula. The three core referenced futures contracts that do not strictly follow the 10/2.5% formula in the non-spot month (i.e., CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), and CBOT Oats (O)) do not require any phase-in period, because they remain at existing Federal and exchange-set non-spot month position limit levels. 1433 Nineteen of the core referenced futures contracts will have Federal spot month position limit levels that are higher than current exchangeset spot month position limit levels. COMEX Copper (HG), CBOT Oats (O), NYMEX Platinum (PL), and NYMEX Palladium (PA) will have Federal spot month position limit levels that are equal to the current exchange-set spot month position limit levels. The last two steps of the Federal spot month step-down position limit levels for CME Live Cattle (LC) are equal to the corresponding last two steps of exchange-set spot month step-down position limit levels. Finally, although currently there is technically no exchange-set spot month position limit for ICE Sugar No. 16, this contract is subject to a single month position limit level of 1,000 contracts, which effectively serves as its spot month position limit level. As a result, the Federal spot month position limit level for ICE Sugar No. 16 will effectively be higher than its current exchange-set spot month position limit level. 1434 17 CFR part 40. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 maintain its existing exchange-set position limit levels and does not choose to adopt the new applicable Federal speculative position limit level as the new exchange-set speculative limit for any relevant referenced contract listed on its exchange, then there will be no practical change from the status quo for market participants from a position limits perspective. If the exchange believes that it is appropriate to raise its exchange-set spot month position limit levels either up to the Federal position limit levels or lower levels as it deems appropriate, then the exchange may do so in a way that is tailored for each referenced contract (including through a phased-in approach) and that is informed by the exchange’s knowledge of each market. A further benefit to the Final Rule’s position limits framework over a federally-mandated phase-in is that exchanges have greater flexibility (relative to the Commission) to quickly modify exchange-set levels, including modifying any phase-in levels, to respond to sudden and changing market conditions. vi. Core Referenced Futures Contracts and Linked Referenced Contracts; Netting The definitions of the terms ‘‘core referenced futures contract’’ and ‘‘referenced contract’’ set the scope of contracts to which Federal position limits apply. As discussed above, by applying the Federal position limits to ‘‘referenced contracts,’’ the Final Rule expands the Federal position limits beyond the 25 physically-settled ‘‘core referenced futures contracts’’ listed in final Appendix E to part 150 by also including any cash-settled and physically-settled ‘‘referenced contracts’’ linked thereto, as well as swaps that meet the ‘‘economically equivalent swap’’ definition in final § 150.1 and thus qualify as ‘‘referenced contracts.’’ 1435 creation of a financially equivalent contract that references the price of a core referenced futures contract, or of the commodity underlying a core referenced futures contract. The Commission has determined that this benefits market integrity and potentially reduces costs to market participants that otherwise could result from market manipulation. The Commission also recognizes that including cash-settled contracts within the final Federal position limits framework may impose additional compliance costs on market participants and exchanges. Further, the Federal position limits—especially outside the spot month—may not provide all of the benefits discussed above with respect to market integrity and manipulation because there is no physical delivery outside the spot month and therefore there is reduced concern for corners and squeezes. However, to the extent that there is manipulation or price distortion involving such non-spot, cash-settled contracts, the Commission’s authority to regulate and oversee futures and related options on futures markets (other than through establishing Federal position limits) may also be effective in uncovering or preventing manipulation or distortion, especially in the non-spot cash markets, and may result in relatively lower compliance costs incurred by market participants. Similarly, the Commission acknowledges that exchange oversight could provide similar benefits to market oversight and prevention of market manipulation, but with lower costs imposed on market participants—given the exchanges’ deep familiarity with their own markets and their ability to tailor a response to a particular market disruption—compared to Federal position limits. The ‘‘referenced contract’’ definition in final § 150.1 also includes ‘‘economically equivalent swap,’’ and, for the reasons discussed below, includes a narrower set of swaps compared to the set of futures contracts and options thereon that would be, under the ‘‘referenced contract’’ definition, captured as either ‘‘directly’’ or ‘‘indirectly linked’’ to a core referenced futures contract.1436 a. Referenced Contracts The Commission has determined that including futures contracts and options thereon that are ‘‘directly’’ or ‘‘indirectly linked’’ to the core referenced futures contracts, including cash-settled contracts, under the definition of ‘‘referenced contract’’ in final § 150.1 helps prevent the evasion of Federal position limits—especially during the spot month—through the b. List of Referenced Contracts 1437 The Commission’s publication of the Staff Workbook is intended to provide a non-exhaustive list of exchange-traded 1435 As discussed in the preamble, the position limits framework also applies to physically-settled swaps that qualify as economically equivalent swaps. However, the Commission believes that physically-settled economically equivalent swaps would be few in number. 1436 See infra Section IV.A.3.vi.e. (discussing economically equivalent swaps). 1437 Appendix C of the Final Rule provides staff guidance to assist market participants and exchanges in determining whether a particular contract qualifies as a referenced contract. PO 00000 Frm 00176 Fmt 4701 Sfmt 4700 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 referenced contracts that are subject to Federal position limits. Although the Commission expects to timely update this list of contracts, the omission of a contract from the Staff Workbook does not mean that such contract is outside the definition of a referenced contract subject to Federal position limits. Additionally, the Staff Workbook will provide a linkage between each referenced contract, and either the core referenced futures contract or referenced contract, as applicable to which it is linked, to aid in market participants’ understanding of the Commission’s determination. Although some commenters believed that the Commission should require exchanges to publish and maintain a definitive list of referenced contracts (other than economically equivalent swaps) 1438 the Commission believes that the centralized publication of this Workbook creates efficiency by providing market participants a known access location, and minimizes costs by not requiring redundant publication. The Commission’s concurrent publication of the Staff Workbook provides a non-exhaustive list of exchange-traded referenced contracts, and will help market participants in determining categories of contracts that fit within the referenced contract definition. This effort is intended to provide clarity to market participants regarding which exchange-traded contracts are subject to Federal position limits. c. Netting and Related Treatment of Cash-Settled Referenced Contracts Under paragraph (1) of the final ‘‘referenced contract’’ definition, referenced contracts include a core referenced futures contract, and any cash-settled futures contracts and options on futures contacts that are directly or indirectly linked to a physically-settled core referenced futures contract. PIMCO and SIFMA AMG contended that cash-settled referenced contracts should not be subject to Federal position limits at all because cashsettled contracts do not introduce the same risk of market manipulation. They argued that subjecting cash-settled referenced contracts to Federal position limits would increase transaction costs and reduce market liquidity and depth in these instruments.1439 1438 MFA/AIMA at 7; Citadel at 4–5; SIFMA AMG at 11–12. 1439 PIMCO at 3; SIFMA AMG at 4–7. These entities did not specifically argue that cash-settled contracts should be excluded from the ‘‘referenced contract’’ definition; rather, they contended that in general such instruments should not be subject to VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 ISDA argued that cash-settled contracts should not be included in an immediate Federal position limits rulemaking, and should instead be deferred until the Commission has adopted Federal limits with respect to physically-delivered spot month futures contracts, and after which the Commission should revisit Federal limits for cash-settled contracts.1440 FIA and ICE argued that limits for cash-settled referenced contracts should be higher relative to Federal position limits for physically-settled referenced contracts. They similarly argued that cash-settled referenced contracts are ‘‘not subject to corners and squeezes’’ and will ‘‘ ‘ensure market liquidity for bona fide hedgers.’ ’’ 1441 In contrast, CME supported the Commission’s approach for spot-month parity for physically-settled and cashsettled referenced contracts across all commodity markets. CME explained that absent such parity, one side of the market could be vulnerable to artificial distortions from manipulations on the other side of the market, regulatory arbitrage, and liquidity drain to the other side of the market.1442 The Commission believes that its parity approach, including parity with respect to the size of the Federal position limits for both cash-settled and physically-settled contracts, benefits market integrity, liquidity, and price discovery by not providing skewed incentives to a market participant to favor one group of contracts over the other, or providing avenues for manipulation that this rulemaking seeks to avoid. The Commission is also generally adopting Federal position limits on an aggregated, instead of on a per-DCM basis.1443 FIA and ICE suggested that Federal position limits for cash-settled referenced contracts should apply per DCM (rather than in the aggregate across DCMs).1444 The Commission views DCM-based limits as restrictive and costly for the most innovative DCMs, as DCM-based limits would necessarily Federal position limits. The Commission notes that this is technically a different argument since cashsettled instruments could be exempt from position limits but still qualify as ‘‘referenced contracts.’’ Nevertheless, the practical result is the same. 1440 ISDA at 3–5. 1441 ICE at 3, 15 (also arguing that cash-settled limits should apply per exchange, rather than across exchanges); FIA at 7–8. 1442 CME Group at 6. 1443 The Commission is permitting market participants to hold a position in cash-settled NYMEX NG referenced contracts up to the Federal spot month position limit on a per exchange basis. This is discussed more in depth in Section IV.A.3.ii.a. 1444 FIA at 7–8; ICE at 13. PO 00000 Frm 00177 Fmt 4701 Sfmt 4700 3411 represent a smaller volume of contracts available than would an aggregated limit. By making the full aggregated Federal position limit available to the contract that is most responsive to the needs of the market, the Commission believes that this provides a marketwide benefit by promoting innovation and competition in the marketplace. The Final Rule permits market participants to net positions outside the spot month in linked physically-settled and cash-settled referenced contracts, but during the spot month market participants may not net their positions in cash-settled referenced contracts against their positions in physicallysettled referenced contracts. The Commission believes that final § 150.2(a) and (b) benefits liquidity formation and bona fide hedgers outside the spot months since the netting rules facilitate the management of risk on a portfolio basis for liquidity providers and market makers. In turn, improved liquidity may benefit bona fide hedgers and other end users by facilitating their hedging strategies and reducing related transaction costs (e.g., improving execution timing and reducing bid-ask spreads). On the other hand, the Commission recognizes that allowing such netting could increase transaction costs and harm market integrity by allowing for a greater possibility of market manipulation since market participants and speculators can maintain larger gross positions outside the spot month. However, the Commission has determined that such potential costs may be mitigated since concerns about corners and squeezes generally are less acute outside the spot month given there is no physical delivery involved, and because there are tools other than Federal position limits for preventing and deterring other types of manipulation, including banging the close, such as exchange-set limits and accountability and surveillance both at the exchange and Federal level. Moreover, prohibiting the netting of physical and cash positions during the spot month should benefit bona fide hedgers as well as price discovery of the underlying markets since market makers and speculators are not able to maintain a relatively large position in the physical markets by netting it against its positions in the cash markets.1445 While 1445 Otherwise, a market participant could maintain large, offsetting positions in excess of limits in both the physically-settled and cashsettled contract, which might harm market integrity and price discovery and undermine the Federal position limits framework. For example, absent such a restriction in the spot month, a trader could stand for over 100% of deliverable supply during E:\FR\FM\14JAR2.SGM Continued 14JAR2 3412 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations this may increase compliance and transaction costs for speculators, it may benefit some bona fide hedgers and end users. It may also impose costs on exchanges, including increased surveillance and compliance costs and lost fees related to the trading that such market makers or speculators otherwise might engage in absent Federal position limits or with the ability to net their physical and cash positions. khammond on DSKJM1Z7X2PROD with RULES2 d. Exclusions From the ‘‘Referenced Contract’’ Definition Although the ‘‘referenced contract’’ definition in final § 150.1 includes linked contracts, it explicitly excludes location basis contracts,1446 commodity index contracts, swap guarantees, trade options that satisfy § 32.3 of the Commission’s regulations,1447 outright price reporting agency index contracts, and monthly average pricing contracts. First, the ‘‘referenced contract’’ definition explicitly excludes location basis contracts, which are contracts that reflect the difference between two delivery locations or quality grades of the same commodity.1448 The Commission believes that excluding location basis contracts from the ‘‘referenced contract’’ definition benefits market integrity by preventing a trader from obtaining an extraordinarily large speculative position in the commodity underlying the referenced contract. Absent this exclusion, a market participant could increase its exposure in the commodity underlying the referenced contract by using the location basis contract to net down the spot month by holding a large long position in the physical-delivery contract along with an offsetting short position in a cash-settled contract, which effectively would corner the market. 1446 ICE further recommended that additional basis and spread contracts be excluded from the referenced contract definition. ICE at 10–11. The Commission has determined not to exclude these additional contracts from the referenced contract definition, as, among other reasons discussed further above, the Commission views the constraints on the liquidity and volatility associated with other excluded contracts as not present to an equal degree in basis and spread contracts proposed to be excluded by ICE. 1447 17 CFR 32.3. 1448 The term ‘‘location basis contract’’ generally means a derivative that is cash-settled based on the difference in price, directly or indirectly, of (1) a core referenced futures contract; and (2) the same commodity underlying a particular core referenced futures contract at a different delivery location than that of the core referenced futures contract. See Appendix C to final part 150. For clarity, a core referenced futures contract may have specifications that include multiple delivery points or different grades (i.e., the delivery price may be determined to be at par, a fixed discount to par, or a premium to par, depending on the grade or quality). The above discussion regarding location basis contracts is referring to delivery locations or quality grades other than those contemplated by the applicable core referenced futures contract. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 against its position in a referenced contract, and then further increase its position in the referenced contract that would otherwise be restricted by position limits. Similarly, the Commission believes that the exclusion of location basis contracts reduces hedging costs for hedgers and commercial end-users, as they are able to more efficiently hedge the cost of commodities at their preferred location without the risk of possibly hitting a position limits ceiling or incurring compliance costs related to applying for a bona fide hedge recognition related to such position.1449 Excluding location basis contracts from the ‘‘referenced contract’’ definition also could impose costs for market participants that wish to trade location basis contracts since, as noted, such contracts are not subject to Federal position limits and thus could be more easily subject to manipulation by a market participant that obtained an excessively large position. However, the Commission believes such costs are mitigated because location basis contracts generally demonstrate less volatility and are less liquid than the core referenced futures contracts, meaning the Commission believes that it would be an inefficient method of manipulation (i.e., too costly to implement and therefore, the Commission believes that the probability of manipulation is low). Further, excluding location basis contracts from the ‘‘referenced contract’’ definition is consistent with existing market practice since the market treats a contract on one grade or delivery location of a commodity as different from another grade or delivery location. Accordingly, to the extent that this exclusion is consistent with current market practice, any benefits or costs already may have been realized. Second, the Commission has concluded that excluding commodity index contracts from the ‘‘referenced contract’’ definition benefits market integrity by preventing speculators from using a commodity index contract to net down an outright position in a referenced contract that is a component 1449 AGA agrees that the exclusion of location basis contracts from the ‘‘referenced contract’’ definition creates certain netting benefits and may allow commercial end-users to more efficiently hedge the cost of commodities at a preferred location. AGA at 9. In general, AGA supported all of the proposed exclusions from the ‘‘referenced contract’’ definition in the 2020 NPRM, as it believes that market participants benefit from clear rules and definitions that help prevent ‘‘potential disagreement leading to increased transaction costs, potential loss of liquidity, and compliance strategies that generally make the markets less efficient.’’ Id. PO 00000 Frm 00178 Fmt 4701 Sfmt 4700 of the commodity index contract, which would allow the speculator to take on large outright positions in the referenced contracts and therefore result in increased speculation, undermining the Federal position limits framework.1450 However, the Commission believes that this exclusion could impose costs on market participants that trade commodity index contracts since, as noted, such contracts are not subject to Federal position limits and thus could be more easily subject to manipulation by a market participant that obtained an excessively large position. The Commission believes such costs would be mitigated because the commodities comprising the index are themselves subject to limits, and because commodity index contracts generally tend to exhibit low volatility since they are diversified across many different commodities. Further, the Commission believes that it is possible that excluding commodity index contracts from the definition of ‘‘referenced contract’’ could result in some trading shifting to commodity index contracts, which may reduce liquidity in exchange-listed core referenced futures contracts, harm pretrade transparency and the price discovery process in the futures markets, and depress open interest (as volumes shift to index positions, which would not count toward open interest calculations). However, the Commission believes that the probability of this occurring is low because the Commission believes that using commodity index contracts is an 1450 Further, the Commission believes that prohibiting the netting of a commodity index position with a referenced contract is required by its interpretation of the Dodd-Frank Act’s amendments to the CEA’s definition of ‘‘bona fide hedging transaction or position.’’ The Commission interprets the amended CEA definition to eliminate the Commission’s ability to recognize risk management positions as bona fide hedges or transactions. See infra Section IV.A.4, Exemptions from Federal Position Limits—Bona Fide Hedging Recognitions, Spread and Other Exemptions (Final §§ 150.1 and 150.3), for further discussion. In this regard, the Commission has observed that it is common for swap dealers to enter into commodity index contracts with participants for which the contract would not qualify as a bona fide hedging position (e.g., with a pension fund). Failing to exclude commodity index contracts from the ‘‘referenced contract’’ definition could enable a swap dealer to use positions in commodity index contracts as a risk management hedge by netting down its offsetting outright futures positions in the components of the index. Permitting this type of risk management hedge would subvert the statutory pass-through swap language in CEA section 4a(c)(2)(B), which the Commission interprets as prohibiting the recognition of positions entered into for risk management purposes as bona fide hedges unless the swap dealer is entering into positions opposite a counterparty for which the swap position is a bona fide hedge. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 inefficient means of obtaining exposure to a specific commodity. Third, the Commission’s determination to exclude trade options from the referenced contract definition is consistent with the historical practice of the Commission, in which it has exempted a number of trade options from Commission requirements. This exclusion benefits end-users who hedge their physical risk through these instruments, yet do not contribute to excessive speculation. Fourth, the Commission’s exclusion of swap guarantees from the referenced contract definition will help avoid any potential confusion regarding the application of position limits to guarantees of swaps. The Commission understands that swap guarantees generally serve as insurance, and, in many cases, swap guarantors guarantee the performance of an affiliate in order to entice a counterparty to enter into a swap with such guarantor’s affiliate. As a result, the Commission believes that swap guarantees do not contribute to excessive speculation, market manipulation, squeezes, or corners. Furthermore, the Commission believes that swap guarantees were not contemplated when Congress articulated its policy goals in CEA section 4a(a).1451 Fifth, the Final Rule reaffirms the Commission’s determination that an outright price reporting agency index contract does not qualify as a ‘‘referenced contract.’’ 1452 To provide market participants clarity regarding this determination, the Commission modified the regulatory text of the ‘‘referenced contract’’ definition in final § 150.1 to explicitly exclude the term ‘‘outright price reporting agency index contracts.’’ 1453 The exclusion of outright price reporting agency index contracts from the ‘‘referenced contract’’ 1451 To the extent that swap guarantees may lower costs for uncleared OTC swaps in particular by incentivizing a counterparty to enter into a swap with the guarantor’s affiliate, excluding swap guarantees may benefit market liquidity, which is consistent with the CEA’s statutory goals in CEA section 4a(a)(3)(B) to ensure sufficient liquidity for bona fide hedgers when establishing its position limit framework. 1452 As explained in the preamble to the Final Rule, the Commission has concluded that an ‘‘outright price reporting agency index contract,’’ which is based on an index published by a price reporting agency that surveys cash-market transaction prices (even if the cash-market practice is to price at a differential to a futures contract), is not directly or indirectly linked to the corresponding referenced contract. See supra Section II.A.16.iii.b(4)(v) (discussing new exclusions from the ‘‘referenced contract’’ definition). 1453 The Commission does not believe this technical change to the regulatory text represents a change in policy. See supra Section II.A.16. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 definition benefits market participants through clarity and mitigation of costs, such as costs to monitor positions for aggregation and other compliance purposes. The Commission believes that this exclusion maintains market integrity as it would be costly to employ these contracts to circumvent position limits. Finally, the Commission has concluded that excluding ‘‘monthly average pricing contracts’’ 1454 from the ‘‘referenced contract’’ definition benefits market integrity by ensuring sufficient market liquidity for bona fide hedgers due to: (1) The difficulty and expense of any entity artificially moving the price of the monthly average by manipulating one or more component prices within the contract; and (2) the widespread use of these contracts by, and their utility to, commercial entities in hedging their risk. As with the outright price reporting agency index contracts, this exclusion benefits market participants to the extent it mitigates costs to monitor positions for aggregation and other compliance purposes. e. Economically Equivalent Swaps The existing Federal position limits framework does not include Federal position limit levels on swaps. The Dodd-Frank Act added CEA section 4a(a)(5), which requires that when the Commission imposes Federal position limits on futures contracts and options on futures contracts pursuant to CEA section 4a(a)(2), the Commission also establish limits simultaneously for ‘‘economically equivalent’’ swaps ‘‘as appropriate.’’ 1455 As the statute does not define the term ‘‘economically equivalent,’’ the Commission is applying its expertise in construing such term consistent with the policy goals articulated by Congress, including in CEA sections 4a(a)(2)(C) and 4a(a)(3) as discussed below. Specifically, under the Commission’s definition of ‘‘economically equivalent 1454 The definition of the new term ‘‘monthly average pricing contracts’’ in Appendix C of this Final Rule is intended to cover the types of contracts generally referred to in the industry as calendar-month average, trade-month average, and balance-of-the-month contracts. See supra Section II.A.16.iii.b(4)(v) (discussing new exclusions from the ‘‘referenced contract’’ definition). 1455 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA section 4a(a)(4) separately authorizes, but does not require, the Commission to impose Federal position limits on swaps that meet certain statutory criteria qualifying them as ‘‘significant price discovery function’’ swaps. 7 U.S.C. 6a(a)(4). The Commission reiterates, for the avoidance of doubt, that the definitions of ‘‘economically equivalent’’ in CEA section 4a(a)(5) and ‘‘significant price discovery function’’ in CEA section 4a(a)(4) are separate concepts and that contracts can be economically equivalent without serving a significant price discovery function. PO 00000 Frm 00179 Fmt 4701 Sfmt 4700 3413 swap’’ set forth in final § 150.1, a swap generally qualifies as economically equivalent with respect to a particular referenced contract so long as the swap shares ‘‘identical material’’ contract specifications, terms, and conditions with the referenced contract. Further, any differences between the swap and referenced contract with respect to the following are disregarded for purposes of determining whether the swap qualifies as economically equivalent: (i) Lot size or notional amount; (ii) for a natural gas swap and a referenced contract that are both physically-settled, delivery dates diverging by less than two calendar days, and for any other swap and referenced contract that are both physically-settled, delivery dates diverging by less than one calendar day; 1456 and (iii) post-trade riskmanagement arrangements.1457 As discussed in turn below, the Commission believes that the Final Rule’s definition of ‘‘economically equivalent swaps’’ benefits (1) market integrity by protecting against excessive speculation and potential manipulation and (2) market liquidity by not favoring OTC or foreign markets over domestic markets. Additionally, (3) the Commission will discuss the costs and benefits related to the Final Rule’s economically equivalent swap definition’s treatment of natural gas swaps; and (4) the Commission will address the several proposed alternative definitions included in commenter letters. As discussed further below, with respect to exchange-set position limits on swaps, the Commission proposed to delay compliance with DCM Core Principle 5 and SEF Core Principle 6, as compliance would otherwise be impracticable, and, in some cases, impossible, at this time. In the 2020 NPRM, the Commission explained that this delay was based largely on the fact that exchanges cannot view positions in OTC swaps across the various places they are trading, including on competitor exchanges. The Commission is maintaining this approach to permit exchanges to delay compliance with respect to exchange-set position limits on swaps, although the Commission emphasizes, for the avoidance of doubt, that it will monitor and enforce swaps for compliance with Federal position limits subject to the compliance dates 1456 As discussed below, the definition of ‘‘economically equivalent swap’’ with respect to natural gas referenced contracts contains the same terms, except that it includes delivery dates diverging by less than two calendar days. 1457 See supra Section II.A.4. (further discussing the Commission’s definition of ‘‘economically equivalent swap’’). E:\FR\FM\14JAR2.SGM 14JAR2 3414 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 discussed above.1458 However, the Commission notes that in two years, the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6 with respect to swaps. (1) Benefits and Costs Related to Market Integrity The Commission believes that the final economically equivalent swap definition benefits market integrity in two ways. First, the final definition protects against excessive speculation and potential market manipulation by limiting the ability of speculators to obtain excessive positions through netting. As explained above, under the Final Rule, market participants may net positions across linked referenced contracts, including positions across linked referenced contracts in economically equivalent swaps and futures.1459 Accordingly, a more inclusive ‘‘economically equivalent’’ definition that would encompass additional swaps (e.g., swaps that may differ in their ‘‘material’’ terms or physically-settled swaps with delivery dates that diverge by one day or more) could make it easier for market participants to inappropriately net down against their referenced futures contracts by allowing market participants to structure swaps that do not necessarily offer identical risk or economic exposure or sensitivity as the linked futures contract, but which could still be netted under the Final Rules. In such a hypothetical case, a market participant could enter into an OTC swap with a maturity that differs by days or even weeks in order to net down a position in a referenced contract, enabling the market participant to hold an even greater position in the referenced contract. Similarly, applying Federal position limits to swaps that share identical ‘‘material’’ terms with their corresponding referenced contracts benefits market integrity by preventing market participants from escaping the position limits framework merely by altering non-material terms, such as holiday conventions. On the other hand, the Commission recognizes that such a narrow ‘‘economically equivalent swap’’ definition could impose costs on the marketplace by possibly permitting excessive speculation since market participants would not be subject to 1458 For discussion of the relevant compliance dates for the Final Rule, see supra Section I.D. 1459 See supra Section II.B.10. (discussing netting). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Federal position limits if they were to enter into swaps that may have different material terms (e.g., penultimate swaps to the extent a penultimate futures contract or options contract does not exist to which a penultimate swap could possibly be deemed to be ‘‘economically equivalent’’ and therefore subject to the applicable Federal position limits) 1460 but may nonetheless be sufficiently correlated to their corresponding referenced contract. In this case, it is possible that there may be potential for excessive speculation, market manipulation, or it is possible that market participants could leave the futures markets for the swaps markets, which could introduce new costs to commercial market participants due to reduced market liquidity or disruptions to the price discovery function.1461 Nonetheless, to the extent that swaps currently are not subject to Federal position limit levels, such potential costs would remain unchanged compared to the status quo. Second, the relatively narrow final definition benefits market integrity, and reduces associated compliance and implementation costs, by permitting exchanges, market participants, and the Commission to focus resources on those swaps that pose the greatest threat for facilitating corners and squeezes—that is, those swaps with substantially identical delivery dates and identical material economic terms to futures and options on futures subject to Federal position limits. While swaps that have different material terms than their corresponding referenced contracts, including different delivery dates, may potentially be used for engaging in market manipulation, the final definition benefits market integrity by allowing exchanges and the 1460 Or, in the case of natural gas referenced contracts, which would potentially include penultimate swaps as economically equivalent swaps, a swap with a maturity of less than one day away from the penultimate swap. See supra Sections II.A.4.iii.f. and II.B.3.vi. (discussing natural gas swaps). 1461 The Commission acknowledges that liquidity could shift to penultimate swaps, which would impose costs on price discovery and market efficiency in the futures markets, in cases where there are no corresponding penultimate futures contracts or options contracts (and therefore the swap would not be deemed to be an economically equivalent swap), but the Commission believes that this concern is mitigated for two reasons. First, basis risk may exist between the penultimate swap and the referenced contract, and so the Commission believes that a market participant is less likely to hold a penultimate swap the greater the economic difference compared to the corresponding referenced contract. Second, the absence of penultimate futures contracts or options contracts may indicate lack of appropriate penultimate liquidity to hedge or offset one’s penultimate swap position and therefore may militate against entering into penultimate swaps. PO 00000 Frm 00180 Fmt 4701 Sfmt 4700 Commission to focus on the most sensitive period of the spot month, including with respect to the Commission’s and exchanges’ various surveillance and enforcement functions. To the extent market participants would be able to use swaps that fall outside the scope of the final definition to effect market manipulation, such potential costs would remain unchanged from the status quo since no swaps are currently covered by existing Federal position limits. The Commission however acknowledges that its narrow economically equivalent swap definition may introduce possible burdens to market integrity—as the form of an opportunity cost—since fewer swaps are covered under the Federal position limits compared to the alternative in which the Commission adopted a broader definition. Further, the Final Rule’s delayed compliance with respect to the establishment and enforcement of exchange-set limits on swaps benefits exchanges by facilitating exchanges’ ability to establish surveillance and compliance systems. As noted above, exchanges currently lack sufficient data regarding individual market participants’ open swap positions since exchanges cannot view positions in OTC swaps across the various places they are trading, including competitor exchanges, which means that requiring exchanges to establish oversight over market participants’ positions currently could impose substantial costs and also may be impractical to achieve.1462 As a result, the Commission has determined that allowing exchanges delayed compliance with respect to swaps reduces unnecessary costs. Nonetheless, the Commission’s determination to permit exchanges to delay implementing Federal position limits on swaps could incentivize market participants to leave the futures markets and instead transact in economically-equivalent swaps, which could reduce liquidity in the futures and related options markets. However, the Commission emphasizes that the Commission will oversee and enforce compliance with Federal position limits for economically equivalent swaps, which should mitigate the concern related to incentivizing futures contracts and related options on futures contracts to move trading and related liquidity to 1462 SIFMA AMG agrees with the Commission’s assessment, stating that ‘‘[s]ince the exchanges do not have visibility into OTC swaps markets, market participants and the CFTC would be responsible for implementing position limits on swaps without the benefit of the exchanges’ extensive experience in monitoring and applying position limits for exchange-listed contracts.’’ SIFMA AMG at 10. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 the OTC swaps markets. With respect to exchange-set position limits on swaps, the Commission notes that in two years, the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement position limits for economically equivalent swaps at the exchange level.1463 Additionally, while futures contracts and options thereon are subject to clearing and exchange oversight, economically equivalent swaps may be transacted bilaterally off-exchange (i.e., OTC swaps). As a result, it is relatively easy to create customized OTC swaps that may be highly correlated to its corresponding futures (or options) contract, which would allow the market participant to create an exposure in the underlying commodity similar to the referenced contract’s exposure. Due to the relatively narrow ‘‘economically equivalent swap’’ definition, the Commission believes that it may be possible for market participants to attempt to avoid Federal position limits by entering into such OTC swaps.1464 While such swaps may not be perfectly correlated to their corresponding referenced contracts, market participants may find this risk acceptable in order to avoid Federal position limits. An increase in OTC swaps at the expense of futures contracts and options on futures contracts may impose costs on market integrity due to lack of exchange oversight. If liquidity were to move from futures exchanges to the OTC swaps markets, non-dealer commercial entities may face increased transaction costs and widening spreads, as swap dealers gain market power in the OTC market relative to centralized exchange trading. 1463 In response to the 2020 NPRM’s proposal to permit exchanges to delay oversight and enforcement of exchanges’ position limit rules on economically equivalent swaps, IATP stated that ‘‘[d]elaying compliance with position limit requirement [sic] to avoid imposing costs on market participants makes it appear that the Commission is serving as a swap dealer booster, although swap dealers are amply resourced to provide the necessary data to the exchanges and to the Commission. The Commission is bending over backward to avoid requiring swaps market participants from paying the costs of exchange trading.’’ However, the Commission emphasizes that the Commission will still implement, oversee, and enforce Federal position limits on swaps. As a result, the proposed delayed enforcement of exchange-set position limits is designed to reduce costs imposed on exchanges rather than swap dealers, which will be subject to Federal position limits under the Final Rule. 1464 In contrast, since futures contracts and options on futures contracts are created by exchanges and submitted to the Commission for either self-certification or approval under part 40 of the Commission’s regulations, a market participant would not be able to customize an exchange-traded futures contract or option on futures contract. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 The Commission is unable to quantify the costs of these potential harms. However, while the Commission acknowledges these potential costs, such costs to those contracts that already have limits (including Federal and/or exchange-set position limits) on them already may have been realized in the marketplace because swaps are not subject to Federal position limits under the status quo. Lastly, under the Final Rule, market participants are able to determine whether a particular swap satisfies the definition of ‘‘economically equivalent swap,’’ as long as market participants make a reasonable, good faith effort in reaching their determination and are able to provide sufficient evidence, if requested, to support a reasonable, good faith effort.1465 The Commission anticipates that this flexibility will benefit market integrity by providing a greater level of certainty to market participants, in contrast to the alternative in which market participants would be required to first submit swaps to the Commission staff and wait for feedback or approval. On the other hand, the Commission also recognizes that not having the Commission explicitly opine on whether a swap would qualify as economically equivalent could cause market participants to avoid entering into such swaps.1466 In turn, this could lead to 1465 See supra Section II.A.4.g (discussing market participants’ discretion in determining whether a swap is economically equivalent). Regarding the obligations of swap dealers to monitor position limits, ISDA commented that the requirements imposed by § 23.601 are burdensome and requested additional guidance regarding same. ISDA at 10. The Commission believes it is unnecessary to provide further detail with respect to § 23.601 because, as discussed above and in the preamble, the Commission will defer to a market participant’s determination as long as the market participant is able to provide sufficient support to show that it made a reasonable, good faith effort in applying its discretion. Furthermore, the Commission is not adopting any amendments to § 23.601, so the baseline status quo in connection with § 23.601 is unchanged under the Final Rule. See supra Section II.A.4.g. 1466 For example, NRECA believes that a standardized reference source to confirm whether a particular swap is subject to Federal position limits would benefit market participants: ‘‘Because the Commission has determined not to codify its interpretations and other guidance, or to establish a single reference source for assistance in confirming ‘swap/not-a-swap’ distinction, the two counterparties to a bilateral off-facility energy transaction must make the ‘swap/not-a-swap’ determination without the benefit of standardized rules or product definitions. Although the terms of many off-facility, bilateral energy commodity transactions are highly-customized, other such transactions may be many iterations closer to futures contract ‘look-alikes,’ that is, to referenced contracts. If such a transaction is (or may be) a ‘swap,’ such a swap would then also need to be evaluated to determine whether it was ‘economically equivalent’ under the Speculative PO 00000 Frm 00181 Fmt 4701 Sfmt 4700 3415 less efficient hedging strategies if the market participant is forced to turn to the futures markets (e.g., a market participant may choose to transact in the OTC swaps markets for various reasons, including liquidity, margin requirements, or simply better familiarity with ISDA and swap processes over exchange-traded futures). However, as noted below, the Commission reserves the right to declare whether a swap or class of swaps is or is not economically equivalent, and a market participant could petition, or request informally, that the Commission make such a determination, although the Commission acknowledges that there could be costs associated with this, including delayed timing and monetary costs. Further, the Commission recognizes that requiring market participants to conduct reasonable due diligence and maintain related records also could impose new compliance costs. Additionally, the Commission recognizes that certain market participants could assert that an OTC swap is (or is not) ‘‘economically equivalent’’ depending upon whether such determination benefits the market participant. In such a case, market participants could theoretically subvert the intent of the Federal position limits framework, although the Commission believes that such potential costs would be mitigated due to the Commission’s surveillance functions and authority to declare that a particular swap or class of swaps either does or does not qualify as economically equivalent. (2) The Final Definition Could Increase Benefits or Costs Related to Market Liquidity and Price Discovery First, the final economically equivalent swap definition could benefit market liquidity by being, in general, less disruptive to the swaps markets, which in turn may reduce the potential for disruption for the price discovery function compared to a possible alternative, broader definition. For example, if the Commission were to adopt an alternative to its final ‘‘economically equivalent swap’’ definition that encompassed a broader range of swaps by including, for example, delivery dates that diverge by one or more calendar days—perhaps by several days or weeks—a market participant (including speculators) with a large portfolio of swaps could more easily bump up against the applicable position limits and therefore would have an incentive either to reduce its Position Limits Rules.’’ NRECA at 18; see also CEWG at 30–31. E:\FR\FM\14JAR2.SGM 14JAR2 3416 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations swaps activity or move its swaps activity to foreign jurisdictions. If there were many similarly situated market participants, the market for such swaps could become less liquid, which in turn could harm liquidity for bona fide hedgers as large liquidity providers could move to other markets. Second, the final definition could benefit market liquidity by being sufficiently narrow to reduce incentives for liquidity providers to move to foreign jurisdictions, such as the European Union (‘‘EU’’).1467 Additionally, the Commission believes that proposing a definition similar to that used by the EU will benefit international comity.1468 Further, market participants trading in both U.S. and EU markets would find the final definition to be familiar, which may khammond on DSKJM1Z7X2PROD with RULES2 1467 In this regard, the final definition is similar in certain ways to the EU definition for OTC contracts that are ‘‘economically equivalent’’ to commodity derivatives traded on an EU trading venue. The applicable European regulations define an OTC derivative to be ‘‘economically equivalent’’ when it has ‘‘identical contractual specifications, terms and conditions, excluding different lot size specifications, delivery dates diverging by less than one calendar day and different post trade risk management arrangements.’’ While the Commission’s final definition is similar, the Commission’s final definition requires ‘‘identical material’’ terms rather than simply ‘‘identical’’ terms. Further, the Commission’s final definition excludes different ‘‘lot size specifications or notional amounts’’ rather than referencing only ‘‘lot size’’ since swaps terminology usually refers to ‘‘notional amounts’’ rather than to ‘‘lot sizes.’’ See EU Commission Delegated Regulation (EU) 2017/ 591, 2017 O.J. (L 87). 1468 Both the Commission’s definition and the applicable EU regulation are intended to prevent harmful netting. See European Securities and Markets Authority, Draft Regulatory Technical Standards on Methodology for Calculation and the Application of Position Limits for Commodity Derivatives Traded on Trading Venues and Economically Equivalent OTC Contracts, ESMA/ 2016/668 at 10 (May 2, 2016), available at https:// www.esma.europa.eu/sites/default/files/library/ 2016-668_opinion_on_draft_rts_21.pdf (‘‘[D]rafting the [economically equivalent OTC swap] definition in too wide a fashion carries an even higher risk of enabling circumvention of position limits by creating an ability to net off positions taken in onvenue contracts against only roughly similar OTC positions.’’) The applicable EU regulator, the European Securities and Markets Authority (‘‘ESMA’’), recently released a ‘‘consultation paper’’ discussing the status of the existing EU position limits regime and specific comments received from market participants. According to ESMA, no commenter, with one exception, supported changing the definition of an economically equivalent swap (referred to as an ‘‘economically equivalent OTC contract’’ or ‘‘EEOTC’’). ESMA further noted that for some respondents, ‘‘the mere fact that very few EEOTC contracts have been identified is no evidence that the regime is overly restrictive.’’ See European Securities and Markets Authority, Consultation Paper MiFID Review Report on Position Limits and Position Management Draft Technical Advice on Weekly Position Reports, ESMA70–156–1484 at 46, Question 15 (Nov. 5, 2019), available at https://www.esma.europa.eu/ document/ consultation-paper-position-limits. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 help reduce compliance costs for those market participants that already have systems and personnel in place to identify and monitor such swaps. As discussed by SIFMA AMG, ‘‘[m]any market participants are active in markets and products that are regulated by the CFTC and EU authorities. Having different definitions would be costly for firms, since they would have to build out different compliance functions, and inefficient for markets.’’ 1469 As noted above, any differences between the Final Rule’s ‘‘economically equivalent swap’’ and the EU’s corresponding definition by the addition of the ‘‘material’’ qualifier should lead to the benefits identified in the above discussion, along with the corresponding costs. (3) The Final Definition Could Create Costs or Benefits Related to Market Liquidity for the Natural Gas Market SIFMA AMG commented that ‘‘financially-settled penultimate day expiry products in natural gas should be excluded from limits to the same extent as penultimate day expiry contracts for each of the other 24 core referenced futures contracts. To introduce a change from existing exchange practice (under which these financially-settled penultimate day contracts are out of scope) could introduce an otherwise avoidable disruption to trading during the closing days of the natural gas contract month, with no corresponding benefits to market oversight or integrity.’’ 1470 As discussed in greater detail in the preamble, the Commission recognizes that the market dynamics in natural gas are unique in several respects, including the fact that unlike with respect to other core referenced futures contracts, for natural gas, relatively liquid spot-month and penultimate cash-settled futures exist.1471 However, in contrast to SIFMA AMG’s comment, the Commission has determined that creating an exception to the proposed ‘‘economically equivalent swap’’ definition for natural gas benefits market liquidity by not unnecessarily favoring existing natural gas penultimate contracts over spot contracts. The Commission is especially 1469 SIFMA AMG at 6–7. AMG at 11. For the purpose of this comment, even though SIFMA AMG refers generally to ‘‘financially-settled penultimate’’ contracts in natural gas, the Commission assumes it is referring to penultimate cash-settled economically equivalent swaps since penultimate futures contracts and options on futures contracts are included under the ‘‘referenced contract’’ definition. 1471 See supra Section II.A.4.iii.f. (discussing economically equivalent natural gas swaps). 1470 SIFMA PO 00000 Frm 00182 Fmt 4701 Sfmt 4700 sensitive to potential market manipulation in the natural gas markets since market participants—to a significantly greater extent compared to the other core referenced futures contracts that are included in the Final Rule—regularly trade in both the physically-settled core referenced futures contract and the cash-settled look-alike referenced contracts that are penultimate contracts. Accordingly, the Commission has concluded that a slightly broader definition of ‘‘economically equivalent swap’’ to encompass penultimate natural gas swaps uniquely benefits the natural gas markets by helping to deter and prevent manipulation of a physically-settled contract to benefit a related cash-settled contract, including penultimate positions. (4) Alternatives to the ‘‘Economically Equivalent Swap’’ Definition Several commenters provided alternative approaches to the 2020 NPRM’s proposed ‘‘economically equivalent swap’’ definition. First, SIFMA AMG argued that the Commission should not impose Federal position limits on swaps at all, and that the proposed Federal position limits were ‘‘unnecessary and would in fact impose cost burdens . . . that are not commensurate with any of the suggested benefits . . . .’’ 1472 Similarly, CHS stated that ‘‘[t]here is little doubt, from CHS’s perspective, that including economically equivalent swaps as ‘referenced contracts’ for position limit purposes will result in a material burden for (a) commercial end-users and (b) small to mid-sized FCMs that focus on the needs of grain and energy hedgers, which are referred to as ‘Commodity-Focused FCMs’. The costs of compliance on such participants will likely be large and time-consuming, and possibly entail some risk of operational error arising out of the implementation process.’’ 1473 1472 SIFMA AMG at 6–7. Additional commenters similarly argued that subjecting swaps to position limits is unnecessary and would increase costs without commensurate benefits. E.g., CHS at 5; NCFC at 5; and ISDA at 5. 1473 CHS at 4. See also NCFC at 5 (similarly stating that ‘‘[t]he costs of compliance on such participants will likely be large and timeconsuming, and possibly entail some risk of operational error arising out of the implementation process.’’). CHS further stated, ‘‘[w]ith respect to commercial end-users, absent additional Commission guidance CHS believes that the burdens will take the form of (a) determining which types of swaps will be deemed to be economically equivalent swaps, (b) making significant and costly modifications to systems to identify and track transactions for reporting purposes, (c) developing tools for swaps aggregation purposes (or manually conducting such tasks if such a tool is not readily available to be interpolated into existing systems) E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 However, as discussed above, the Dodd-Frank Act added CEA section 4a(a)(5), which explicitly requires that the Commission impose Federal position limits on swaps that are ‘‘economically equivalent’’ to the futures contracts and options on futures contracts subject to Federal position limits, and that the Commission establish limits simultaneously for ‘‘economically equivalent’’ swaps. Accordingly, from the perspective of this cost-benefit discussion, the question is not whether the Final Rule should encompass swaps at all, but only the extent to which swaps should be incorporated as ‘‘economically equivalent’’ pursuant to CEA section 4a(a)(5). Nonetheless, the Commission recognizes that subjecting economically equivalent swaps to Federal position limits could impose the compliance costs referenced above by CHS and others. However, to the extent that the Final Rule adopts a narrow ‘‘economically equivalent swap’’ definition, the Commission anticipates these costs should be mitigated compared to alternative definitions, while simultaneously satisfying the statutory requirement under CEA section 4a(a)(5). Second, CME and Better Markets both suggested that the general ‘‘referenced contract’’ definition that applies to futures contracts and options on futures contracts should also apply to swaps, rather than the narrower ‘‘economically equivalent swap’’ definition. Similarly, NEFI argued that the narrower ‘‘economically equivalent swap’’ definition could allow for easy avoidance of Federal position limits.1474 The Commission discusses the possible costs and benefits of the Final Rule’s narrow definition versus this proposed alternative of a broader definition throughout this cost-benefit discussion of economically equivalent swaps, and the reasons discussed by the and (d) determining intra-day positions when addressing economically equivalent swaps, which will require real-time system reporting and real– time exception alerts, among other things . . . . In these respects, CHS asks the Commission to be mindful and more fully address the costs and benefits applicable to commercial end-users and Commodity-Focused FCMs, and to provide more clarity regarding the scope of referenced contracts. As a guide, CHS urges the Commission to maintain as narrow a definition of ‘referenced contract’ as possible. CHS also urges the Commission, both in the context of market participants generally and commercial end-users and Commodity-Focused FCMs particularly, to address CHS’s recommendations in the following section.’’ Id. at 4–5. NCFC similarly stated that ‘‘NCFC believes any Federal speculative position limits rule should not unduly burden commercial end-users who utilize derivatives markets for economically appropriate risk management activities.’’ NCFC at 7. 1474 NEFI at 3. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Commission throughout this section similarly apply in response to CME’s, Better Markets’, and NEFI’s proposed alternative to establish a broader ‘‘economically equivalent swap’’ definition. Third, SIFMA AMG argued that while it opposed including swaps within the Final Rule, to the extent the Commission determines to include swaps within the Final Rule, that, in the alternative, at least cash-settled swaps should be excluded from the economically equivalent swap definition since these types of swaps ‘‘have not historically been the source of manipulative corners, squeezes, or other disruptions related to physical commodity prices, and SIFMA AMG does not believe limits on these products would be necessary to further deter and prevent this type of trading activity.’’ 1475 However, the Commission believes that SIFMA AMG’s proposed alternative to exclude all cash-settled swaps ex ante would impose liquidity costs for bona fide hedgers since excluding all cashsettled swaps could incentivize liquidity to move from corresponding cash-settled referenced contracts to cash-settled OTC swaps, potentially harming the liquidity in the futures markets, including liquidity for bona fide hedgers. This could also harm price discovery if significant liquidity and trading migrates from the exchangetraded futures markets to the more opaque OTC swaps markets. For example, as noted above, if liquidity were to move from futures exchanges to the OTC swaps markets, non-dealer commercial entities may face increased transaction costs and widening spreads, as swap dealers gain market power in 1475 SIFMA AMG at 7. SIFMA AMG further argued that ‘‘imposing spot month limits only on physically-settled futures contracts would avoid such confusion, and more importantly, would adequately address the products of greatest concern and would serve to reduce compliance costs and related burdens (i.e., technology builds, personnel allocation, training, etc.) for the Commission and market participants by allowing the Commission to observe the impact of limits for physically-settled futures prior to evaluating whether to extend limits to a broader scope of derivatives products.’’ SIFMA AMG at 5–6. PIMCO and ISDA similarly argue that neither cash-settled swaps nor futures contracts should be subject to position limits. PIMCO at 3; ISDA at 5 (arguing that position limits on cash-settled referenced contracts, whether futures contracts or swaps, ‘‘impose a level of cost and complexity in implementation that does not correspond to any identified regulatory or policy benefit of such limits.’’) AQR similarly argued that the ‘‘opportunity or ability to use a swap to squeeze or corner an underlying physical commodity is extremely remote and thus extension of position limits to swaps would likely not be merited based on an analysis of the costs and benefits of such action.’’ AQR at 10. PO 00000 Frm 00183 Fmt 4701 Sfmt 4700 3417 the OTC market relative to centralized exchange trading. The Commission is unable to quantify the costs of these potential harms.1476 Furthermore, the Commission notes that CEA section 4a(a)(3) does not merely refer to corners and squeezes, but also refers to ‘‘manipulation’’ generally. Accordingly, the Commission believes that the Final Rule will better benefit market integrity to the extent that cash-settled swaps would be subject to the Final Rule by helping to prevent other forms of manipulation, such as ‘‘banging’’ or ‘‘marking’’ the close. Fourth, in contrast to the alternative posited by SIFMA AMG immediately above in which the Commission would exclude all cash-settled swaps, Better Markets believed that the Final Rule’s exclusion of certain cash-settled swaps could actually impose costs on liquidity formation. Better Markets thus proposed an alternative where settlement type (i.e., cash-settled versus physicallysettled) was not considered to be a ‘‘material’’ difference and therefore cash-settled swaps could be deemed to be ‘‘economically equivalent’’ to core referenced futures contracts, which are all physically-settled. Better Markets argued that the 2020 NPRM’s economically equivalent definition ‘‘essentially excludes’’ cash-settled swaps from Federal position limits because cash-settled swaps would not be able to qualify as economically equivalent to a physically-settled core referenced futures contract.1477 As Better Markets commented, distinguishing between cash-settled and physically-settled swaps and futures contracts by deeming settlement type (i.e., cash-settled vs. physically-settled settlement) to be a material term would ‘‘incentivize[ ] speculative liquidity formation away from more liquid, more transparent, and more restrictive futures exchanges and to the swaps markets.’’ 1478 However, the Commission does not believe that the treatment of cash-settled swaps under the Final Rule imposes such costs, at least to the extent assumed by Better Markets. The 1476 However, while the Commission acknowledges these potential costs, such costs to the nine legacy agricultural contracts may already have been realized because their corresponding swaps are not subject to Federal position limits under the status quo. Nonetheless, the Commission also recognizes that certain of the 16 non-legacy core referenced futures contracts that would be subject to Federal position limits for the first time under the Final Rule may have larger, more liquid swaps markets than the nine legacy agricultural contracts, and therefore potentially larger concomitant benefits and/or costs. 1477 Better Markets at 32. 1478 Id. E:\FR\FM\14JAR2.SGM 14JAR2 3418 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Commission believes Better Markets’ concern is mitigated since under the Final Rule cash-settled swaps are subject to Federal position limits only if there is a corresponding (i.e., ‘‘economically equivalent’’) cash-settled futures contract or option on a futures contract.1479 That is, cash-settled swaps are free from Federal position limits if there are no corresponding cash-settled futures contracts or options on futures contracts. In these situations, if no corresponding futures contract or option thereon exists, then there is no liquidity formation in cash-settled futures contracts and options on futures contracts with which a cash-settled swap would be competing for liquidity in the first place.1480 Fifth, FIA proposed an alternative in which cash-settled economically equivalent swaps would be subject to a separate (higher) Federal spot-month position limit levels compared to their corresponding referenced contracts, and FIA argued that its proposed alternative would benefit innovation and competition between exchanges.1481 However, the Commission believes that establishing separate (or higher) position limits for economically equivalent swaps could impose liquidity costs and burden market integrity and price discovery. In particular, separate position limits for cash-settled swaps would make it easier for potential manipulators to engage in market manipulation, such as ‘‘banging’’ or ‘‘marking’’ the close, by effectively permitting higher Federal position limits in cash-settled referenced contracts. For example, a market participant would be able to double its cash-settled positions by maintaining positions in both cashsettled futures and cash-settled economically equivalent swaps since under FIA’s proposed alternative positions in each contract type, that is futures contracts (including options 1479 The Commission notes that a swap could be deemed to be ‘‘economically equivalent’’ to any referenced contract, including cash-settled lookalikes, and that the ‘‘economically equivalent swap’’ definition is not limited to core referenced futures contracts. 1480 In contrast to Better Markets, AQR noted that any ‘‘extension of position limits to swaps risks negatively impacting commercial hedgers by reducing market liquidity, increasing transaction costs, and increasing commodity market volatility. While the Commission cannot entirely avoid those risks if compelled to impose such limits, the proposed approach to economically equivalent swaps may mitigate them in ways that allow the Commission to fully discharge its statutory obligation without unnecessarily restricting market activity.’’ AQR at 11. 1481 FIA at 7–8. The Commission generally addresses FIA’s argument about innovation and competition in the preamble above under Section II.B.10.v. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 thereon) and swaps, would be subject to their own separate position limits for purposes of Federal position limits. Furthermore, imposing position limits separately on economically equivalent swaps and futures contracts (and options thereon) as requested under FIA’s proposed alternative would mean that market participants would not be able to net their economically equivalent swaps with their futures positions. In contrast, the absence of separate Federal position limits for economically equivalent swaps means that market participants are able to net economically equivalent swaps with other referenced contracts, i.e., futures contracts against swaps. The Commission also recognizes that netting could permit larger speculative positions in futures markets for market participants who did not previously have bona fide hedge exemptions, but who have positions in swaps in the same commodity that could be netted against futures contracts in the same commodity. This observation might seem to be at cross-purposes with the relatively narrow ‘‘economically equivalent swap’’ definition. However, the Commission is concerned that separate position limits for swaps could impair liquidity in futures contracts or swaps, as the case may be. For example, a market participant (including a market maker or speculator) with a large portfolio of swaps (or futures contracts) near the applicable position limit would be assumed to have a strong preference for executing futures contracts (or swaps) transactions in order to maintain a swaps (or futures contracts) position below the applicable position limit. If there were many similarly situated market participants, the market for such swaps (or futures contracts) could become less liquid, which could burden market efficiency and impose higher trading costs for bona fide hedgers. The absence of separate position limits for swaps should decrease the possibility of illiquid markets for referenced contracts subject to Federal position limits. Because economically equivalent swaps and the corresponding futures contracts and options on futures contracts are close substitutes for each other, the absence of separate position limits should allow greater integration between the economically equivalent swaps and corresponding futures and options markets for referenced contracts, which should benefit price discovery, and should also provide market participants with more flexibility whether hedging, providing liquidity or market making, or PO 00000 Frm 00184 Fmt 4701 Sfmt 4700 speculating, which should benefit market efficiency and price discovery. Sixth, COPE alternatively requested that the Commission explicitly exclude physically-settled swaps, or at least provide specific examples of the contracts intended to be included.1482 While the Commission provides greater clarity in the corresponding preamble discussion above,1483 the Commission has determined that excluding all physically-settled swaps ex ante is inconsistent with the statutory goals in CEA section 4a(a)(3)(B), especially the requirements to deter corners and squeezes and to ensure sufficient market liquidity for bona fide hedgers enumerated in CEA section 4a(a)(3)(B)(ii) and (iii), respectively. For example, excluding physically-settled swaps could potentially incentivize liquidity to move from physicallysettled core referenced futures contracts to physically-settled swaps, which could impose costs both on market liquidity for bona fide hedgers and also on market integrity by enabling potential manipulators to accumulate large directional positions in physicallysettled contracts to effect a corner and squeeze more easily. This could additionally harm price discovery as liquidity and trading would move from the more transparent exchange-traded futures contracts and options thereon to the more opaque OTC swaps markets. Seventh, NCFC stated that it ‘‘appreciate[s] that CFTC proposed a narrow definition of an economically equivalent swap under a Federal position limits regime. Likewise, we do not object to an inclusion of such swaps in theory since our members use them for legitimate hedging purposes. However, NCFC continues to be concerned with the operational difficulties, burdens, and costs for commercial end users and small- to mid-sized FCMs that focus on the needs of agricultural hedgers of including swaps for position limit purposes. The costs of compliance on such participants will likely be large and time-consuming, and possibly entail some risk of operational error arising out of the implementation process.’’ 1484 As a result, NCFC suggested, as an alternative to the 2020 NPRM’s approach, that the Final Rule exclude from a commercial end-user’s Federal position limits those agricultural commodity swaps that are transacted by invoking the ‘‘End-User Exemption to Mandatory Clearing’’ rule.1485 1482 COPE at 4–5. Section II.A.4.iii.d(1). 1484 NCFC at 5. 1485 Id. 1483 See E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations According to NCFC, those swap contracts already must meet the test ‘‘to hedge or mitigate commercial risk,’’ and are ‘‘not used for a purpose that is in the nature of speculation, investing, or trading,’’ as outlined in § 50.50 of the Commission’s regulations, and therefore, by definition, these contracts should not be subject to end-user Federal speculative position limits.1486 The Commission understands NCFC’s concern, but believes NCFC’s alternative is unnecessary for two reasons. First, to the extent a swap described by NCFC would ‘‘hedge or mitigate commercial risk,’’ the Commission believes that the costs described by NCFC are mitigated since such swap likely would qualify for an enumerated bona fide hedge under the Final Rule and therefore would not contribute to a commercial end-user’s net position for Federal position limits purposes.1487 Second, the Commission believes the purported benefits related to NCFC’s alternative are limited since physical commodity swaps are not required to be cleared under the Commission’s existing regulations, so determining whether the end-user clearing exemption applies is not necessarily a helpful proxy in determining whether a swap is ‘‘economically equivalent’’ or not for purposes of CEA section 4a(a)(5). vii. Pre-Existing Positions Final § 150.2(g) imposes Federal position limits on ‘‘pre-existing positions’’ 1488—other than preenactment swaps and transition period swaps—during both the spot month and non-spot month. The Commission believes that final § 150.2(g) benefits market integrity since pre-existing positions (other than preenactment and transition period swaps) that exceed spot-month limits could result in market or price disruptions as positions are rolled into the spot khammond on DSKJM1Z7X2PROD with RULES2 1486 Id. 1487 To the extent an FCM would not be able to qualify for a bona fide hedge, the Commission believes that excepting such swaps for purely financial firms would functionally have the same effect as maintaining the risk-management exemption, which Congress, through the DoddFrank Act’s amendments to the CEA, has directed the Commission to eliminate. See Section II.A.4.iii. Nonetheless, to the extent that NCFC’s comment is limited to small- and medium-sized FCMs, the Commission does not believe that such FCMs generally will violate the Federal position limit levels based on the Commission’s understanding of existing market dynamics and positions held by market participants under the status quo, and therefore costs should be comparatively mitigated for small- and medium-sized FCMs. 1488 Final § 150.1 defines ‘‘pre-existing position’’ to mean ‘‘any position in a commodity derivative contract acquired in good faith prior to the effective date’’ of any applicable position limit. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 3419 month.1489 The Commission recognizes some costs and benefits associated with final § 150.2(g)(2) may have already been realized given that the nine legacy agricultural contracts are already subject to the Federal non-spot month position limits. Therefore, exchanges and market participants should not incur any significant new costs to comply with § 150.2(g)(2), and will likely continue to benefit from market integrity as a result of the Final Rule. In response to the 2020 NPRM, FIA and MGEX suggested that the Commission alternatively restructure the provision to include just two categories, ‘‘pre-existing swaps’’ and ‘‘pre-existing futures,’’ because the variability of exemptive relief could create operational challenges for market participants.’’ 1490 Although the Commission did not adopt the terms ‘‘pre-existing swaps’’ and ‘‘pre-existing futures’’ for the Final Rule as FIA and MGEX suggested, the practical effect is that final § 150.2(g) creates two categories—(1) pre-existing futures contracts (including options thereon), which are subject to both the spot month and non-spot month Federal position limits; and (2) pre-existing swaps, which are not subject to such limits. Furthermore, to offset the operational challenges or other burdens associated with final § 150.2(g), the Commission is delaying the compliance date to January 1, 2022 in connection with the Federal position limits for the 16 non-legacy core referenced futures contracts, and further delaying the compliance date to January 1, 2023 for swaps that are subject to Federal position limits under the Final Rule. to anticipate. Like the Federal position limits it supports, § 150.2(i) helps to protect market integrity by preventing excessive speculation and market manipulation. However, the Commission also recognizes possible costs to market participants due to uncertainty under the Final Rule’s antievasion provision since it may be difficult for market participants to determine, as a bright-line matter, whether their positions and trading strategies represent legitimate avoidance of position limits or instead represent malfeasant evasive practices.1491 As a result, the lack of a bright-line standard could potentially impose liquidity costs as market participants may instead choose to engage in less efficient trading strategies in order to err cautiously to avoid engaging in potentially ‘‘evasive’’ behavior. As an alternative to the ‘‘willfully’’ standard, FIA recommended that the anti-evasion analysis be based on the presence of ‘‘deceit, deception, or other unlawful or illegitimate activity.’’ 1492 Because a position that does not involve fraud or deceit can still involve other indicia of evasive activity, the proposed alternative would be less effective in protecting market integrity to the extent it failed to capture evasive activity. Further, the incorporation of a standard other than ‘‘willful’’ would create confusion to market participants by resulting in divergent standards among Commission rulemakings concerning evasion. viii. Anti-Evasion Final § 150.2(i) provides that, if used to willfully circumvent or evade speculative position limits: (1) A commodity index contract, monthly average pricing contract, outright price reporting contract, and/or a location basis contract will be considered to be a referenced contract; (2) a bona fide hedging transaction or position recognition or spread exemption will no longer apply; and (3) a swap will considered to be an economically equivalent swap even if it does not meet the economically equivalent swap definition set forth in § 150.1. This provision serves to deter and prevent a number of potential methods of evading Federal position limits, the specifics of which the Commission may not be able i. Background The Final Rule provides for several exemptions that, subject to certain conditions, permit a trader to exceed the applicable Federal position limit set forth in final § 150.2. Specifically, § 150.3 generally maintains but modifies, as discussed below, the two existing Federal exemptions that include (1) bona fide hedging positions and (2) spread positions. Final § 150.3 also includes new Federal exemptions 1489 The Commission is particularly concerned about protecting the spot month in physicaldelivery futures from corners and squeezes. 1490 FIA at 8–9; MGEX at 4. PO 00000 Frm 00185 Fmt 4701 Sfmt 4700 4. Exemptions From Federal Position Limits—Bona Fide Hedging Recognitions, Spread and Other Exemptions (Final §§ 150.1 and 150.3) 1491 SIFMA AMG at 7, n.16 (noting that the antievasion provision makes the application of the proposed ‘‘economically equivalent swap’’ definition less clear because it incorporates a subjective measure of intent); see also FIA at 25 (questioning how a participant would distinguish a strategy that minimizes position size with an evasive strategy); Better Markets at 33 (describing the anti-evasion provision as a ‘‘useful deterrent,’’ but noting that the willful circumvention standard would be difficult to meet and partially turns on the Commission’s consideration of the legitimate business purpose analysis). 1492 FIA at 25–26. E:\FR\FM\14JAR2.SGM 14JAR2 3420 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations for certain conditional spot month positions in natural gas, financial distress positions, and pre-enactment and transition period swaps. Final § 150.1 sets forth the definitions for which positions may qualify as a ‘‘bona fide hedging transaction or position’’ and for ‘‘spread transaction.’’ 1493 ii. Bona Fide Hedging Definition; Enumerated Bona Fide Hedges; and Guidance on Spot Month Hedge Exemption Restrictions and Measuring Risk The Commission is adopting several amendments to the bona fide hedge definition. First, the Commission is revising some of the general elements of the ‘‘bona fide hedging transaction or position’’ definition in final § 150.1 to conform the Commission’s regulatory definition to the statutory bona fide hedge definition in CEA section 4a(c), as amended by Congress in the DoddFrank Act. As discussed in greater detail in the preamble, the Final Rule (1) revises the temporary substitute test, consistent with the Commission’s understanding of the Dodd-Frank Act’s amendments to section 4a of the CEA, to no longer recognize as bona fide hedges certain risk management positions; (2) revises the economically appropriate test to make explicit that the position must be economically appropriate to the reduction of ‘‘price risk’’; and (3) eliminates the incidental test and orderly trading requirement, which the Dodd-Frank Act did not include in section 4a of the CEA. The Commission believes that these amendments to the existing general elements of the regulatory definition include non-discretionary changes that are required by Congress’s amendments to section 4a of the CEA, or in the case of the incorporation of ‘‘price risk,’’ do not represent a change from the status quo baseline. The Commission is also amending the bona fide hedge definition to conform to the CEA’s statutory definition, by adding a provision for positions that qualify as pass-through swaps and pass-through swap offsets.1494 khammond on DSKJM1Z7X2PROD with RULES2 1493 The Commission currently defines this term in existing § 1.3 in the plural as ‘‘bona fide hedging transactions or positions’’ while the Final Rule defines it in the singular ‘‘bona fide hedging transaction or position.’’ See supra Section I.E. (discussing use of certain terminology). This discussion sometimes refers to the ‘‘bona fide hedging transaction or position’’ definition as ‘‘bona fide hedges,’’ ‘‘bona fide hedging,’’ or ‘‘bona fide hedge positions.’’ For the purpose of this discussion, the terms have the same meaning. 1494 As discussed in Section II.A.—§ 150.1— Definitions of the preamble, the existing definition of ‘‘bona fide hedging transactions and positions’’ appears in existing § 1.3 of the Commission’s VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Second, the Commission is maintaining the distinction between enumerated and non-enumerated bona fide hedges but is (1) moving the location of the enumerated bona fide hedges, which will remain part of the regulatory text, from the existing definition of ‘‘bona fide hedging transactions and positions’’ currently found in Commission regulation § 1.3 to final Appendix A in part 150; 1495 and (2) expanding the list of enumerated hedges, which will continue to be selfeffectuating for Federal position limit purposes, thereby not requiring prior Commission approval. Third, the Commission is proposing guidance in Appendix B with respect to (i) whether an entity may measure risk on a net or gross basis for purposes of determining its bona fide hedge positions, and (ii) factors exchanges could consider when applying a restriction on an exemption against holding a position under a bona fide hedge or spread transaction exemption in excess of limits during the lesser of the last five days of trading or the time period for the spot month in a physically-delivered contract, or otherwise limit the size of such position. The Commission expects that these modifications related to bona fide hedging will primarily benefit physical commodity commercial market participants, as well as their counterparties. CEA section 4a(c)(1) directs the Commission to exclude bona fide hedge positions from any Federal position limits framework. Further, the Commission believes that, generally, recognizing bona fide hedges supports all section 15(a) factors under this costbenefit discussion. For example, recognizing bona fide hedges encourages participation in the futures markets by commercial market participants.1496 Increasing participation from different types of market participants, including commercial market participants: (i) protects the legitimate commercial activity of cash-market participants,1497 regulations; the revised definition of this term, in singular form, now appears in § 150.1. 1495 For the avoidance of doubt, Appendix A will still be incorporated as part of the Commission’s regulations under the Final Rule. In contrast, the 2020 NPRM had proposed to make Appendix A Acceptable Practices. 1496 NFPEA at 6 (stating that ‘‘Congress intended the Commission to protect end-users’ continued access to cost-effective commercial risk management tools, and did not intend to burden end-users with unnecessary regulatory compliance obligations’’). 1497 AGA expressed its support of an expanded list of enumerated hedges by stating that, ‘‘consistent with the mandate of the CEA, any PO 00000 Frm 00186 Fmt 4701 Sfmt 4700 (ii) increases competitiveness, and (iii) supports the financial integrity of futures markets. Further, increased participation and competitiveness will benefit price discovery. Finally, an expanded list of enumerated bona fide hedges supports sound risk management practices by commercial market participants and their counterparties, which may result in indirect benefits to commodity end users or the public.1498 Recognizing an expanded list of enumerated bona fide hedges, which are self-effectuating and do not require prior approval from the Commission, will mitigate related compliance costs for those contract markets that will be newly subject to Federal position limits under the Final Rule. This is in comparison to an alternative scenario in which a narrow set of available enumerated hedges would have required market participants to obtain prior approval before availing themselves of an exemption for Federal position limit purposes. The Commission notes that this section will discuss the substantive exemptions for Federal position limit purposes while the next section will discuss the process for the Commission or exchanges, as applicable, to grant exemptions and bona fide hedge recognitions. a. Bona Fide Hedging Definition (1) Elimination of Risk Management Exemptions; Addition of the PassThrough Swap Exemption The Commission is eliminating the word ‘‘normally’’ from the bona fide hedge definition’s temporary substitute test and, as a result, prohibiting recognition, as bona fide hedges, of risk management positions in physical commodity derivatives subject to Federal speculative position limits. This amendment conforms the regulatory bona fide hedging definition with the Commission’s interpretation that the removal of the word ‘‘normally’’ from the CEA’s section 4a(c)(2) statutory temporary substitute test by the DoddFrank Act signaled Congressional intent speculative position limits regime adopted by the CFTC must be established in a way that allows commercial end-users, such as natural gas utilities, to continue to enter into bona fide hedges to manage, hedge and mitigate the commercial risks of their natural gas distribution business in a nonburdensome and cost-effective manner on behalf of customers.’’ AGA at 2. 1498 In expressing overall support for the proposed definition of bona fide hedging transaction or position in the 2020 NPRM, CME Group noted that the Commission’s recognition of a wider range of commercial hedging practices generally reflects Congress’s intent not to unduly burden bona fide hedgers. CME Group at 9. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 to cease recognizing ‘‘risk management’’ positions as bona fide hedges for physical commodities. Additionally, in accordance with CEA section 4a(c)(2)(B), the Commission is, however, expanding the bona fide hedging definition to also include as a bona fide hedge any position that qualifies as a pass-through swap/swap offset, discussed further below.1499 The Commission believes that including pass-through swaps and pass-through swap offsets within the definition of a bona fide hedge will mitigate some of the potential impact resulting from the rescission of the risk management exemption,1500 and the Commission discusses the costs and benefits related to the pass-through swap provision further below. As discussed below, the Final Rule’s pass-through provisions should help address certain of the hedging needs of persons seeking to offset the risk from 1499 See infra Section IV.A.4.ii.a(2). The existing bona fide hedging definition in § 1.3 requires that a position must ‘‘normally’’ represent a substitute for transactions or positions made at a later time in a physical marketing channel (i.e., the ‘‘temporary substitute test’’). The Dodd-Frank Act amended the temporary substitute language that previously appeared in the statute by removing the word ‘‘normally’’ from the phrase normally ‘‘represents a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel.’’ 7 U.S.C. 6a(c)(2)(A)(i). The Commission interprets this change as reflecting Congressional direction that a bona fide hedging position in physical commodities must always (and not just ‘‘normally’’) be in connection with the production, sale, or use of a physical cash-market commodity. Previously, the Commission stated that, among other things, the inclusion of the word ‘‘normally’’ in connection with the pre-Dodd-Frank-Act version of the temporary substitute language indicated that the bona fide hedging definition should not be construed to apply only to firms using futures to reduce their exposures to risks in the cash market, and that to qualify as a bona fide hedge, a transaction in the futures market did not need to be a temporary substitute for a later transaction in the cash market. See Clarification of Certain Aspects of the Hedging Definition, 52 FR at 27195, 27196 (Jul. 20, 1987). In other words, that 1987 interpretation took the view that a futures position could still qualify as a bona fide hedging position even if it was not in connection with the production, sale, or use of a physical commodity. Accordingly, based on the Commission’s interpretation of the revised statutory definition of bona fide hedging in CEA section 4a(c)(2), risk-management hedges would not be recognized under the Commission’s bona fide hedging definition in § 150.1. 1500 See, e.g., ICE at 5–6 (contending that eliminating risk management exemptions could make it less efficient and more expensive for commercial end-users to hedge risks and that passthrough exemption is an inadequate substitution); ISDA at 6–7 (arguing that the elimination of the risk management exemptions will result in increased costs for ‘‘tailored over-the-counter financial products, . . . will cause some dealers to exit the business and will in any event lead to decreases in liquidity in the underlying futures markets, with a corresponding increase in volatility.’’); see also supra Section II.A.1.iii.a(4) (discussing elimination of the risk management exemptions). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 swap books, allowing for sufficient liquidity in the marketplace for both bona fide hedgers and their counterparties. Accordingly, under the Final Rule, market participants with positions that do not otherwise satisfy the bona fide hedging definition or qualify for another exemption are no longer able to rely on recognition of such risk-reducing techniques as bona fide hedges. Market participants who provide liquidity to commercial market participants and have obtained or requested a risk management exemption under the existing definition, and who do not qualify for a pass-through swap offset, may resort to other hedging strategies. These other hedging strategies may result in increased costs for these liquidity providers for those activities that are not eligible for the bona fide hedge treatment. The Commission recognizes the possible liquidity costs as a result of eliminating risk management exemptions. Specifically, the Commission considered the risk that dealers who approach or exceed the Federal position limit may decide to pull back on providing liquidity, including to bona fide hedgers, due to the exclusion of risk management positions from the bona fide hedge definition. However, the Commission considered the risk of possible reduced liquidity against various factors and believes that the potential cost of reduced liquidity will be mitigated for several reasons. First, the Final Rule extends the compliance date by which risk management exemption holders must reduce their positions to comply with Federal position limits under the Final Rule to January 1, 2023. This delay provides sufficient time for existing positions to roll off and/or be replaced with positions that conform with the Federal position limits adopted in this Final Rule. Second, for the nine legacy agricultural contracts, the Final Rule generally sets Federal non-spot month position limit levels higher than existing non-spot limits, which may enable additional dealer activity described above.1501 The remaining non-legacy 16 core referenced futures contracts will not be subject to non-spot month Federal position limits and will remain subject to existing exchange-set limits or 1501 See infra Section II.B.4. (discussing non-spot month limit levels). Final § 150.2 generally increases position limits for non-spot months for contracts that currently are subject to the Federal position limits framework other than for CBOT Oats (O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), for which the Commission is maintaining existing levels. PO 00000 Frm 00187 Fmt 4701 Sfmt 4700 3421 accountability levels outside of the spot month, which does not represent a change from the status quo. The generally higher levels with respect to the nine legacy agricultural contracts, and the exchanges’ flexible accountability regimes with respect to the new 16 core referenced futures contracts, should mitigate at least some potential costs related to the prohibition on recognizing risk management positions as bona fide hedges. Third, the Final Rule may improve market competitiveness and reduce transaction costs. As noted above, existing holders of the risk management exemption, and the levels permitted thereunder, are currently confidential, and the Commission is no longer granting new risk management exemptions to potential new liquidity providers. Accordingly, by eliminating the risk management exemption, the Final Rule benefits the public and strengthens market integrity by improving market transparency since certain dealers are no longer able to maintain the grandfathered risk management exemption while other dealers lack this ability under the status quo. While the Commission believes that the risk management exemption may allow dealers to provide additional market making activities, which benefits market liquidity and may result in lower prices for end-users, as noted above, the potential costs resulting from removing the risk management exemption may be mitigated by the Final Rule’s revised position limit levels that reflect current EDS for spot month levels and current open interest and trading volume for non-spot month levels. Therefore, the Commission believes that existing risk management exemption holders should be able to continue providing liquidity to bona fide hedgers, but acknowledges that some may not to the same degree as under the exemption. However, the Commission believes that any potential harm to liquidity should be mitigated. Further, the spot month and non-spot month levels, which generally are higher than the status quo, together with the elimination of the risk management exemptions that benefit only certain dealers, may enable new liquidity providers to enter the markets on a level playing field with the existing risk management exemption holders. With the possibility of additional liquidity providers, the framework may strengthen market integrity by decreasing concentration risk potentially posed by too few market makers. However, the benefits to market liquidity the Commission described above may be muted since this analysis is predicated, in part, on the E:\FR\FM\14JAR2.SGM 14JAR2 3422 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations understanding that dealers are the predominant large traders. Data in the Commission’s Supplementary COT and its underlying data indicate that riskmanagement exemption holders are not the only large participants in these markets—large commercial firms also hold large positions in such commodities. Fourth, although the Commission will no longer recognize risk management positions as bona fide hedges under this Final Rule, the Commission maintains other authorities, including the authority under CEA section 4a(a)(7), to exempt risk management positions from Federal position limits. Fifth, consistent with existing industry practice, exchanges may continue to recognize risk management positions for contracts that are not subject to Federal position limits, including for excluded commodities. Finally, as discussed immediately below, the Commission believes the recognition of pass-through swaps and pass-through swap offsets could mitigate, to some extent, the costs to the market in general, or to specific market participants, resulting from the risk management exemption’s elimination.1502 (2) Pass-Through Swaps and PassThrough Swap Offsets The revised bona fide hedging definition, consistent with the DoddFrank Act’s changes to CEA section 4a(c)(2), permits the recognition as bona fide hedges of futures and options on futures positions that offset passthrough swaps entered into by dealers and other liquidity providers (the ‘‘passthrough swap counterparty’’) 1503 opposite bona fide hedging swap counterparties (the ‘‘bona fide hedge counterparty’’), as long as: (1) The passthrough swap counterparty receives from the bona fide hedging swap counterparty a written representation that the pass-through swap qualifies as a bona fide hedge; and (2) the passthrough swap counterparty enters into a futures or option on a futures position or a swap position to offset and reduce the price risk attendant to the passthrough swap.1504 Accordingly, a subset khammond on DSKJM1Z7X2PROD with RULES2 1502 NCFC concurs that ‘‘the substantial increase in the overall speculative position limits and allowances for pass-through swaps will limit any potential loss of liquidity’’ that may result from the elimination of the risk management exemption. NCFC at 7. 1503 Such pass-through swap counterparties are typically swap dealers providing liquidity to bona fide hedgers. 1504 See paragraph (2)(i) of the proposed bona fide hedging definition. Of course, if the pass-through swap qualifies as an ‘‘economically equivalent swap,’’ then the pass-through swap counterparty VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 of risk management exemption holders and transactions they enter into could continue to benefit from an exemption, and potential counterparties could benefit from the liquidity they provide, as long as the position being offset qualifies as a bona fide hedge for the bona fide hedge counterparty. The Commission has determined that any resulting costs or benefits related to the proposed pass-through swap exemption are a result of Congress’s amendments to CEA section 4a(c) rather than the Commission’s discretionary action. On the other hand, the Commission’s discretionary action to require the pass-through swap counterparty to receive and maintain a written representation from the bona fide hedging swap counterparty that the pass-through swap qualifies as a bona fide hedging position causes the swap counterparty to incur marginal recordkeeping costs.1505 The Commission considered comments requesting the elimination of the passthrough swap provision recordkeeping requirement in § 150.3(d) based on arguments that requiring this recordkeeping was not practical.1506 The Commission is not persuaded by those arguments as the recordkeeping requirements assist the Commission in verifying that the pass-through swap provision is only being utilized to offset risks arising from bona fide hedges. Accordingly, the Commission is finalizing the proposed pass-through swap recordkeeping requirement in § 150.3(d), subject to certain conforming changes to reflect amendments to the pass-through swap paragraph of the bona fide hedging definition. Since not all swaps entered into by a commercial entity may qualify as a bona fide hedge, the Commission declines commenters’ requests that a passthrough swap counterparty may reasonably rely solely upon the fact that the counterparty is a commercial end user and, absent an agreement between the counterparties, that the swap appears to be consistent with hedges entered into by end users in the same line of business. The Commission, does not need to rely on the pass-through swap provision since it may be able to offset its long (or short) position in the economically equivalent swap with the corresponding short (or long) position in the futures or option on futures position or on the opposite side of another economically equivalent swap. 1505 To the extent that the pass-through swap counterparty is a swap dealer or major swap participant, it already may be subject to similar recordkeeping requirements under § 1.31 and part 23 of the Commission’s regulations. As a result, such costs may already have been realized. 1506 Cargill at 10; EEI/EPSA at 7–8; FIA at 11–12; CMC at 5; Shell at 6–7; ICE at 6–7; ISDA at 11–12. PO 00000 Frm 00188 Fmt 4701 Sfmt 4700 however, is amending the regulatory text to provide flexibility and avoid a prescriptive requirement that would otherwise cause additional costs or burdens. Instead, the Final Rule provides that the pass-through swap counterparty (i.e., the swap dealer) may rely in good faith on a written representation made by its bona fide hedging swap counterparty, unless the pass-through swap counterparty has information that would cause a reasonable person to question the accuracy of the representation. The Commission is adding the written representation requirement to enable the Commission to verify that only market participants with bona fide hedge exemptions are able to pass-through those exemptions to their swap dealer counterparties. To avoid a prescriptive requirement that would incur additional costs to market participants, the Final Rule does not prescribe the form or manner by which the pass-through swap counterparty obtains the written representation. The Commission recognizes that such flexibility would allow for the bona fide hedging counterparty to make such representations on a relationship basis through counterparty relationship documentation (e.g., through ISDA documentation) or on a transaction basis (e.g., through trade confirmations or in other forms as agreed upon by the parties), based on the most cost efficient manner for the market participants. The Final Rule’s pass-through swap provision, consistent with the DoddFrank Act’s changes to CEA section 4a(c)(2), also addresses a situation where a participant who qualifies as a bona fide hedging swap counterparty (i.e., a participant with a position in a previously-entered into swap that qualified, at the time the swap was entered into, as a bona fide hedging position under the revised definition) seeks, at some later time, to offset that swap position.1507 Such step might be taken, for example, to respond to a change in the participant’s risk exposure in the underlying commodity. As a result, a participant could use futures contracts or options on futures contracts in excess of Federal position limits to offset the price risk of a previouslyentered into swap, which would allow the participant to exceed Federal position limits using either new futures or options on futures or swap positions that reduce the risk of the original swap. The Commission expects the passthrough swap provision to facilitate 1507 See paragraph (2)(ii) of the ‘‘bona fide hedging transaction or position’’ definition in § 150.1. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations dynamic hedging by market participants. The Commission recognizes that a significant number of market participants use dynamic hedging to more effectively manage their portfolio risks. Therefore, this provision may increase operational efficiency. In addition, by permitting dynamic hedging, a greater number of dealers should be better able to provide liquidity to the market, as these dealers will be able to more effectively manage their risks by entering into pass-through swaps with bona fide hedgers as counterparties. Moreover, market participants are not precluded from using swaps that are not ‘‘economically equivalent swaps’’ for such risk management purposes since swaps that are not deemed to be ‘‘economically equivalent’’ to a referenced contract are not subject to the Commission’s position limits framework. (3) Limiting ‘‘Risk’’ to ‘‘Price’’ Risk; Elimination of the Incidental Test and Orderly Trading Requirement khammond on DSKJM1Z7X2PROD with RULES2 The bona fide hedging definition’s ‘‘economically appropriate test’’ set out in final § 150.1 explicitly provides that only hedges that offset price risks can be recognized as bona fide hedging transactions or positions. The Commission does not believe that this particular change imposes any new costs or benefits, as it is consistent with both the existing bona fide hedging definition 1508 as well as the Commission’s longstanding policy.1509 Nonetheless, the Commission realizes that hedging occurs for more types of risks than price (e.g., volumetric hedging) and hedging solely to protect against changes in value of non-price risks would fall outside the category of a bona fide hedge, which offsets the 1508 The existing bona fide hedging definition in § 1.3 provides that ‘‘no transactions or positions shall be classified as bona fide hedging unless their purpose is to offset price risks incidental to commercial cash or spot operations.’’ (emphasis added). Accordingly, the definition in final § 150.1 merely moves this requirement to the definition’s revised ‘‘economically appropriate test’’ requirement. 1509 For example, in promulgating existing § 1.3, the Commission explained that a bona fide hedging position must, among other things, ‘‘be economically appropriate to risk reduction, such risks must arise from operation of a commercial enterprise, and the price fluctuations of the futures contracts used in the transaction must be substantially related to fluctuations of the cashmarket value of the assets, liabilities or services being hedged.’’ Bona Fide Hedging Transactions or Positions, 42 FR at 14832, 14833 (Mar. 16, 1977). The Dodd-Frank Act added CEA section 4a(c)(2), which copied the ‘‘economically appropriate test’’ from the Commission’s definition in § 1.3. See also 78 FR at 75702, 75703. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 ‘‘price risk’’ of an underlying commodity cash position. In response to commenters, the Commission clarifies in the preamble that price risk can be informed and impacted by various other types of risks.1510 The Commission agrees with commenters who stated that market participants form independent economic assessments of how different risks (including, but not limited to, geopolitical, turmoil, weather, or counterparty) might create or impact the price risk of underlying commodities.1511 The Commission recognizes these risks can create price risks and understands that firms may manage these potential risks to their businesses differently and in the manner most suitable for their business. By limiting the economically appropriate prong to price risk, the Commission is reiterating its historical practice (which has adequately applied to the legacy agricultural contracts for decades) to recognize hedges of price risk of an underlying commodity position as bona fide hedges while acknowledging that price risk may itself be impacted by non-price risks. Market participants may continue to manage non-price risks in a variety of ways, which may include participation in the futures markets or exposure to other financial products. In fact, market participants may decide to use futures contracts that are not subject to Federal position limits, if they determine such contracts will help them manage nonprice risks faced by their businesses. Alternatively, commenters suggested that the Commission permit market participants to use the non-enumerated hedge process to receive recognition of hedges of non-price risk on a case-bycase basis.1512 The Commission is precluded from adopting this alternative in light of its view that price risk is required to satisfy the CEA’s economically appropriate test. Further, the Commission is unaware of commercial market participants historically seeking non-enumerated bona fide hedge recognition for nonprice risk in the spot month. The Commission further implements Congress’s Dodd-Frank Act amendments that did not include in the statutory bona fide hedge definition the incidental test and orderly trading requirement by eliminating those elements from to the Commission’s regulatory definition. As discussed in the preamble, the Commission believes 1510 See supra Section II.A.1.iii.b (discussing economically appropriate test); Cargill at 3. 1511 See, e.g., CMC at 3. 1512 MGEX at 2; FIA at 11. PO 00000 Frm 00189 Fmt 4701 Sfmt 4700 3423 that these changes do not represent a change in policy or regulatory requirement. As a result, the Commission does not identify any costs or benefits related to these changes. b. Enumerated Bona Fide Hedges The Commission maintains, and incorporates in final § 150.3, a list of enumerated bona fide hedges in Appendix A to part 150 of the Commission’s regulations that includes: (i) All of the existing enumerated hedges; and (ii) additional enumerated bona fide hedges. The Commission reinforces that hedging practices not otherwise listed may still be deemed, on a case-by-case basis, to comply with the proposed bona fide hedging definition (i.e., non-enumerated bona fide hedges). As discussed further below, the enumerated bona fide hedges in Appendix A are ‘‘self-effectuating’’ for purposes of Federal position limit levels. This is expected to help in ensuring timely hedging and therefore reduce compliance costs associated with seeking an exemption.1513 (1) Treatment of Unfixed Price Transactions As discussed in the preamble, the Commission has long recognized fixedprice commitments as the basis for a bona fide hedge.1514 Under existing § 1.3, only one enumerated hedge explicitly mentions ‘‘unfixed price,’’ and its availability is limited to circumstances where a market participant has both an unfixed-price purchase and an unfixed-price sale on hand (precluding a market participant with only an unfixed-price purchase or an unfixed price sale from qualifying for this particular enumerated hedge).1515 In 2012, Commission staff issued interpretive letter 12–07 (‘‘Staff Letter 12–07’’), which clarified that a commercial entity may qualify for the existing enumerated bona fide hedge for unfilled anticipated requirements even if the commercial entity has entered into long-term, unfixed-price supply or requirements contracts because, as staff explained, the unfixed-price purchase 1513 For example, AGA expressed support for the Commission’s proposal to recognize anticipatory merchandising as an enumerated hedge because it promotes liquidity. AGA at 8. AGA stated that ‘‘[a]bsent such an enumerated hedge, there would be a piecemeal approach to permitting such hedges which could reduce liquidity, raise costs, and create undue risks for gas utilities, without any regulatory benefits toward the Commission’s goal to reduce excessive speculative activities.’’ Id. 1514 See supra Section I. 1515 See, e.g., paragraphs (2)(i)(A) and 2(ii)(A) of existing § 1.3. E:\FR\FM\14JAR2.SGM 14JAR2 3424 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 contract does not ‘‘fill’’ the commercial entity’s anticipated requirements.1516 The Final Rule affirms and broadens the application of the interpretation provided in Staff Letter No. 12–07. As a result, commercial market participants with unfixed price transactions may qualify for bona fide hedge treatment under the enumerated bona fide hedges for anticipatory merchandising, anticipated unsold production, or anticipated unfilled requirements.1517 The Commission clarifies that a commercial market participant that enters into an unfixed-price transaction will not be precluded from qualifying for one of these anticipatory enumerated bona fide hedges as long as the commercial entity otherwise satisfies all requirements for such anticipatory bona fide hedge, including demonstrating its anticipated need in the physical marketing channel related to either its unsold production, unfilled requirements, and/or merchandising, as applicable.1518 As such, merely entering into an unfixed-price transaction is not alone sufficient to demonstrate compliance with one of the enumerated anticipatory bona fide hedges. The same costs and benefits described above with respect to an expanded list of enumerated bona fide hedge recognitions also apply to such recognition based on unfixed-price transactions. The Commission’s treatment of unfixed price transactions under the Final Rule will benefit physical commodity commercial market participants. As discussed previously, CEA section 4a(c)(1) directs the Commission to exclude bona fide hedge positions from any Federal position limits framework. In accordance with CEA section 4a(c)(1), the Commission’s treatment of unfixed price transactions entered into by commercial market participants protects the legitimate commercial activity of cash-market participants,1519 thereby encouraging participation in the futures markets by commercial market participants. Additionally, bona hedge treatment for qualified unfixed price transactions benefits the public by allowing commercial market participants to more effectively and predictably hedge their 1516 CFTC Staff Letter 12–07 at 1, issued August 16, 2012, https://www.cftc.gov/LawRegulation/ CFTCStaffLetters/letters.htm, title search ‘‘12–07.’’ 1517 See supra Section II.A.1.iv (discussing treatment of unfixed price transactions). 1518 The specific requirements associated with each enumerated bona fide hedge, including each anticipatory bona fide hedge, are described in detail further below. 1519 See Cargill at 6 (stating that the Commission should recognize unfixed price transactions as they are ‘‘fundamental to price risk management and routinely used by firms to manage risk’’). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 price risks, thus controlling costs that might be passed on to the public.1520 However, to the extent the Commission currently allows exemptions related to unfixed-price transactions, the costs and benefits already may be realized by market participants and may not represent a change from the status quo baseline. Alternatively, several commenters requested that the Commission create a new enumerated bona fide hedge for unfixed-price transactions or amend the existing enumerated bona fide hedge for offsetting unfixed purchase and sales.1521 The Commission does not believe that this is necessary since, as described above, commercial market participants may continue to both qualify for anticipatory bona fide hedges while also entering into unfixed-price transactions. Further, the Commission believes that neither of these alternatives is suitable because there is an inherent difficulty in evaluating the propriety of a hedge of an unfixed price obligation with a fixed-price futures contract due to the basis risk that exists until the unfixed price obligation is fixed. Given differences among markets, creating a new enumerated bona fide hedge for any unfixed price transaction could, under certain circumstances, impose costs on market integrity, including by enabling potential market manipulation and/or allowing excessive speculation by potentially affording bona fide hedging treatment for speculative transactions. To the extent that a market participant does not qualify for an enumerated bona fide hedge in connection with an unfixedprice transaction, the Commission believes that any potential harms or costs to that market participant would be mitigated because the participant could still avail itself of the process under §§ 150.3 and 150.9 for nonenumerated bona fide hedges.1522 1520 CEWG at 18 (discussing storage hedges, stating that ‘‘(‘‘[n]ot allowing commercial energy firms to utilize these industry-standard hedges on an enumerated basis because they are ‘‘anticipatory’’ in nature or viewed as a form of ‘‘merchandising’’—or both—could result in storage assets being underutilized, which could increase volatility in physical and financial markets for energy commodities that ultimately could translate into higher costs for consumers’’). 1521 See, e.g., Ecom at 1; ACA at 2; CEWG at 19– 21; Chevron at 11; CME Group at 8–9; DECA at 2; East Cotton at 2; Gerald Marshall at 2; IFUS at 5– 7; IMC at 2; Jess Smith at 2; LDC at 2; Mallory Alexander at 2; McMeekin at 2; Memtex at 2; Moody Compress 1; NCC at 1; NGFA at 7; Olam at 2; Omnicotton at 2; Canale Cotton at 2; Shell at 7; Southern Cotton at 2; Suncor at 7; SW Ag at 2; Toyo at 2; Texas Cotton at 2; Walcot at 2; White Gold at 2. 1522 One commenter maintains that reliance on the non-enumerated bona fide hedge process for management of unpriced physical purchase or sale PO 00000 Frm 00190 Fmt 4701 Sfmt 4700 (2) Elimination of the Five-Day Rule The Final Rule eliminates the existing restriction on holding certain enumerated bona fide hedges during the last five days of trading under existing § 1.3. Instead, under final § 150.5(a)(2)(ii)(H), the exchanges have discretion to determine, for purposes of their own exchange-granted exemptions (for contracts subject to Federal position limits), whether to apply a restriction against holding positions in excess of limits during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract (the ‘‘Five-Day Rule’’). Under final § 150.5(a)(2)(ii)(H), exchanges are able to establish their own Five-Day Rule, or otherwise limit the size of positions. The exchanges would thus have the ability and discretion, but not an obligation, to apply a five-day Rule or similar restriction to exemptions on any contracts subject to Federal position limits, regardless of whether such contracts have been subject to Federal position limits before.1523 The Commission has determined that exchanges are well-informed with respect to their respective markets, and well-positioned to make a determination with respect to imposing the Five-Day Rule in connection with recognizing bona fide hedges for their respective commodity contracts. In general, the Commission believes that, on the one hand, limiting a trader’s ability to establish a position in this manner by requiring the Five-Day Rule could result in increased costs related to operational inefficiencies, as a trader may believe that holding a position late into the spot period is necessary for the bona fide hedge position. On the other hand, the Commission believes that price convergence may be particularly sensitive to potential market manipulation or excessive speculation during the spot period. Accordingly, the Commission believes that the commitments ‘‘will impose procedural hurdles, uncertainty, and additional costs on a critically important function of the supply chain in the U.S. economy.’’ CEWG at 21. Another commenter stated that imposing a burden on commercial end users with unpriced physical purchase or sale commitments to rely on the non-enumerated hedge exemption process is contrary to the intent and language of the CEA. Cargill at 6. These concerns, however, are mitigated because, under the Final Rule, commercial market participants with unfixed price transactions may qualify for bona fide hedge treatment under the enumerated bona fide hedges for anticipatory merchandising, anticipated unsold production, or anticipated unfilled requirements. 1523 The Commission is adopting Appendix B and Appendix G of this Final Rule to provide guidance for exchanges to consider when determining whether to impose the Five-Day Rule or similar requirements on bona fide hedge exemptions and spread exemptions, respectively. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 determination to not impose the FiveDay Rule with respect to any of the enumerated bona fide hedges for Federal purposes, but to instead rely on exchanges’ determinations with respect to exchange-granted exemptions, helps to better optimize these considerations. The Commission notes there is a potential cost to market integrity and price convergence since the Five-Day Rule is being eliminated as a blanket Federal requirement from some enumerated hedges while the exchanges will now have guidance from the Commission to consider when choosing whether to grant a position limits exemption subject to a five-day rule or similar restriction.1524 Under this new framework, however, the Commission will continue to leverage its own market surveillance and oversight functions to ensure that exchanges continue to comply with their legal obligations, including with respect to Core Principles 2, 3, 4, and 5, among others.1525 With an expanded list of contracts subject to Federal position limits, it is best to provide the exchanges additional discretion to protect their markets using tools other than a five-day rule, and to supplement that discretion with guidance highlighting the importance of the spot month to ensure price convergence and an orderly delivery process. Finally, the Commission believes a concern over oversight is also mitigated by the fact that the exchanges have an economic incentive to ensure that price convergence occurs with their respective contracts since commercial end-users would be less willing to use such contracts for hedging purposes if price convergence failed to occur in such contracts as they may generally desire to hedge cash-market prices with futures contracts. The Commission is also adopting guidance in Appendix B to part 150 on factors for the exchanges to consider when granting an exemption subject to a restriction against holding physically delivered futures contracts into the spot month. In response to some commenters who stated that the proposed guidance was too prescriptive and would result in additional burdens,1526 the Commission 1524 Better Markets at 61 (discussing elimination of the Five-Day Rule and Appendix B guidance by stating that ’’ the CFTC proposes to abolish the rule for enumerated hedges, over-relying instead—and again—on the judgment of the exchanges to determine whether to apply the Five-Day Rule, or apply and grant fact specific waivers’’). 1525 Core Principle 4, 7 U.S.C. 7b–3(f)(4)(B); 7 U.S.C. 7b–3(f)(2); 7 U.S.C. 7b–3(f)(3); 7 U.S.C.7b– 3(f)(5). 1526 Cargill at 9; CME Group at 9 (stating that the ‘‘CME Group believes the proposed guidance could be interpreted to cause unnecessary burden and VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 clarifies and reiterates the appendix is not intended to be used as a mandatory checklist. The Commission, however, has determined it is helpful to provide the exchanges with guidance highlighting the importance of the spot month to ensure price convergence and an orderly delivery process. Since price convergence and an orderly trading environment serve as a deterrent to mitigate certain types of market manipulation schemes such as corners and squeezes, the guidance is intended to include a non-exclusive list of considerations the Commission expects the exchanges to consider when determining whether to allow a position in excess of limits throughout the spot month. The Commission does not expect the guidance to impose additional burdens on the exchanges, as the exchanges currently have in place market surveillance practices or procedures to review the appropriateness of an exemption during the relevant referenced contract’s spot period. The guidance is intended to supplement that existing process. As discussed in the preamble, the guidance does not impose any additional reporting requirements on market participants, and the factors described in the guidance apply simply to the exchanges’ evaluation of the specific contract market when considering whether an exemption shall be granted subject to any condition or limitation in the spot month. Finally, the Commission is making certain amendments to the guidance to ensure that the factors maintain a flexible approach, particularly where existing exchange application requirements already require market participants to provide relevant cash-market information. c. Guidance for Measuring Risk The Commission is issuing guidance in paragraph (a) of final Appendix B to part 150 on whether positions may be hedged on either a gross or net basis. Under the guidance, among other things, a trader may measure risk on a gross basis if that approach is consistent with the trader’s historical practice and is not intended to evade applicable limits. The key cost associated with allowing gross hedging is that it may provide opportunity for hidden speculative trading or for cherry picking costs to market participants. The guidance appears to create a formal process for firms to provide information outlined in the Appendix as part of their bona fide hedge exemption applications, but the Proposal does not seem to consider this additional burden in its cost analysis’’). PO 00000 Frm 00191 Fmt 4701 Sfmt 4700 3425 of positions in a manner that subverts positions limits.1527 Such risk is mitigated to a certain extent by the guidance’s provisos that the trader does not switch between net hedging and gross hedging in order to evade limits and that the trader must demonstrate, upon request by the Commission or an exchange, the justifications for measuring risk on a gross basis.1528 By focusing on consistency and historical practice with respect to the manner in which a person measures risk, the guidance enables market participants to measure risk on a gross basis when dictated by the nature of the exposure, but not simply when utilizing gross hedging will yield a larger exposure than net hedging, or will otherwise subvert Federal position limit or aggregation requirements. However, the Commission also recognizes that there are myriad ways in which organizations are structured and engage in commercial hedging practices, including the use of multi-line business strategies in certain industries that are subject to Federal position limits for the first time under this Final Rule and for which net hedging could impose significant costs or be operationally unfeasible.1529 1527 For example, using gross hedging, a market participant could potentially point to a large long cash position as justification for a bona fide hedge, even though the participant, or an entity with which the participant is required to aggregate, has an equally large short cash position that would result in the participant having no net price risk to hedge as the participant had no price risk exposure to the commodity prior to establishing such derivative position. Instead, the participant created price risk exposure to the commodity by establishing the derivative position. 1528 The proposed guidance on gross hedging positions in the 2020 NPRM provided that an exchange document the justifications for recognizing a gross position as a non-enumerated bona fide hedge pursuant to § 150.9. Several commenters alternatively requested elimination of that requirement as imposing unnecessary burdens directly on exchanges and indirectly on market participants. See CEWG at 4; FIA at 14; and MGEX at 3. Because the Commission and exchanges have other tools for accessing such information, the Commission eliminated that requirement from the guidance in Appendix B of this Final Rule. Under final § 150.3(b)(2) and (e) and final § 150.9(e)(5), and (g), the Commission has access to any information related to the applicable exemption request, and therefore concludes that eliminating this requirement does not result in any related costs and benefits. 1529 FIA stated that ‘‘the recommendation to implement specific policies and procedures governing gross and net hedging has the potential to create unnecessary, unintended and burdensome conflicts with other company policies, such as accounting policies, with little or no measurable benefit.’’ FIA at 15. The Final Rule clarifies that the guidance does not require market participants to develop written policies or procedures setting forth when gross or net hedging is appropriate. E:\FR\FM\14JAR2.SGM 14JAR2 3426 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 iii. Spread Exemptions Under existing § 150.3, certain spread exemptions are self-effectuating. Specifically, existing § 150.3 allows for ‘‘spread or arbitrage positions’’ that are ‘‘between single months of a futures contract and/or, on a futures-equivalent basis, options thereon, outside of the spot month, in the same crop year; provided, however, that such spread or arbitrage positions, when combined with any other net positions in the single month, do not exceed the allmonths limit set forth in § 150.2.’’ 1530 Final §§ 150.1 and 150.3 amend the existing spread position exemption for Federal position limits by (i) listing, in the spread transaction definition, specific types of spread exemptions that are self-effectuating for purposes of Federal limits and that may be granted by an exchange; (ii) creating a process that requires a person to apply for spread exemptions (that are not listed in the spread transaction definition) directly with the Commission pursuant to final § 150.3; 1531 and (iii) providing guidance on the types of spread positions that meet the spread transaction definition in a new Appendix G to part 150 under the Final Rule. In addition, final § 150.3 permits spread exemptions outside the same crop year and/or during the spot month.1532 In connection with the spread exemption provisions, the Commission is relaxing the prohibition for contracts during the same crop year and/or the spot month so that market participants may receive spread exemptions outside the same crop year and/or during the spot month. There may be benefits that result from permitting these types of spread exemptions. For example, the Commission believes that permitting 1530 17 CFR 150.3. CEA section 4a(a)(1) provides the Commission with authority to exempt from position limits transactions ‘‘normally known to the trade’’ as ‘‘spreads’’ or ‘‘straddles’’ or ‘‘arbitrage’’ or to fix limits for such transactions or positions different from limits fixed for other transactions or positions. 1531 The ‘‘spread transaction’’ definition lists the most common types of spread positions: intramarket spread, inter-market spread, intracommodity spread, or inter-commodity spread, including a calendar spread, quality differential spread, processing spread, product or by-product differential spread, or futures-option spread. Final § 150.3(b) also permits market participants to apply to the Commission for other spread transactions. 1532 As discussed under final § 150.3, spread exemptions identified in the proposed ‘‘spread transaction’’ definition in final § 150.1 are selfeffectuating, similar to the status quo, and do not represent a change to the status quo baseline. The related costs and benefits, particularly with respect to requesting exemptions with respect to spreads other than those identified in the proposed ‘‘spread transaction’’ definition, are discussed under the respective sections below. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 spread exemptions in different crop years or during the spot month may potentially improve price discovery and provide market participants with the ability to use additional strategies involving spread positions, which may reduce hedging costs. As in the inter-market wheat example discussed below, the spread relief, which is not limited to the same crop year, may better link prices between two markets (e.g., the price of MGEX wheat futures and the price of CBOT wheat futures). Put another way, permitting spread exemptions outside the same crop year may enable pricing in two different but related markets for substitute goods to be more highly correlated, which benefits market participants with a price exposure to the underlying protein content in wheat generally, rather than that of a particular commodity. However, the Commission also recognizes certain potential costs to permitting spread exemptions during the spot month, particularly to extend into the last five days of trading. This feature could raise the risk of allowing participants in the market at a time in the contract where only those interested in making or taking delivery should be present. When a contract goes into expiration, open interest and trading volume naturally decrease, as traders not interested in making or taking delivery roll their positions into deferred calendar months. The presence of large spread positions, normally tied to large liquidity providers so close to the expiration of a futures contract, could lead to disruptions in the price discovery function of the contract by disrupting the futures/cash price convergence. This could lead to increased transaction costs and harm the hedging utility for end-users of the futures contract, which could lead to higher costs passed on to consumers. However, the Commission believes that these concerns are mitigated, as spread exemptions will not be selfeffectuating for purposes of exchangeset position limits. Accordingly, exchanges will continue to apply their expertise in overseeing and maintaining the integrity of their markets. For example, an exchange could: Refuse to grant a spread exemption if the exchange determines that the exemption is inconsistent with the requirements of § 150.5(a) or harmful to its markets; require a market participant to reduce its positions; or implement a five-day rule for spread exemptions, as discussed above.1533 The Commission has also 1533 See supra Section II.A.1.viii. (discussing the Five-Day Rule). PO 00000 Frm 00192 Fmt 4701 Sfmt 4700 provided guidance to exchanges in a new Appendix G to support exchange analysis of whether to grant a particular spread exemption and to remind exchanges of their oversight obligations when granting spread exemptions. Generally, the Commission finds that, by allowing speculators to execute intermarket and intra-market spreads, speculators are able to hold a greater amount of open interest in underlying contract(s), and therefore, bona fide hedgers may benefit from any increase in market liquidity. Spread exemptions may also lead to better price continuity and price discovery if market participants who seek to provide liquidity (for example, through entry of resting orders for spread trades between different contracts) receive a spread exemption, and thus would not otherwise be constrained by a position limit. For clarity, the Commission has identified the following two examples of spread positions that could benefit from the spread exemptions permitted by this Final Rule: • Reverse crush spread in soybeans on the CBOT subject to an inter-market spread exemption. In the case where soybeans are processed into two different products, soybean meal and soybean oil, the crush spread is the difference between the combined value of the products and the value of soybeans. There are two actors in this scenario: The speculator and the soybean processor. The spread’s value approximates the profit margin from actually crushing (or mashing) soybeans into meal and oil. The soybean processor may want to lock in the spread value as part of its hedging strategy, establishing a long position in soybean futures and short positions in soybean oil futures and soybean meal futures, as substitutes for the processor’s expected cash-market transactions (the long position hedges the purchase of the anticipated inputs for processing and the short position hedges the sale of the anticipated soybean meal and oil products). On the other side of the processor’s crush spread, a speculator takes a short position in soybean futures against long positions in soybean meal futures and soybean oil futures. The soybean processor may be able to lock in a higher crush spread because of liquidity provided by such a speculator who may need to rely upon a spread exemption. In this example, the speculator is accepting basis risk represented by the crush spread, and the speculator is providing liquidity to the soybean processor. The crush spread positions may result in greater correlation between the futures prices of E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 soybeans on the one hand and those of soybean oil and soybean meal on the other hand, which means that prices for all three products may move up or down together in a more correlated manner. • Wheat spread subject to intermarket spread exemptions. There are two actors in this scenario: The speculator and the wheat farmer. In this example, a farmer growing hard wheat would like to reduce the price risk of her crop by shorting a MGEX wheat futures. There, however, may be no hedger, such as a mill, that is immediately available to trade at a desirable price for the farmer. There may be a speculator willing to offer liquidity to the hedger; however, the speculator may wish to reduce the risk of an outright long position in MGEX wheat futures through establishing a short position in CBOT wheat futures (soft wheat). Such a speculator, who otherwise would have been constrained by a position limit at MGEX and/or CBOT, may seek exemptions from MGEX and CBOT for an inter-market spread, that is, for a long position in MGEX wheat futures and a short position in CBOT wheat futures of the same maturity. As a result of the exchanges granting an inter-market spread exemption to such a speculator, who otherwise may be constrained by limits, the farmer might be able to transact at a higher price for hard wheat than might have existed absent the inter-market spread exemptions. Under this example, the speculator is accepting basis risk between hard wheat and soft wheat, reducing the risk of a position on one exchange by establishing a position on another exchange, and potentially providing liquidity to a hedger. Further, spread transactions may aid in price discovery regarding the relative protein content for each of the hard and soft wheat contracts. iv. Conditional Spot Month Exemption Positions in Natural Gas Final § 150.3(a)(4) provides a new Federal conditional spot month position limit exemption for cash-settled NYMEX NG referenced contracts. The conditional exemption permits traders to acquire positions up to 10,000 cashsettled NYMEX NG referenced contracts (the Federal spot month limit in final § 150.2 for cash-settled NYMEX NG is 2,000 cash-settled NYMEX NG referenced contracts per exchange and another 2,000 cash-settled NYMEX NG referenced contracts in the OTC swaps market) per exchange that lists a cashsettled NYMEX NG referenced contract, along with an additional position in cash-settled economically equivalent VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 NYMEX NG OTC swaps that has a notional amount of up to 10,000 equivalent-sized contracts, as long as such person does not also hold positions in the physically-settled NYMEX NG referenced contract.1534 NYMEX, IFUS, and Nodal currently have rules in place establishing a conditional spot month limit exemption of up to 5,000 equivalent-sized cashsettled natural gas contracts per exchange, provided that the market participant does not hold any physically-settled natural gas contracts. Finalizing the conditional limit exemption for NYMEX NG enables the NYMEX NG referenced contract market to continue to operate as it has under the existing exchange-set conditional limit exemption framework, which the Commission notes has functioned well based on its observation over the past decade. Removing the conditional limit exemption will result in reduced liquidity, including for commercial hedgers seeking to offset price risks but not necessarily looking to make or take delivery, due to the significantly lower positions a market participant would be able to hold in the cash-settled NYMEX NG referenced contracts. Several commenters suggested removing the NYMEX NG conditional limit exemption’s requirement to divest all holdings in the physically-settled NYMEX NG referenced contract.1535 The Commission believes that this could result in significant costs to the market by encouraging manipulation of the physically-settled NYMEX NG referenced contract to benefit a large position in the cash-settled NYMEX NG referenced contract available through the conditional limit exemption. Specifically, without this divestiture requirement, a trader could hold up to 40,000 cash-settled NYMEX NG referenced contracts and 2,000 physically-settled NYMEX NG referenced contracts. At these levels, it may not require much movement in the physically-settled markets to disproportionately benefit the cashsettled holdings. As a result, the requirement to exit the physicallysettled contract is critical for reducing a market participant’s incentive to manipulate the cash settlement price by, for example, banging-the-close or distorting physical delivery prices in the physically-settled contract to benefit leveraged cash-settled positions. 1534 The NYMEX NG contract is the only natural gas contract included as a core referenced futures contract under the Final Rule. 1535 ISDA at 8; SIFMA AMG at 10–11; FIA at 7– 8; NGSA at 12–14; Citadel at 7; CCI at 4; EEI/EPSA at 4. PO 00000 Frm 00193 Fmt 4701 Sfmt 4700 3427 CME commented that the conditional limit exemption for NYMEX NG could ‘‘incentivize the manipulation of a cash commodity price in order to benefit a position in a cash-settled contract.’’ 1536 The Commission notes that the conditional limit exemption does provide for a substantial increase in a trader’s cash-settled position, but the core requirement that a trader must divest out of the physically-settled NYMEX NG referenced contract during the spot month period is intended to address and reduce the incentive for a trader to manipulate the physicallysettled NYMEX NG core referenced futures contract to benefit a position in the cash-settled NYMEX NG referenced contracts. Furthermore, based on its experience in monitoring the NYMEX NG market since the conditional limit exemption was adopted, the Commission has not observed any market manipulations attributable to a trader utilizing the conditional limit exemption. That said, the Commission is aware of instances where traders violated the conditional exemption by holding or trading in the physicallysettled NYMEX NG core referenced futures contracts. The exchanges also detected and took corrective action against those traders. The Commission will continue to closely monitor natural gas trader positions across exchanges and work with the exchanges to ensure the CME Group’s concerns continue to be addressed to protect the market participants and the public and defend the financial integrity and price discovery function of the NYMEX NG core referenced futures contract.1537 Further, the Commission has heeded natural gas traders’ concerns about disrupting market practices and harming liquidity in the cash-settled contract, which could increase the cost of hedging and possibly prevent convergence between the physical delivery futures and cash markets.1538 While a trader with a position in the physically-settled NYMEX NG referenced contract may incur costs associated with liquidating that position in order to meet the conditions of the Federal exemption, such costs are incurred outside of the Final Rule, as the trader would have to do so as a condition of the exchange-level 1536 CME Group at 6. IFUS Rule 6.20(c) and NYMEX Rule 559.F. See, e.g., Nodal Rulebook Appendix C (equivalent rule of Nodal). 1538 See 81 FR at 96862, 96863. 1537 See E:\FR\FM\14JAR2.SGM 14JAR2 3428 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations exemption under current exchange rules.1539 v. Financial Distress Exemption Final § 150.3(a)(3) provides an exemption for certain financial distress circumstances, including the default of a customer, affiliate, or acquisition target of the requesting entity that may require the requesting entity to take on, in short order, the positions of another entity. In codifying the Commission’s historical practice, the Final Rule accommodates transfers of positions from financially distressed firms to financially secure firms. The disorderly liquidation of a position threatens price impacts that may harm the efficiency and price discovery function of markets, and § 150.3(a)(3) makes it less likely that positions are prematurely or needlessly liquidated. The Commission has determined that costs related to filing and recordkeeping are negligible. The Commission cannot accurately estimate how often this exemption may be invoked because emergency or distressed market situations are unpredictable and dependent on a variety of firm and market-specific factors as well as general macroeconomic indicators.1540 The Commission, nevertheless, believes that emergency or distressed market situations that might trigger the need for this exemption are infrequent, and that codifying this historical practice adds transparency to the Commission’s oversight responsibilities. khammond on DSKJM1Z7X2PROD with RULES2 vi. Pre-Enactment and Transition Period Swaps Exemption Final § 150.3(a)(5) provides an exemption from position limits for positions acquired in good faith in any ‘‘pre-enactment swap,’’ or in any ‘‘transition period swap,’’ in either case as defined in final § 150.1. A person relying on this exemption may net such positions with post-effective date commodity derivative contracts for the purpose of complying with any nonspot month speculative positions limits, but may not net against spot month positions. This exemption is selfeffectuating, and the Commission believes that § 150.3(a)(5) benefits both individual market participants by lessening the impact of the Federal position limits in final § 150.2, and market liquidity in general as liquidity providers initially will not be forced to reduce or exit their positions. 1539 See IFUS Rule 6.20(c) and NYMEX Rule 559.F. See, e.g., Nodal Rulebook Appendix C (equivalent rules of Nodal). 1540 See 81 FR at 96862, 96863. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Final § 150.3(a)(5) benefits price discovery and convergence by prohibiting large traders seeking to roll their positions into the spot month from netting down positions in the spotmonth against their pre-enactment swap or transition period swap. The Commission acknowledges that, on its face, including a ‘‘good-faith’’ requirement in final § 150.3(a)(5) could hypothetically diminish market integrity since determining whether a trader has acted in ‘‘good faith’’ is inherently subjective and could result in disparate treatment among traders, where certain traders may assert a more aggressive position in order to seek a competitive advantage over others. The Commission believes the risk of any such unscrupulous trader or exchange is mitigated since exchanges are still subject to Commission oversight and to DCM Core Principles 4 (‘‘prevention of market disruption’’) and 12 (‘‘protection of markets and market participants’’), among others. The Commission has determined that market participants who voluntarily employ this exemption also incur negligible recordkeeping costs. 5. Process for the Commission or Exchanges To Grant Exemptions and Bona Fide Hedge Recognitions for Purposes of Federal Position Limits (Final §§ 150.3 and 150.9) and Related Changes to Part 19 of the Commission’s Regulations Existing §§ 1.47 and 1.48 set forth the process for market participants to apply to the Commission for recognition of certain bona fide hedges for purposes of Federal position limits, and existing § 150.3 set forth the types of spread exemptions a person can rely on for purposes of Federal position limits. Under existing Commission practices, spread exemptions and certain enumerated bona fide hedges are generally self-effectuating and do not require market participants to apply to the Commission for purposes of Federal position limits. Market participants are currently, however, required to file Form 204 monthly reports 1541 to justify certain position limit overages. Further, for those bona fide hedges for which market participants are required to apply to the Commission, existing regulations and market practice require market participants to apply both to the Commission for purposes of Federal position limits and also to the relevant exchanges for purposes of exchange-set limits. The Commission has determined that this dual application process 1541 In the case of cotton, market participants currently file the relevant portions of Form 304. PO 00000 Frm 00194 Fmt 4701 Sfmt 4700 creates inefficiencies for market participants. Final §§ 150.3 and 150.9, taken together, make several changes to the process of acquiring bona fide hedge recognitions and spread exemptions for Federal position limits purposes. Final §§ 150.3 and 150.9 maintain certain elements of the status quo while also adopting certain changes to facilitate the exemption process.1542 First, with respect to the proposed enumerated bona fide hedges, final § 150.3 maintains the status quo by providing that those enumerated bona fide hedges that currently are selfeffectuating for the nine legacy agricultural contracts will continue to remain self-effectuating for the nine legacy agricultural contracts for purposes of Federal position limits.1543 Similarly, the enumerated bona fide hedges for the additional 16 contracts that are newly subject to Federal position limits (i.e., those contracts other than the nine legacy agricultural contracts) also are self-effectuating for purposes of Federal position limits. Second, for recognition of any nonenumerated bona fide hedge in connection with any referenced contract, market participants are required to apply either directly to the Commission under final § 150.3 or through an exchange that adheres to certain requirements under final § 150.9. The Commission notes that existing regulations require market participants to apply to the Commission for recognition of non-enumerated bona fide hedges, and so the Final Rule does not represent a change to the status quo in this respect for the nine legacy agricultural contracts. Third, final § 150.3 maintains the status quo by providing that the most common spread exemptions for the nine legacy agricultural contracts remain selfeffectuating. Similarly, these common spread exemptions also are selfeffectuating for the additional 16 contracts that are newly subject to Federal position limits. These common spread exemptions are listed in the 1542 In this section the Commission discusses the costs and benefits related to the application process for these exemptions and bona fide hedge recognitions. For a discussion of the costs and benefits related to the scope of the exemptions and bona fide hedge recognitions, see supra Section IV.A.4. 1543 Final § 150.3(a)(1)(i). Under the status quo, market participants must apply to the Commission for recognition of certain enumerated anticipatory bona fide hedges. The Final Rule also makes these enumerated anticipatory bona fide hedges selfeffectuating for the nine legacy agricultural contracts. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations ‘‘spread transaction’’ definition under final § 150.1.1544 Fourth, for any spread exemption not listed in the ‘‘spread transaction’’ definition, market participants are required to apply directly to the Commission under final § 150.3. There is no exception for the nine legacy agricultural products, nor are market participants permitted to apply through an exchange under final § 150.9 for these types of spread exemptions.1545 The Commission anticipates that most—if not all—market participants will utilize the exchange-centric process set forth in final § 150.9 with respect to applying for recognition of nonenumerated bona fide hedges, rather than applying directly to the Commission under § 150.3. Market participants are likely already familiar with the processes set forth in § 150.9, which is intended to leverage the processes currently in place at the exchanges for addressing requests for bona fide hedge recognitions from exchange-set limits. In the sections below, the Commission will discuss the costs and benefits related to both processes. khammond on DSKJM1Z7X2PROD with RULES2 i. Process for Requesting Exemptions and Bona Fide Hedge Recognitions Directly From the Commission (Final § 150.3) Under existing §§ 1.47 and 1.48, and existing § 150.3, the processes for obtaining a recognition of a bona fide hedge or for relying on a spread exemption, are similar in some respects and different in other respects than the approach adopted in final § 150.3. Existing §§ 1.47 and 1.48 require market participants seeking recognition of nonenumerated bona fide hedges and enumerated anticipatory bona fide hedges, respectively, for purposes of Federal position limits to apply directly to the Commission for prior approval. In contrast, existing non-anticipatory enumerated bona fide hedges and spread exemptions are self-effectuating, which means that market participants are not required to submit any information to the Commission for prior approval, although such market participants must subsequently file Form 204 or Form 304 each month in order to describe their cash-market positions and justify their bona fide 1544 Final § 150.1 defines ‘‘spread transaction’’ to include an intra-market spread, inter-market spread, intra-commodity spread, or inter-commodity spread, including a calendar spread, quality differential spread, processing spread, product or by-product differential spread, or futures-option spread. 1545 As discussed below, the Final Rule also eliminates the Form 204 and the equivalent portions of the Form 304. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 hedge position. There currently is no codified Federal process related to financial distress exemptions or natural gas conditional spot month exemptions. Final § 150.3 provides a process for market participants to apply directly to the Commission for recognition of nonenumerated bona fide hedges or spread exemptions not included in the ‘‘spread transaction’’ definition in final § 150.1, which in each case would not be selfeffectuating under the Final Rule. Under final § 150.3, any person seeking Commission recognition of these types of bona fide hedges or spread exemptions (as opposed to applying for recognition of non-enumerated bona fide hedges using the exchange-centric process under proposed § 150.9 described below) are required to submit a request directly to the Commission and to provide information similar to what is currently required under existing §§ 1.47 and 1.48.1546 a. Existing Bona Fide Hedges That Currently Require Prior Submission to the Commission Under Existing §§ 1.47 and 1.48 for the Nine Legacy Agricultural Contracts Under the Final Rule, the Commission maintains the distinction between enumerated bona fide hedges and nonenumerated bona fide hedges in final § 150.3: (1) Enumerated bona fide hedges continue to be self-effectuating; (2) enumerated anticipatory bona fide hedges are now self-effectuating, so market participants no longer need to apply to the Commission for recognition; and (3) non-enumerated bona fide hedges still require market participants to apply for recognition. Market participants that choose to apply directly to the Commission for a bona fide hedge recognition (i.e., for nonenumerated bona fide hedges) are subject to an application process that 1546 For bona fide hedges and spread exemptions, this information includes: (i) A description of the position in the commodity derivative contract (including the name of the underlying commodity and the derivative position size) or of the spread position for which the application is submitted; (ii) an explanation of the hedging strategy, including a statement that the position complies with the applicable requirements for, and the definition of, a bona fide hedging transaction or position, and information to demonstrate why the position satisfies such requirements and definition; (iii) a statement concerning the maximum size of all gross positions in commodity derivative contracts for which the application is submitted; (iv) for bona fide hedges, a description of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the position for which the application is submitted, including information regarding the offsetting cash positions; and (v) any other information that may help the Commission determine whether the position meets the applicable requirements for a bona fide hedge position or spread transaction. PO 00000 Frm 00195 Fmt 4701 Sfmt 4700 3429 generally is similar to what the Commission currently administers for the non-enumerated bona fide hedges and the enumerated anticipatory bona fide hedges.1547 With respect to enumerated anticipatory bona fide hedges for the nine legacy agricultural contracts, for which market participants currently are required to apply to the Commission for recognition for Federal position limit purposes, the Commission anticipates that the Final Rule will benefit market participants by making such hedges selfeffectuating.1548 As a result, market participants will no longer be required to spend time and resources applying to the Commission. Further, for these enumerated anticipatory hedges, existing § 1.48 requires market participants to submit either an initial or supplemental application to the Commission 10 days prior to entering into the bona fide hedge that would cause the hedger to exceed Federal position limits.1549 Under existing § 1.48, a market participant could proceed with its proposed bona fide hedge if the Commission does not notify a market participant otherwise within the specific 10-day period. Under the Final Rule, because bona fide hedgers can implement enumerated anticipatory bona fide hedges without filing an application with the Commission for approval and waiting the requisite 10 days, they may be able to implement their hedging strategy more efficiently with reduced cost and risk. The 1547 As noted above, under the existing framework, market participants are not required to apply for any type of bona fide hedge recognition or spread exemption from the Commission for any of the additional 16 contracts that are newly subject to Federal position limits (i.e., those contracts other than the nine legacy agricultural contracts); rather, under the existing framework, such market participants must apply to the exchanges for bona fide hedge recognitions or exemptions for purposes of exchange-set position limits. Accordingly, to the extent that market participants do not need to apply to the Commission in connection with any of the additional 16 contracts, the Final Rule does not impose additional costs or benefits compared to the status quo. 1548 As noted above, since market participants do not need to apply to the Commission for bona fide hedge recognition for any of the additional 16 contracts that are newly subject to Federal position limits, the Commission’s proposal does not result in any additional costs or benefits to the extent such bona fide hedge recognitions are self-effectuating. 1549 Under the Commission’s existing regulations, non-anticipatory enumerated bona fide hedges are self-effectuating, and market participants do not have to file any applications for recognition under existing Commission regulations. However, existing Commission regulations require bona fide hedgers to file with the Commission monthly Form 204 (or Form 304 in connection with ICE Cotton No. 2 (CT)) reports discussing their underlying cash positions in order to substantiate their bona fide hedge positions. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3430 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Commission acknowledges that making such bona fide hedges more efficient to obtain could increase the possibility of excess speculation since anticipatory exemptions are theoretically more difficult to substantiate compared to the other existing enumerated bona fide hedges. However, the Commission has gained significant experience over the years with bona fide hedging practices in general, and with enumerated anticipatory bona fide hedging practices in particular, and the Commission has determined that making such hedges self-effectuating should not increase the risk of excessive speculation or market manipulation compared to the status quo. For non-enumerated bona fide hedges, existing § 1.47 requires market participants to submit (i) initial applications to the Commission 30 days prior to the date the market participant would exceed the applicable position limits and (ii) supplemental applications (i.e., applications for a market participant that desires to exceed the bona fide hedge amount provided in the person’s previous Commission filing) 10 days prior for Commission approval, and market participants can proceed with their proposed bona fide hedges if the Commission does not intervene within the specific time (e.g., either 10 days or 30 days). Final § 150.3 similarly requires market participants that elect to apply directly to the Commission (as opposed to applying through an exchange pursuant to final § 150.9) for a recognition of a non-enumerated bona fide hedge for any of the 25 core referenced futures contracts to apply to the Commission prior to exceeding Federal position limits. Final § 150.3 does not, however, prescribe a certain time period by which a bona fide hedger must apply or by which the Commission must respond. The Commission anticipates that the Final Rule benefits bona fide hedgers by enabling them, in many cases, to generally implement their hedging strategies sooner than the existing 30-day or 10-day waiting period, as applicants will have access to an expanded list of enumerated hedges (which don’t require prior Commission approval), a new streamlined process for applying through exchanges for nonenumerated hedges, increased position limits, and, as discussed here, a more flexible approach for applying directly to the Commission for a nonenumerated hedge. Considering these factors, the Commission believes that, ultimately, hedging-related costs would likely decrease. However, the Commission believes that there could VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 also be circumstances in which the overall process for applying directly to the Commission could take longer than the existing timelines under § 1.47, which could increase hedging-related costs if a bona fide hedger is compelled to wait longer, compared to existing Commission practices, before executing its hedging strategy. On the other hand, the Commission also recognizes that there could be potential costs to bona fide hedgers if, under the Final Rule, they are forced either to enter into less effective bona fide hedges, or to wait to implement their hedging strategy, as a result of the potential uncertainty that could result from § 150.3 not requiring the Commission to respond within a certain amount of time. However, the Commission believes this concern is mitigated since market participants will likely also have the option to apply for a non-enumerated bona fide hedge under final § 150.9. As explained further below, final § 150.9(e)(3) is a streamlined process whereby a market participant in receipt of a notice of approval from the relevant exchange may elect, at its own risk, to exceed Federal position limits during the Commission’s review period, which is limited to 10 (or 2) days under § 150.9.1550 This concern is also mitigated to the extent market participants utilize the § 150.3 process that permits a market participant that demonstrates a ‘‘sudden or unforeseen’’ increase in its bona fide hedging needs to enter into a bona fide hedge without first obtaining the Commission’s prior approval, as long as the market participant submits a retroactive application to the Commission within five business days of exceeding the applicable position limit. The Commission believes this ‘‘five-business day retroactive exemption’’ benefits bona fide hedgers compared to existing §§ 1.47 and 1.48, which require Commission prior approval, since hedgers that qualify to exercise the five-business day retroactive exemption are also likely facing more acute hedging needs—with potentially commensurate costs if required to wait. This provision also leverages, for Federal position limit purposes, existing exchange practices for granting retroactive exemptions from exchange-set limits. On the other hand, the proposed fivebusiness day retroactive exemption could harm market liquidity and bona fide hedgers if the applicable exchange or the Commission were to not approve 1550 See supra Section II.G.7. (discussing when a person may exceed Federal position limits). PO 00000 Frm 00196 Fmt 4701 Sfmt 4700 the retroactive request, and the Commission subsequently required liquidation of the position in question. As a result, such possibility could cause market participants to either enter into smaller bona fide hedge positions than they otherwise would, or cause the bona fide hedger to delay entering into its hedge, in either case potentially causing bona fide hedgers to incur increased hedging costs. However, the Commission believes this concern is partially mitigated since proposed § 150.3 requires the purported bona fide hedger to exit its position in a ‘‘commercially reasonable time,’’ which the Commission believes should partially mitigate any costs incurred by the market participant compared to either an alternative that would require the bona fide hedger to exit its position immediately, or the status quo where the market participant either is unable to enter into a hedge at all without Commission prior approval. b. Spread Exemptions and NonEnumerated Bona Fide Hedges Final § 150.3 imposes a new requirement for Federal position limit purposes for market participants to (1) apply either directly to the Commission pursuant to § 150.3 or indirectly through an exchange pursuant to final § 150.9 for any non-enumerated bona fide hedge; and (2) to apply directly to the Commission pursuant to § 150.3 for any spread exemptions not identified in the proposed ‘‘spread transaction’’ definition (the Commission notes that a market participant may not apply indirectly through an exchange for spread exemptions for Federal position limit purposes).1551 As noted above, common spread exemptions (i.e., those identified in the definition of ‘‘spread transaction’’ in final § 150.1) remain self-effectuating for the nine legacy agricultural products, and also are selfeffectuating for the 16 additional core referenced futures contracts.1552 The baseline is the status quo under existing § 150.3(a)(3), which provides that certain spread exemptions are selfeffectuating for purposes of Federal position limits. As noted above, § 150.3 is also the baseline for non-enumerated bona fide hedges. The final rule 1551 As discussed below, for spread exemptions not identified in the proposed ‘‘spread transaction’’ definition in § 150.3, market participants are required to apply directly to the Commission under § 150.3 and are not able to apply under § 150.9. 1552 Existing § 150.3(a)(2) does not specify a formal process for granting either spread exemptions or non-anticipatory enumerated bona fide hedges that are consistent with CEA section 4a(a)(1), so, in practice, spread exemptions and non-anticipatory enumerated bona fide hedges have been self-effectuating. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations maintains the status quo with respect to spread exemptions that meet the ‘‘spread transaction definition’’ for the nine legacy agricultural contracts as such spread exemptions will continue to be self-effectuating. The final rule also maintains the status quo for any non-enumerated bona fide hedge in one of the nine legacy agricultural contracts by requiring an applicant to receive prior approval, and similarly requiring prior approval for such non-enumerated bona fide hedges for the additional 16 contracts that are newly subject to Federal position limits.1553 The Commission concludes that there is a change to the status quo baseline with respect to the 16 non-legacy core referenced futures contracts to the extent that they will be subject to Federal position limits for the first time under the Final Rule. However, since the most common spread exemptions will be ‘‘self-effectuating’’ for Federal purposes, market participants will not need to do anything new, compared to the status quo, under the Final Rule in connection with self-effectuating spread exemptions. Accordingly, as a practical matter, the Commission does not believe that the Final Rule will impose any new costs or benefits with respect to the 16 non-legacy core referenced futures products related to the Final Rule’s treatment of these self-effectuating spread exemptions since market participants will not need to do anything differently compared to the status quo (i.e., market participants will still need to obtain exchange approval of any spread exemption for purposes of exchange-set position limits, but will not be required to do anything for Federal purposes in connection with self-effectuating spread exemptions). Alternatively, several commenters advocated for the Commission to expand the proposed § 150.9 process to also allow exchanges to grant ‘‘nonenumerated’’ spread exemptions for spread positions that do not meet the ‘‘spread transaction’’ definition.1554 As more fully explained in the preamble, the Commission determined not to expand § 150.9 for two primary reasons.1555 First, most of the more common spread exemptions used by market participants fall within the scope of the Final Rule’s expanded ‘‘spread transaction’’ definition and are selfeffectuating for purposes of Federal 1553 The Commission discusses the costs and benefits related to the process for non-enumerated bona fide hedge recognitions with respect to the nine legacy agricultural products in the above section. 1554 See MFA/AIMA at 10; FIA at 21; Citadel at 8–9; ISDA at 9; ICE at 7–8. 1555 See supra Sections II.G.4., II.G.5. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 position limits. Spread exemption requests that fall outside of the ‘‘spread transaction’’ definition are likely to be novel exemption requests that require Commission review. Second, bona fide hedge recognitions and spread transactions are subject to different legal standards under CEA section 4a(a). Because CEA section 4a(a)(c)(2) provides clear criteria to the Commission for determining what constitutes a bona fide hedging transaction or position, the Commission has defined in detail the term ‘‘bona fide hedging transaction or position’’ in § 150.1. As a result, the Commission is permitting exchanges to evaluate applications for non-enumerated bona fide hedges for purposes of exchange-set limits in accordance with the same clear criteria used by the Commission. In contrast, CEA section 4(a)(a)(1) does not include clear criteria to the Commission for the granting of spread exemptions and requires the Commission to use its judgment to conduct a fact-specific analysis of novel spread exemption requests. Because exchanges would lack clear standards for assessing whether a particular spread position satisfies the requirements of the CEA, the Commission currently is uncomfortable with leveraging an exchange’s analysis and determination with respect to novel spread exemption requests and believes that such an alternative could impose costs on risk management practices due to possible inconsistent treatment of such exemption requests across exchanges as well as potential uncertainty due to lack of a clear statutory standard. To the extent market participants are required to obtain prior approval for a non-enumerated bona fide hedge or spread exemption for any of the additional 16 contracts that are newly subject to Federal position limits, the Commission recognizes that § 150.3 imposes costs on market participants who are now required to spend time and resources submitting applications to the Commission or an exchange, or both, as applicable, for prior approval of exemptions for Federal position limit purposes.1556 Further, compared to the status quo in which the proposed new 16 contracts are not subject to Federal position limits, the process in § 150.3 could increase uncertainty since market participants are required to seek prior approval and wait for an undetermined amount of time for a Commission response. As a result, such uncertainty 1556 The Commission’s Paperwork Reduction Act analysis identifies some of these information collection burdens in greater specificity. See infra Section IV.B.3.ii.c. (discussing in greater detail the cost and benefits related to spread exemptions). PO 00000 Frm 00197 Fmt 4701 Sfmt 4700 3431 could cause market participants to either enter into smaller spread or bona fide hedging positions or do so at a later time. In either case, this could cause market participants to incur additional costs and/or implement less efficient hedging strategies. However, the Commission believes that final § 150.3’s framework is familiar to market participants that currently apply to the Commission for bona fide exemptions for the nine legacy agricultural products, which should serve to reduce costs for some market participants associated with obtaining recognition of a bona fide hedge or spread exemption from the Commission for Federal position limits for those market participants.1557 The Commission believes that this analysis also applies to the nine legacy agricultural contracts for spread exemptions that are not listed in the proposed ‘‘spread transaction’’ definition and therefore also requires market participants to apply to the Commission for these types of spread exemptions for the first time for the nine legacy agricultural products. However, because the Commission has determined that most spread transactions are self-effectuating (especially for the nine legacy agricultural contracts based on the Commission’s experience), the Commission believes that § 150.3 imposes only small costs with respect to spread exemptions for both the nine legacy agricultural contracts as well as the additional 16 contracts that are newly subject to Federal position limits.1558 1557 The Commission anticipates that the application process in § 150.3(b) could slightly reduce compliance-related costs, compared to the status quo application process to the Commission under existing §§ 1.47 and 1.48, because § 150.3 provides a single, standardized process for all bona fide hedge and spread exemption requests that is slightly less complex—and more clearly laid out in the proposed regulations—than the Commission’s existing application processes. Nonetheless, since the Commission anticipates that most market participants would apply directly to exchanges for bona fide hedges when provided the option under § 150.9, the Commission believes that most market participants would incur the costs and benefits discussed thereunder. 1558 ICE requested that market participants be able to apply for spread exemptions on a late or retroactive basis the same way they would be permitted to apply for bona fide hedge exemptions within five days of exceeding Federal position limits under proposed §§ 150.3 and 150.9. ICE at 8. The Commission has determined not to permit late retroactive applications for spread exemptions under § 150.3(a) because the Commission believes that the Final Rule provides sufficient flexibility to allow market participants to identify their exemption needs and submit timely applications. See supra Section II.C.4.iii. The Commission further believes that allowing retroactive spread exemptions (and other types of retroactive E:\FR\FM\14JAR2.SGM Continued 14JAR2 3432 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 While the Commission has years of experience granting and monitoring spread exemptions and enumerated and non-enumerated bona fide hedges for the nine legacy agricultural contracts, as well as overseeing exchange processes for administering exemptions from exchange-set limits on such commodities, the Commission does not have the same level of experience or comfort administering bona fide hedge recognitions and spread exemptions for the additional 16 contracts that are subject to the Federal position limits and the new exemption processes for the first time. Accordingly, the Commission recognizes that permitting enumerated bona fide hedges and spread exemptions identified in the ‘‘spread transaction’’ definition for these additional 16 contracts might not provide the purported benefits, or could result in increased costs, compared to the nine legacy agricultural products. The Commission also believes that § 150.3 benefits market participants by providing them the option to choose the process for applying for a nonenumerated bona fide hedge (i.e., either directly with the Commission or, alternatively, through the exchangecentric process discussed under § 150.9 below) for the additional 16 contracts that are newly subject to Federal position limits that are more efficient given the market participants’ unique facts, circumstances, and experience.1559 If a market participant chooses to apply through an exchange for Federal position limits pursuant to final § 150.9, the market participant receives the added benefit of not being required to also submit another application directly to the Commission. The Commission anticipates that most market participants would apply directly to exchanges for nonenumerated bona fide hedges, pursuant to the streamlined process § 150.9, as explained below, in which case the exemptions) could potentially be harmful to the market, as these types of strategies may involve non-risk-reducing or speculative activity that should be evaluated prior to a person exceeding Federal position limits. Id. 1559 As noted above, market participants seeking spread exemptions not listed in the proposed ‘‘spread transaction’’ definition in § 150.1 are required to apply directly with the Commission under § 150.3 and are not permitted to apply under § 150.9. The Commission recognizes that these types of spread exemptions are difficult to analyze compared to either the spread exemptions identified in § 150.1 or bona fide hedges in general. Accordingly, the Commission has determined to require market participants to apply directly to the Commission. Further, compared to the spread exemptions identified in final § 150.1, the Commission anticipates relatively few requests, and so does not believe the application requirement will impose a large aggregate burden across market participants. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Commission believes that most market participants would incur the costs and benefits discussed thereunder. The Commission also believes that this analysis applies with respect to nonenumerated bona fide hedges for the nine legacy agricultural contracts. c. Exemption-Related Recordkeeping Final § 150.3(d) requires persons who avail themselves of any of the foregoing exemptions to maintain complete books and records concerning all details of each of their exemptions and any related position, and to make such records available to the Commission upon request under § 150.3(e). Several commenters recommended that the Commission delete the passthrough swap recordkeeping requirements in proposed § 150.3(d)(2) based on concerns it would place all compliance burdens on the passthrough swap counterparty offering the swap rather than the bona fide hedging counterparty.1560 Commenters further expressed concerns the proposed provision would be burdensome to the extent it would require the pass-through swap counterparty to maintain records of each representation made by the bona fide hedging counterparty on a trade-bytrade basis.1561 The Commission intended § 150.3(d)(2) to be an extension of market participants’ existing obligations to maintain regulatory records under part 45 and § 1.31. As discussed above, the revised ‘‘bona fide hedging transaction or position’’ definition in final § 150.1 requires that a pass-through swap counterparty receive a written representation from its bona fide hedging swap counterparty in order for the pass-through swap to qualify as a bona fide hedge.1562 In light of that, final § 150.3(d)(2) requires a person relying on the pass-through swap provision to maintain any records created for purposes of demonstrating a good faith reliance on that provision in accordance with § 150.1. These recordkeeping requirements benefit market integrity by providing the Commission with the necessary information to monitor the use of exemptions from speculative position limits and help to ensure that any person who claims any exemption permitted by § 150.3 can demonstrate compliance with the applicable requirements. The Commission does not expect these requirements to impose significant new costs on market participants, as these requirements are 1560 Cargill at 6; Shell at 6. 1561 Id. 1562 See PO 00000 supra at Section II.A.1.x. Frm 00198 Fmt 4701 Sfmt 4700 in line with existing Commission and exchange-level recordkeeping obligations. d. Exemption Renewals Consistent with existing §§ 1.47 and 1.48, with respect to any Commissionrecognized bona fide hedge or Commission-granted spread exemption pursuant to final § 150.3, the Commission does not require a market participant to reapply annually to the Commission.1563 The Commission believes that this reduces burdens on market participants but also recognizes that not requiring market participants to annually reapply to the Commission ostensibly could harm market integrity since the Commission will not directly receive updated information with respect to particular bona fide hedgers or exemption holders prior to the trader exceeding the applicable Federal position limits. However, the Commission believes that any potential harm is mitigated since the Commission, unlike exchanges, has access to aggregate market data, including positions held by individual market participants. Further, § 150.3 requires a market participant to submit a new application if any material information changes, or upon the Commission’s request. In addition, the Commission will receive information about any annual renewals of such requests made to an exchange (for purposes of exchange-set limits) through the monthly exchange reports required under § 150.5(a)(4). On the other hand, market participants benefit by not being required to annually submit new applications, which the Commission believes reduces compliance costs. e. Exemptions for Financial Distress and Conditional Natural Gas Positions Final § 150.3 codifies the Commission’s existing informal practice with respect to exemptions for financial distress and existing industry practice with respect to the conditional spot month limit exemption positions in natural gas. The same costs and benefits described above with respect to applications for bona fide hedge recognitions and spread exemptions also apply to these exemptions. However, to the extent the Commission currently allows exemptions related to financial distress, the Commission has determined that the costs and benefits with respect to the related application 1563 As discussed below, with respect to exchange-set limits under § 150.5 or the exchange process for Federal position limits under § 150.9, market participants are required to annually reapply to exchanges. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations process already may be recognized by market participants. khammond on DSKJM1Z7X2PROD with RULES2 ii. Process for Market Participants To Apply to an Exchange for NonEnumerated Bona Fide Hedge Recognitions for Purposes of Federal Position Limits (Final § 150.9) and Related Changes to Part 19 of the Commission’s Regulations Final § 150.9 provides a framework whereby a market participant could avoid the existing dual application process described above and, instead, file one application with an exchange to receive a non-enumerated bona fide hedging recognition, which as discussed previously is not self-effectuating for purposes of Federal position limits. Under this process, a person is allowed to exceed the Federal position limit levels following an exchange’s review and approval of an application for a bona fide hedge recognition, provided that the Commission during its review does not notify the exchange otherwise within a certain period of time thereafter. Market participants who do not elect to use the process in final § 150.9 for purposes of Federal position limits are required to request relief both directly from the Commission under § 150.3, as discussed above, and also apply to the relevant exchange, consistent with existing practices.1564 a. Final § 150.9—Establishment of General Exchange Process Pursuant to final § 150.9, exchanges that elect to process these applications are required to file new rules or rule amendments with the Commission under § 40.5 of the Commission’s regulations and obtain from applicants all information to enable the exchange and the Commission to determine that the facts and circumstances support a non-enumerated bona fide hedge recognition. Also, final § 150.9(e)(1) requires exchanges to provide real-time notification to the Commission of each initial determination to recognize a nonenumerated bona fide hedging transaction or position. The Commission believes that exchanges’ existing practices generally are consistent with the requirements of § 150.9, and, therefore, exchanges will only incur marginal costs, if any, to modify their existing practices to comply. Similarly, the Commission anticipates that establishing uniform, standardized exemption processes across exchanges benefits market participants by reducing compliance 1564 As noted above, the Commission anticipates that most, if not all, market participants will use § 150.9, rather than § 150.3, where permitted. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 costs. On the other hand, the Commission recognizes that exchanges that wish to participate in the processing of applications with the Commission under § 150.9 are required to expend resources to establish a process consistent with the Final Rule. However, to the extent exchanges have similar procedures, such benefits and costs may already have been realized by market participants and exchanges. The Commission believes that there are significant benefits to the § 150.9 process that will be largely realized by market participants. The Commission has determined that the use of a single application to process both exchange and Federal position limits exemptions benefits market participants and exchanges by simplifying and streamlining the process. For applicants seeking recognition of a nonenumerated bona fide hedge, § 150.9 should reduce duplicative efforts, because applicants are saved the expense of applying in parallel to both an exchange and the Commission for relief from exchange-set position limits and Federal position limits, respectively. Because many exchanges already possess similar application processes with which market participants are likely accustomed, compliance costs should be decreased in the form of reduced applicationproduction time by market participants and reduced response time by exchanges.1565 As discussed above, in connection with the recognition of bona fide hedges for Federal position limit purposes, current practices set forth in existing §§ 1.47 and 1.48 require market participants to differentiate between (i) enumerated non-anticipatory bona fide hedges that are self-effectuating, and (ii) enumerated anticipatory bona fide hedges and non-enumerated bona fide hedges for which market participants must apply to the Commission for prior approval. Under the Final Rule, the Commission’s application processes no longer distinguish among different types of enumerated bona fide hedges (e.g., anticipatory versus non-anticipatory enumerated bona fide hedges), and therefore, do not require exchanges to have separate processes for enumerated anticipatory positions under § 150.9. The Final Rule also eliminates the requirement for bona fide hedgers to file Form 204 or the relevant portions of Form 304, as applicable, with respect to 1565 The Commission has previously estimated the combined annual burden hours for submitting applications under both §§ 1.47 and 1.48 to be 42 hours. See infra Section IV.B. (Paperwork Reduction Act) and 85 FR 11596, 11700 (Feb. 27, 2020). PO 00000 Frm 00199 Fmt 4701 Sfmt 4700 3433 any bona fide hedge, whether enumerated or non-enumerated.1566 The Commission expects this to benefit market participants by providing a more efficient and less complex process that is consistent with existing practices at the exchange-level.1567 On the other hand, the Commission recognizes that § 150.9 imposes new costs related to non-enumerated bona fide hedges for the additional 16 contracts that are newly subject to Federal position limits. Under final § 150.9(c), market participants are now required to submit applications, including information to demonstrate why a particular position qualifies as bona fide hedge, as defined in § 150.1 and CEA section 4a(c)(2), to receive prior approval for Federal position limits purposes.1568 However, since the Commission understands that exchanges already require market participants to submit applications and receive prior approval under exchangeset limits for all types of bona fide hedges, the Commission does not believe § 150.9 imposes any additional incremental costs on market participants beyond those already incurred under exchanges’ existing processes.1569 Accordingly, the 1566 See supra Section II.H.2. (discussing changes to part 19 eliminating Form 204 and portions of Form 304). 1567 See infra Section IV.A.5.iii. for discussion related to changes to part 19 regarding the provision of information by market participants, noting that the elimination of Form 204 by the Final Rule reduces the burden hours estimates by 300 annual aggregate burden hours. 1568 One commenter requested that the Commission provide additional factors that exchanges should consider when granting nonenumerated bona fide hedge recognitions. ISDA at 9. As discussed more fully in the preamble, the Commission believes that the final regulations strike a reasonable tradeoff by providing sufficient guidance to the exchanges for their review and determination in the context of exchange limits, while preserving the exchanges’ discretionary authority to determine what types of additional information, if any, to collect. See supra Section II.G.5. (discussing final § 150.9(c)). 1569 Under the 2020 NPRM, proposed § 150.9(c)(1)(ii) would have required exchanges to request a ‘‘factual and legal’’ analysis from applicants for non-enumerated bona fide hedge recognitions. 85 FR 11638. Two commenters expressed concern that the proposed requirement could be interpreted as requiring applications to engage legal counsel to complete their applications, which would result in additional costs to market participants. See CME Group at 10 and CMC at 11. The Commission did not intend for exchanges to require that applicants engage legal counsel to complete their applications for non-enumerated bona fide hedge recognitions. Final § 150.9(c)(1)(ii), instead of requiring a ‘‘factual and legal analysis,’’ requires an applicant to provide ‘‘an explanation of the hedging strategy,’’ including a statement that the position complies with the applicable requirements of the bona fide hedge definition, and information to demonstrate why the position satisfies the applicable requirements. See supra Section II.G.5. (discussing final § 150.9(c)). E:\FR\FM\14JAR2.SGM 14JAR2 3434 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Commission believes that any costs already may have been realized by market participants. Further, the Commission believes that employing a concurrent process with exchanges that are self-regulatory organizations responsible for overseeing non-enumerated bona fide hedges executed on their platforms and that are not self-effectuating for Federal position limits purposes benefits market integrity by ensuring that market participants are appropriately relying on such bona fide hedges and not entering into such positions in order to attempt to manipulate the market or evade position limits. However, to the extent that exchange oversight, consistent with Commission standards and DCM core principles, already exists, such benefits may already be realized. khammond on DSKJM1Z7X2PROD with RULES2 b. Final § 150.9—Exchange Expertise, Market Integrity, and Commission Oversight For non-enumerated bona fide hedge recognitions that require the Commission’s prior approval, the Final Rule provides a framework that utilizes existing exchange resources and expertise so that fair access and liquidity are promoted at the same time market manipulations, squeezes, corners, and other conduct that would disrupt markets are deterred and prevented.1570 Final § 150.9 builds on existing exchange processes, which the Commission believes strengthens the ability of the Commission and exchanges to monitor markets and trading strategies while reducing burdens on both the exchanges, which administer the process, and market participants, who utilize the process. For example, exchanges are familiar with their market participants’ commercial needs, practices, and trading strategies, and already evaluate hedging strategies in connection with setting and enforcing exchange-set position limits.1571 Accordingly, exchanges should be able to readily identify bona fide hedges. For these reasons, the Commission has determined that allowing market participants to apply through an exchange under § 150.9, rather than directly to the Commission as required under existing § 1.47, is likely to be 1570 See CME Group at 7 (stating that the § 150.9 streamlined process would wisely leverage exchanges’ long history of reviewing hedging approaches and applying those approaches to specific facts and circumstances, and would thereby advance the statutory goal of allowing commercial parties to ‘‘hedge their legitimate anticipated business needs’’ without imposing any undue burden in doing so). 1571 For a discussion on the history of exemptions, see 78 FR at 75703–75706. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 more efficient than if the Commission itself initially had to review and approve all applications. The Commission considers the increased efficiency in processing applications under § 150.9 as a benefit to bona fide hedgers and liquidity providers. By having the availability of the exchange’s analysis and view of the markets, the Commission is better informed in its review of the market participant and its application, which in turn may further benefit market participants in the form of administrative efficiency and regulatory consistency. However, the Commission recognizes additional costs for exchanges required to create and submit real-time notices under final § 150.9(e). In particular, commenters voiced concerns that the Commission’s review of each non-enumerated bona fide hedge application could impose significant burdens on exchanges, market participants, and the Commission.1572 To the extent exchanges already provide similar notice to the Commission or to market participants, or otherwise are required to notify the Commission under certain circumstances, such benefits and costs already may have been realized. In addition, the Commission expects that, due to the expanded list of enumerated hedges and other exemptions available to market participants as well as the higher Federal limits in the Final Rule, there will be a manageable amount of non-enumerated bona fide hedges that exchanges and the Commission will review through the new streamlined process. The Commission also reiterates that § 150.9 is an optional process that exchanges and market participants may elect to use in lieu of utilizing the traditional process of requesting nonenumerated bona fide hedges directly from the Commission under § 150.3. On the other hand, to the extent exchanges become more involved with respect to review and oversight of market participants’ bona fide hedges and spread exemptions, exchanges could incur additional costs. However, as noted, the Commission believes most of the costs have been realized by 1572 IFUS at 52 (stating that the ‘‘exemption-byexemption review of exchange decisions is a novel and significant departure from the longstanding process for the implementation of the position limits regime, imposes substantial burdens on the Commission and the exchanges, and decreases regulatory certainty for market participants regarding the status of an exemption’’). See also ICE at 9 (questioning ‘‘whether it is necessary for the Commission to routinely review each nonenumerated determination by the exchange’’ and asserting that the § 150.9 10-day review process ‘‘imposes unnecessary burdens and delays on market participants’’). PO 00000 Frm 00200 Fmt 4701 Sfmt 4700 exchanges under current market practice. At the same time, the Commission also recognizes that this aspect of the Final Rule could hypothetically harm market integrity. Absent other provisions, since exchanges profit from increased activity, an exchange could hypothetically seek a competitive advantage by offering excessively permissive exemptions, which could allow certain market participants to utilize non-enumerated bona fide hedge recognitions to engage in excessive speculation or to manipulate market prices. If an exchange engaged in such activity, other market participants would likely face greater costs through increased transaction fees, including forgoing trading opportunities resulting from market prices moving against market participants and/or preventing the market participant from executing at its desired prices, which may also further lead to inefficient hedging. However, the Commission believes that these hypothetical costs are unfounded since under final § 150.9 the Commission reviews the applications submitted by market participants for bona fide hedge recognitions and spread exemptions for Federal position limits. The Commission emphasizes that § 150.9 is not providing exchanges with an ability to recognize a bona fide hedge or grant an exemption for Federal position limit purposes in lieu of a Commission review.1573 Rather, § 150.9(e) and (f) require an exchange to provide the Commission with notice of the disposition of any application for purposes of exchange limits concurrently with the notice the exchange provides to the applicant, and the Commission will have 10 business days to make its determination for Federal position limits purposes (although, in connection with ‘‘sudden or unforeseen increases’’ in bona fide hedging needs, as discussed in connection with final § 150.3, § 150.9 requires the Commission to make its determination within two business days). Each non-enumerated bona fide hedge approved by an exchange for purposes of its own limits is separately and independently reviewed by the Commission for purposes of Federal position limits. Finally, under DCM Core Principle 5 and SEF Core Principle 6, exchanges are accountable for administering position limits in a manner that reduces the potential threat of market manipulation or congestion. The Commission believes that these 1573 See supra Section II.G. (discussing Commission determination of non-enumerated bona fide hedge applications submitted under § 150.9). E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations requirements, working in concert, provide sufficient protection against any potential harm to market integrity. On the other hand, the Commission also recognizes that there could be potential costs to bona fide hedgers if, under the Final Rule, they wait up to 10 business days for the Commission to complete its review after the exchange’s initial review—especially compared to the status quo for the 16 commodities that are subject to Federal position limits for the first time under the Final Rule and currently are not required to receive the Commission’s prior approval. As a result, the Commission recognizes that a market participant could incur costs by waiting during the 10 business day period, or be required to enter into a less efficient hedge, which would harm liquidity.1574 However, the Commission believes this concern is mitigated since, under final § 150.9(e)(3), a market participant in receipt of a notice of approval from the relevant exchange may elect, at its own risk, to exceed Federal position limits during the Commission’s 10-day review period.1575 Further, final § 150.9(c)(2)(i), similar to final § 150.3, permits a market participant that demonstrates a ‘‘sudden or unforeseen’’ increase in its bona fide hedging needs to enter into a bona fide hedge without first obtaining the Commission’s prior approval, as long as the market participant submits a retroactive application to the Commission within five business days of exceeding the applicable position limit.1576 In turn, the Commission only has two business days (as opposed to the default 10 business days) to complete its review for Federal purposes. The Commission believes this retroactive application exemption benefits bona fide hedgers compared to existing § 1.47, which requires Commission prior approval, since hedgers that qualify to exercise the retroactive exemption are also likely facing more acute hedging needs—with potentially commensurate costs if required to wait. Absent the retroactive application exemption, market participants would be penalized and prevented from assuming appropriate hedges even though their hedging need arises from circumstances beyond their control. This provision also leverages, for Federal position limit purposes, existing exchange practices for granting 1574 See ICE at 9 (requesting that the Commission permit a ‘‘market participant to engage in hedging up to the requested exemption limit while waiting for approval’’). 1575 See supra Sections II.G.7. (discussing when a person may exceed Federal position limits). 1576 Id. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 retroactive exemptions from exchangeset limits. On the other hand, the retroactive application exemption could harm market liquidity and bona fide hedgers since the Commission is able to require a market participant to exit its position if the exchange or the Commission does not approve of the retroactive request. Such uncertainty could cause market participants to either enter into smaller bona fide hedge positions than it otherwise would, or could cause the bona fide hedger to delay entering into its hedge, in either case potentially causing bona fide hedgers to incur increased hedging costs. However, the Commission believes this concern is partially mitigated since § 150.9 requires the purported bona fide hedger to exit its position in a ‘‘commercially reasonable time,’’ which the Commission believes should partially mitigate any costs incurred by the market participant compared to either an alternative that would require the bona fide hedger to exit its position immediately, or the status quo where the market participant is unable to enter into a hedge at all without Commission approval. As discussed in the preamble, the Commission received and considered two comments recommending a broader retroactive application exemption: (1) CME recommended that the Commission allow retroactive applications regardless of the circumstances and impose a position limits violation on an applicant in the event the exchange denies its application; and (2) ICE recommended that the Commission permit retroactive exemptions for other types of exemptions, as well as for position limit overages that occur as a result of operational or incidental issues where the applicant did not intend to evade position limits.1577 An expansion of this exception beyond bona fide hedge needs that arise due to sudden or unforeseen circumstances could disincentivize market participants from properly monitoring their hedging activities and filing applications in a timely manner. Because the Final Rule provides broad flexibility to market participants in the form of various exemptions, among other enhancements to the Federal position limits framework for bona fide hedges and other exemptions, the Commission determined not to expand the retroactive application provision in § 150.9(c)(2)(ii).1578 1577 See supra Section II.G.5.iii.b. (citing CME Group at 9–10 and ICE at 10). 1578 See supra Section II.G.5.ii. (discussing final § 150.9(c)(2)(i)). PO 00000 Frm 00201 Fmt 4701 Sfmt 4700 3435 While existing § 1.47 does not require market participants to annually reapply for certain bona fide hedges, final § 150.9(c)(3) requires market participants to reapply at least annually with exchanges to maintain previouslyapproved non-enumerated bona fide hedge recognition for purposes of Federal position limits. Several commenters requested the Commission to clarify that an applicant is subject to the Commission’s 10/2-day review process in § 150.9(e) only for initial applications for non-enumerated bona fide hedges, and is not subject to such review for annual renewal applications unless the facts and circumstances materially change from those presented in the initial application. As discussed in the preamble, market participants are only subject to the Commission’s 10/2day review process for their initial applications for non-enumerated bona fide hedges unless there are material changes to their initial application. The Commission recognizes that requiring market participants to reapply annually could impose additional costs on those that are not currently required to do so. However, the Commission believes that this is consistent with industry practice with respect to exchange-set limits and that market participants are familiar with exchanges’ exemption processes, which should reduce related costs.1579 Further, the Commission believes that market integrity is strengthened by ensuring that exchanges receive updated trader information that may be relevant to the exchange’s oversight.1580 However, to the extent any of these benefits and costs reflects current market practice, they already may have been realized by exchanges and market participants. The Commission anticipates additional costs for exchanges required to create and submit certain notifications and monthly reports. Final § 150.9(e)(1) requires exchanges to provide real-time notification to the Commission of each initial determination to recognize a bona fide hedging transaction or position.1581 1579 See infra Section IV.A.6. (discussing final § 150.5). 1580 In contrast, the Commission, unlike exchanges, has access to aggregate market data, including positions held by individual market participants, and so the Commission has determined that requiring market participants to apply annually under final § 150.3, absent any changes to their application, does not benefit market integrity to the same extent. 1581 In addition to submitting a copy of any exchange-approved non-enumerated bona fide hedge application to the Commission under § 150.9(e), an exchange may, on a voluntary basis, send the Commission an advance courtesy copy of the non-enumerated bona fide hedge application E:\FR\FM\14JAR2.SGM Continued 14JAR2 3436 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Final § 150.5(a)(4) requires exchanges to provide monthly reports with necessary information in the form and manner required by the Commission. The exchange-to-Commission monthly report for contracts subject to Federal speculative position limits in final § 150.5(a)(4) further details the exchange’s disposition of a market participant’s application for recognition of a bona fide hedge position or spread exemption as well as the related position(s) in the underlying cash markets and swaps markets.1582 The Commission believes that such reports provide greater transparency by facilitating the tracking of these positions by the Commission and further assist the Commission in ensuring that a market participant’s activities conform to the exchange’s rules and to the CEA. The combination of the ‘‘real-time’’ exchange notification and exchanges’ provision of monthly reports to the Commission under final §§ 150.9(e)(1) and 150.5(a)(4), respectively, provides the Commission with enhanced surveillance tools on both a ‘‘real-time’’ and a monthly basis to ensure compliance with the requirements of the Final Rule. However, to the extent exchanges already provide similar notice to the Commission, or otherwise are required to notify the Commission under certain circumstances, such benefits and costs already may have been realized. khammond on DSKJM1Z7X2PROD with RULES2 c. Final § 150.9(d)—Recordkeeping Final § 150.9(d) requires exchanges to maintain complete books and records of all activities relating to the processing and disposition of any applications, including applicants’ submission materials,1583 and determination when the exchange first receives it from the applicant. For purposes of the cost-benefit considerations, we expect this to be a de minimis burden on an exchange that elects to provide the courtesy copy to the Commission. In addition, we expect that providing the courtesy copy could facilitate a more rapid Commission evaluation of applications submitted under § 150.9, help facilitate additional regulatory certainty for market participants, and aid the Commission in its review of applications processed under § 150.9. 1582 In response to concerns from ICE that proposed § 150.5(a)(4) may be overly burdensome and redundant, the Commission clarified that the monthly report is required to capture only positions that are subject to Federal position limits (as opposed to other exchange-set non-enumerated exemptions), exchanges have discretion as to the best timing for submitting their reports so long as they are submitted on a monthly basis, and exchanges need not include factual and legal analysis in the monthly report. See supra Section II.D.3.iv. (discussing § 150.5(a)(4)). 1583 One commenter requested that § 150.9 allow exchanges to maintain records of applicants’ positions on an aggregate basis, as opposed to requiring an exchange to match applicants’ bona fide hedge positions to their underlying cash VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 documents.1584 The Commission believes that this benefits market integrity and Commission oversight by ensuring that pertinent records are readily accessible, as needed by the Commission. However, the Commission acknowledges that such requirements impose costs on exchanges. Nonetheless, to the extent that exchanges are already required to maintain similar records, such costs and benefits already may be realized.1585 d. Final § 150.9(f)—Commission Revocation of Previously Approved Applications The Commission acknowledges that there may be costs to market participants if the Commission revokes a previously-approved non-enumerated hedge recognition for Federal purposes under final § 150.9(f). Specifically, market participants could incur costs to unwind trades or reduce positions if the Commission required the market participant to do so under final § 150.9(f)(2). However, the potential cost to market participants is mitigated under final § 150.9(f) since the Commission provides a commercially reasonable time for a person to come back into compliance with the Federal position limits, which the Commission believes should mitigate transaction costs to exit the position and allow a market participant the opportunity to potentially execute other hedging strategies. e. Final § 150.9—Commodity Indexes and Risk Management Exemptions Final § 150.9(b) prohibits exchanges from recognizing as a bona fide hedge positions on a one-to-one basis. NGSA at 9. In the preamble, the Commission noted that final § 150.9(d) does not prescribe the manner in which exchanges record application materials and information—it simply requires exchanges to keep a record of application materials and information collected. See supra Section II.G.6.iii. 1584 Moreover, consistent with existing § 1.31, the Commission expects that these records will be readily accessible until the termination, maturity, or expiration date of the bona fide hedge recognition or exempt spread position and during the first two years of the subsequent five-year retention period. 1585 The Commission believes that exchanges that process applications for recognition of bona fide hedging transactions or positions and/or spread exemptions currently maintain records of such applications as required pursuant to other existing Commission regulations, including existing § 1.31. The Commission, however, also believes that final § 150.9(d) may impose additional recordkeeping obligations on such exchanges. The Commission estimates that each exchange electing to administer the processes will likely spend five (5) hours annually to comply with the recordkeeping requirement of final § 150.9(d) and thus will incur minimal costs compared to the status quo. See generally Section IV.B. (discussing the Commission’s PRA determinations). PO 00000 Frm 00202 Fmt 4701 Sfmt 4700 any positions that include commodity index contracts and one or more referenced contracts, including exemptions known as risk management exemptions. The Commission recognizes that this prohibition could alter trading strategies that currently use commodity index contracts as part of an entity’s risk management program. Although there likely is a cost to change risk management strategies for entities that currently rely on a bona fide hedge recognition for positions in commodity index contracts, as discussed above, the Commission believes that such financial products are not substitutes for positions in a physical market and therefore do not satisfy the statutory requirement for a bona fide hedge under section 4a(c)(2) of the Act.1586 In addition, the Commission further posits that this cost may be reduced or mitigated by the proposed increase in Federal position limit levels set forth in final § 150.2, or by the implementation of the pass-through swap provision of the bona fide hedge definition in final § 150.1.1587 iii. Related Changes to Part 19 of the Commission’s Regulations Regarding the Provision of Information by Market Participants Under existing regulations, the Commission relies on Form 204 1588 and Form 304,1589 known collectively as the ‘‘series ‘04’’ reports, to monitor for compliance with Federal position limits. Prior to the amendments to part 19 in the Final Rule, market participants that held bona fide hedging positions in excess of Federal position limits for the nine legacy agricultural contracts had to justify such overages by filing the applicable report (Form 304 for cotton and Form 204 for the other eight legacy commodities) each month.1590 The 1586 See supra Section III.C.4. (discussing commodity indices); see supra Section IV.A.4.ii.a(1) (discussing elimination of the risk management exemption). 1587 See supra Section IV.A.4.b.i(1) (discussing the pass-through swap exemption). 1588 CFTC Form 204: Statement of Cash Positions in Grains, Soybeans, Soybean Oil, and Soybean Meal, available at https://www.cftc.gov/sites/ default/files/idc/groups/public/@forms/documents/ file/cftcform204.pdf (existing Form 204). 1589 CFTC Form 304: Statement of Cash Positions in Cotton, U.S. Commodity Futures Trading Commission website, available at https:// www.cftc.gov/ucm/groups/public/@forms/ documents/file/cftcform304.pdf (existing Form 204). Parts I and II of Form 304 address fixed-price cash positions used to justify cotton positions in excess of Federal position limits. As described below, Part III of Form 304 addresses unfixed price cotton ‘‘on-call’’ information, which is not used to justify cotton positions in excess of limits, but rather to allow the Commission to prepare its weekly cotton on-call report. 1590 17 CFR 19.01. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Commission has used these reports to determine whether a trader had sufficient cash positions to justify purported bona fide hedges positions using futures and options on futures positions above the applicable Federal position limits. As discussed above, with respect to bona fide hedging positions, the Commission is adopting a streamlined approach, under final §§ 150.5 and 150.9, to cash-market reporting that reduces duplication between the Commission and the exchanges. Generally, the Commission is adopting amendments to part 19 and related provisions in part 15 that: (i) Eliminate Form 204; and (ii) amend the Form 304, in each case to remove any cash-market reporting requirements. Under the Final Rule, the Commission instead relies on cash-market reporting submitted directly to the exchanges, pursuant to final §§ 150.5 and 150.9,1591 or requests cash-market information through a special call.1592 The cash-market and swap-market reporting elements of §§ 150.5 and 150.9 discussed above are largely consistent with current market practices with respect to exchange-set limits and thus should not result in any new costs.1593 The Final Rule’s elimination of Form 204 and the cash-market reporting segments of the Form 304 eliminate the reporting burden and associated costs.1594 Market participants should realize significant benefits by being able to submit cash-market reporting to one entity—the exchanges—instead of having to comply with duplicative reporting requirements between the Commission and applicable exchange, or implement new Commission processes for reporting cash-market data for market participants who will be newly subject to position limits.1595 1591 See supra Section II.G.ii.3. (discussing final § 150.9). As discussed above, leveraging existing exchange application processes should avoid duplicative Commission and exchange procedures and increase the speed by which position limit exemption applications are addressed. For purposes of Federal position limits, the cash-market reporting regime discussed in this section of the release only pertains to bona fide hedges, not to spread exemptions, because the Commission has not traditionally relied on cash-market information when reviewing requests for spread exemptions. 1592 See final § 19.00(b). 1593 See, e.g., CME Rule 559 and ICE Rule 6.29. 1594 Based on revised estimates of the current collections of information under existing part 19, the Commission estimates that the Final Rule reduces the collections of information in part 19 by 600 reports and by 300 annual aggregate burden hours since the Final Rule eliminates Form 204. See infra Section IV.B. (Paperwork Reduction Act) and 85 FR 11596, 11700 (Feb. 27, 2020). 1595 The Commission has noted that certain commodity markets are subject to Federal position limits for the first time. In addition, the existing VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Further, market participants are generally already familiar with exchange processes for reporting and recognizing bona fide hedging exemptions, which is an added benefit, especially for market participants that are newly subject to Federal position limits. Further, these changes do not impact the Commission’s existing provisions for gathering information through special calls relating to positions exceeding limits and/or to reportable positions. Accordingly, as discussed above, the Commission requires that all persons exceeding the Federal position limits set forth in final § 150.2, as well as all persons holding or controlling reportable positions pursuant to existing § 15.00(p)(1), must file any pertinent information as instructed in a special call.1596 The Commission acknowledges that, on its face, not obtaining the cashmarket position information in the form of a series ‘04 report could hypothetically result in some increase in speculation; however, as set out above, this risk is mitigated by the Commission’s special call authority and by the requirements that the exchanges receive this information under §§ 150.5 and 150.9, as applicable. The Commission in turn would be able to receive this information from the applicable exchange. Final § 19.00(a)(3) is similar to existing § 19.00(a)(3), but requires any such person to file the information as instructed in the special call, rather than to file a series ‘04 report.1597 The Commission believes that relying on its special call authority is less burdensome for market participants than the existing Forms 204 and 304 reporting costs, as special calls are discretionary requests for information whereas the series ‘04 reporting requirements are a monthly, recurring reporting burden for market participants. While collecting this data monthly would permit the Commission to analyze the bona fide hedges in a time series, which may be helpful in understanding trends in hedging techniques, the Commission will have access to this same data from the exchanges and could do the same analysis if required. The Commission received one comment addressing the purported burdens that would accompany elimination of the cash-market reporting forms. Better Markets, for example, argued that eliminating these series ‘04 Form 204 would be inadequate for reporting of cash-market positions relating to certain energy contracts that are subject to Federal position limits for the first time under the Final Rule. 1596 See final § 19.00(b). 1597 17 CFR 19.00(a)(3). PO 00000 Frm 00203 Fmt 4701 Sfmt 4700 3437 forms would impose additional reporting burdens on market participants by requiring participants to report cash-market information to multiple exchanges, and suggested that the Commission should instead ‘‘ensure that all cash positions reporting is automated’’ and ‘‘amenable to aggregation’’ in order to provide such information to the exchanges.1598 The Commission disagrees with Better Markets’ concerns about increased reporting burdens and criticism of the existing reporting infrastructure for the reasons discussed above.1599 However, as noted above, eliminating the ‘04 forms will reduce burdens on market participants.1600 Separately, ACSA argued for the elimination of Form 304 in its entirety.1601 ACSA asserted that Part III of Form 304, which is used to prepare the Commission’s cotton on-call report, causes competitive harm to the U.S. cotton industry because the report divulges one market participant’s proprietary information to another market participant and, according to ACSA, foreign mills believe that the report imposes risks and costs and are therefore more likely to purchase cotton from outside of the United States in order to avoid completing Part III of Form 304.1602 As discussed in detail above at Section II.H.5.iv, the Commission believes that the cotton on-call report contributes to efficient price discovery,1603 and that continued publication of the cotton on-call report will not change the existing dynamics of the cotton market. 6. Exchange-Set Position Limits (Final § 150.5) i. Introduction Existing § 150.5 addresses exchangeset position limits on contracts not 1598 Better Markets at 59–60. supra Section H.2.iii.–iv. (discussing Better Markets’ comments and the Commission’s responses thereto). 1600 Id. 1601 ACSA at 9–11. 1602 See id.; see also NCTO at 1–2 (arguing against publication of the cotton-on-call report and that textile mills are particularly harmed when speculators trade against the cash-market positions disclosed in the cotton on-call report because textile mills purchase the majority of their cotton on call). 1603 See, e.g., Glencore at 2. One commenter stated that it is difficult to see the benefit in limiting transparency in the cotton market and that cotton on-call report is useful and necessary because it allows market participants to identify market composition. Dunavant at 1. Similarly, another commenter stated that discontinuation of the cotton on-call report would widen the informational divide between large and small market participants while providing no benefits to the public or price discovery. Gerald Marshall at 3. 1599 See E:\FR\FM\14JAR2.SGM 14JAR2 3438 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 subject to Federal position limits under existing § 150.2, and sets forth different standards for DCMs to apply in setting limit levels depending on whether the DCM is establishing limit levels: (1) On an initial or subsequent basis; (2) for cash-settled or physically-settled contracts; and (3) during or outside the spot month. In contrast, for physical commodity derivatives, final § 150.5(a) and (b): (1) Expands existing § 150.5’s framework to also cover contracts subject to Federal position limits under final § 150.2; (2) simplifies the existing standards that DCMs apply when establishing exchange-set position limits; and (3) provides non-exclusive acceptable practices for compliance with those standards.1604 Additionally, final § 150.5(d) requires DCMs to adopt aggregation rules that conform to existing § 150.4.1605 As a general matter, one factor (in addition to more specific factors discussed throughout this Final Rule’s cost-benefit considerations) affecting the costs and benefits of the Federal position limits established by this Final Rule is the fact that exchanges, for many years, have had in place spot month position limits for all of the core referenced contracts and non-spot month limits for all of the nine legacy agricultural contracts.1606 Under final § 150.5(a) and (b), exchanges will be required to adopt exchange-set position limits both (i) for contracts subject to Federal position limits and (ii) during the spot month for physical commodity contracts not subject to Federal position limits. Exchanges also will be required to adopt position limits or position accountability outside the spot month for those physical commodity contracts not subject to non-spot month Federal position limits, although the specifics may change with evolving market 1604 See 17 CFR 150.2. Existing § 150.5 addresses only contracts not subject to Federal position limits under existing § 150.2 (aside from certain major foreign currency contracts). To avoid confusion created by the parallel Federal and exchange-set position limit frameworks, the Commission clarifies that final § 150.5 deals solely with exchange-set position limits and exemptions therefrom, whereas final § 150.9 deals solely with the process for purposes of Federal position limits. 1605 See 17 CFR 150.4. 1606 See Section II.D, supra, CME Group, Position Limits, https://www.cmegroup.com/marketregulation/position-limits.html; IFUS, Market Resources, Position Limits & Reporting, https:// www.theice.com/futures-us/market-resources; CEA section 5(d)(5)(A) (requiring position limits or accountability); existing § 150.5; final § 150.5(a). This is generally true with the exception of ICE Sugar No. 16, which is only subject to exchange-set single month and all-months-combined position limits. However, the single month position limit effectively acts as the spot month position limits for this contract. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 conditions and regulatory requirements.1607 Exchange-set position limits, broadly speaking, have much the same effect as Federal position limits since both restrict the size of speculative positions market participants may hold.1608 Moreover, there is significant interaction between Federal position limits and exchange-set position limits. In particular, CEA section 5(d)(5)(B) provides that, for contracts where the Commission has established a position limit, exchange-set position limits must be set at a level no higher than the Federal limit.1609 In addition, where both the Commission and an exchange have position limits in place for a contract, final § 150.5(a)(2) puts constraints on exemptions from the exchange-set limit that are tied to the Commission’s position limits in ways described in detail in Section II.D.3, above. As a result, the costs and benefits considered by the Commission, to a considerable extent, are jointly attributable to Federal and exchange-set position limits. The Commission does not have information that would permit a quantitative evaluation of the extent to which this is true. Qualitatively, where position limits overlap, a greater attribution of costs and benefits to the Federal limits appears appropriate to the extent that Federal limits trigger exchange-set limits pursuant to CEA section 5(d)(5)(B). However, this is less true if an exchange elects to impose position limits that are more stringent than the Federal limits for particular contracts.1610 Despite the overlap in the effects of Federal and exchange-set position limits, there are a number of distinctive features of Federal position limits. Most importantly, as noted above, for contracts where Federal position limits are established, they establish a ceiling on positions that can be held, both as a matter of law under CEA section 5(d)(5)(B) and as a matter of practicality since market participants must comply with Federal limits no matter what the 1607 See supra Section II.D; see also CEA section 5(d)(5); final § 150.5(a). 1608 See ICE Futures U.S. at 3 (‘‘There is no apparent benefit provided by adding a Federal position limit and guidance’’ to ICE’s procedures for position limits and exemptions to such limits.) 1609 See also final § 150.5(a)(1). 1610 For example, exchanges sometimes reduce position limit levels in response to particular market conditions. See, e.g., ICE Futures U.S. at 3, n.3 (describing a reduction in spot month position limit for cocoa in March of 2020 in response to potential impact of disruptions to normal business conditions on ability of market participants to submit cocoa for grading). In addition, an exchange could routinely set a lower position limit based on its judgment of what is necessary to prevent manipulation or other problems or based on the preferences of important participants in its market. PO 00000 Frm 00204 Fmt 4701 Sfmt 4700 level of exchange-set limits. In addition, while exchanges can share information to some extent, the Commission regulates trading on all exchanges and therefore is generally in a position to better monitor and enforce compliance with position limits across more than one exchange, for example in connection with positions in a core referenced futures contract in one exchange and a linked cash-settled lookalike referenced contract on another exchange. There are other differences as well. Even where the Commission and an exchange set the same numerical position limit for a contract, final § 150.5(a)(2) allows for the possibility that there may be some differences in the exemptions allowed.1611 And Federal position limits established pursuant to paragraph CEA section 4a(a)(2) are subject to a statutory requirement to achieve, to the maximum extent practicable, the multiple policy objectives set forth in subparagraph 4a(a)(3)(B) of the CEA. By contrast, exchanges have a narrower statutory mandate to adopt position limits or position accountability to ‘‘reduce the potential threat of market manipulation or congestion.’’ 1612 Finally, Federal position limits create compliance costs beyond those attributable to exchangeset position limits since market participants will need to establish systems to ensure compliance with Federal requirements. However, some compliance costs, for example keeping track of position levels, may be common to both forms of position limits.1613 Exchange-set position limits for contracts and commodities not subject to Federal position limits also affect the costs and benefits of Federal position limits, and, in particular, of the Commission’s finding that position limits are necessary only for the 25 CRFCs and contracts linked to them.1614 1611 See supra Section II.D. section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A). However, the statutory policy objectives for Federal position limits may indirectly affect exchange-set limits where Federal limits set a ceiling for exchange-set limits pursuant to CEA section 5(d)(5)(B), 7 U.S.C. 7(d)(5)(B). 1613 See supra Section III.B.2.c.ii; see also COPE at 3 (rule does not require market participants to create recordkeeping system to track data solely for purpose of filing forms with the Commission although some additions to existing tracking effort will be required). 1614 For information on exchange-set position limits and position accountability for contracts and commodities not subject to Federal position limits, see, e.g., CME Group, Position Limits, https:// www.cmegroup.com/market-regulation/positionlimits.html; IFUS, Market Resources, Position Limits & Reporting, https://www.theice.com/ futures-us/market-resources; CEA section 5(d)(5)(A) (requiring position limits or accountability); existing § 150.5; final § 150.5(b). 1612 CEA E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations The Commission also has concluded that the existence of exchange-set limits and position accountability (discussed further below) mitigates the effects of not establishing Federal position limits for other commodity derivatives contracts.1615 ii. Physical Commodity Derivative Contracts Subject to Federal Position Limits Under the Final Rule (Final § 150.5(a)) a. Exchange-Set Position Limits and Related Exemption Process For contracts subject to Federal position limits under the Final Rule, final § 150.5(a)(1) requires DCMs to establish exchange-set limits no higher than the level set by the Commission. This is not a new requirement, and merely restates the applicable requirement in DCM Core Principle 5.1616 Final § 150.5(a)(2) authorizes DCMs to grant exemptions from such limits and is generally consistent with current industry practice. The Commission has determined that codifying such practice establishes important, minimum standards needed for DCMs to administer—and the Commission to oversee—an effective and efficient program for granting exemptions to exchange-set limits in a manner that does not undermine the Federal position limits framework.1617 In particular, § 150.5(a)(2) protects market integrity and prevents exchangegranted exemptions from undermining the Federal position limits framework by requiring DCMs to either conform their exemptions to the type the Commission would grant under final §§ 150.3 or 150.9, or to cap the exemption at the applicable Federal position limit level and to assess whether an exemption request would result in a position that is ‘‘not in accord 1615 See infra Section IV.A.6. Commission regulation § 38.300 (restating DCMs’ statutory obligations under the CEA 5(d)(5), 7 U.S.C. 7(d)(5)). Accordingly, the Commission will not discuss any costs or benefits related to this proposed change since it merely reflects an existing regulatory and statutory obligation. 1617 This standard is substantively consistent with current market practice. See, e.g., CME Rule 559 (providing that CME will consider, among other things, the ‘‘applicant’s business needs and financial status, as well as whether the positions can be established and liquidated in an orderly manner . . .’’) and ICE Rule 6.29 (requiring a statement that the applicant’s ‘‘positions will be initiated and liquidated in an orderly manner . . .’’). This standard is also substantively similar to existing § 150.5’s standard and is not intended to be materially different. See existing § 150.5(d)(1) (an exemption may be limited if it would not be ‘‘in accord with sound commercial practices or exceed an amount which may be established and liquidated in orderly fashion.’’) 17 CFR 150.5(d)(1). khammond on DSKJM1Z7X2PROD with RULES2 1616 See VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 with sound commercial practices’’ or would ‘‘exceed an amount that may be established or liquidated in an orderly fashion in that market.’’ Absent other factors, this element of the Final Rule could potentially increase compliance costs for traders since each DCM could establish different exemption-related rules and practices. However, to the extent that rules and procedures currently differ across exchanges, any compliancerelated costs and benefits for traders may already be realized. Similarly, absent other provisions, a DCM could hypothetically seek a competitive advantage by offering excessively permissive exemptions, which could allow certain market participants to utilize exemptions in establishing sufficiently large positions to engage in excessive speculation and to manipulate market prices. However, final § 150.5(a)(2) mitigates these risks by requiring that exemptions that do not conform to the types the Commission may grant under final § 150.3 cannot exceed final § 150.2’s applicable Federal position limit unless the Commission has first approved such exemption. Moreover, before a DCM could permit a new exemption category, final § 150.5(e) requires a DCM to submit rules to the Commission allowing for such exemptions, allowing the Commission to ensure that the proposed exemption type would be consistent with applicable requirements, including with the requirement that any resulting positions would be ‘‘in accord with sound commercial practices’’ and may be ‘‘established and liquidated in an orderly fashion.’’ Final § 150.5(a)(2) additionally requires traders to re-apply to the exchange at least annually for the exchange-level exemption. The Commission recognizes that requiring traders to re-apply annually could impose additional costs on traders that are not currently required to do so. However, the Commission believes this is industry practice among existing market participants, who are likely already familiar with DCMs’ exemption processes.1618 This familiarity should reduce related costs, and the Final Rule should strengthen market integrity by ensuring that DCMs receive updated 1618 As noted above, the Commission believes this requirement is consistent with current market practice. See, e.g., CME Rule 559 and ICE Rule 6.29. While ICE Rule 6.29 merely requires a trader to ‘‘submit to [ICE Exchange] a written request’’ without specifying how often a trader must reapply, the Commission understands from informal discussions between Commission staff and ICE that traders must generally submit annual updates. PO 00000 Frm 00205 Fmt 4701 Sfmt 4700 3439 information related to a particular exemption. The Commission received various comments pertaining to § 150.5(a)(2). CMC requested that the Commission clarify that each exchange has discretion to determine what information is required of applicants when applying for a spread exemption from exchangeset limits.1619 As noted in the 2020 NRPM, exchanges have discretion to determine what information is required of applicants applying for a spread exemption, or any other exemption from exchange-set limits, except for instances where the exchange is processing a nonenumerated bona fide hedge applications in accordance with the applications requirements of § 150.9.1620 This flexibility permits exchanges to further mitigate costs and/or burdens associated with the exemption process by adopting protocols that leverage existing processes with which their participants are already familiar. CMC also requested that the Commission clarify that an exchange is not responsible for monitoring the use of spread positions for purposes of Federal position limits.1621 Exchanges are required to administer and monitor their position limits and any exemptions therefrom in accordance with DCM Core Principle 5 and SEF Core Principle 6, as applicable.1622 For an inter-market spread exemption where part of the spread position is executed on another exchange or over the counter, exchanges are encouraged to request information from the spread exemption applicant about the entire composition of the spread position.1623 Even though an exchange is not responsible for monitoring a trader’s position on other exchanges, it is beneficial to the exchange to obtain this information so it is best informed about whether to grant the exemption. The Commission notes while an exchange may incur costs through requesting information from (or providing information to) another exchange, these costs already may have been realized by exchanges to the extent they reflect existing market practice. Similarly, such information sharing benefits market integrity, but such benefits likewise already may have been realized. Final § 150.5(a)(4) requires a DCM to provide the Commission with certain monthly reports regarding the disposition of any exemption 1619 CMC at 7. FR 11644 (explaining that exchanges have flexibility to establish the application process as they see fit). 1621 CMC at 7. 1622 See supra Section II.D.3.ii.c. 1623 See id. 1620 85 E:\FR\FM\14JAR2.SGM 14JAR2 3440 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations application, including the recognition of any position as a bona fide hedge, the exemption of any spread transaction or other position, the revocation or modification or previously granted recognitions or exemptions, or the rejection of any application, as well as certain related information similar to the information that applicants must provide the Commission under final § 150.3 or an exchange under final § 150.9, including underlying cashmarket and swap-market information related to bona fide hedge positions. The Commission generally recognizes that this monthly reporting requirement could impose additional costs on exchanges, although the Commission also has determined that this requirement would assist with the Commission’s oversight functions and therefore benefit market integrity. The Commission discusses this proposed requirement in greater detail in its discussion of final § 150.9.1624 Further, while existing § 150.5(d) does not explicitly address whether traders should request an exemption prior to taking on its position, final § 150.5(a)(2), in contrast, explicitly authorizes (but does not require) DCMs to permit traders to file a retroactive exemption request due to ‘‘demonstrated sudden or unforeseen increases in its bona fide hedging needs,’’ but only within five business days after the trade and as long as the trader provides a supporting explanation.1625 As noted above, these provisions are largely consistent with existing market practice, and to this extent, the benefits and costs already may have been realized by DCMs and market participants. b. Pre-Existing Positions khammond on DSKJM1Z7X2PROD with RULES2 Final § 150.5(a)(3) requires DCMs to impose exchange-set position limits on ‘‘pre-existing positions,’’ other than preenactment swaps and transition period swaps.1626 The Commission believes that this approach benefits market integrity since pre-existing positions that exceed spot-month limits could result in market or price disruptions as 1624 See supra Section IV.A.5.b.ii. (discussing monthly exchange-to-Commission report in final § 150.5(a)). 1625 Certain exchanges currently allow for the submission of exemption requests up to five business days after the trader established the position that exceeded a limit in certain circumstances. See, e.g., CME Rule 559 and ICE’s ‘‘Guidance on Position Limits’’ (Mar. 2018). 1626 Final § 150.1 defines ‘‘pre-existing position’’ to mean ‘‘any position in a commodity derivative contract acquired in good faith prior to the effective date’’ of any applicable position limit. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 positions are rolled into the spot month.1627 The Commission is alleviating the burden associated with final 150.5(a)(3) by delaying the compliance date to allow exchanges sufficient time to implement the Final Rule. iii. Physical Commodity Derivative Contracts Not Subject to Federal Position Limits Under the Final Rule (Final § 150.5(b)) a. Spot Month Limits and Related Acceptable Practices For cash-settled contracts during the spot month, existing § 150.5 sets forth the following qualitative standard: exchange-set limits should be ‘‘no greater than necessary to minimize the potential for market manipulation or distortion of the contract’s or underling commodity’s price.’’ However, for physically-settled contracts, existing § 150.5 provides a one-size-fits-all parameter that exchange limits must be no greater than 25% of EDS. In contrast, the standard for setting spot month limit levels for physical commodity derivative contracts not subject to Federal position limits set forth in final § 150.5(b)(1) does not distinguish between cash-settled and physically-settled contracts, and instead requires DCMs to apply the existing § 150.5 qualitative standard to both.1628 The Commission also provides a related, non-exclusive acceptable practice that deems exchange-set position limits for both cash-settled and physically-settled contracts subject to § 150.5(b) to be in compliance if the limits are no higher than 25% of the spot-month EDS. Applying the existing § 150.5 qualitative standard and non-exclusive acceptable practice in final 150.5(b)(1), rather than a one-size-fits-all regulation, to both cash-settled and physicallysettled contracts during the spot month is expected to enhance market integrity by permitting a DCM to establish a more tailored, product-specific approach by 1627 The Commission is particularly concerned about protecting the spot month in physicaldelivery futures from corners and squeezes. 1628 Final § 150.5(b)(1) requires DCMs to establish position limits for spot-month contracts at a level that is ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ Existing § 150.5 also distinguishes between ‘‘levels at designation’’ and ‘‘adjustments to levels,’’ although each category similarly incorporates the qualitative standard for cash-settled contracts and the 25% metric for physically-settled contracts. Final § 150.5(b) eliminates this distinction. The Commission intends the final § 150.5(b)(1) standard to be substantively the same as the existing § 150.5 standard for cash-settled contracts, except that under final § 150.5(b)(1), the standard applies to physically-settled contracts. PO 00000 Frm 00206 Fmt 4701 Sfmt 4700 applying other parameters that may take into account the unique liquidity and other characteristics of the particular market and contract, which is not possible under the one-size-fits-all 25% of EDS parameter set forth in existing § 150.5. While the Commission recognizes that the existing 25% of EDS parameter has generally worked well, the Commission also recognizes that there may be circumstances where other parameters may be preferable and just as effective, if not more, including, for example, if the contract is cash-settled or does not have a reasonably accurate measurable deliverable supply, or if the DCM can demonstrate that a different parameter would better promote market integrity or efficiency for a particular contract or market. On the other hand, the Commission recognizes that final § 150.5(b)(1) could adversely affect market integrity by theoretically allowing DCMs to establish excessively high position limits in order to gain a competitive advantage, which also could harm the integrity of other markets that offer similar products.1629 However, the Commission believes these potential risks are mitigated since (i) final § 150.5(e) requires DCMs to submit proposed position limits to the Commission, which will review those rules for compliance with § 150.5(b), including to ensure that the proposed limits are ‘‘in accord with sound commercial practices’’ and that they may be ‘‘established and liquidated in an orderly fashion’’; and (ii) final § 150.5(b)(3) requires DCMs to adopt position limits for any new contract at a ‘‘comparable’’ level to existing contracts that are substantially similar (i.e., ‘‘look-alike contracts’’) on other exchanges unless the exchange listing the new contracts demonstrates to the satisfaction of Commission staff, in their product filing with the Commission, how its levels comply with the requirements of § 150.5(b)(1) and (2). Moreover, this latter requirement also may reduce the amount of time and effort needed for the DCM and Commission staff to assess proposed limits for any new contract that competes with another DCM’s existing contract. 1629 Since the existing § 150.5 framework already applies the proposed qualitative standard to cashsettled spot-month contracts, any new risks resulting from the proposed standard would occur only with respect to physically-settled contracts, which are currently subject to the one-size-fits-all 25% EDS parameter under the existing framework. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 b. Non-Spot Month Limits/ Accountability Levels and Related Acceptable Practices Existing § 150.5 provides one-size-fitsall levels for non-spot month contracts and allows for position accountability after a contract’s initial listing only for those contracts that satisfy certain trading thresholds.1630 In contrast, for contracts outside the spot-month, final § 150.5(b)(2) requires DCMs to establish either position limits or position accountability levels that satisfy the same proposed qualitative standard discussed above for spot-month contracts.1631 For DCMs that establish position limits, final Appendix F to part 150 sets forth related acceptable practices that provide non-exclusive parameters that are generally consistent with existing § 150.5’s parameters for non-spot month contracts.1632 For DCMs that establish position accountability, 1630 As noted above, in establishing the specific metric, existing § 150.5 distinguishes between ‘‘levels at designation’’ and ‘‘adjustments to [subsequent] levels.’’ Final § 150.5(b)(2) eliminates this distinction and applies the qualitative standard for all non-spot month position limit and accountability levels. 1631 DCM Core Principle 5 requires DCMs to establish either position limits or accountability for speculators. See Commission regulation § 38.300 (restating DCMs’ statutory obligations under the CEA 5(d)(5)). Accordingly, inasmuch as final § 150.5(b)(2) requires DCMs to establish position limits or accountability, the Final Rule does not represent a change to the status quo baseline requirements. 1632 Specifically, the acceptable practices in final Appendix F to part 150 provides that DCMs are deemed to comply with final § 150.5(b)(2)(i) qualitative standard if they establish non-spot limit levels no greater than any one of the following: (1) Based on the average of historical positions sizes held by speculative traders in the contract as a percentage of open interest in that contract; (2) the spot month limit level for that contract; (3) 5,000 contracts (scaled up proportionally to the ratio of the notional quantity per contract to the typical cash-market transaction if the notional quantity per contract is smaller than the typical cash-market transaction, or scaled down proportionally if the notional quantity per contract is larger than the typical cash-market transaction); or (4) 10% of open interest in that contract for the most recent calendar year up to 50,000 contracts, with a marginal increase of 2.5% of open interest thereafter. These parameters have largely appeared in existing § 150.5 for many years in connection with non-spot month limits, either for levels at designation, or for subsequent levels, with certain revisions. For example, while existing § 150.5(b)(3) has provided a limit of 5,000 contracts for energy products, existing § 150.5(b)(2) provides a limit of 1,000 contracts for physical commodities other than energy products. The acceptable practice parameters in final Appendix F create a uniform standard of 5,000 contracts for all physical commodities. The Commission expects that the 5,000 contract acceptable practice, for example, is a useful rule of thumb for exchanges because it allows them to establish limits and demonstrate compliance with Commission regulations in a relatively efficient manner, particularly for new contracts that have yet to establish open interest. The spot month limit level under item (2) above is a new parameter for non-spot month contracts. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 § 150.1’s definition of ‘‘position accountability’’ provides that a trader must reduce its position upon a DCM’s request, which is generally consistent with existing § 150.5’s framework, but does not distinguish between trading volume or contract type, like existing § 150.5. While DCMs are provided the ability to decide whether to use limit levels or accountability levels for any such contract, under either approach, the DCM has to set a level that is ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ One commenter alternatively recommended that § 150.5(b)(2) should require exchanges to set position limits and position accountability levels outside of the spot month at levels that reduce the potential threat of market manipulation or price distortion and the potential for sudden or unreasonable fluctuations or unwarranted changes.1633 For the reasons more fully discussed below, the Commission believes that outside the spot-month, either exchange-set position limits or exchange-set accountability levels are sufficient for exchanges to reduce these potential threats. Proposed § 150.5(b)(2) benefits market efficiency by authorizing DCMs to determine whether position limits or accountability is best-suited outside of the spot month based on the DCM’s knowledge of its markets. For example, position accountability could improve liquidity compared to position limits since liquidity providers may be more willing or able to participate in markets that do not have hard limits. As discussed above, DCMs are wellpositioned to understand their respective markets, and best practices in one market may differ in another market, including due to different market participants or liquidity characteristics of the underlying commodities. For DCMs that choose to establish position limits, the Commission believes that applying the final § 150.5 qualitative standard to contracts outside the spot-month benefits market integrity by permitting a DCM to establish a more tailored, product-specific approach by applying other tools that may take into account the unique liquidity and other characteristics of the particular market and contract, which is not possible under the existing § 150.5 specific parameters for non-spot month contracts. While the Commission recognizes that the existing parameters 1633 Better PO 00000 Markets at 47–48. Frm 00207 Fmt 4701 Sfmt 4700 3441 may have been well-suited to market dynamics when initially promulgated, the Commission also recognizes that open interest may have changed for certain contracts subject to final § 150.5(b), and open interest will likely continue to change in the future (e.g., as new contracts may be introduced and as supply and/or demand may change for underlying commodities). In cases where open interest has not increased, the exchange may not need to change existing limit levels. But, for contracts where open interest has increased, the exchange is able to raise its limits to facilitate liquidity consistent with an orderly market. However, the Commission reiterates that the specific parameters in the acceptable practices set forth in final Appendix F to part 150 are merely non-exclusive examples, and an exchange is be able to establish higher (or lower) limits, provided the exchange submits its proposed limits to the Commission under final § 150.5(e) and explains how its proposed limits satisfy the qualitative standard and are otherwise consistent with all applicable requirements. The Commission, however, recognizes that final § 150.5(b)(2) could adversely affect market integrity by potentially allowing DCMs to establish position accountability levels rather than position limits, regardless of whether the contract exceeds the volume-based thresholds provided in existing § 150.5. However, final § 150.5(e) requires DCMs to submit any proposed position accountability rules to the Commission for review, and the Commission will determine on a case-by-case basis whether such rules satisfy regulatory requirements, including the proposed qualitative standard. Similarly, in order to gain a competitive advantage, DCMs could theoretically set excessively high accountability (or position limit) levels, which also could potentially adversely affect markets with similar products. However, the Commission believes these risks are mitigated since (i) final § 150.5(e) requires DCMs to submit proposed position accountability (or limits) to the Commission, which will review those rules for compliance with § 150.5(b), including to ensure that the exchange’s proposed accountability levels (or limits) are ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion’’ of the contract or underlying commodity; and (ii) final § 150.5(b)(3) requires DCMs to adopt position limits for any new contract at a ‘‘comparable’’ level to existing contracts that are substantially similar on other exchanges unless the exchange listing the new E:\FR\FM\14JAR2.SGM 14JAR2 3442 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations contracts demonstrates to the satisfaction of Commission staff, in their product filing with the Commission, how its levels comply with the requirements of § 150.5(b)(1) and (2). khammond on DSKJM1Z7X2PROD with RULES2 c. Exchange-Set Limits on Economically Equivalent Swaps As discussed above, swaps that qualify as ‘‘economically equivalent swaps’’ are subject to the Federal position limits framework. However, the Commission has determined to permit exchanges to delay enforcing their respective exchange-set position limits on economically equivalent swaps at this time. Specifically, with respect to exchange-set position limits on swaps, the Commission notes that in two years (which generally coincides with the compliance date for economically equivalent swaps), the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6. However, after the swap compliance period (January 1, 2023), the Commission underscores that it will enforce Federal position limits in connection with OTC swaps. Nonetheless, the Commission’s determination to permit exchanges to delay implementing exchange-set position limits on swaps could incentivize market participants to leave the futures markets and instead transact in economically equivalent swaps, which could reduce liquidity in the futures and related options markets, which could also increase transaction and hedging costs. Delaying position limits on swaps therefore could harm market participants, especially endusers that do not transact in swaps, if many participants were to shift trading from the futures to the swaps markets. In turn, end-users could pass on some of these increased costs to the public at large.1634 However, the Commission believes that these concerns are mitigated to the extent the Commission still oversees and enforces Federal position limits even if the exchanges are not be required to do so. iv. Position Aggregation Final § 150.5(d) requires all DCMs that list physical commodity derivative contracts to apply aggregation rules that conform to existing § 150.4, regardless 1634 On the other hand, the Commission has not seen any shifting of liquidity to the swaps markets—or general attempts at market manipulation or evasion of Federal position limits—with respect to the nine legacy core referenced futures contracts, even though swaps currently are not subject to Federal or exchange position limits. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 of whether the contract is subject to Federal position limits under § 150.2.1635 The Commission believes final § 150.5(d) benefits market integrity in several ways. First, a harmonized approach to aggregation across exchanges that list physical commodity derivative contracts prevents confusion that could result from divergent standards between Federal position limits under § 150.2 and exchange-set limits under § 150.5(b). As a result, final § 150.5(d) provides uniformity, consistency, and reduced administrative burdens for traders who are active on multiple trading venues and/or trade similar physical contracts, regardless of whether the contracts are subject to § 150.2’s Federal position limits. Second, a harmonized aggregation policy eliminates the potential for DCMs to use excessively permissive aggregation policies as a competitive advantage, which would impair the effectiveness of the Commission’s aggregation policy and position limits framework. Third, since, for contracts subject to Federal position limits, final § 150.5(a) requires DCMs to set position limits at a level not higher than that set by the Commission under final § 150.2, differing aggregation standards could effectively lead to an exchange-set limit that is higher than that set by the Commission. Accordingly, harmonizing aggregation standards reinforces the efficacy and intended purpose of final §§ 150.2 and 150.5 and existing § 150.4 by eliminating DCMs’ ability to circumvent the applicable Federal aggregation and position limits rules. To the extent a DCM currently is not applying the Federal aggregation rules in existing § 150.4, or similar exchangebased rules, final § 150.5(d) could impose costs with respect to market participants trading referenced contracts for the 16 new commodities that are subject to Federal position limits for the first time. Market participants are required to update their trading and 1635 The Commission adopted final aggregation rules in 2016 under existing § 150.4, which applies to contracts subject to Federal position limits under § 150.2. See Final Aggregation Rulemaking, 81 FR at 91454. Under the Final Aggregation Rulemaking, unless an exemption applies, a person’s positions must be aggregated with positions for which the person controls trading or for which the person holds a 10% or greater ownership interest. The Division of Market Oversight has issued timelimited no-action relief from some of the aggregation requirements contained in that rulemaking. See CFTC Letter No. 19–19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/ download. Commission regulation § 150.4(b) sets forth several permissible exemptions from aggregation. The Commission, outside the Final Rule, will separately consider comments related to the Final Aggregation Rulemaking and codification of NAL 19–19. PO 00000 Frm 00208 Fmt 4701 Sfmt 4700 compliance systems to ensure they comply with the new aggregation rules. 7. Section 15(a) Factors 1636 i. Protection of Market Participants and the Public A chief purpose of speculative position limits is to preserve the integrity of derivatives markets for the benefit of commercial interests, producers, and other end- users that use these markets to hedge risk and of consumers that consume the underlying commodities. As discussed above, the Commission believes that the final position limits regime operates to deter excessive speculation and manipulation, such as corners and squeezes, which might impair the contract’s price discovery function and liquidity for bona fide hedgers—and ultimately, protects the integrity and utility of the commodity markets for the benefit of both producers and consumers. The Commission is including 25 core referenced futures contracts, as well as any referenced contracts directly or indirectly linked thereto, within the final Federal position limits framework. In selecting the 25 core referenced futures contracts, the Commission analyzed (1) the importance of these contracts to the operation of the underlying cash commodity market, including that they require physical delivery; and (2) the importance of the underlying commodity to the economy as a whole. As discussed above, the Commission is of the view that evidence demonstrating one or both of these factors is sufficient to establish that position limits are necessary because each factor relates to the statutory objective identified in CEA section 4a(a)(1).1637 Of particular importance in the Commission’s position limit regime are the limits on the spot month, because the Commission believes that deterring and preventing manipulative behaviors, such as corners and squeezes, is more urgent during this period. The spot month position limits are designed, among other things, to deter and prevent corners and squeezes, as spot months are more susceptible to such activities 1636 The discussion here covers the Final Rule amendments that the Commission has identified as being relevant to the areas set out in section 15(a) of the CEA: (i) Protection of market participants and the public; (ii) efficiency, competitiveness, and financial integrity of futures markets; (iii) price discovery; (iv) sound risk management practices; and (v) other public interest considerations. For amendments that are not specifically addressed, the Commission has not identified any effects. 1637 See supra Section III.C. (discussing the necessity findings as to the 25 core referenced futures contacts). E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations than non-spot months, as well as promote a more orderly liquidation process at expiration.1638 By restricting derivatives positions to a proportion of the deliverable supply of the commodity, the spot month position limits reduce the possibility that a market participant can use derivatives to affect the price of the cash commodity (and vice versa).1639 Limiting a speculative position based on a percentage of deliverable supply also restricts a speculative trader’s ability to establish a leveraged position in cashsettled derivative contracts, diminishing that trader’s incentive to manipulate the cash settlement price. As the Commission has determined in the preamble, excessive speculation or manipulation during the spot month may cause sudden or unreasonable fluctuations or unwarranted changes in the price of the commodities underlying these contracts.1640 In this way, the Commission believes that the limits in the Final Rule benefit market participants that seek to hedge the spot price of a commodity at expiration, and benefit consumers who are able to purchase underlying commodities for which prices are determined by fundamentals of supply and demand, rather than influenced by excessive speculation, manipulation, or other undue and unnecessary burdens on interstate commerce. The Commission believes that the Final Rule’s Commission and exchangecentric processes for granting exemptions from Federal position limits, including non-enumerated bona fide hedging recognitions, help ensure the hedging utility of the derivatives markets for commercial end-users. First, the Final Rule allows exchanges to leverage existing processes and their knowledge of their own markets, including participant positions and activities, along with their knowledge of the underlying commodity cash market, which should allow for more timely review of exemption applications than if the Commission were to conduct such initial application reviews. This benefits the public by allowing producers and end-users of a commodity to more efficiently and predictably hedge their price risks, thus controlling costs that might be passed on to the public. Second, exchanges may be bettersuited than the Commission to leverage their knowledge of their own markets, including participant positions and activities, along with their knowledge of 1638 See supra Sections II.A.19 and II.B.3.iii. supra Section II.B.3.iii. 1640 See supra Section III.C. (discussing the necessity finding). 1639 See VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 the underlying commodity cash market, in order to recognize whether an applicant qualifies for an exemption and what the level for that exemption should be. This benefits market participants and the public by helping assure that exemption levels are set in a manner that meets the risk management needs of the applicant without negatively impacting the derivative and cash market for that commodity. Third, allowing for self-effectuating spread exemptions for purposes of Federal position limits could improve liquidity in all months for a listed contract or across commodities, benefitting hedgers by providing tighter bid-ask spreads for out-right trades. Furthermore, traders using spreads can arbitrage price discrepancies between calendar months within the same commodity contract or price discrepancies between commodities, helping ensure that futures prices more accurately reflect the underlying market fundamentals for a commodity. Lastly, the Commission will review each application for bona fide hedge recognitions (other than those bona fide hedges that would be self-effectuating under the Final Rule), but the Final Rule allows the Commission to also leverage the exchange’s knowledge and experience of its own markets and market participants discussed above for market participants that applies to the Commission by first submitting the application for a non-enumerated bona fide hedge exemption to the exchange for purposed of exchange-set limits under final § 150.9. Similarly, the Commission will review each application for a spread exemption that is not covered by the spread transaction definition and therefore is not selfeffectuating for purposes of Federal position limits. The Commission also understands that there are costs to market participants and the public to setting position limit levels that are too high or too low. If the levels are set too high, there’s greater risk of excessive speculation, which may harm market participants and the public. Further, to the extent that the limits are set at such a level that even without these proposed exemptions, the probability of nearing or breaching such levels may be negligible for most market participants, benefits associated with such exemptions may be reduced. Conversely, if the limits are set too low, transaction costs for market participants who are near or above the limit will rise as they transact in other instruments with higher transaction costs to obtain their desired level of PO 00000 Frm 00209 Fmt 4701 Sfmt 4700 3443 speculative positions. Additionally, limits that are too low could incentivize speculators to leave the market and be unavailable to provide liquidity for hedgers, resulting in ‘‘choppy’’ prices. It is also possible for limits that are set too low to harm market efficiency because the views of some speculators might not be reflected fully in the price formation process. In setting the final Federal position limit levels, the Commission considered these factors in order to implement to the maximum extent practicable, as it finds necessary in its discretion, to apply the position limits framework articulated in CEA section 4a(a) to set Federal position limits to protect market integrity and price discovery, thereby benefiting market participants and the public. ii. Efficiency, Competitiveness, and Financial Integrity of Futures Markets Position limits help to prevent market manipulation or excessive speculation that may unduly influence prices at the expense of the efficiency and integrity of markets. The Final Rule’s expansion of the Federal position limits regime to 25 core referenced futures contracts (e.g., the existing nine legacy agricultural contracts and the 16 new contracts) enhances the buffer against excessive speculation historically afforded exclusively to the nine legacy agricultural contracts, improving the financial integrity of those markets. Moreover, the limits in final § 150.2 may promote market competitiveness by preventing a trader from gaining too much market power in the respective markets. Also, in the absence of position limits, market participants may be deterred from participating in a particular market if the market participants perceive that there is a participant with an unusually large speculative position exerting what they believe is unreasonable market power. A lack of participation may harm liquidity, and consequently, may harm market efficiency. On the other hand, traders who find position limits overly constraining may seek to trade in substitute instruments in order to meet their demand for speculative instruments. The substitute instruments could be futures contracts or swaps that are similar to or highly correlated with their corresponding core referenced futures contracts (but not otherwise deemed to be referenced contracts). They could also be trade options or other forward contracts. These traders may also decide to not trade beyond the Federal speculative position limit. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3444 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Trading in substitute instruments may be less effective than trading in referenced contracts. For example, the trading of futures contracts has strong safeguards since futures contracts are by definition exchange-traded, which includes (1) the posting of initial and variation margin and (2) credit reviews and guarantees by futures commission merchants. These safeguards protect the integrity of futures markets but are generally not required for forward transactions, which are generally not traded on exchanges or centrally cleared. Forward contract nonperformance may result in dislocations in the physical marketing channel, which may lead to higher prices for consumers and end users and otherwise impose burdens on commerce. Further, with the use of substitute instruments, futures prices might not fully reflect all the speculative demand to hold the futures contract, because substitute instruments may not fully influence prices the same way that trading directly in the futures contract does. Thus, market efficiency and price discovery might be harmed, too. The Commission believes that focusing on the 25 core referenced futures contracts (included any referenced contracts linked thereto), which generally have high levels of open interest and trading volume and/ or have been subject to existing Federal position limits for many years, should, in general, be less disruptive for the respective derivatives markets, which in turn may reduce the potential for disruption for the price discovery function of the underlying commodity markets as compared to including less liquid contracts (only to the extent that the Commission is able to make the requisite necessity finding for such contracts). Finally, the Commission believes that eliminating certain risk management positions as bona fide hedges, coupled with the increased non-spot month limit levels for most of the nine legacy agricultural contracts, will foster competition among swap dealers by subjecting all market participants, including all swap dealers, to the same non-spot month limit rather than limited staff-granted risk management exemptions. Accommodating risk management activity by additional entities with higher position limit levels may also help lessen the concentration risk potentially posed by a few commodity index traders holding exemptions that are not available to competing market participants. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 iii. Price Discovery As discussed above, market manipulation may result in artificial or distorted prices.1641 Similarly, excessive speculation may result in ‘‘sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity.’’ 1642 Position limits may help to prevent the price discovery function of the underlying commodity markets from being disrupted.1643 Also, in the absence of position limits, market participants might elect to trade less as a result of a perception that the market pricing does not reflect market forces, as a consequence of what they perceive is the exercise of too much market power by a concentration of several or one larger speculator. This reduced trading may result in a reduction in liquidity, which may have a negative impact on price discovery. On the other hand, imposing position limits raises the concerns that liquidity and price discovery may be diminished, because certain market segments, i.e., speculative traders, are restricted. For certain commodities, the Final Rule sets the levels of position limits at increased levels, to avoid harming liquidity that may be provided by speculators that would establish large positions, while restricting speculators from establishing extraordinarily large positions. The Commission further believes that the bona fide hedging recognition and exemption processes will foster liquidity and potentially improve price discovery by making it more efficient for market participants to apply for bona fide hedging recognitions and spread exemptions. In addition, position limits may serve as a prophylactic measure that reduces market volatility due to a participant otherwise engaging in large quantity trades in a short time interval that induce price impacts that interfere with price discovery. In particular, spot month position limits make it more difficult to mark the close of a futures contract to possibly benefit other contracts that settle on the closing futures price. Marking the close harms markets by spoiling convergence between futures prices and spot prices at expiration and by damaging price discovery. iv. Sound Risk Management Practices The Final Rule promotes sound risk management practices by providing exemptions for bona fide hedgers to 1641 See supra Section II.A.16. (discussing the referenced contract definition). 1642 See supra Section III.A. (discussing the necessity finding). 1643 Id. PO 00000 Frm 00210 Fmt 4701 Sfmt 4700 hedge their corresponding risk. In addition, the Commission crafted the Final Rule to ensure sufficient market liquidity for bona fide hedgers to the maximum extent practicable, e.g., by: (1) Creating a bona fide hedging definition that is broad enough to accommodate common commercial hedging practices, including anticipatory hedging, for a variety of commodity types; (2) maintaining the status quo with respect to existing bona fide hedge recognitions and spread exemptions that will remain self-effectuating and make additional bona fide hedges and spreads selfeffectuating (i.e., certain anticipatory hedging); (3) providing additional ability for a streamlined process where market participants can make a single submission to an exchange in which the exchange and Commission will each review applications for non-enumerated bona fide hedge recognitions for purposes of Federal and exchange-set limits that are in line with commercial hedging practices; and (4) allowing for a conditional spot month limit exemption in natural gas. To the extent that monitoring for position limits requires market participants to create internal risk limits and evaluate position size in relation to the market, position limits may also provide an incentive for market participants to engage in sound risk management practices. Further, sound risk management practices will be promoted by the Final Rule to allow for market participants to measure risk in the manner most suitable for their business (i.e., net versus gross hedging practices), rather than having to conform their hedging programs to a one-size-fits-all standard that may not be suitable for their risk management needs. Finally, generally increasing nonspot month limit levels for the nine legacy agricultural contracts to levels that reflect observed levels of trading activity, based on recent data reviewed by the Commission, should allow swap dealers, liquidity providers, market makers, and others who have risk management needs, but who are not hedging a physical commercial, to soundly manage their risks. v. Other Public Interest The Commission has not identified any additional public interest considerations related to the costs and benefits of this Final Rule. B. Paperwork Reduction Act 1. Overview Certain provisions of the Final Rule amend or impose new ‘‘collection of information’’ requirements as that term E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations is defined under the Paperwork Reduction Act (‘‘PRA’’).1644 An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number from the Office of Management and Budget (‘‘OMB’’). The Final Rule modifies the following existing collections of information previously approved by OMB and for which the Commodity Futures Trading Commission (‘‘Commission’’) has received control numbers: (i) OMB control number 3038– 0009 (Large Trader Reports), which generally covers Commission regulations in parts 15 through 21; (ii) OMB control number 3038–0013 (Aggregation of Positions), which covers Commission regulations in part 150; 1645 and (iii) OMB control number 3038– 0093 (Provisions Common to Registered Entities), which covers Commission regulations in part 40. The Commission requested that OMB approve and revise OMB control numbers 3038–0009, 3038–0013, and 3038–0093 in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. 2. Commission Reorganization of OMB Control Numbers 3038–0009 and 3038– 0013 The Commission requested two nonsubstantive changes so that all collections of information related solely to the Commission’s position limit requirements are consolidated under one OMB control number.1646 First, the Commission is transferring collections of information under part 19 (Reports by Persons Holding Bona Fide Hedge Positions and By Merchants and Dealers in Cotton) related to position limit requirements from OMB control number 3038–0009 to OMB control number 3038–0013. Second, the modified OMB control number 3038–0013 is renamed as ‘‘Position Limits.’’ This renaming change is non-substantive and allows for all collections of information related to the Federal position limits requirements, including exemptions from speculative position limits and 1644 44 U.S.C. 3501 et seq. OMB control number 3038–0013 is titled ‘‘Aggregation of Positions.’’ The Commission is renaming the OMB control number ‘‘Position Limits’’ to better reflect the nature of the information collections covered by that OMB control number. 1646 The Commission notes that certain collections of information under OMB control number 3038–0093 relate to several Commission regulations in addition to the Commission’s final position limits framework. As a result, the collections of information discussed herein under this OMB control number 3038–0093 are not being consolidated under OMB control number 3038– 0013. khammond on DSKJM1Z7X2PROD with RULES2 1645 Currently, VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 related large trader reporting, to be housed in one collection. A single collection makes it easier for market participants to know where to find the relevant position limits PRA burdens. The remaining collections of information under OMB control number 3038–0009 cover reports by various entities under parts 15, 17, and 21 1647 of the Commission’s regulations, while OMB control number 3038–0013 holds collections of information arising from parts 19 and 150. As discussed in Section 3 below, this non-substantive reorganization results in: (i) A decreased burden estimate under control number 3038–0009 due to the transfer of the collection of information arising from obligations in part 19; and (ii) a corresponding increase of the amended part 19 burdens under control number 3038–0013. However, as discussed further below, the collection of information and burden hours arising from revised part 19 that is transferred to OMB control number 3038–0013 is less than the existing burden estimate under OMB control number 3038–0009 since the Final Rule amends existing part 19 by eliminating existing Form 204 and certain parts of Form 304 and the reporting burdens related thereto. As a result, market participants will see a net reduction of collections of information and burden hours under revised part 19. 3. Collections of Information The Final Rule amends existing regulations, and creates new regulations, concerning speculative position limits. Among other amendments, the Final Rule includes: (1) New and amended Federal spotmonth limits for the 25 core referenced futures contracts; (2) amended Federal non-spot limits for the nine legacy agricultural contracts subject to existing Federal position limits; (3) amended rules governing exchange-set limit levels and grants of exemptions therefrom; (4) an amended process for requesting certain spread exemptions and non-enumerated bona fide hedge recognitions for purposes of Federal position limits directly from the Commission; (5) a new streamlined process for recognizing non-enumerated bona fide hedge positions from Federal limit requirements; and (6) amendments to part 19 and related provisions that eliminate certain reporting obligations 1647 As noted above, OMB control number 3038– 0009 generally covers Commission regulations in parts 15 through 21. However, it does not cover §§ 16.02, 17.01, 18.04, or 18.05, which are under OMB control number 3038–0103. 78 FR at 69200 (transferring §§ 16.02, 17.01, 18.04, and 18.05 to OMB Control Number 3038–0103). PO 00000 Frm 00211 Fmt 4701 Sfmt 4700 3445 that require traders to submit a Form 204 and Parts I and II of Form 304. Specifically, the Final Rule amends parts 15, 17, 19, 40, and 150 of the Commission’s regulations to implement the revised Federal position limits framework. The Final Rule also transfers an amended version of the ‘‘bona fide hedging transactions or positions’’ definition from existing § 1.3 to final § 150.1, and removes §§ 1.47, 1.48, and 140.97. The Final Rule revises existing collections of information covered by OMB control number 3038–0009 by amending part 19,1648 along with conforming changes to part 15, in order to narrow the scope of who is required to report under part 19.1649 Furthermore, the Final Rule’s amendments to part 150 revise existing collections of information covered by OMB control number 3038–0013, including new reporting and recordkeeping requirements related to the application and request for relief from Federal position limit requirements submitted to exchanges. Finally, the Final Rule amends part 40 to incorporate a new reporting obligation into the definition of ‘‘terms and conditions’’ in § 40.1(j) and results in a revised existing collection of information covered by OMB control number 3038–0093. i. OMB Control Number 3038–0009— Large Trader Reports; Part 19—Reports by Persons Holding Bona Fide Hedge Positions and by Merchants and Dealers in Cotton Under OMB control number 3038– 0009, the Commission currently estimates that the collections of information related to existing part 19, including Form 204 and Form 304, collectively known as the ‘‘series ‘04’’ reports, have a combined annual burden hours of 1,553 hours. Under existing part 19, market participants that hold bona fide hedging positions in excess of position limits for the nine legacy agricultural contracts subject to existing Federal position limits must file a monthly report on Form 204 (or Parts I and II of Form 304 for cotton). These reports show a snapshot of traders’ cash 1648 See supra Section IV.B.2 (discussing the transfer of information collection under part 19 from OMB control number 3038–0009 to 3038– 0013). 1649 As noted above, the Commission accomplishes this by eliminating existing Form 204 and Parts I and II of Form 304. Additionally, changes to part 17, covered by OMB control number 3038–0009, make conforming amendments to remove certain duplicative provisions and associated information collections related to aggregation of positions, which are in existing § 150.4. These conforming changes do not impact the burden estimates of OMB control number 3038– 0009. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations positions on one given day each month, and are used by the Commission to determine whether a trader has sufficient cash positions to justify futures and options on futures positions above the applicable Federal position limits in existing § 150.2. The Final Rule amends part 19 to remove these reporting obligations associated with Form 204 and Parts I and II of Form 304. As discussed under final § 150.9 below, the Commission has determined to eliminate these forms because the Commission will still receive adequate information to carry out its market and financial surveillance programs since its amendments to §§ 150.5 and 150.9 enable the Commission to obtain the necessary information from the exchanges. To effect these changes to traders’ reporting obligations, the Commission is eliminating (i) existing § 19.00(a)(1), which requires the applicable persons to file a Form 204; and (ii) existing § 19.01, which among other things, sets forth the cash-market information required to be submitted on Forms 204 and 304.1650 The Commission is maintaining Part III of Form 304, which requests information on unfixed-price ‘‘on call’’ purchases and sales of cotton and which the Commission utilizes to prepare its weekly cotton on-call report.1651 The Commission is also maintaining its existing special call authority under part 19. The supporting statement for the current active information collection request for part 19 under OMB control number 3038–0009 1652 states that in 2014: (i) 135 reportable traders filed the series ‘04 reports (i.e., Form 204 and Form 304 in the aggregate), (ii) totaling 3,105 series ‘04 reports, for a total of (iii) 1,553 burden hours.1653 However, based on more current and recent 2019 submission data, the Commission has revised its existing estimates slightly higher for the series ‘04 reports under part 19: Accordingly, based on the above revised estimates, the Commission is revising its estimate of the current collections of information under existing part 19 to reflect that approximately 105 reportable traders 1654 file a total of 3,460 responses annually 1655 resulting in an aggregate annual burden of 1,730 hours.1656 1657 The Final Rule reduces the current OMB control number 3038–0009 by these revised burden estimates under part 19 as they will be transferred to OMB control number 3038–0013. With respect to the overall collections of information transferred to OMB control number 3038–0013 based on the Commission’s revised part 19 estimate, the Commission estimates that the Final Rule reduces the collections of information in part 19 by 600 reports 1658 and by 300 annual aggregate burden hours since the Final Rule eliminates Form 204, as discussed above.1659 The Commission does not expect a change in the number of reportable traders that are required to file Part III of Form 304.1660 Thus, the Commission continues to expect approximately 55 weekly Form 304 reports, for an annual total of 2,860 reports 1661 for an aggregate total of 1,430 burden hours, which information collection burdens will be transferred to OMB control number 3038–0013.1662 In addition, the Commission is maintaining its authority to issue special calls for information to any person claiming an exemption from speculative Federal position limits. While the position limits framework expands to traders in the 25 core referenced futures contacts (an increase from the existing nine legacy agricultural products), the position limit levels themselves are also generally higher. The higher position limit levels result in a smaller universe of traders who may exceed the position limits and thus be subject to a special call for information on their large position(s). Taking into account the higher limits 1650 As noted above, the amendments to part 19 affect certain provisions of part 15 and § 17.00. Based on the elimination of Form 204 and Parts I and II of Form 304, as discussed above, the Commission is adopting conforming technical changes to remove related reporting provisions from (i) the ‘‘reportable position’’ definition in § 15.00(p); (ii) the list of ‘‘persons required to report’’ in § 15.01; and (iii) the list of reporting forms in § 15.02. These conforming amendments to part 15 do not impact the existing burden estimates. 1651 The Commission is adopting a conforming technical change to Part III of Form 304 to require traders to identify themselves on the Form 304 using their Public Trader Identification Number, in lieu of the CFTC Code Number required on previous versions of the Form 304. However, the Commission has determined that this does not result in any change to its existing PRA estimates with respect to the collections of information related to Part III of Form 304. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 1652 See ICR Reference No: 201906–3038–008. Series ’04 submissions × 0.5 hours per submission = 1,553 aggregate burden hours for all submissions. The Commission notes that it has estimated that it takes approximately 20 minutes to complete a Form 204 or 304. However, in order to err conservatively, the Commission now uses a figure of 30 minutes. 1654 55 Form 304 reports + 50 Form 204 reports = 105 reportable traders. 1655 2,860 Form 304s + 600 Form 204s = 3,460 total annual series ’04 reports. 1656 3,460 series ‘04 reports × 0.5 hours per report = 1,730 annual aggregate burden hours. 1657 These revised estimates result in an increased estimate under existing part 19 of 355 series ’04 reports submitted by traders (3,460 estimated series ’04 reports¥3,105 submissions from the Commission’s previous estimate = an increase of 355 response difference); an increase of 177 1653 3,105 PO 00000 Frm 00212 Fmt 4701 Sfmt 4700 aggregate burden hours across all respondents (1,730 aggregate burden hours¥1,553 aggregate burden hours from the Commission’s previous estimate = an increase of 177 aggregate burden hours); and a decrease of 30 respondent traders (105 respondents¥135 respondents from the Commission’s previous estimate = a decrease of 30 respondents). 1658 50 monthly Form 204 reports × 12 months = 600 total annual reports. 1659 600 Form 204 reports × 0.5 burden hours per report = 300 aggregate annual burden hours. 1660 Since the Final Rule eliminates Parts I and II of Form 304, amended Form 304 only refers to existing Part III of that form. 1661 55 weekly Form 304 reports × 52 weeks = 2,860 total annual Form 304 reports. 1662 2,860 Form 304 reports × 0.5 burden hours per report = 1,430 aggregate annual burden hours. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.014</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3446 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations and smaller universe of traders who will likely exceed the position limits, the Commission estimates that it is likely to issue a special call for information to four reportable traders. The Commission estimates that it will take approximately five hours to respond to a special call. The Commission therefore estimates that industry will incur a total of 20 aggregate annual burden hours.1663 ii. OMB Control Number 3038–0013— Aggregation of Positions (Renaming ‘‘Position Limits’’) khammond on DSKJM1Z7X2PROD with RULES2 a. Introduction; Bona Fide Hedge Recognition and Exemption Process The Final Rule amends the existing process for market participants to apply to obtain an exemption or recognition of a bona fide hedge position. Currently, the ‘‘bona fide hedging transaction or position’’ definition appears in existing § 1.3. Under existing §§ 1.47 and 1.48, a market participant must apply directly to the Commission to obtain a bona fide hedge recognition in accordance with § 1.3 for Federal position limit purposes. Final §§ 150.3 and 150.9 establish an amended process for obtaining a bona fide hedge exemption or recognition, which includes: (i) A new bona fide hedging definition in § 150.1, (ii) a new process administered by the exchanges in final § 150.9 for recognizing nonenumerated bona fide hedging positions for Federal limit requirements, and (iii) an amended process to apply directly to the Commission for certain spread exemptions or for recognition of nonenumerated bona fide hedging positions in final § 150.3. Final § 150.3 also includes new exemption types not explicitly listed in existing § 150.3. The Commission has previously estimated the combined annual burden hours for submitting applications under both §§ 1.47 and 1.48 to be 42 hours.1664 The Final Rule largely maintains the existing process where market participants may apply directly to the Commission, although the Commission expects market participants to predominantly rely on the streamlined process to obtain recognition of their non-enumerated bona fide hedging positions for purposes of Federal position limit requirements. Enumerated bona fide hedge positions 1663 Four possible reportable traders x 5 hours each = 20 aggregate annual burden hours. 1664 The supporting statement for a previous information collection request, ICR Reference No: 201808–3038–003, for OMB control number 3038– 0013, estimated that seven respondents would file the §§ 1.47 and 1.48 submissions, and that each respondent would file two submissions for a total of 14 annual submissions, requiring 3 hours per response, for a total of 42 burden hours for all respondents. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 remain self-effectuating, which means that market participants do not need to apply to the Commission for purposes of Federal position limits, although market participants still need to apply to an exchange for recognition of bona fide hedge positions for purposes of exchange-set position limits. The Commission expects market participants to rely on the streamlined exchange process because all the contracts that are now subject to Federal position limits are already subject to exchange-set limits. Thus, most market participants are likely to already be familiar with an exchange-administered process, as adopted under § 150.9. Familiarity with an exchange-administered process will result in operational efficiencies, such as completing one application for nonenumerated bona fide hedge requests for both Federal and exchange-set limits and thus a reduced burden on market participants. As previously discussed, the Final Rule moves the ‘‘bona fide hedge transaction or position’’ definition to final § 150.1. The Final Rule maintains the distinction between enumerated and non-enumerated bona fide hedges, and market participants are required to apply for recognition of non-enumerated bona fide hedge positions either directly from the Commission pursuant to § 150.3 or through an exchange-centric process under § 150.9.1665 The Commission does not believe that this amendment has any PRA impacts since it is maintaining the status quo in which enumerated bona fide hedges are selfeffectuating while requiring traders to apply to the Commission or an exchange for recognition of non-enumerated bona fide hedge positions. b. § 150.2 Speculative Limits Under final § 150.2(f), upon request from the Commission, DCMs listing a core referenced futures contract are required to supply to the Commission deliverable supply estimates for each core referenced futures contract listed at that DCM. DCMs are only required to submit estimates if requested to do so by the Commission on an as-needed basis. When submitting estimates, DCMs are required to provide a description of the methodology used to derive the estimate, as well as any statistical data supporting the estimate. Appendix C to 1665 Currently, in order to determine whether a futures or an option on futures as a bona fide hedge, either (1) the position in question must qualify as an enumerated bona fide hedge, as defined in existing § 1.3, or (2) the trader must file a statement with the Commission, pursuant to existing § 1.47 (for non-enumerated bona fide hedges) and/or existing § 1.48 (for enumerated anticipatory bona fide hedges). The Commission does not expect this change to have any PRA impacts. PO 00000 Frm 00213 Fmt 4701 Sfmt 4700 3447 part 38 sets forth guidance regarding estimating deliverable supply. Submitting deliverable supply estimates upon demand from the Commission for contracts subject to Federal position limits is a new reporting obligation for DCMs. The Commission estimates that six DCMs will be required to submit initial deliverable supply estimates. The Commission estimates that it will request each DCM that lists a core referenced futures contract to file one initial report for each core reference futures contract it lists on its market. Such requests from the Commission will result in one initial submission for each of the 25 core referenced futures contracts. The Commission further estimates that it will take 20 hours to complete and file each report for a total annual burden of 500 hours for all respondents.1666 Accordingly, the changes to § 150.2(f) result in an initial, one-time increase to the current burden estimates of OMB control number 3038– 0013 of 25 submissions across six respondent DCMs for the initial number of submissions for the 25 core referenced futures contracts and an initial, one-time burden of 500 hours. c. § 150.3 Exemptions From Federal Position Limit Requirements Market participants may currently apply directly to the Commission for recognition of certain bona fide hedges under the process set forth in existing §§ 1.47 and 1.48. There is no existing process that is codified under the Commission’s regulations for spread exemptions or other exemptions included under final § 150.3. Final § 150.3(a) specifies the circumstances in which a trader could exceed Federal position limits.1667 With respect to non-enumerated bona fide hedge recognitions and spread exemptions not identified in the proposed ‘‘spread transaction’’ definition in § 150.1, final § 150.3(b) provides a process for market participants to request such non1666 20 initial hours × 25 core referenced futures contracts = 500 one-time, aggregate burden hours. While there is an initial annual submission, the Commission does not expect to require the exchanges to resubmit the supply estimates on an annual basis. 1667 Final § 150.3(b) includes (1) recognitions of bona fide hedges under § 150.3(b); (2) spread exemptions under § 150.3(b); (3) financial distress positions a person could request from the Commission under § 140.99(a)(1); and (4) exemptions for certain natural gas positions held during the spot month. Final § 150.3(b) also exempts pre-enactment and transition period swaps. The enumerated bona fide hedge recognitions and spread exemptions identified in the proposed ‘‘spread transaction’’ definition in § 150.1 are self-effectuating. E:\FR\FM\14JAR2.SGM 14JAR2 3448 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 enumerated bona fide hedge recognitions or spread exemptions directly from the Commission (as previously noted, both enumerated bona fide hedges and spread exemptions identified in the proposed ‘‘spread transaction’’ definition are selfeffectuating and do not require a market participant to submit an exemption request to the Commission). Final § 150.3(b), (d), and (e) sets forth exemption-related reporting and recordkeeping requirements that impact the current burden estimates in OMB control number 3038–0013.1668 The collection of information under final § 150.3(b), (d) and (e) is necessary for the Commission to determine whether to recognize a trader’s position qualifies for one of the exemptions from Federal position limit requirements listed in § 150.3(a). Final § 150.3(b) establishes application filing requirements and recordkeeping and reporting requirements that are similar to existing requirements for bona fide hedge recognitions under existing §§ 1.47 and 1.48. Although these requirements in final § 150.3 are new for market participants seeking spread exemptions (which are currently self-effectuating), the filing, recordkeeping, and reporting requirements in § 150.3(b) are otherwise familiar to market participants that have requested certain bona fide hedging recognitions from the Commission under existing regulations. The Commission estimates that very few or no traders will request recognition of a non-enumerated bona fide hedge, and any traders that do would likely prefer the streamlined process in final § 150.9 (discussed further below) rather than applying directly to the Commission under final § 150.3(b). Similarly, the Commission estimates that very few or no traders will submit a request for a spread exemption since the Commission has determined that the most common spread exemptions are included in the ‘‘spread transaction’’ definition and therefore are self-effectuating and do not need Commission approval for purposes of Federal position limits. The Commission expects that traders are likely to rely on the § 150.3(b) process when dealing with a spread transaction or non-enumerated bona fide hedge 1668 Final § 150.3(f) clarifies the implications on entities required to aggregate accounts under § 150.4, and § 150.3(g) provides for delegation of certain authorities to the Director of the Division of Market Oversight. The changes to §§ 150.3(f) and 150.3(g) do not impact the current estimates for these OMB control numbers. Also, the Final Rule reminds persons of the relief provisions in § 140.99, covered by OMB control number 3038–0049, which does not impact the burden estimates. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 position that poses a novel or complex question under the Commission’s rules. Particularly when the exchanges have not recognized a particular hedging strategy as a non-enumerated bona fide hedge previously, the Commission expects market participants to seek more regulatory clarity under § 150.3(b). In the event a trader submits such request under § 150.3, the Commission estimates that traders would file one request per year for a total of one annual request for all respondents. The Commission further estimates that in such situation, it would take 20 hours to complete and file each report, for a total of 20 aggregate annual burden hours for all traders. Final § 150.3(d) establishes recordkeeping requirements for persons who claim any exemptions or relief under § 150.3. Section 150.3(d) should help to ensure that if any person claims any exemption permitted under § 150.3 such exemption holder can demonstrate compliance with the applicable requirements as follows: First, under § 150.3(d)(1), any person claiming an exemption is required to keep and maintain complete books and records concerning certain details.1669 Section 150.3(d)(1) establishes recordkeeping requirements for any person relying on an exemption permitted under final § 150.3(a). Under § 150.3(d), the Commission estimates that 425 traders will create five records each, per year, for a total of 2,125 annual records for respondents. The Commission further estimates that it will take one hour to comply with the recordkeeping requirement of § 150.3(d)(1) for a total of five aggregate annual burden hours for each trader. Second, under § 150.3(d)(2), a passthrough swap counterparty, as defined by § 150.1, that relies on a written representation received from a bona fide hedging swap counterparty that the swap qualifies in good faith as a ‘‘bona fide hedging position or transaction,’’ as defined under § 150.1, is required to: (i) Maintain the relevant books and records of any such written representation for at least two years following the expiration of the swap; and (ii) furnish any books and records of such written representation to the Commission upon request. Section 150.3(d)(2) creates a new recordkeeping obligation for certain persons relying on the pass-through 1669 The requirement includes all details of related cash, forward, futures, options on futures, and swap positions and transactions (including anticipated requirements, production, merchandising activities, royalties, contracts for services, cash commodity products and byproducts, cross-commodity hedges, and records of bona fide hedging swap counterparties). PO 00000 Frm 00214 Fmt 4701 Sfmt 4700 swap representations, and the Commission estimates that 425 traders will be requested to maintain the required records. The Commission estimates that each trader will maintain at least five records per year for a total of 2,125 aggregate annual records for all respondents. The Commission further estimates that it will take one hour to comply with the recordkeeping requirement of § 150.3(d) for a total of five annual burden hours for each trader and 2,125 aggregate annual burden hours for all traders. The Commission is moving existing § 150.3(b), which currently allows the Commission or certain Commission staff to make special calls to demand certain information regarding persons claiming exemptions, to final § 150.3(e), with some modifications to include swaps.1670 Together with the recordkeeping provision of § 150.3(d), § 150.3(e) should enable the Commission to monitor the use of exemptions from speculative position limits and help to ensure that any person who claims any exemption permitted by § 150.3 can demonstrate compliance with the applicable requirements. The Commission’s existing collection under existing § 150.3 estimated that the Commission issues two special calls per year for information related to exemptions, and that each response to a special call for information takes 3 burden hours to complete. This includes two burden hours to fulfill reporting requirements and one burden hour related to recordkeeping for an aggregate total for all respondents of six annual burden hours, broken down into four aggregate annual burden hours for reporting and two aggregate annual burden hours for recordkeeping.1671 The Commission estimates that § 150.3(e) imposes information collection burdens related to special calls by the Commission on approximately 18 additional respondents, for an estimated 20 special calls per year.1672 The Commission 1670 Final § 150.3(e) refers to commodity derivative contracts, whereas existing § 150.3(b) refers to futures and options on futures. The change results in the inclusion of swaps. 1671 The special call authority under part 19 and the special call authority discussed under § 150.3 are similar in nature; however, part 19 applies to special calls regarding bona fide hedge recognitions and related underlying cash-market positions while the special calls under § 150.3 applies to the other exemptions under § 150.3. 1672 2 respondents subject to special calls under existing § 150.3 + 18 additional respondents under final § 150.3 = 20 total respondents. The Commission estimates, at least during the initial implementation period, that it is likely to issue more special calls for information to monitor compliance with position limits, particularly in the E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations estimates that these 20 market participants will provide one submission per year to respond to the special call for a total of 20 annual submissions for all respondents. The Commission estimates it will take a market participant approximately 10 hours to complete a response to a special call. Therefore, the Commission estimates responses to special calls for information will take an aggregate total of 200 burden hours for all traders.1673 The Commission notes that it is also maintaining its special call authority for reporting requirements under part 19 discussed above. khammond on DSKJM1Z7X2PROD with RULES2 d. § 150.5 Exchange-Set Limits and Exemptions Amendments to § 150.5 refine the process, and establish non-exclusive methodologies, by which exchanges may set exchange-level limits and grant exemptions therefrom, including separate methodologies for setting limit levels for contracts subject to Federal position limits (§ 150.5(a)) and physical commodity derivatives not subject to Federal position limits (§ 150.5(b)).1674 In compliance with part 40 of the Commission’s regulations, exchanges currently have policies and procedures in place to address exemptions from exchange-set limits through their rulebooks. The Commission expects that the exchanges will accordingly update their rulebooks, both to conform to new requirements and to incorporate the additional contracts that are subject to Federal position limits for the first time into their process for setting exchangelevel limits and exemptions therefrom. The collections of information related to amended rulebooks under part 40 are covered by OMB control number 3038– 0093. Separately, the collections of information related to applications for exemptions from exchange-set limits are covered by OMB control number 3038– 0013. Under final § 150.5(a)(1), for any contract subject to a Federal position limit, DCMs and, ultimately, SEFs, will be required to establish exchange-set position limits for such contracts. Under final § 150.5(a)(2), exchanges that wish to grant exemptions from exchange-set limits on commodity derivative commodity markets that will now be subject to Federal position limits for the first time. 1673 20 special calls × 10 burden hours per call = 200 total burden hours. 1674 Final § 150.5 addresses exchange-set position limits and exemptions therefrom, whereas final § 150.9 addresses Federal position limits and a streamlined process for purposes of Federal position limits where an applicant may apply through an exchange to the Commission for recognition of an non-enumerated bona fide hedge for purposes of Federal position limits. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 contracts subject to Federal position limits must require traders to file an application that shows a request for a bona fide hedge recognition or exemption conforms to a type that may be granted under final § 150.3(a)(1)–(4). Exchanges must require that such exchange-set limit exemption applications be filed in advance of the date such position would be in excess of the limits, but exchanges have the discretion to adopt rules allowing traders to file bona fide hedging applications within five business days after a trader took on such position due to sudden or unforeseen increases in the trader’s bona fide hedging needs. Final § 150.5(a)(2) also provides that exchanges must require that the trader reapply for the exemption at least annually. Final § 150.5(a)(4) requires each exchange to provide a monthly report showing the disposition of any exemption application, including the recognition of any position as a bona fide hedge, the exemption of any spread transaction, the renewal, revocation, or modification of a previously granted recognition or exemption, or the rejection of any application.1675 These collections of information related to exemptions from exchange-set limits are necessary to ensure that such exchange-set limits comply with Commission regulations, including that exchange limits are no higher than the applicable Federal level; to establish minimum standards needed for exchanges to administer the exchange’s position limits framework; and to enable the Commission to oversee an exchange’s exemptions process to 1675 Additionally, each report should include the following details: (A) The date of disposition; (B) The effective date of the disposition; (C) The expiration date of any recognition or exemption; (D) Any unique identifier(s) the designated contract market or swap execution facility may assign to track the application, or the specific type of recognition or exemption; (E) If the application is for an enumerated bona fide hedging transaction or position, the name of the enumerated bona fide hedging transaction or position listed in Appendix A to this part; (F) If the application is for a spread transaction listed in the spread transaction definition in § 150.1, the name of the spread transaction as it is listed in § 150.1; (G) The identity of the applicant; (H) The listed commodity derivative contract or position(s) to which the application pertains; (I) The underlying cash commodity; (J) The maximum size of the commodity derivative position that is recognized by the designated contract market or swap execution facility as a bona fide hedging transaction or position, specified by contract month and by the type of limit as spot month, single month, or allmonths-combined, as applicable; (K) Any size limitations or conditions established for a spread exemption or other exemption; and (L) For a bona fide hedging transaction or position, a concise summary of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the commodity derivative position for which the application was submitted. PO 00000 Frm 00215 Fmt 4701 Sfmt 4700 3449 ensure it does not undermine the Federal position limits framework. In addition, the Commission will use the information to confirm that exemptions are granted and renewed in accordance with the types of exemptions that may be granted under final § 150.3(a)(1)–(4). The Commission estimates under final § 150.5(a) that 425 traders will submit applications to claim spread exemptions and bona fide hedge recognitions from exchange-set position limits on commodity derivatives contracts subject to Federal position limits set forth in § 150.2. The Commission estimates that each trader on average will submit five applications to an exchange each year for a total of 2,125 applications for all respondents. The Commission further estimates that it will take two hours to complete and file each application for a total of 10 annual burden hours for each trader and 4,250 aggregate burden hours for all traders.1676 The Commission estimates under final § 150.5(a)(4) that six exchanges will provide monthly reports for an annual total of 72 monthly reports for all exchanges.1677 The Commission further estimates that it will take five hours to complete and file each monthly report for a total of 60 annual burden hours for each exchange and 360 annual burden hours for all exchanges.1678 Final § 150.5(b) requires exchanges, for physical commodity derivatives that are not subject to Federal position limits, to set limits during the spot month and to set either limits or accountability outside of the spot month. Under § 150.5(b)(3), where multiple exchanges list contracts that are substantially the same, including physically-settled contracts that have the same underlying commodity and delivery location, or cash-settled contracts that are directly or indirectly linked to a physically-settled contract, the exchange must either adopt ‘‘comparable’’ limits for such contracts, or demonstrate to the Commission how 1676 To increase efficiency and reduce duplicative efforts, the Final Rule permits an exchange to have a single process in place that allows market participants to request non-enumerated bona fide hedge recognitions from both Federal and exchange-set position limits at the same time. The Commission believes that under a single process, the estimated burdens under final § 150.5(a) discussed in this section for exemptions from exchange-set limits includes the burdens under the Federal limit exemption process for nonenumerated bona fide hedges under final § 150.9 discussed below. 1677 6 exchanges × 12 months = 72 total monthly reports per year. 1678 5 hours per monthly report × 12 months = 60 hours per year for each exchange. 60 annual hours × 6 exchanges = 360 aggregate annual hours for all exchanges. E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3450 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations the non-comparable levels comply with the standards set forth in § 150.5(b)(1) and (2). Such a determination also must address how the levels are necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index. Final § 150.5(b)(3) is intended to help ensure that position limits established on one exchange do not jeopardize market integrity or otherwise harm other markets. This provision may also improve the efficiency with which exchanges adopt limits on newly-listed contracts that compete with an existing contract listed on another exchange and help reduce the amount of time and effort needed for Commission staff to assess the new limit levels. Further, § 150.5(b)(3) is consistent with the Commission’s determination to generally apply equivalent Federal position limits to linked contracts, including linked contracts listed on multiple exchanges. The Commission estimates that under § 150.5(b)(3), six exchanges will make submissions to demonstrate to the Commission how the non-comparable levels comply with the standards set forth in § 150.5(b)(1) and (2). The Commission estimates that each exchange on average will make three submissions each year for a total of 18 submissions for all exchanges. The Commission further estimates that it will take 10 hours to complete and file each submission for a total of 18 annual burden hours for each exchange and 180 burden hours for all exchanges.1679 Final § 150.5(b)(4) permits exchanges to grant exemptions from any exchange limit established for physical commodity contracts not subject to Federal position limits. To grant such exemptions, exchanges must require traders to file an application to show whether the requested exemption from exchange-set limits is in accord with sound commercial practices in the relevant commodity derivative market and/or that may be established and liquidated in an orderly fashion in that market. This collection of information is necessary to confirm that any exemptions granted from exchange limits on physical commodity contracts not subject to Federal position limits do not pose a threat of market manipulation or congestion, and maintains orderly execution of transactions. The Commission estimates that 200 traders will submit one application each year and that each 1679 18 estimated annual submissions × 10 burden hours per submission = 180 aggregate annual burden hours. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 application will take approximately two hours to complete, for an aggregate total of 400 burden hours per year for all traders. Final § 150.5(e) reflects that, consistent with the definition of ‘‘rule’’ in existing § 40.1, any exchange action establishing or modifying position limits or exemptions therefrom, or position accountability, in any case pursuant to § 150.5(a), (b), or (c), including related guidance in Appendices F or G, to part 150, qualifies as a ‘‘rule’’ and must be submitted to the Commission pursuant to part 40 of the Commission’s regulations. Final § 150.5(e) further provides that exchanges are required to review regularly any position limit levels established under § 150.5 to ensure the level continues to comply with the requirements of those sections. The Commission estimates under § 150.5(e) that six exchanges will submit revised rulebooks to satisfy their compliance obligations under part 40. The Commission estimates that each exchange on average will make one initial revision of its rulebook to reflect the new position limit framework for a total of six applications for all exchanges. The Commission further estimates that it will take 30 hours to revise a rulebook for a total of 30 annual burden hours for each exchange and 180 burden hours for all exchanges.1680 This collection of information is necessary to ensure that the exchanges’ rulebooks reflect the most up-to-date rules and requirements in compliance with the position limits framework. The information is used to confirm that exchanges are complying with their requirements to regularly review any position limit levels established under § 150.5. e. § 150.9 Exchange Process for Bona Fide Hedge Recognitions From Federal Position Limits Final § 150.9 establishes a new streamlined process in which a trader could apply through an exchange to request a non-enumerated bona fide hedging recognition for purposes of Federal position limits. As part of the process, final § 150.9 creates certain recordkeeping and reporting obligations on the market participant and the exchange, including: (i) An application to request non-enumerated bona fide hedge recognitions, which the trader submits to the exchange and which the exchange subsequently provides to the Commission if the exchange approves the application for purposes of 1680 6 initial applications × 30 burden hours = 180 initial aggregate burden hours. PO 00000 Frm 00216 Fmt 4701 Sfmt 4700 exchange-set limits; (ii) a notification to the Commission and the applicant of the exchange’s determination for purposes of exchange limits regarding the trader’s request for recognition of a bona fide hedge or spread exemption; (iii) and a requirement to maintain full, complete and systematic records for Commission review of the exchange’s decisions. The Commission believes that the exchanges that will elect to process applications for non-enumerated bona fide hedging exemptions under § 150.9(a) already have similar processes for the review and disposition of such exemption applications in place through their rulebooks for purposes of exchange-set position limits. Accordingly, the estimated burden on an exchange to comply with final § 150.9 will be less burdensome because the exchanges may leverage their existing policies and procedures to comply with the Final Rule. The Commission estimates that six exchanges will elect to process applications for non-enumerated bona fide hedge recognitions that satisfy the Federal position limit requirements under final § 150.9, and will be required to file amended rulebooks pursuant to part 40 of the Commission’s regulations. The Commission bases its estimate on the number of exchanges that have submitted similar rules to the Commission in the past. Final § 150.9(c) requires a trader to submit an application with certain information to enable the exchange to determine whether it should recognize a position as a bona fide hedge for purposes of exchange-set position limits. Each applicant will need to reapply to the exchange for its nonenumerated bona fide hedge recognition at least on an annual basis by updating its original application. The Commission expects that traders will benefit from the streamlined framework established under final § 150.9 because traders may submit one application to obtain a non-enumerated bona fide hedge recognition for purposes of both exchange-set and Federal position limits, as opposed to submitting separate applications to the Commission for Federal position limit purposes and separate applications to an exchange for exchange limit purposes.1681 1681 The Commission believes the collections of information set forth above are necessary for the exchange to process requests for recognition of nonenumerated bona fide hedges for purposes of exchange-set position limits, and separately, if applicable, for the Commission to make its determination for purposes of Federal position limits. The information is used by the exchange to determine, and the Commission to review and determine, whether the facts and circumstances demonstrate it is appropriate to recognize a position E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Accordingly, the estimated burden for traders requesting non-enumerated bona fide hedge recognitions from exchangeset limits under § 150.5(a) will subsume the burden estimates in connection with final § 150.9 for requesting nonenumerated bona fide hedge recognition’s from Federal position limits since the Commission believes exchanges will combine the two processes (i.e., any trader who applies through an exchange under final § 150.9 for a non-enumerated bona fide hedge for Federal position limits purposes also will be deemed to be applying at the same time under final § 150.5(a) for exchange position limits purposes and thus it would not be appropriate to distinguish between the two for PRA purposes). Accordingly, the Commission anticipates that six exchanges each will receive only one application for a non-enumerated bona fide hedge recognition under final § 150.9 for a total of six aggregate annual applications for all exchanges; however, as noted above, this amount is included in the Commission’s estimate in connection with final § 150.5(a).1682 Specifically, as discussed above in connection with final § 150.5(a), the Commission estimates under final §§ 150.5(a) and 150.9(a) that 425 traders will submit applications to claim exemptions and/or bona fide hedge recognitions for contracts subject to Federal position limits as set forth in § 150.2.1683 as a non-enumerated bona fide hedging transaction or position. 1682 As discussed above, the process and estimated burdens under final § 150.9 do not apply to § 150.5(b) because final § 150.5(b) applies to those physical commodity contracts that are not subject to Federal position limits (as opposed to final § 150.5(a), which applies to those contracts subject to Federal position limits). As a result, a trader that would use the process established under § 150.5(b) for exchange-set limits will not need to apply under final § 150.9 since the traders would not need a bona fide hedge recognition or an exemption from Federal position limits. 1683 As discussed in connection with final § 150.5(a) above, the Commission estimates that each trader on average will make five applications each year for a total of 2,125 applications across all exchanges. The Commission further estimates that, for final §§ 150.5(a) and 150.9(a), taken together, it will take two hours to complete and file each application for a total of 10 annual burden hours for each trader and 4,250 aggregate annual burden hours for all traders (2,125 total annual applications × two burden hours per application = 4,250 aggregate annual burden hours). The Commission anticipates that compared to final § 150.5(a), fewer traders will apply under final § 150.9 since final § 150.9 applies only to non-enumerated bona fide hedge recognitions for Federal purposes. In comparison, while final § 150.5 encompasses these same applications for non-enumerated bona fide hedge recognitions (but for the purpose of exchange-set limits), final § 150.5(a) also includes enumerated bona fide hedge applications along with spread exemption requests. The Commission’s estimate of 4,250 aggregate annual burden hours VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Final § 150.9(d) requires exchanges to keep full, complete, and systematic records, including all pertinent data and memoranda, of all activities relating to the processing of such applications and the disposition thereof. In addition, as provided for in final § 150.9(g) and existing § 1.31, the Commission may, in its discretion, at any time, review the exchange’s records retained pursuant to final § 150.9(d) or request additional information pursuant to § 150.9(e)(5). The recordkeeping requirement is necessary for the Commission to review the exchanges’ processes, retention of records, and compliance with requirements established and implemented under this section. Final § 150.9(d) creates a new recordkeeping obligation consistent with the standards in existing § 1.31.1684 The Commission estimates that six exchanges will each create one record in connection with final § 150.9 each year for a total of six annual records for all respondents. The Commission further estimates that it will take five hours to comply with the recordkeeping requirement of § 150.9(d) for a total of five annual burden hours for each exchange and 30 aggregate annual burden hours across all exchanges. Final § 150.9(d) allows the Commission to inspect such books and records.1685 In the event the Commission exercises its authority to inspect such books and records, it estimates that the Commission will conduct an inspection of two exchanges per year and each exchange will incur encompasses all such requests from all traders. However, for the sake of clarity, the Commission anticipates that six exchanges each will receive one application per year for a non-enumerated bona fide hedge under final § 150.9 (for a total of six applications across all exchanges); as noted, this burden is included in the Commission’s estimate of 425 respondents in connection with its estimate under final § 150.5(a). 1684 Consistent with existing § 1.31, the Commission expects that these records will be readily available during the first two years of the required five-year recordkeeping period for paper records, and readily accessible for the entire fiveyear recordkeeping period for electronic records. In addition, the Commission expects that records required to be maintained by an exchange pursuant to this section will be readily accessible during the pendency of any application, and for two years following any disposition that did not recognize a derivative position as a bona fide hedge. 1685 Final § 150.9(d)(1) requires the exchange to keep full, complete, and systematic records, which include all pertinent data and memoranda, of all activities relating to the processing of such applications and the disposition thereof. This requirement working in concert with § 1.31 allows the Commission to inspect any such records. Separately, under § 150.9(e)(5), if the Commission determines additional information is required to conduct its review, then it would notify the exchange and the relevant market participant of any issues identified and provide them with an opportunity to provide supplemental information. PO 00000 Frm 00217 Fmt 4701 Sfmt 4700 3451 four hours to make its books and records available to the Commission for review for a total of eight aggregate annual burden hours for the two estimated respondent exchanges.1686 Under final § 150.9(e), an exchange needs to provide an applicant and the Commission with notice of any approved application of an exchange’s determination to recognize bona fide hedges with respect to its own position limits for purposes of exceeding the Federal position limits. The notification requirement is necessary to inform the Commission of the details of the type of bona fide hedge recognitions being granted. The information is used to keep the Commission informed as to the manner in which an exchange administers its application procedures, and the exchange’s rationale for permitting large positions. The Commission estimates that under final § 150.9(e), six exchanges will submit notifications of approved application of an exchange’s determination to recognize nonenumerated bona fide hedges for purposes of exceeding the Federal position limits. The Commission estimates that each exchange on average will make two notifications: One notification each to the applicant trader and to the Commission each year for a total of 12 notices for all exchanges. The Commission further estimates that it will take 0.5 hours to complete and file each notification for a total of one annual burden hour for each exchange and six burden hours for all exchanges.1687 In addition to submitting a copy of any exchange-approved nonenumerated bona fide hedge application to the Commission under § 150.9(e), the preamble clarifies that an exchange may, on a voluntary basis, send the Commission an advance courtesy copy of the non-enumerated bona fide hedge application when the exchange first receives it from the applicant. Although this advance courtesy copy would be a voluntary submission, it is still considered a new information collection under the PRA. However, the Commission believes there is no corresponding burden for this filing because the Commission considers this practice to be in the ordinary course of business as it is usual and customary for exchanges to provide the Commission with advance copies of various filings under other Commission 1686 2 exchanges per year subject to a Commission inspection × 4 hours per inspection request = 8 aggregate annual burden hours for all exchanges. 1687 Twelve notices for all exchanges × 0.5 hours per notice = six total burden hours across all exchanges. E:\FR\FM\14JAR2.SGM 14JAR2 3452 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations regulations.1688 In the event that this practice is not considered usual and customary, the Commission estimates that the burden of such filing will be de minimis and take less than five minutes for an exchange to send an application to the Commission, if the exchange elects to do so (less than 30 total minutes in the aggregate across all exchanges: 6 exchanges × 1 advance copy × less than 5 minutes = less than 30 minutes). iii. OMB Control Number 3038–0093— Provisions Common to Registered Entities a. § 150.9(a) khammond on DSKJM1Z7X2PROD with RULES2 Under final § 150.9(a), exchanges that would like for their market participants to be able to exceed Federal position limits based on a non-enumerated bona fide hedge recognition granted by the exchange with respect to its own limits must maintain rules that establish processes consistent with the provisions of final § 150.9 and must seek approval of such rules from the Commission pursuant to § 40.5 of the Commission’s regulations. The collection of information is necessary to capture the new non-enumerated bona fide hedge process in the exchanges’ rulebook, which is subject to Commission approval. The information is used to assess the process put in place by each exchange submitting amended rulebooks. The Commission has previously estimated the combined annual burden hours for both §§ 40.5 and 40.6 to be 7,000 hours.1689 Upon implementation of final § 150.9, the Commission estimates that six exchanges will each make one initial § 40.5 rule filing per year for a total of six one-time initial submissions for all exchanges. The Commission further estimates that the exchanges will employ a combination of in-house and outside legal and compliance counsel to update existing rulebooks and it will take 25 hours to complete and file each rule for a total 25 one-time burden hours for each exchange and 150 one-time burden hours for all exchanges. 1688 For example, exchanges have frequently submitted advance courtesy copies of new rule filings and product filings to the Commission under the part 40 regulations. 1689 The supporting statement for the current active information collection request, ICR Reference No: 201503–3038–002, for OMB control number 3038–0013, estimated that seven respondents would file the §§ 1.47 and 1.48 reports, and that each respondent would file two reports for a total of 14 annual responses, requiring three hours per response, for a total of 42 burden hours for all respondents. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 C. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’) requires that agencies consider whether the rules they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis respecting the impact.1690 A regulatory flexibility analysis or certification typically is required for ‘‘any rule for which the agency publishes a general notice of proposed rulemaking pursuant to’’ the notice-and-comment provisions of the Administrative Procedure Act, 5 U.S.C. 553(b).1691 The requirements related to the Final Rule fall mainly on registered entities, exchanges, FCMs, swap dealers, clearing members, foreign brokers, and large traders. The Commission has previously determined that registered DCMs, FCMs, swap dealers, major swap participants, eligible contract participants, SEFs, clearing members, foreign brokers and large traders are not small entities for purposes of the RFA.1692 Further, while the requirements under this rulemaking may impact nonfinancial end users, the Commission notes that position limits levels apply only to large traders. Accordingly, the Chairman, on behalf of the Commission, hereby certifies, on behalf of the Commission, pursuant to 5 U.S.C. 605(b), that the actions taken herein will not have a significant economic impact on a substantial number of small entities. The Chairman made the same certification in the 2013 Proposal,1693 the 2016 Supplemental Proposal,1694 the 2016 Reproposal,1695 and the 2020 NPRM.1696 D. Antitrust Considerations Section 15(b) of the CEA requires the Commission to take into consideration 1690 44 U.S.C. 601 et seq. U.S.C. 601(2), 603–05. 1692 See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618–19, (Apr. 30, 1982) (DCMs, FCMs, and large traders) (‘‘RFA Small Entities Definitions’’); Opting Out of Segregation, 66 FR 20740–20743, (Apr. 25, 2001) (eligible contract participants); Position Limits for Futures and Swaps; Final Rule and Interim Final Rule, 76 FR 71626, 71680, (Nov. 18, 2011) (clearing members); Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476, 33548, (Jun. 4, 2013) (SEFs); A New Regulatory Framework for Clearing Organizations, 66 FR 45604, 45609, (Aug. 29, 2001) (DCOs); Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, Jan. 19, 2012, (swap dealers and major swap participants); and Special Calls, 72 FR 50209, (Aug. 31, 2007) (foreign brokers). 1693 See 2013 Proposal, 78 FR at 75784. 1694 See 2016 Supplemental Proposal, 81 FR at 38499. 1695 See 2016 Reproposal, 81 FR at 96894. 1696 See 2020 NPRM, 85 FR at 11708. 1684 5 PO 00000 Frm 00218 Fmt 4701 Sfmt 4700 the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA, in issuing any order or adopting any Commission rule or regulation.1697 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. In the Proposal, the Commission requested comments on whether: (1) The proposed rules could be anticompetitive; (2) there are other less anticompetitive means of deterring and preventing price manipulation or any other disruptions to market integrity; and (3) requiring DCOs to impose initial margin surcharges in lieu of imposing position limits is feasible. The Commission does not anticipate that the position limits regime that it is adopting today will result in anticompetitive behavior. To the contrary, the Commission believes that the relatively high position limit levels (coupled with the numerous exemptions from position limits adopted as part of this rulemaking) do not establish any barriers to entry or competitive restraints. As noted above, the Commission encouraged comments from the public on any aspect of the rulemaking that may have the potential to be inconsistent with the antitrust laws or be anticompetitive in nature. The Commission received two (2) comments asserting that the proposed rule may be anticompetitive. ICE commented that it has concerns regarding the potential anticompetitive aspects of the Commission’s approach to aggregation of contracts across all exchanges rather than on a per exchange basis.1698 In particular, ICE asserted that the aggregation of referenced contracts across all exchanges by the Commission fails to comply with the requirements of Section 15(b) of the CEA that requires the Commission take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA.1699 ICE noted that an aggregated Federal position limit, across all exchanges, may make it very difficult for an exchange to launch a new contract or that would be aggregated with an existing contract for position limit purposes. In addition, ICE also indicated that launching a new exchange may even be more difficult given the aggregate approach to position limits across exchanges. The underlying 1697 7 U.S.C. 19(b). at 12. 1699 ICE believes that this is particularly true for cash-settled contracts and for other contracts outside of the delivery month. 1698 ICE E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations basis for ICE’s assertion is that aggregation may potentially reduce the ability of a new exchange or new contract to attract enough liquidity to become sustainable. ICE argued that a more flexible approach to aggregation of positions that allows each exchange to develop its own liquidity (and establish its own limits), even for similar or lookalike contracts, would better advance the goals of developing robust and liquid markets while providing adequate means to protect against excessive speculation. Similarly, FIA commented that the Commission’s aggregation of position limits across exchanges in connection with financially-settled reference contracts ‘‘will reduce innovation and competition between exchanges because any new proposed financially-settled referenced futures contracts will have to share the same liquidity pool with existing financially-settled referenced futures contracts, including economically-equivalent swaps.’’ 1700 Instead, FIA argued that position limits should be established per designated contract spot month limits for financially-settled referenced contracts and a separate spot month limit should be established for economicallyequivalent swaps in order to enhance competition, innovation and liquidity for bona fide hedgers. As an initial legal matter, the Commission interprets CEA section 4a(a)(6) to generally require aggregated Federal position limits across exchanges. CEA section 4a(a)(6) requires the Commission to ‘‘establish limits . . . on the aggregate number or amount of positions . . . across—(A) contracts listed by designated contract markets . . . .’’ Accordingly, even if the Commission were to grant ICE’s claim in arguendo of possible anti-competitive affects, the requirement in CEA section 4a(a)(6) that Federal position limits should apply in the aggregate across exchanges is dispositive for the Commission’s approach under the Final Rule.1701 As stated above in Section II.B.10 of the preamble, the Commission disagrees with comments by ICE and FIA asserting that generally the aggregation of cash-settled positions across exchanges would impair competition and provide a barrier to financial innovation. Both commenters 1700 FIA at p. 8. discussed in the preamble to this release, however, the Commission is making an exception under its exemptive authority for position limits in CEA section 4a(a)(7) for the NYMEX NG referenced contracts, which will be subject to a per-exchange position limit level, based on the unique liquidity characteristics of the natural gas markets. 1701 As VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 essentially advocate for a disaggregated Federal position limit that applies on a per-exchange basis based on the notion that this will promote and attract greater liquidity to the markets regardless of the potential for manipulation and/or market disruption. In contrast to these commenters’ concerns, the Commission submits that in general an aggregate position limit framework across exchanges should promote, not prohibit, competition and therefore enhance liquidity formation.1702 The ability to apply the Federal position limits framework on a disaggregated basis would also significantly increase position limits so that the potential risk of excessive speculation and manipulation would become a much greater concern to the Commission based on the ability of market participants to hold larger positions in the aggregate across exchanges. Therefore, under the approach supported by ICE and FIA, the Commission would be required to readjust Federal position limits to a much lower level, potentially impacting liquidity and future financial innovation. The Commission also asserts that the application of the Federal position limit levels across exchanges promotes innovation and competition in the marketplace because the full aggregate position limit level is available for market participants regardless of the particular trading venue/exchange, which, by definition, promotes greater competition and significant price discovery. As noted in the 2020 NPRM and the preamble of this adopting release,1703 the Commission is aware that exchanges may also have conflicting and competing interests in connection with the adoption of exchange position limits and accountability levels. Additionally, the final rules with respect to exchangeset position limits require any new commodity derivative contract to establish limits at a ‘‘comparable’’ level to existing contracts that are substantially similar (i.e., ‘‘look-alike contracts’’) on other exchanges unless the exchange listing the new contract demonstrates to the satisfaction of Commission staff, in its product filing with the Commission, how its levels comply with the requirements of 1702 The Commission believes that permitting Federal position limits to apply on a disaggregated, per-exchange basis also has the potential to further divide liquidity among several liquidity pools, which could make accessing liquidity for bona fide hedgers more difficult and reduce price discovery. 1703 See 85 FR 11596, 11677 at fn. 576; see also Section II.G. (discussing the § 150.9 process and the role of the exchanges) and Section II.B.2 (discussing the role of exchanges in connection with non-spot month limits under § 150.2). PO 00000 Frm 00219 Fmt 4701 Sfmt 4700 3453 § 150.5(b)(1) and (2). This requirement could potentially provide competitive advantages to the ‘‘first mover’’ exchange since such exchange could effectively establish the position limit for all other exchanges that seek to list and trade substantially similar contracts. Although the Commission acknowledges these competitive concerns, the Commission believes that these concerns are mitigated because (i) an exchange is required to submit any proposed position limits to the Commission under part 40 of the Commission’s regulations and (ii) an exchange is required pursuant to § 150.5(b) to set limits that are necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index. In addition, for those commodity derivative contracts that are subject to a Federal speculative position limit under § 150.2, the limit set by the exchange can be no higher than Federal speculative position limit specified in § 150.2. The Commission believes that exchanges have significant incentives to maintain well-functioning markets to remain competitive with other exchanges. Market participants may choose exchanges that are less susceptible to sudden or unreasonable fluctuations or unwarranted changes caused by excessive speculation or corners, squeezes, and manipulation, which could, among other things, harm the price discovery function of the commodity derivative contracts and negatively impact the delivery of the underlying commodity, bona fide hedging strategies, and market participants’ general risk management.1704 Furthermore, several academic studies, including one concerning futures exchanges and another concerning demutualized stock exchanges, support the conclusion that exchanges are able to both satisfy shareholder interests and meet their self-regulatory organization responsibilities.1705 1704 Kane, Stephen, Exploring price impact liquidity for December 2016 NYMEX energy contracts, n.33, available at https://www.cftc.gov/ sites/default/files/idc/groups/public/@ economicanalysis/documents/file/oce_ priceimpact.pdf. 1705 See David Reiffen and Michel A. Robe, Demutualization and Customer Protection at SelfRegulatory Financial Exchanges, Journal of Futures Markets, Vol. 31, 126–164, Feb. 2011 (in many circumstances, an exchange that maximizes shareholder (rather than member) income has a greater incentive to aggressively enforce regulations that protect participants from dishonest agents); and Kobana Abukari and Isaac Otchere, Has Stock Exchange Demutualization Improved Market E:\FR\FM\14JAR2.SGM Continued 14JAR2 3454 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations The Commission has determined that the position limit rules adopted today serve the regulatory purpose of the CEA ‘‘to deter and prevent price manipulation or any other disruptions to market integrity.’’ 1706 In addition, the Commission notes that the adopted position limit rules implement additional purposes and policies set forth in section 4a(a) of the CEA.1707 The Commission has considered the rulemaking and related comments to determine whether it is anticompetitive, and continues to believe that the position limits rulemaking will not result in any unreasonable restraint of trade or impose any material anticompetitive burden on trading in the markets. 17 CFR Part 19 Commodity futures, Cottons, Grains, Reporting and recordkeeping requirements, Swaps. ■ 17 CFR Part 40 Commodity futures, Procedural rules, Reporting and recordkeeping requirements. * Final Regulatory Text and Related Appendices 17 CFR Part 151 Bona fide hedging, Commodity futures, Cotton, Grains, Position limits, Referenced Contracts, Swaps. For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR chapter I as follows: List of Subjects 17 CFR Part 1 Agricultural commodity, Agriculture, Brokers, Committees, Commodity futures, Conflicts of interest, Consumer protection, Definitions, Designated contract markets, Directors, Major swap participants, Minimum financial requirements for intermediaries, Reporting and recordkeeping requirements, Swap dealers, Swaps. 17 CFR Part 15 Brokers, Commodity futures, Reporting and recordkeeping requirements, Swaps. 1. The authority citation for part 1 continues to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 24 (2012). [Amended] 2. In § 1.3, remove the definition of the term ‘‘bona fide hedging transactions and positions for excluded commodities’’. Quality? International Evidence, Review of Quantitative Finance and Accounting, Dec 09, 2019, https://doi.org/10.1007/s11156-019-00863-y (demutualized exchanges have realized significant reductions in transaction costs in the postdemutualization period). 1706 Section 3(b) of the CEA, 7 U.S.C. 5(b). 1707 7 U.S.C. 7a(a) (burdens on interstate commerce; trading or position limits). khammond on DSKJM1Z7X2PROD with RULES2 PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT ■ Brokers, Commodity futures, Reporting and recordkeeping requirements, Swaps. 03:06 Jan 14, 2021 17 CFR Part 150 Bona fide hedging, Commodity futures, Cotton, Grains, Position limits, Referenced Contracts, Swaps. § 1.3 17 CFR Part 17 VerDate Sep<11>2014 17 CFR Part 140 Authority delegations (Government agencies), Conflict of interests, Organizations and functions (Government agencies). Jkt 253001 PART 15—REPORTS—GENERAL PROVISIONS 3. The authority citation for part 15 continues to read as follows: ■ Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, 124 Stat. 1376 (2010). PO 00000 Frm 00220 Fmt 4701 Sfmt 4700 4. In § 15.00, revise paragraph (p)(1) to read as follows: § 15.00 Definitions of terms used in parts 15 to 19, and 21 of this chapter. * * * * (p) * * * (1) For reports specified in parts 17 and 18 and in § 19.00(a) and (b) of this chapter, any open contract position that at the close of the market on any business day equals or exceeds the quantity specified in § 15.03 in either: (i) Any one futures of any commodity on any one reporting market, excluding futures contracts against which notices of delivery have been stopped by a trader or issued by the clearing organization of the reporting market; or (ii) Long or short put or call options that exercise into the same futures contract of any commodity, or other long or short put or call commodity options that have identical expirations and exercise into the same commodity, on any one reporting market. * * * * * ■ 5. In § 15.01, revise paragraph (d) to read as follows: § 15.01 Persons required to report. * * * * * (d) Persons, as specified in part 19 of this chapter, who: (1) Are merchants or dealers of cotton holding or controlling positions for future delivery in cotton that equal or exceed the amount set forth in § 15.03; or (2) Are persons who have received a special call from the Commission or its designee under § 19.00(b) of this chapter. * * * * * ■ 6. Revise § 15.02 to read as follows: § 15.02 Reporting forms. Forms on which to report may be obtained from any office of the Commission or via https://www.cftc.gov. Listed below are the forms to be used for the filing of reports. To determine who shall file these forms, refer to the Commission rule listed in the column opposite the form number. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 7. The authority citation for part 17 continues to read as follows: ■ Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 6t, 7, 7a, and 12a. 8. In § 17.00, revise paragraph (b) introductory text to read as follows: ■ § 17.00 Information to be furnished by futures commission merchants, clearing members and foreign brokers. * * * * (b) Interest in or control of several accounts. Except as otherwise instructed by the Commission or its designee and as specifically provided in § 150.4 of this chapter, if any person holds or has a financial interest in or controls more than one account, all such accounts shall be considered by the futures commission merchant, clearing member, or foreign broker as a single account for the purpose of determining special account status and for reporting purposes. * * * * * ■ 9. In § 17.03, add paragraph (i) to read as follows: khammond on DSKJM1Z7X2PROD with RULES2 * § 17.03 Delegation of authority to the Director of the Office of Data and Technology or the Director of the Division of Market Oversight. * * * * * (i) Pursuant to § 17.00(b), and as specifically provided in § 150.4 of this chapter, the authority shall be VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 designated to the Director of the Office of Data and Technology to instruct a futures commission merchant, clearing member, or foreign broker to consider otherwise than as a single account for the purpose of determining special account status and for reporting purposes all accounts one person holds or controls, or in which the person has a financial interest. ■ 10. Revise part 19 to read as follows: PART 19—REPORTS BY PERSONS HOLDING REPORTABLE POSITIONS IN EXCESS OF POSITION LIMITS, AND BY MERCHANTS AND DEALERS IN COTTON Sec. 19.00 Who shall furnish information. 19.01 [Reserved] 19.02 Reports pertaining to cotton on call purchases and sales. 19.03 Delegation of authority to the Director of the Division of Enforcement. 19.04–19.10 [Reserved] Appendix A to Part 19—Form 304 Authority: 7 U.S.C. 6g, 6c(b), 6i, and 12a(5). § 19.00 Who shall furnish information. (a) Persons filing cotton-on-call reports. Merchants and dealers of cotton holding or controlling positions for future delivery in cotton that are reportable pursuant to § 15.00(p)(1)(i) of this chapter shall file CFTC Form 304. (b) Persons responding to a special call. All persons: Exceeding speculative position limits under § 150.2 of this chapter; or holding or controlling positions for future delivery that are PO 00000 Frm 00221 Fmt 4701 Sfmt 4700 reportable pursuant to § 15.00(p)(1) of this chapter and who have received a special call from the Commission or its designee shall file any pertinent information as instructed in the special call. Filings in response to a special call shall be made within one business day of receipt of the special call unless otherwise specified in the call. Such filing shall be transmitted using the format, coding structure, and electronic data submission procedures approved in writing by the Commission. § 19.01 [Reserved] § 19.02 Reports pertaining to cotton on call purchases and sales. (a) Information required. Persons required to file CFTC Form 304 reports under § 19.00(a) shall file CFTC Form 304 reports showing the quantity of call cotton bought or sold on which the price has not been fixed, together with the respective futures on which the purchase or sale is based. As used herein, call cotton refers to spot cotton bought or sold, or contracted for purchase or sale at a price to be fixed later based upon a specified future. (b) Time and place of filing reports. Each CFTC Form 304 report shall be made weekly, dated as of the close of business on Friday, and filed not later than 9 a.m. Eastern Time on the third business day following that Friday using the format, coding structure, and electronic data transmission procedures approved in writing by the Commission. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.015</GPH> PART 17—REPORTS BY REPORTING MARKETS, FUTURES COMMISSION MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS 3455 3456 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations § 19.03 Delegation of authority to the Director of the Division of Enforcement. khammond on DSKJM1Z7X2PROD with RULES2 (a) The Commission hereby delegates, until it orders otherwise, the authority in § 19.00(b) to issue special calls to the Director of the Division of Enforcement, or such other employee or employees as the Director may designate from time to time. (b) The Commission hereby delegates, until it orders otherwise, to the Director VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 of the Division of Enforcement, or such other employee or employees as the Director may designate from time to time, the authority in § 19.00(b) to provide instructions or to determine the format, coding structure, and electronic data transmission procedures for submitting data records and any other information required under this part. (c) The Director of the Division of Enforcement may submit to the PO 00000 Frm 00222 Fmt 4701 Sfmt 4700 Commission for its consideration any matter which has been delegated in this section. (d) Nothing in this section prohibits the Commission, at its election, from exercising the authority delegated in this section. § § 19.04—19.10 [Reserved] Appendix A to Part 19—Form 304 BILLING CODE 6351–01–P E:\FR\FM\14JAR2.SGM 14JAR2 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00223 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 3457 ER14JA21.016</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00224 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.017</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3458 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00225 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 3459 ER14JA21.018</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00226 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.019</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3460 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00227 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 3461 ER14JA21.020</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00228 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.021</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3462 BILLING CODE 6351–01–C PART 40—PROVISIONS COMMON TO REGISTERED ENTITIES 11. The authority citation for part 40 continues to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and 12, as amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Pub. L. 111–203, 124 Stat. 1376 (2010). 12. In § 40.1, revise paragraphs (j)(1)(vii) and (j)(2)(vii) to read as follows: ■ § 40.1 khammond on DSKJM1Z7X2PROD with RULES2 13. The authority citation for part 140 continues to read as follows: * * * * (j) * * * (1) * * * (vii) Speculative position limits, position accountability standards, and position reporting requirements, including an indication as to whether the contract meets the definition of a referenced contract as defined in § 150.1 of this chapter, and, if so, the name of either the core referenced futures contract or other referenced contract upon which the new referenced contract submitted under this part 40 is based. * * * * * (2) * * * (vii) Speculative position limits, position accountability standards, and position reporting requirements, including an indication as to whether the contract meets the definition of VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PART 140—ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION ■ Definitions. * economically equivalent swap as defined in § 150.1 of this chapter, and, if so, the name of either the core referenced futures contract or referenced contract, as applicable, to which the swap submitted under this part 40 is economically equivalent. * * * * * Authority: 7 U.S.C. 2(a) (12), 12a, 13(c), 13(d), 13(e), and 16(b). § 140.97 ■ [Removed and Reserved] 14. Remove and reserve § 140.97. PART 150—LIMITS ON POSITIONS 15. The authority citation for part 150 is revised to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, and 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). ■ 16. Revise § 150.1 to read as follows: § 150.1 Definitions. As used in this part— Bona fide hedging transaction or position means a transaction or position in commodity derivative contracts in a physical commodity, where: PO 00000 Frm 00229 Fmt 4701 Sfmt 4700 3463 (1) Such transaction or position: (i) Represents a substitute for transactions made or to be made, or positions taken or to be taken, at a later time in a physical marketing channel; (ii) Is economically appropriate to the reduction of price risks in the conduct and management of a commercial enterprise; and (iii) Arises from the potential change in the value of— (A) Assets which a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising; (B) Liabilities which a person owes or anticipates incurring; or (C) Services that a person provides or purchases, or anticipates providing or purchasing; or (2) Such transaction or position qualifies as a: (i) Pass-through swap and passthrough swap offset pair. Paired positions of a pass-through swap and a pass-through swap offset, where: (A) The pass-through swap is a swap position entered into by one person for which the swap would qualify as a bona fide hedging transaction or position pursuant to paragraph (1) of this definition (the bona fide hedging swap counterparty) that is opposite another person (the pass-through swap counterparty); (B) The pass-through swap offset: E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.022</GPH> Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 3464 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (1) Is a futures contract position, option on a futures contract position, or swap position entered into by the passthrough swap counterparty; and (2) Reduces the pass-through swap counterparty’s price risks attendant to the pass-through swap; and (C) With respect to the pass-through swap offset, the pass-through swap counterparty receives from the bona fide hedging swap counterparty a written representation that the pass-through swap qualifies as a bona fide hedging transaction or position pursuant to paragraph (1) of this definition, and the pass-through swap counterparty may rely in good faith on such written representation, unless the pass-through swap counterparty has information that would cause a reasonable person to question the accuracy of the representation; or (ii) Offset of a bona fide hedger’s qualifying swap position. A futures contract position, option on a futures contract position, or swap position entered into by a bona fide hedging swap counterparty that reduces price risks attendant to a previously-enteredinto swap position that qualified as a bona fide hedging transaction or position at the time it was entered into for that counterparty pursuant to paragraph (1) of this definition. Commodity derivative contract means any futures contract, option on a futures contract, or swap in a commodity (other than a security futures product as defined in section 1a(45) of the Act). Core referenced futures contract means a futures contract that is listed in § 150.2(d). Economically equivalent swap means, with respect to a particular referenced contract, any swap that has identical material contractual specifications, terms, and conditions to such referenced contract. (1) Other than as provided in paragraph (2) of this definition, for the purpose of determining whether a swap is an economically equivalent swap with respect to a particular referenced contract, the swap shall not be deemed to lack identical material contractual specifications, terms, and conditions due to different lot size specifications or notional amounts, delivery dates diverging by less than one calendar day, or different post-trade risk management arrangements. (2) With respect to any natural gas referenced contract, for the purpose of determining whether a swap is an economically equivalent swap to such referenced contract, the swap shall not be deemed to lack identical material contractual specifications, terms, and conditions due to different lot size VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 specifications or notional amounts, delivery dates diverging by less than two calendar days, or different posttrade risk management arrangements. (3) With respect to any referenced contract or class of referenced contracts, the Commission may make a determination that any swap or class of swaps satisfies, or does not satisfy, this economically equivalent swap definition. Eligible affiliate means an entity with respect to which another person: (1) Directly or indirectly holds either: (i) A majority of the equity securities of such entity, or (ii) The right to receive upon dissolution of, or the contribution of, a majority of the capital of such entity; (2) Reports its financial statements on a consolidated basis under Generally Accepted Accounting Principles or International Financial Reporting Standards, and such consolidated financial statements include the financial results of such entity; and (3) Is required to aggregate the positions of such entity under § 150.4 and does not claim an exemption from aggregation for such entity. 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: (1) Which authorizes an independent account controller independently to control all trading decisions with respect to the eligible entity’s client positions and accounts that the independent account controller holds directly or indirectly, or on the eligible entity’s behalf, but without the eligible entity’s day-to-day direction; and (2) Which maintains: (i) Only such minimum control over the independent account controller as is consistent with its fiduciary responsibilities to the managed positions and accounts, and necessary to fulfill its duty to supervise diligently the trading done on its behalf; or (ii) If a limited partner, limited member or shareholder of a commodity pool the operator of which is exempt from registration under § 4.13 of this chapter, only such limited control as is consistent with its status. PO 00000 Frm 00230 Fmt 4701 Sfmt 4700 Entity means a ‘‘person’’ as defined in section 1a of the Act. Excluded commodity means an ‘‘excluded commodity’’ as defined in section 1a of the Act. Futures-equivalent means: (1)(i) An option contract, whether an option on a futures contract or an option that is a swap, which has been: (A) Adjusted by an economically reasonable and analytically supported exposure to price changes of the underlying referenced contract that has been computed for that option contract as of the previous day’s close or the current day’s close or computed contemporaneously during the trading day, and (B) Converted to an economically equivalent amount of an open position in the underlying referenced contract. (ii) An entity is allowed one business day to liquidate an amount of the position that is in excess of speculative position limits without being considered in violation of the speculative position limits if such excess position results from: (A) A position that exceeds speculative position limits as a result of an option contract assignment; or (B) A position that includes an option contract that exceeds speculative position limits when the applicable option contract is adjusted by an economically reasonable and analytically supported exposure to price changes of the underlying referenced contract as of that business day’s close of trading, as long as the applicable option contract does not exceed such speculative position limits when evaluated using the previous business day’s exposure to the underlying referenced contract. This paragraph (B) shall not apply if such day would be the last trading day of the spot month for the corresponding core referenced futures contract. (2) A futures contract which has been converted to an economically equivalent amount of an open position in a core referenced futures contract; and (3) A swap which has been converted to an economically equivalent amount of an open position in a core referenced futures contract. Independent account controller means a person: (1) Who specifically is authorized by an eligible entity, as defined in this section, independently to control trading decisions on behalf of, but without the day-to-day direction of, the eligible entity; (2) Over whose trading the eligible entity maintains only such minimum control as is consistent with its fiduciary responsibilities for managed E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations positions and accounts to fulfill its duty to supervise diligently the trading done on its behalf or as is consistent with such other legal rights or obligations which may be incumbent upon the eligible entity to fulfill; (3) Who trades independently of the eligible entity and of any other independent account controller trading for the eligible entity; (4) Who has no knowledge of trading decisions by any other independent account controller; and (5) Who is: (i) Registered as a futures commission merchant, an introducing broker, a commodity trading advisor, or an associated person of any such registrant, or (ii) A general partner, managing member or manager of a commodity pool the operator of which is excluded from registration under § 4.5(a)(4) of this chapter or § 4.13 of this chapter, provided that such general partner, managing member or manager complies with the requirements of § 150.4(c). Long position means, on a futuresequivalent basis, a long call option, a short put option, a long underlying futures contract, or a swap position that is equivalent to a long futures contract. Physical commodity means any agricultural commodity as that term is defined in § 1.3 of this chapter or any exempt commodity as that term is defined in section 1a of the Act. Position accountability means any bylaw, rule, regulation, or resolution that: (1) Is submitted to the Commission pursuant to part 40 of this chapter in lieu of, or along with, a speculative position limit, and (2) Requires an entity whose position exceeds the accountability level to consent to: (i) Provide information about its position to the designated contract market or swap execution facility; and (ii) Halt increasing further its position or reduce its position in an orderly manner, in each case as requested by the designated contract market or swap execution facility. Pre-enactment swap means any swap entered into prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), the terms of which have not expired as of the date of enactment of that Act. Pre-existing position means any position in a commodity derivative contract acquired in good faith prior to the effective date of any bylaw, rule, regulation, or resolution that specifies a speculative position limit level or a subsequent change to that level. Referenced contract means: (1) A core referenced futures contract listed in § 150.2(d) or, on a futures- VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 equivalent basis with respect to a particular core referenced futures contract, a futures contract or an option on a futures contract, including a spread, that is either: (i) Directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of that particular core referenced futures contract; or (ii) Directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of the same commodity underlying that particular core referenced futures contract for delivery at the same location or locations as specified in that particular core referenced futures contract; or (2) On a futures-equivalent basis, an economically equivalent swap. (3) The definition of referenced contract does not include a location basis contract, a commodity index contract, any guarantee of a swap, a trade option that meets the requirements of § 32.3 of this chapter, any outright price reporting agency index contract, or any monthly average pricing contract. Short position means, on a futuresequivalent basis, a short call option, a long put option, a short underlying futures contract, or a swap position that is equivalent to a short futures contract. Speculative position limit means the maximum position, either net long or net short, in a commodity derivative contract that may be held or controlled by one person absent an exemption, whether such limits are adopted for: (1) Combined positions in all commodity derivative contracts in a particular commodity, including the spot month futures contract and all single month futures contracts (the spot month and all single month futures contracts, cumulatively, ‘‘all-monthscombined’’); (2) Positions in a single month of commodity derivative contracts in a particular commodity other than the spot month futures contract (‘‘single month’’); or (3) Positions in the spot month of commodity derivative contacts in a particular commodity. Such a limit may be established under Federal regulations or rules of a designated contract market or swap execution facility. For referenced contracts other than core referenced futures contracts, single month means the same period as that of the relevant core referenced futures contract. Spot month means: (1) For physical-delivery core referenced futures contracts, the period of time beginning at the earlier of: PO 00000 Frm 00231 Fmt 4701 Sfmt 4700 3465 (i) The close of business on the trading day preceding the first day on which delivery notices can be issued by the clearing organization of a contract market or (ii) The close of business on the trading day preceding the third-to-last trading day and ending when the contract expires, except as follows: (A) For the ICE Futures U.S. Sugar No. 11 (SB) core referenced futures contract, the spot month means the period of time beginning at the opening of trading on the second business day following the expiration of the regular option contract traded on the expiring futures contract and ending when the contract expires; (B) For the ICE Futures U.S. Sugar No. 16 (SF) core referenced futures contract, the spot month means the period of time beginning on the third-to-last trading day of the contract month and ending when the contract expires; and (C) For the Chicago Mercantile Exchange Live Cattle (LC) core referenced futures contract, the spot month means the period of time beginning at the close of trading on the first business day following the first Friday of the contract month and ending when the contract expires; and (2) For referenced contracts other than core referenced futures contracts, the spot month means the same period as that of the relevant core referenced futures contract. Spread transaction means an intramarket spread, inter-market spread, intra-commodity spread, or intercommodity spread, including a calendar spread, quality differential spread, processing spread, product or byproduct differential spread, or futuresoption spread. Swap means ‘‘swap’’ as that term is defined in section 1a of the Act and as further defined in § 1.3 of this chapter. Swap dealer means ‘‘swap dealer’’ as that term is defined in section 1a of the Act and as further defined in § 1.3 of this chapter. Transition period swap means a swap entered into during the period commencing on the day of the enactment of the Dodd-Frank Act of 2010 (July 21, 2010), and ending 60 days after the publication in the Federal Register of final amendments to this part implementing section 737 of the Dodd-Frank Act of 2010, the terms of which have not expired as of 60 days after the publication date. ■ 17. Revise § 150.2 to read as follows: § 150.2 Federal speculative position limits. (a) Spot month speculative position limits. For physical-delivery referenced contracts and, separately, for cashsettled referenced contracts, no person E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 may hold or control positions in the spot month, net long or net short, in excess of the levels specified by the Commission. (b) Single month and all-monthscombined speculative position limits. For any referenced contract, no person may hold or control positions in a single month or in all-months-combined VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (including the spot month), net long or net short, in excess of the levels specified by the Commission. (c) Relevant contract month. For purposes of this part, for referenced contracts other than core referenced futures contracts, the spot month and any single month shall be the same as PO 00000 Frm 00232 Fmt 4701 Sfmt 4725 those of the relevant core referenced futures contract. (d) Core referenced futures contracts. Federal speculative position limits apply to referenced contracts based on the following core referenced futures contracts: BILLING CODE 6351–01–P E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.023</GPH> 3466 khammond on DSKJM1Z7X2PROD with RULES2 BILLING CODE 6351–01–C (e) Establishment of speculative position limit levels. The levels of Federal speculative position limits are fixed by the Commission at the levels listed in appendix E to this part. (f) Designated contract market estimates of deliverable supply. Each designated contract market listing a core referenced futures contract shall supply to the Commission an estimated spot VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 month deliverable supply upon request by the Commission, and may supply such estimates to the Commission at any other time. Each estimate shall be accompanied by a description of the methodology used to derive the estimate and any statistical data supporting the estimate, and shall be submitted using the format and procedures approved in writing by the Commission. A designated contract market should use PO 00000 Frm 00233 Fmt 4701 Sfmt 4700 3467 the guidance regarding deliverable supply in appendix C to part 38 of this chapter. (g) Pre-existing positions—(1) Preexisting positions in a spot month. A spot month speculative position limit established under this section shall apply to pre-existing positions, other than pre-enactment swaps and transition period swaps. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.024</GPH> Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 3468 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (2) Pre-existing positions in a nonspot month. A single month or allmonths-combined speculative position limit established under this section shall apply to pre-existing positions, other than pre-enactment swaps and transition period swaps. (h) Positions on foreign boards of trade. The speculative position limits established under this section shall apply to a person’s combined positions in referenced contracts, including positions executed on, or pursuant to the rules of, a foreign board of trade, pursuant to section 4a(a)(6) of the Act, provided that: (1) Such referenced contracts settle against any price (including the daily or final settlement price) of one or more contracts listed for trading on a designated contract market or swap execution facility that is a trading facility; and (2) The foreign board of trade makes available such referenced contracts to its members or other participants located in the United States through direct access to its electronic trading and order matching system. (i) Anti-evasion provision. For the purposes of applying the speculative position limits in this section, if used to willfully circumvent or evade speculative position limits: (1) A commodity index contract, monthly average pricing contract, outright price reporting agency index contract, and/or a location basis contract shall be considered to be a referenced contract; (2) A bona fide hedging transaction or position recognition or spread exemption shall no longer apply; and (3) A swap shall be considered to be an economically equivalent swap. (j) Delegation of authority to the Director of the Division of Market Oversight. (1) The Commission hereby delegates, until it orders otherwise, to the Director of the Division of Market Oversight or such other employee or employees as the Director may designate from time to time, the authority in paragraph (f) of this section to request estimated spot month deliverable supply from a designated contract market and to provide the format and procedures for submitting such estimates. (2) The Director of the Division of Market Oversight may submit to the Commission for its consideration any matter which has been delegated in this section. (3) Nothing in this section prohibits the Commission, at its election, from exercising the authority delegated in this section. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (k) Eligible affiliates and aggregation. For purposes of this part, if an eligible affiliate meets the conditions for any exemption from aggregation under § 150.4, the eligible affiliate may choose to utilize that exemption, or it may opt to be aggregated with its affiliated entities. ■ 18. Revise § 150.3 to read as follows: § 150.3 Exemptions. (a) Positions which may exceed limits. A person may exceed the speculative position limits set forth in § 150.2 to the extent that all applicable requirements in this part are met, provided that such person’s transactions or positions each satisfy one of the following: (1) Bona fide hedging transactions or positions. Positions that comply with the bona fide hedging transaction or position definition in § 150.1, and are: (i) Enumerated in appendix A to this part; or (ii) Approved as non-enumerated bona fide hedging transactions or positions in accordance with paragraph (b)(4) of this section or § 150.9. (2) Spread transactions. Transactions that: (i) Meet the spread transaction definition in § 150.1; or (ii) Do not meet the spread transaction definition in § 150.1, but have been approved by the Commission pursuant to paragraph (b)(4) of this section. (3) Financial distress positions. Positions of a person, or a related person or persons, under financial distress circumstances, when exempted by the Commission from any of the requirements of this part in response to a specific request made pursuant to § 140.99(a)(1) of this chapter, where financial distress circumstances include, but are not limited to, situations involving the potential default or bankruptcy of a customer of the requesting person or persons, an affiliate of the requesting person or persons, or a potential acquisition target of the requesting person or persons. (4) Conditional spot month limit exemption positions in natural gas. Spot month positions in natural gas cashsettled referenced contracts that exceed the spot month speculative position limit set forth in § 150.2, provided that: (i) Such positions do not exceed the futures-equivalent of 10,000 NYMEX Henry Hub Natural Gas core referenced futures contracts per designated contract market that lists a cash-settled referenced contract in natural gas; (ii) Such positions do not exceed the futures-equivalent of 10,000 NYMEX Henry Hub Natural Gas core referenced futures contracts in economically equivalent swaps in natural gas; and PO 00000 Frm 00234 Fmt 4701 Sfmt 4700 (iii) The person holding or controlling such positions does not hold or control positions in spot month physicaldelivery referenced contracts in natural gas. (5) Pre-enactment and transition period swaps exemption. The speculative position limits set forth in § 150.2 shall not apply to positions acquired in good faith in any preenactment swap or any transition period swap, provided however that a person may net such positions with posteffective date commodity derivative contracts for the purpose of complying with any non-spot month speculative position limit. (b) Application for relief. Any person with a position in a referenced contract seeking recognition of such position as a bona fide hedging transaction or position in accordance with paragraph (a)(1)(ii) of this section, or seeking an exemption for a spread position in accordance with paragraphs (a)(2)(ii) of this section, in each case for purposes of Federal speculative position limits set forth in § 150.2, may apply to the Commission in accordance with this section. (1) Required information. The application shall include the following information: (i) With respect to an application for recognition of a bona fide hedging transaction or position: (A) A description of the position in the commodity derivative contract for which the application is submitted, including but not necessarily limited to, the name of the underlying commodity and the derivative position size; (B) An explanation of the hedging strategy, including a statement that the position complies with the requirements of section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position in § 150.1, and information to demonstrate why the position satisfies such requirements and definition; (C) A statement concerning the maximum size of all gross positions in commodity derivative contracts for which the application is submitted; (D) A description of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the position for which the application is submitted, including, but not necessarily limited to, information regarding the offsetting cash positions; and (E) Any other information that may help the Commission determine whether the position satisfies the requirements of section 4a(c)(2) of the Act and the definition of bona fide E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations hedging transaction or position in § 150.1. (ii) With respect to an application for a spread exemption: (A) A description of the spread position for which the application is submitted; (B) A statement concerning the maximum size of all gross positions in commodity derivative contracts for which the application is submitted; and (C) Any other information that may help the Commission determine whether the position is consistent with section 4a(a)(3)(B) of the Act. (2) Additional information. If the Commission determines that it requires additional information in order to determine whether to recognize a position as a bona fide hedging transaction or position or to grant a spread exemption, the Commission shall: (i) Notify the applicant of any supplemental information required; and (ii) Provide the applicant with ten business days in which to provide the Commission with any supplemental information. (3) Timing of application. (i) Except as provided in paragraph (b)(3)(ii) of this section, a person seeking relief in accordance with this section must apply to the Commission and receive a notice of approval of such application prior to the date that the position for which the application was submitted would be in excess of the applicable Federal speculative position limit set forth in § 150.2; (ii) Due to demonstrated sudden or unforeseen increases in its bona fide hedging needs, a person may apply for recognition of a bona fide hedging transaction or position within five business days after the person established the position that exceeded the applicable Federal speculative position limit. (A) Any application filed pursuant to paragraph (b)(3)(ii) of this section must include an explanation of the circumstances warranting the sudden or unforeseen increases in bona fide hedging needs. (B) If an application filed pursuant to paragraph (b)(3)(ii) of this section is denied, the person must bring its position within the Federal speculative position limits within a commercially reasonable time, as determined by the Commission in consultation with the applicant and the applicable designated contract market or swap execution facility. (C) If an application filed pursuant to paragraph (b)(3)(ii) of this section is denied, the Commission will not pursue an enforcement action for a position VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 limits violation for the person holding the position during the period of the Commission’s review nor once the Commission has issued its determination so long as the application was submitted in good faith and the person brings its position within the Federal speculative position limits within a commercially reasonable time in accordance with paragraph (b)(3)(ii)(B) of this section. (4) Commission determination. After a review of any application submitted under paragraph (b) of this section and any supplemental information provided by the applicant, the Commission will determine, with respect to the transaction or position for which the application is submitted, whether to recognize all or a specified portion of such transaction or position as a bona fide hedging transaction or position or whether to exempt all or a specified portion of such spread transaction, as applicable. The Commission shall notify the applicant of its determination, and an applicant may exceed Federal speculative position limits set forth in § 150.2, or in the case of applications filed pursuant to paragraph (b)(3)(ii) of this section, the applicant may rely upon the Commission’s determination, upon receiving a notice of approval. (5) Renewal of application. With respect to any application approved by the Commission pursuant to this section, a person shall renew such application if there are any material changes to the information provided in the original application pursuant to paragraph (b)(1) of this section or upon request by the Commission. (6) Commission revocation or modification. If the Commission determines, at any time, that a recognized bona fide hedging transaction or position is no longer consistent with section 4a(c)(2) of the Act or the definition of bona fide hedging transaction or position in § 150.1, or that a spread exemption is no longer consistent with section 4a(a)(3)(B) of the Act, the Commission shall: (i) Notify the person holding such position; (ii) Provide an opportunity for the applicant to respond to such notification; and (iii) Issue a determination to revoke or modify the bona fide hedge recognition or spread exemption for purposes of Federal speculative position limits and, as applicable, require the person to reduce the derivative position within a commercially reasonable time, as determined by the Commission in consultation with the applicant and the applicable designated contract market or PO 00000 Frm 00235 Fmt 4701 Sfmt 4700 3469 swap execution facility, or otherwise come into compliance. This notification shall briefly specify the nature of the issues raised and the specific provisions of the Act or the Commission’s regulations with which the position or application is, or appears to be, inconsistent. (c) Previously-granted risk management exemptions. To the extent that exemptions previously granted under § 1.47 of this chapter or by a designated contract market or a swap execution facility are for the risk management of positions in financial instruments, including but not limited to index funds, such exemptions shall no longer apply as of January 1, 2023. (d) Recordkeeping. (1) Persons who avail themselves of exemptions under this section shall keep and maintain complete books and records concerning all details of each of their exemptions, including relevant information about related cash, forward, futures contracts, option on futures contracts, and swap positions and transactions (including anticipated requirements, production, merchandising activities, royalties, contracts for services, cash commodity products and by-products, crosscommodity hedges, and records of bona fide hedging swap counterparties) as applicable, and shall make such books and records available to the Commission upon request under paragraph (e) of this section. (2) Any person that relies on a written representation received from another person that a swap qualifies as a passthrough swap under paragraph (2) of the definition of bona fide hedging transaction or position in § 150.1 shall keep and make available to the Commission upon request the relevant books and records of such written representation, including any books and records that the person intends to use to demonstrate that the pass-through swap is a bona fide hedging transaction or position, for a period of at least two years following the expiration of the swap. (3) All books and records required to be kept pursuant to this section shall be kept in accordance with the requirements of § 1.31 of this chapter. (e) Call for information. Upon call by the Commission, the Director of the Division of Enforcement, or the Director’s delegate, any person claiming an exemption from speculative position limits under this section shall provide to the Commission such information as specified in the call relating to: the positions owned or controlled by that person; trading done pursuant to the claimed exemption; the commodity derivative contracts or cash-market E:\FR\FM\14JAR2.SGM 14JAR2 3470 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations positions which support the claimed exemption; and the relevant business relationships supporting a claimed exemption. (f) Aggregation of accounts. Entities required to aggregate accounts or positions under § 150.4 shall be considered the same person for the purpose of determining whether they are eligible for an exemption under paragraphs (a)(1) through (4) of this section with respect to such aggregated account or position. (g) Delegation of authority to the Director of the Division of Market Oversight. (1) The Commission hereby delegates, until it orders otherwise, to the Director of the Division of Market Oversight, or such other employee or employees as the Director may designate from time to time: (i) The authority in paragraph (a)(3) of this section to provide exemptions in circumstances of financial distress; (ii) The authority in paragraph (b)(2) of this section to request additional information with respect to a request for a bona fide hedging transaction or position recognition or spread exemption; (iii) The authority in paragraph (b)(3)(ii)(B) of this section to, if applicable, determine a commercially reasonable amount of time required for a person to bring its position within the Federal speculative position limits; (iv) The authority in paragraph (b)(4) of this section to determine whether to recognize a position as a bona fide hedging transaction or position or to grant a spread exemption; and (v) The authority in paragraph (b)(2) or (5) of this section to request that a person submit updated materials or renew their request with the Commission. (2) The Director of the Division of Market Oversight may submit to the Commission for its consideration any matter which has been delegated in this section. (3) Nothing in this section prohibits the Commission, at its election, from exercising the authority delegated in this section. ■ 19. Revise § 150.5 to read as follows: khammond on DSKJM1Z7X2PROD with RULES2 § 150.5 Exchange-set speculative position limits and exemptions therefrom. (a) Requirements for exchange-set limits on commodity derivative contracts subject to Federal speculative position limits set forth in § 150.2—(1) Exchange-set limits. For any commodity derivative contract that is subject to a Federal speculative position limit under § 150.2, a designated contract market or swap execution facility that is a trading facility shall set a speculative position VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 limit no higher than the level specified in § 150.2. (2) Exemptions to exchange-set limits. A designated contract market or swap execution facility that is a trading facility may grant exemptions from any speculative position limits it sets under paragraph (a)(1) of this section in accordance with the following: (i) Exemption levels. An exemption that conforms to an exemption the Commission identified in: (A) Sections 150.3(a)(1)(i), (a)(2)(i), (a)(4) and (a)(5) may be granted at a level that exceeds the level of the applicable Federal limit in § 150.2; (B) Sections 150.3(a)(1)(ii) and (a)(2)(ii) may be granted at a level that exceeds the level of the applicable Federal limit in § 150.2, provided the exemption is first approved in accordance with § 150.3(b) or 150.9, as applicable; (C) Section 150.3(a)(3) may be granted at a level that exceeds the level of the applicable Federal limit in § 150.2, provided that, a division of the Commission has first approved such exemption pursuant to a request submitted under § 140.99(a)(1) of this chapter; and (D) An exemption of the type that does not conform to any of the exemptions identified in § 150.3(a) must be granted at a level that does not exceed the applicable Federal limit in § 150.2 and that complies with paragraph (a)(2)(ii)(G) of this section, unless the Commission has first approved such exemption pursuant to § 150.3(b) or pursuant to a request submitted under § 140.99(a)(1). (ii) Application for exemption from exchange-set limits. With respect to a designated contract market or swap execution facility that is a trading facility that elects to grant exemptions under paragraph (a)(2)(i) of this section: (A) Except as provided in paragraph (a)(2)(ii)(B) of this section, the designated contract market or swap execution facility shall require an entity to file an application requesting such exemption in advance of the date that such position would be in excess of the limits then in effect. Such application shall include any information needed to enable the designated contract market or swap execution facility and the Commission to determine whether the facts and circumstances demonstrate that the designated contract market or swap execution facility may grant an exemption. Any application for a bona fide hedging transaction or position shall include a description of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the position for which the PO 00000 Frm 00236 Fmt 4701 Sfmt 4700 application is submitted, including, but not limited to, information regarding the offsetting cash positions. (B) The designated contract market or swap execution facility may adopt rules that allow a person, due to demonstrated sudden or unforeseen increases in its bona fide hedging needs, to file an application to request a recognition of a bona fide hedging transaction or position within five business days after the person established the position that exceeded the applicable exchange-set speculative position limit. (C) The designated contract market or swap execution facility must require that any application filed pursuant to paragraph (a)(2)(ii)(B) of this section include an explanation of the circumstances warranting the sudden or unforeseen increases in bona fide hedging needs. (D) If an application filed pursuant to paragraph (a)(2)(ii)(B) of this section is denied, the applicant must bring its position within the designated contract market or swap execution facility’s speculative position limits within a commercially reasonable time as determined by the designated contract market or swap execution facility. (E) The Commission will not pursue an enforcement action for a position limits violation for the person holding the position during the period of the designated contract market or swap execution facility’s review nor once the designated contract market or swap execution facility has issued its determination, so long as the application was submitted in good faith and the applicant brings its position within the designated contract market or swap execution facility’s speculative position limits within a commercially reasonable time as determined by the designated contract market or swap execution facility. (F) The designated contract market or swap execution facility shall require, for any such exemption granted, that the entity re-apply for the exemption at least annually; (G) The designated contract market or swap execution facility: (1) May, in accordance with the designated contract market or swap execution facility’s rules, deny any such application, or limit, condition, or revoke any such exemption, at any time after providing notice to the applicant, and (2) Shall consider whether the requested exemption would result in positions that would not be in accord with sound commercial practices in the relevant commodity derivative market and/or that would exceed an amount E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations that may be established and liquidated in an orderly fashion in that market; and (H) Notwithstanding paragraph (a)(2)(ii)(G) of this section, the designated contract market or swap execution facility may grant exemptions, subject to terms, conditions, or limitations, that require a person to exit any referenced contract positions in excess of position limits during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract, or to otherwise limit the size of such position during that time period. Designated contract markets and swap execution facilities may refer to paragraph (b) of appendix B or appendix G to part 150, for guidance regarding the foregoing, as applicable. (3) Exchange-set limits on pre-existing positions—(i) Pre-existing positions in a spot month. A designated contract market or swap execution facility that is a trading facility shall require compliance with spot month exchangeset speculative position limits for preexisting positions in commodity derivative contracts other than preenactment swaps and transition period swaps. (ii) Pre-existing positions in a nonspot month. A single month or allmonths-combined speculative position limit established under paragraph (a)(1) of this section shall apply to any preexisting positions in commodity derivative contracts, other than preenactment swaps and transition period swaps. (4) Monthly reports detailing the disposition of each exemption application. (i) For commodity derivative contracts subject to Federal speculative position limits, the designated contract market or swap execution facility shall submit to the Commission a report each month showing the disposition of any exemption application, including the recognition of any position as a bona fide hedging transaction or position, the exemption of any spread transaction or other position, the renewal, revocation, or modification of a previously granted recognition or exemption, and the rejection of any application, as well as the following details for each application: (A) The date of disposition; (B) The effective date of the disposition; (C) The expiration date of any recognition or exemption; (D) Any unique identifier(s) the designated contract market or swap execution facility may assign to track the application, or the specific type of recognition or exemption; VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 (E) If the application is for an enumerated bona fide hedging transaction or position, the name of the enumerated bona fide hedging transaction or position listed in appendix A to this part; (F) If the application is for a spread transaction listed in the spread transaction definition in § 150.1, the name of the spread transaction as it is listed in § 150.1; (G) The identity of the applicant; (H) The listed commodity derivative contract or position(s) to which the application pertains; (I) The underlying cash commodity; (J) The maximum size of the commodity derivative position that is recognized by the designated contract market or swap execution facility as a bona fide hedging transaction or position, specified by contract month and by the type of limit as spot month, single month, or all-months-combined, as applicable; (K) Any size limitations or conditions established for a spread exemption or other exemption; and (L) For a bona fide hedging transaction or position, a concise summary of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the commodity derivative position for which the application was submitted. (ii) The designated contract market or swap execution facility shall submit to the Commission the information required by paragraph (a)(4)(i) of this section: (A) As specified by the Commission on the Forms and Submissions page at www.cftc.gov; and (B) Using the format, coding structure, and electronic data transmission procedures approved in writing by the Commission. (b) Requirements for exchange-set limits on commodity derivative contracts in a physical commodity that are not subject to the limits set forth in § 150.2—(1) Exchange-set spot-month limits. For any physical commodity derivative contract that is not subject to a Federal speculative position limit under § 150.2, a designated contract market or swap execution facility that is a trading facility shall set a speculative position limit as follows: (i) Spot month speculative position limit levels. For any commodity derivative contract subject to paragraph (b) of this section, a designated contract market or swap execution facility that is a trading facility shall establish speculative position limits for the spot month no greater than 25 percent of the estimated spot month deliverable PO 00000 Frm 00237 Fmt 4701 Sfmt 4700 3471 supply, calculated separately for each month to be listed. (ii) Additional sources for compliance. Alternatively, a designated contract market or swap execution facility that is a trading facility may submit rules to the Commission establishing spot month speculative position limits other than as provided in paragraph (b)(1)(i) of this section, provided that each limit is set at a level that is necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index. (2) Exchange-set limits or accountability outside of the spot month—(i) Non-spot month speculative position limit or accountability levels. For any commodity derivative contract subject to paragraph (b) of this section, a designated contract market or swap execution facility that is a trading facility shall adopt either speculative position limits or position accountability outside of the spot month at a level that is necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index. (ii) Additional sources for compliance. A designated contract market or swap execution facility that is a trading facility may refer to the nonexclusive acceptable practices in paragraph (b) of appendix F of this part to demonstrate to the Commission compliance with the requirements of paragraph (b)(2)(i) of this section. (3) Look-alike contracts. For any newly listed commodity derivative contract subject to paragraph (b) of this section that is substantially the same as an existing contract listed on a designated contract market or swap execution facility that is a trading facility, the designated contract market or swap execution facility that is a trading facility listing such newly listed contract shall adopt spot month, individual month, and all-monthscombined speculative position limits comparable to those of the existing contract. Alternatively, if such designated contract market or swap execution facility seeks to adopt speculative position limits that are not comparable to those of the existing contract, such designated contract market or swap execution facility shall demonstrate to the Commission how the levels comply with paragraphs (b)(1) and/or (b)(2) of this section. (4) Exemptions to exchange-set limits. A designated contract market or swap execution facility that is a trading facility may grant exemptions from any E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3472 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations speculative position limits it sets under paragraph (b)(1) or (2) of this section in accordance with the following: (i) An entity seeking an exemption shall be required to apply to the designated contract market or swap execution facility for any such exemption from its speculative position limit rules; and (ii) A designated contract market or swap execution facility that is a trading facility may deny any such application, or limit, condition, or revoke any such exemption, at any time after providing notice to the applicant. Such designated contract market or swap execution facility shall consider whether the requested exemption would result in positions that would not be in accord with sound commercial practices in the relevant commodity derivative market and/or would exceed an amount that may be established and liquidated in an orderly fashion in that market. (c) Requirements for security futures products. For security futures products, speculative position limits and position accountability requirements are specified in § 41.25 of this chapter. (d) Rules on aggregation. For commodity derivative contracts in a physical commodity, a designated contract market or swap execution facility that is a trading facility shall have aggregation rules that conform to § 150.4. (e) Requirements for submissions to the Commission. In order for a designated contract market or swap execution facility that is a trading facility to adopt speculative position limits and/or position accountability pursuant to paragraph (a) or (b) of this section and/or to elect to offer exemptions from any such levels pursuant to such paragraphs, the designated contract market or swap execution facility shall submit to the Commission pursuant to part 40 of this chapter rules establishing such levels and/or exemptions. To the extent that a designated contract market or swap execution facility adopts speculative position limit levels, such part 40 submission shall also include the methodology by which such levels are calculated. The designated contract market or swap execution facility shall review such speculative position limit levels regularly for compliance with this section and update such speculative position limit levels as needed. (f) Delegation of authority to the Director of the Division of Market Oversight—(1) Commission delegations. The Commission hereby delegates, until it orders otherwise, to the Director of the Division of Market Oversight, or such other employee or employees as the VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Director may designate from time to time, the authority in paragraph (a)(4)(ii) of this section to provide instructions regarding the submission to the Commission of information required to be reported, pursuant to paragraph (a)(4)(i) of this section, by a designated contract market or swap execution facility, to specify the manner for submitting such information on the Forms and Submissions page at www.cftc.gov, and to determine the format, coding structure, and electronic data transmission procedures for submitting such information. (2) Commission consideration of delegated matter. The Director of the Division of Market Oversight may submit to the Commission for its consideration any matter which has been delegated in this section. (3) Commission authority. Nothing in this section prohibits the Commission, at its election, from exercising the authority delegated in this section. ■ 20. Revise § 150.6 to read as follows: § 150.6 Scope. This part shall only be construed as having an effect on speculative position limits set by the Commission or by a designated contract market or swap execution facility, including any associated recordkeeping and reporting regulations in this chapter. Nothing in this part shall be construed to relieve any designated contract market, swap execution facility, or its governing board from responsibility under section 5(d)(4) of the Act to prevent manipulation and corners. Further, nothing in this part shall be construed to affect any other provisions of the Act or Commission regulations, including, but not limited to, those relating to actual or attempted manipulation, corners, squeezes, fraudulent or deceptive conduct, or to prohibited transactions. § 150.7 [Reserved] ■ 21. Add reserved § 150.7. ■ 22. Add § 150.8 to read as follows: § 150.8 Severability. If any provision of this part, or the application thereof to any person or circumstances, is held invalid, such invalidity shall not affect the validity of other provisions or the application of such provision to other persons or circumstances that can be given effect without the invalid provision or application. ■ 23. Add § 150.9 to read as follows: PO 00000 Frm 00238 Fmt 4701 Sfmt 4700 § 150.9 Process for recognizing nonenumerated bona fide hedging transactions or positions with respect to Federal speculative position limits. For purposes of Federal speculative position limits, a person with a position in a referenced contract seeking recognition of such position as a nonenumerated bona fide hedging transaction or position, in accordance with § 150.3(a)(1)(ii), shall apply to the Commission, pursuant to § 150.3(b), or apply to a designated contract market or swap execution facility in accordance with this section. If such person submits an application to a designated contract market or swap execution facility in accordance with this section, and the designated contract market or swap execution facility, with respect to its own speculative position limits established pursuant to § 150.5(a), recognizes the person’s position as a non-enumerated bona fide hedging transaction or position, then the person may also exceed the applicable Federal speculative position limit for such position in accordance with paragraph (e) of this section. The designated contract market or swap execution facility may approve such applications only if the designated contract market or swap execution facility complies with the conditions set forth in paragraphs (a) through (e) of this section. (a) Approval of rules. The designated contract market or swap execution facility must maintain rules that establish application processes and conditions for recognizing bona fide hedging transactions or positions consistent with the requirements of this section, and must seek approval of such rules from the Commission pursuant to § 40.5 of this chapter. (b) Prerequisites for a designated contract market or swap execution facility to recognize a bona fide hedging transaction or position in accordance with this section. (1) The designated contract market or swap execution facility lists the applicable referenced contract for trading; (2) The position meets the definition of bona fide hedging transaction or position in section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position in § 150.1; and (3) The designated contract market or swap execution facility does not recognize as a bona fide hedging transaction or position any position involving a commodity index contract and one or more referenced contracts, including exemptions known as risk management exemptions. (c) Application process. The designated contract market or swap E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations execution facility’s application process meets the following conditions: (1) Required application information. The designated contract market or swap execution facility requires the applicant to provide, and can obtain from the applicant, all information needed to enable the designated contract market or swap execution facility and the Commission to determine whether the facts and circumstances demonstrate that the designated contract market or swap execution facility may recognize a position as a bona fide hedging transaction or position, including the following: (i) A description of the position in the commodity derivative contract for which the application is submitted, including but not limited to, the name of the underlying commodity and the derivative position size; (ii) An explanation of the hedging strategy, including a statement that the position complies with the requirements of section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position in § 150.1, and information to demonstrate why the position satisfies such requirements and definition; (iii) A statement concerning the maximum size of all gross positions in commodity derivative contracts for which the application is submitted; (iv) A description of the applicant’s activity in the cash markets and the swaps markets for the commodity underlying the position for which the application is submitted, including, but not limited to, information regarding the offsetting cash positions; and (v) Any other information the designated contract market or swap execution facility requires, in its discretion, to determine that the position complies with paragraph (b)(2) of this section, as applicable. (2) Timing of application. (i) Except as provided in paragraph (c)(2)(ii) of this section, the designated contract market or swap execution facility requires the applicant to submit an application and receive a notice of approval of such application from the designated contract market or swap execution facility prior to the date that the position for which such application was submitted would be in excess of the applicable Federal speculative position limits. (ii) A designated contract market or swap execution facility may adopt rules that allow a person, due to demonstrated sudden or unforeseen increases in its bona fide hedging needs, to file an application with the designated contract market or swap execution facility to request a recognition of a bona fide hedging VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 transaction or position within five business days after the person established the position that exceeded the applicable Federal speculative position limit. (A) The designated contract market or swap execution facility must require that any application filed pursuant to paragraph (c)(2)(ii) of this section include an explanation of the circumstances warranting the sudden or unforeseen increases in bona fide hedging needs. (B) If an application filed pursuant to paragraph (c)(2)(ii) of this section is denied by the designated contract market, swap execution facility, or Commission, the applicant must bring its position within the applicable Federal speculative position limits within a commercially reasonable time as determined by the Commission in consultation with the applicant and the applicable designated contract market or swap execution facility. (C) The Commission will not pursue an enforcement action for a position limits violation for the person holding the position during the period of the designated contract market, swap execution facility, or Commission’s review nor once a determination has been issued, so long as the application was submitted in good faith and the person complies with paragraph (c)(2)(ii)(B) of this section. (3) Renewal of applications. The designated contract market or swap execution facility requires each applicant to reapply with the designated contract market or swap execution facility to maintain such recognition at least on an annual basis by updating the initial application, and to receive a notice of extension of the original approval from the designated contract market or swap execution facility to continue relying on such recognition for purposes of Federal speculative position limits. If the facts and circumstances underlying a renewal application are materially different than the initial application, the designated contract market or swap execution facility is required to treat such application as a new request submitted through the § 150.9 process and subject to the Commission’s 10/2-day review process in paragraph (e) of this section. (4) Exchange revocation authority. The designated contract market or swap execution facility retains its authority to limit, condition, or revoke, at any time after providing notice to the applicant, any bona fide hedging transaction or position recognition for purposes of the designated contract market or swap execution facility’s speculative position limits established under § 150.5(a), for PO 00000 Frm 00239 Fmt 4701 Sfmt 4700 3473 any reason as determined in the discretion of the designated contract market or swap execution facility, including if the designated contract market or swap execution facility determines that the position no longer meets the conditions set forth in paragraph (b) of this section, as applicable. (d) Recordkeeping. (1) The designated contract market or swap execution facility keeps full, complete, and systematic records, which include all pertinent data and memoranda, of all activities relating to the processing of such applications and the disposition thereof. Such records include: (i) Records of the designated contract market’s or swap execution facility’s recognition of any derivative position as a bona fide hedging transaction or position, revocation or modification of any such recognition, or the rejection of an application; (ii) All information and documents submitted by an applicant in connection with its application, including documentation and information that is submitted after the disposition of the application, and any withdrawal, supplementation, or update of any application; (iii) Records of oral and written communications between the designated contract market or swap execution facility and the applicant in connection with such application; and (iv) All information and documents in connection with the designated contract market or swap execution facility’s analysis of, and action(s) taken with respect to, such application. (2) All books and records required to be kept pursuant to this section shall be kept in accordance with the requirements of § 1.31 of this chapter. (e) Process for a person to exceed Federal speculative position limits on a referenced contract—(1) Notification to the Commission. The designated contract market or swap execution facility must submit to the Commission a notification of each initial determination to recognize a bona fide hedging transaction or position in accordance with this section, concurrently with the notice of such determination the designated contract market or swap execution facility provides to the applicant. (2) Notification requirements. The notification in paragraph (e)(1) of this section shall include, at a minimum, the following information: (i) Name of the applicant; (ii) Brief description of the bona fide hedging transaction or position being recognized; E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3474 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (iii) Name of the contract(s) relevant to the recognition; (iv) The maximum size of the position that may exceed Federal speculative position limits; (v) The effective date and expiration date of the recognition; (vi) An indication regarding whether the position may be maintained during the last five days of trading during the spot month, or the time period for the spot month; and (vii) A copy of the application and any supporting materials. (3) Exceeding Federal speculative position limits on referenced contracts. A person may exceed Federal speculative position limits on a referenced contract after the designated contract market or swap execution facility issues the notification required pursuant to paragraph (e)(1) of this section, unless the Commission notifies the designated contract market or swap execution facility and the applicant otherwise, pursuant to paragraph (e)(5) or (6) of this section, before the ten business day period expires. (4) Exceeding Federal speculative position limits on referenced contracts due to sudden or unforeseen circumstances. If a person files an application for a recognition of a bona fide hedging transaction or position in accordance with paragraph (c)(2)(ii) of this section, then such person may rely on the designated contract market or swap execution facility’s determination to grant such recognition for purposes of Federal speculative position limits two business days after the designated contract market or swap execution facility issues the notification required pursuant to paragraph (e)(1) of this section, unless the Commission notifies the designated contract market or swap execution facility and the applicant otherwise, pursuant to paragraph (e)(5) or (6) of this section, before the two business day period expires. (5) Commission stay of pending applications and requests for additional information. The Commission may stay an application that requires additional time to analyze, and/or may request additional information to determine whether the position for which the application is submitted meets the conditions set forth in paragraph (b) of this section. The Commission shall notify the applicable designated contract market or swap execution facility and the applicant of a Commission determination to stay the application and/or request any supplemental information, and shall provide an opportunity for the applicant to respond. The Commission will have an additional 45 days from the date of VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 the stay notification to conduct the review and issue a determination with respect to the application. If the Commission stays an application and the applicant has not yet exceeded Federal speculative position limits, then the applicant may not exceed Federal speculative position limits unless the Commission approves the application. If the Commission stays an application and the applicant has already exceeded Federal speculative position limits, then the applicant may continue to maintain the position unless the Commission notifies the designated contract market or swap execution facility and the applicant otherwise, pursuant to paragraph (e)(6) of this section. (6) Commission determination for pending applications. If, during the Commission’s ten or two business day review period in paragraphs (e)(3) and (4) of this section, the Commission determines that a position for which the application is submitted does not meet the conditions set forth in paragraph (b) of this section, the Commission shall: (i) Notify the designated contract market or swap execution facility and the applicant within ten or two business days, as applicable, after the designated contract market or swap execution facility issues the notification required pursuant to paragraph (e)(1) of this section; (ii) Provide an opportunity for the applicant to respond to such notification; (iii) Issue a determination to deny the application, or limit or condition the application approval for purposes of Federal speculative position limits and, as applicable, require the person to reduce the derivatives position within a commercially reasonable time, as determined by the Commission in consultation with the applicant and the applicable designated contract market or swap execution facility, or otherwise come into compliance; and (iv) The Commission will not pursue an enforcement action for a position limits violation for the person holding the position during the period of the Commission’s review nor once the Commission has issued its determination, so long as the application was submitted in good faith and the person complies with any requirement to reduce the position pursuant to paragraph (e)(6)(iii) of this section, as applicable. (f) Commission revocation of applications previously approved. (1) If a designated contract market or a swap execution facility limits, conditions, or revokes any recognition of a bona fide hedging transaction or position for purposes of the respective designated PO 00000 Frm 00240 Fmt 4701 Sfmt 4700 contract market’s or swap execution facility’s speculative position limits established under § 150.5(a), then such recognition will also be deemed limited, conditioned, or revoked for purposes of Federal speculative position limits. (2) If the Commission determines, at any time, that a position that has been recognized as a bona fide hedging transaction or position for purposes of Federal speculative position limits is no longer consistent with section 4a(c)(2) of the Act or the definition of bona fide hedging transaction or position in § 150.1, the following applies: (i) The Commission shall notify the person holding the position and the relevant designated contract market or swap execution facility. After providing such person and such designated contract market or swap execution facility an opportunity to respond, the Commission may, in its discretion, limit, condition, or revoke its determination for purposes of Federal speculative position limits and require the person to reduce the derivatives position within a commercially reasonable time as determined by the Commission in consultation with such person and such designated contract market or swap execution facility, or otherwise come into compliance; (ii) The Commission shall include in its notification a brief explanation of the nature of the issues raised and the specific provisions of the Act or the Commission’s regulations with which the position or application is, or appears to be, inconsistent; and (iii) The Commission will not pursue an enforcement action for a position limits violation for the person holding the position during the period of the Commission’s review, nor once the Commission has issued its determination, provided the person submitted the application in good faith and reduces the position within a commercially reasonable time, as determined by the Commission in consultation with such person and the relevant designated contract market or swap execution facility, or otherwise comes into compliance. (g) Delegation of authority to the Director of the Division of Market Oversight—(1) Commission delegations. The Commission hereby delegates, until it orders otherwise, to the Director of the Division of Market Oversight, or such other employee or employees as the Director may designate from time to time, the authority to request additional information, pursuant to paragraph (e)(5) of this section, from the applicable designated contract market or swap execution facility and applicant. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (2) Commission consideration of delegated matter. The Director of the Division of Market Oversight may submit to the Commission for its consideration any matter which has been delegated in this section. (3) Commission authority. Nothing in this section prohibits the Commission, at its election, from exercising the authority delegated in this section. ■ 24. Add appendices A through G to read as follows: khammond on DSKJM1Z7X2PROD with RULES2 Appendix A to Part 150—List of Enumerated Bona Fide Hedges Pursuant to § 150.3(a)(1)(i), positions that comply with the bona fide hedging transaction or position definition in § 150.1 and that are enumerated in this appendix A may exceed Federal speculative position limits to the extent that all applicable requirements in this part are met. A person holding such positions enumerated in this appendix A may exceed Federal speculative position limits for such positions without requesting prior approval under § 150.3 or § 150.9. A person holding such positions that are not enumerated in this appendix A must request and obtain approval pursuant to § 150.3 or § 150.9 prior to exceeding the applicable Federal speculative position limits—unless such positions qualify for the retroactive approval process, and the person seeks retroactive approval in accordance with § 150.3 or § 150.9. The enumerated bona fide hedges do not state the exclusive means for establishing compliance with the bona fide hedging transaction or position definition in § 150.1 or with the requirements of § 150.3(a)(1). (a) Enumerated hedges—(1) Hedges of inventory and cash commodity fixed-price purchase contracts. Short positions in commodity derivative contracts that do not exceed in quantity the sum of the person’s ownership of inventory and fixed-price purchase contracts in the commodity derivative contracts’ underlying cash commodity. (2) Hedges of cash commodity fixed-price sales contracts. Long positions in commodity derivative contracts that do not exceed in quantity the sum of the person’s fixed-price sales contracts in the commodity derivative contracts’ underlying cash commodity and the quantity equivalent of fixed-price sales contracts of the cash products and byproducts of such commodity. (3) Hedges of offsetting unfixed-price cash commodity sales and purchases. Both short and long positions in commodity derivative contracts that do not exceed in quantity the amount of the commodity derivative contracts’ underlying cash commodity that has been both bought and sold by the same person at unfixed prices: (i) Basis different delivery months in the same commodity derivative contract; or (ii) Basis different commodity derivative contracts in the same commodity, regardless of whether the commodity derivative contracts are in the same calendar month. (4) Hedges of unsold anticipated production. Short positions in commodity VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 derivative contracts that do not exceed in quantity the person’s unsold anticipated production of the commodity derivative contracts’ underlying cash commodity. (5) Hedges of unfilled anticipated requirements. Long positions in commodity derivative contracts that do not exceed in quantity the person’s unfilled anticipated requirements for the commodity derivative contracts’ underlying cash commodity, for processing, manufacturing, or use by that person, or for resale by a utility as it pertains to the utility’s obligations to meet the unfilled anticipated demand of its customers for the customer’s use. (6) Hedges of anticipated merchandising. Long or short positions in commodity derivative contracts that offset the anticipated change in value of the underlying commodity that a person anticipates purchasing or selling, provided that: (i) The positions in the commodity derivative contracts do not exceed in quantity twelve months’ of current or anticipated purchase or sale requirements of the same cash commodity that is anticipated to be purchased or sold; and (ii) The person is a merchant handling the underlying commodity that is subject to the anticipatory merchandising hedge, and that such merchant is entering into the position solely for purposes related to its merchandising business and has a demonstrated history of buying and selling the underlying commodity for its merchandising business. (7) Hedges by agents. Long or short positions in commodity derivative contracts by an agent who does not own or has not contracted to sell or purchase the commodity derivative contracts’ underlying cash commodity at a fixed price, provided that the agent is responsible for merchandising the cash positions that are being offset in commodity derivative contracts and the agent has a contractual arrangement with the person who owns the commodity or holds the cash-market commitment being offset. (8) Hedges of anticipated mineral royalties. Short positions in a person’s commodity derivative contracts offset by the anticipated change in value of mineral royalty rights that are owned by that person, provided that the royalty rights arise out of the production of the commodity underlying the commodity derivative contracts. (9) Hedges of anticipated services. Short or long positions in a person’s commodity derivative contracts offset by the anticipated change in value of receipts or payments due or expected to be due under an executed contract for services held by that person, provided that the contract for services arises out of the production, manufacturing, processing, use, or transportation of the commodity underlying the commodity derivative contracts. (10) Offsets of commodity trade options. Long or short positions in commodity derivative contracts that do not exceed in quantity, on a futures-equivalent basis, a position in a commodity trade option that meets the requirements of § 32.3 of this chapter. Such commodity trade option transaction, if it meets the requirements of § 32.3 of this chapter, may be deemed, for PO 00000 Frm 00241 Fmt 4701 Sfmt 4700 3475 purposes of complying with this paragraph (a)(10) of this appendix A, as either a cash commodity purchase or sales contract as set forth in paragraph (a)(1) or (2) of this appendix A, as applicable. (11) Cross-commodity hedges. Positions in commodity derivative contracts described in paragraph (2) of the bona fide hedging transaction or position definition in § 150.1 or in paragraphs (a)(1) through (10) of this appendix A may also be used to offset the risks arising from a commodity other than the cash commodity underlying the commodity derivative contracts, provided that the fluctuations in value of the cash commodity underlying the commodity derivative contracts, shall be substantially related to the fluctuations in value of the actual or anticipated cash commodity position or a pass-through swap. (b) [Reserved] Appendix B to Part 150—Guidance on Gross Hedging Positions and Positions Held During the Spot Period (a) Guidance on gross hedging positions. (1) A person’s gross hedging positions may be deemed in compliance with the bona fide hedging transaction or position definition in § 150.1, whether enumerated or nonenumerated, provided that all applicable regulatory requirements are met, including that the position is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise and otherwise satisfies the bona fide hedging definition in § 150.1, and provided further that: (i) The manner in which the person measures risk is consistent and follows historical practice for that person; (ii) The person is not measuring risk on a gross basis to evade the speculative position limits in § 150.2 or the aggregation rules in § 150.4; and (iii) The person is able to demonstrate compliance with paragraphs (a)(1)(i) and (ii) of this appendix, including by providing justifications for measuring risk on a gross basis, upon the request of the Commission and/or of a designated contract market, including by providing information regarding the entities with which the person aggregates positions. (b) Guidance regarding positions held during the spot period. The regulations governing exchange-set speculative position limits and exemptions therefrom under § 150.5(a)(2)(ii)(D) provide that designated contract markets and swap execution facilities (‘‘exchanges’’) may impose restrictions on bona fide hedging transaction or position exemptions to require the person to exit any such positions in excess of limits during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract, or otherwise limit the size of such position. This guidance is intended to provide factors the Commission believes exchanges should consider when determining whether to impose a five-day rule or similar restriction but is not intended to be used as a mandatory checklist. The exchanges may consider whether: E:\FR\FM\14JAR2.SGM 14JAR2 3476 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (1) The position complies with the bona fide hedging transaction or position definition in § 150.1, whether enumerated or non-enumerated; (2) There is an economically appropriate need to maintain such position in excess of Federal speculative position limits during the spot period for such contract, and such need relates to the purchase or sale of a cash commodity; and (3) The person wishing to exceed Federal position limits during the spot period: (i) Intends to make or take delivery during that time period; (ii) Has the ability to take delivery for any long position at levels that are economically appropriate (i.e., the delivery comports with the person’s demonstrated need for the commodity and the contract is the most economical source for that commodity); (iii) Has the ability to deliver against any short position (i.e., has inventory on hand in a deliverable location and in a condition in which the commodity can be used upon delivery and that delivery against futures contracts is economically appropriate, as it is the best sales option for that inventory). Appendix C to Part 150—Guidance Regarding the Definition of Referenced Contract khammond on DSKJM1Z7X2PROD with RULES2 This appendix C provides guidance regarding the ‘‘referenced contract’’ definition in § 150.1, which provides in paragraph (3) of the definition of referenced contract that the term referenced contract does not include a location basis contract, a commodity index contract, a swap guarantee, a trade option that meets the requirements of § 32.3 of this chapter, a monthly average pricing contract, or an outright price reporting agency index contract. The term ‘‘referenced contract’’ is used throughout part 150 of the Commission’s regulations to refer to contracts that are subject to Federal position limits. A position in a contract that is not a referenced contract is not subject to Federal position limits, and, as a consequence, cannot be netted with positions in referenced contracts for purposes of Federal position limits. This guidance is intended to clarify the types of contracts that would qualify as a location basis contract, commodity index contract, monthly average pricing contract, or outright price reporting agency index contract. Compliance with this guidance does not diminish or replace, in any event, the obligations and requirements of any person VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 to comply with the regulations provided under this part, or any other part of the Commission’s regulations. The guidance is for illustrative purposes only and does not state the exclusive means for a contract to qualify, or not qualify, as a referenced contract as defined in § 150.1, or to comply with any other provision in this part. (a) Guidance. (1) As provided in paragraph (3) of the ‘‘referenced contract’’ definition in § 150.1, the following types of contracts are not deemed referenced contracts, meaning such contracts are not subject to Federal position limits and cannot be netted with positions in referenced contracts for purposes of Federal position limits: location basis contracts; commodity index contracts; swap guarantees; trade options that meet the requirements of § 32.3 of this chapter; monthly average pricing contracts; and outright price reporting agency index contracts. (2) Location basis contract. For purposes of the referenced contract definition in § 150.1, a location basis contract means a commodity derivative contract that is cash-settled based on the difference in: (i) The price, directly or indirectly, of: (A) A particular core referenced futures contract; or (B) A commodity deliverable on a particular core referenced futures contract, whether at par, a fixed discount to par, or a premium to par; and (ii) The price, at a different delivery location or pricing point than that of the same particular core referenced futures contract, directly or indirectly, of: (A) A commodity deliverable on the same particular core referenced futures contract, whether at par, a fixed discount to par, or a premium to par; or (B) A commodity that is listed in appendix D to this part as substantially the same as a commodity underlying the same core referenced futures contract. (3) Commodity index contract. For purposes of the referenced contract definition in § 150.1, a commodity index contract means an agreement, contract, or transaction that is based on an index comprised of prices of commodities that are not the same or substantially the same, and that is not a location basis contract, a calendar spread contract, or an intercommodity spread contract as such terms are defined in this guidance, where: (i) A calendar spread contract means a cash-settled agreement, contract, or PO 00000 Frm 00242 Fmt 4701 Sfmt 4700 transaction that represents the difference between the settlement price in one or a series of contract months of an agreement, contract, or transaction and the settlement price of another contract month or another series of contract months’ settlement prices for the same agreement, contract, or transaction; and (ii) An intercommodity spread contract means a cash-settled agreement, contract, or transaction that represents the difference between the settlement price of a referenced contract and the settlement price of another contract, agreement, or transaction that is based on a different commodity. (4) Monthly average pricing contract means a contract that satisfies one of the following: (i) The contract’s price is calculated based on the equally-weighted arithmetic average of the daily prices of the underlying referenced contract for the entire corresponding calendar month or trade month, as applicable; or (ii) In determining the price of such contract, the component daily prices, in the aggregate, during the spot month of the underlying referenced contract comprise no more than 40 percent of such contract’s weighting. (5) Outright price reporting agency index contract means any outright commodity derivative contract whose settlement price is based solely on an index published by a price reporting agency that surveys cash-market transaction prices, provided, however, that this term does not include any commodity derivative contract that settles at a basis, or differential, between a referenced contract and a price reporting agency index. (b) [Reserved] Appendix D to Part 150—Commodities Listed as Substantially the Same for Purposes of the Term ‘‘Location Basis Contract’’ as Used in the Referenced Contract Definition The following table lists each relevant core referenced futures contract and associated commodities that are treated as substantially the same as a commodity underlying a core referenced futures contract for purposes of the term ‘‘location basis contract’’ as such term is used in the referenced contract definition under § 150.1, and as such term is discussed in appendix C to this part. BILLING CODE 6351–01–P E:\FR\FM\14JAR2.SGM 14JAR2 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00243 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 3477 ER14JA21.025</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00244 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.026</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3478 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 3479 1 Step-down spot month limits apply to positions net long or net short as follows: 600 contracts at the close of trading on the first business day following the first Friday of the contract month; 300 contracts at the close of trading on the business day prior to the last five trading days of the contract month; and 200 contracts at the close of trading on the business day prior to the last two trading days of the contract month. 2 For persons that are not availing themselves of the § 150.3(a)(4) conditional spot month limit exemption in natural gas, the 2,000 contract spot month speculative position limit level applies to: (1) the physically-settled NYMEX Henry Hub VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Natural Gas (NG) core referenced futures contract and any other physically-settled contract that qualifies as a referenced contract to NYMEX Henry Hub Natural Gas (NG) under the definition of ‘‘referenced contract’’ under § 150.1, in the aggregate across all exchanges listing a physicallysettled NYMEX Henry Hub Natural Gas (NG) referenced contract and the OTC swaps market, net long or net short; and (2) the cash-settled NYMEX Henry Hub Natural Gas (NG) referenced contracts, net long or net short, on a per-exchange basis for each exchange that lists one or more cash-settled NYMEX Henry Hub Natural Gas (NG) referenced contract(s) rather than aggregated across such PO 00000 Frm 00245 Fmt 4701 Sfmt 4700 exchanges. Further, an additional 2,000 contract limit, net long or net short, applies across all cashsettled economically equivalent NYMEX Henry Hub Natural Gas (NG) OTC swaps. 3 Step-down spot month limits apply to positions net long or net short as follows: 6,000 contracts at the close of trading three business days prior to the last trading day of the contract; 5,000 contracts at the close of trading two business days prior to the last trading day of the contract; and 4,000 contracts at the close of trading one business day prior to the last trading day of the contract. E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.027</GPH> khammond on DSKJM1Z7X2PROD with RULES2 Appendix E to Part 150—Speculative Position Limit Levels VerDate Sep<11>2014 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 03:06 Jan 14, 2021 Jkt 253001 PO 00000 Frm 00246 Fmt 4701 Sfmt 4725 E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.028</GPH> khammond on DSKJM1Z7X2PROD with RULES2 3480 BILLING CODE 6351–01–C khammond on DSKJM1Z7X2PROD with RULES2 Appendix F to Part 150—Guidance on, and Acceptable Practices in, Compliance With the Requirements for Exchange-Set Limits and Position Accountability on Commodity Derivative Contracts The following are guidance and acceptable practices for compliance with § 150.5. Compliance with the acceptable practices and guidance does not diminish or replace, in any event, the obligations and requirements of the person to comply with the other regulations provided under this part. The acceptable practices and guidance are for illustrative purposes only and do not state the exclusive means for establishing compliance with § 150.5. (a) Acceptable practices for compliance with § 150.5(b)(2)(i) regarding exchange-set limits or accountability outside of the spot VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 month. A designated contract market or swap execution facility that is a trading facility may satisfy § 150.5(b)(2)(i) by complying with either of the following acceptable practices: (1) Non-spot month speculative position limits. For any commodity derivative contract subject to § 150.5(b), a designated contract market or swap execution facility that is a trading facility sets individual single month or all-months-combined levels no greater than any one of the following: (i) The average of historical position sizes held by speculative traders in the contract as a percentage of the average combined futures and delta-adjusted option month-end open interest for that contract for the most recent calendar year; (ii) The level of the spot month limit for the contract; (iii) 5,000 contracts (scaled-down proportionally to the notional quantity per PO 00000 Frm 00247 Fmt 4701 Sfmt 4700 3481 contract relative to the typical cash-market transaction if the notional quantity per contract is larger than the typical cash-market transaction, and scaled up proportionally to the notional quantity per contract relative to the typical cash-market transaction if the notional quantity per contract is smaller than the typical cash-market transaction); or (iv) 10 percent of the average combined futures and delta-adjusted option month-end open interest in the contract for the most recent calendar year up to 50,000 contracts, with a marginal increase of 2.5 percent of open interest thereafter. (2) Non-spot month position accountability. For any commodity derivative contract subject to § 150.5(b), a designated contract market or swap execution facility that is a trading facility adopts position accountability, as defined in § 150.1. (b) [Reserved] E:\FR\FM\14JAR2.SGM 14JAR2 ER14JA21.029</GPH> Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations 3482 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Appendix G to Part 150—Guidance on Spread Transaction Exemptions Granted for Contracts that are Subject to Federal Speculative Position Limits Positions that comply with § 150.3(a)(2)(i) or (ii) may exceed Federal speculative position limits, provided that the entity separately requests a spread transaction exemption from the relevant exchange’s position limits established pursuant to proposed § 150.5(a). The following provides guidance to exchanges and market participants on the use of spread transaction exemptions granted pursuant to § 150.5(a). Exchanges and market participants may also consider this guidance for purposes of spread transaction exemptions granted pursuant to § 150.5(b). The following guidance includes recommendations for exchanges and market participants to consider when granting or relying on spread transaction exemptions for positions that include referenced contracts that are subject to Federal speculative position limits. (a) General guidance on spread transaction exemptions for referenced contracts. (1) When granting spread transaction exemptions pursuant to § 150.5(a), an exchange should: (i) Collect sufficient information from the market participant to be able to: (A) Understand the spread strategy, consistent with § 150.5(a)(2)(ii)(A); and (B) Verify that there is a material economic relationship between the legs of the spread transaction, consistent with the requirement in § 150.5(a)(2)(ii)(G) to grant exemptions in accordance with sound commercial practices; (ii) Consider whether granting the spread transaction exemption would, to the maximum extent practicable: (A) Ensure sufficient market liquidity for bona fide hedgers; and (B) Not unduly reduce the effectiveness of Federal speculative position limits to: (1) Diminish, eliminate, or prevent excessive speculation; (2) Deter and prevent market manipulations, squeezes, and corners; and (3) Ensure that the price discovery function of the underlying market is not disrupted; (iii) Consider implementing safeguards to ensure that when granting spread transaction exemptions, especially during the spot period, the exchange is able to comply with all statutory and regulatory obligations, including the requirements of: (A) DCM Core Principle 2 and SEF Core Principle 2, as applicable, to, among other things, prohibit abusive trading practices on its markets by members and market participants, and prohibit any other manipulative or disruptive trading practices prohibited by the Act or Commission regulations; (B) DCM Core Principle 4 and SEF Core Principle 4, as applicable, to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process through market surveillance, compliance, and enforcement practices and procedures; (C) DCM Core Principle 5 and SEF Core Principle 6, as applicable, to implement exchange-set position limits in a manner that VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 reduces the potential threat of market manipulation or congestion; and (D) DCM Core Principle 12, as applicable, to protect markets and market participants from abusive practices committed by any party, including abusive practices committed by a party acting as an agent for a participant; and to promote fair and equitable trading on the contract market; (iv) Ensure that any spread exemption transaction does not impede convergence or facilitate the formation of artificial prices; and (v) Provide a cap or limit on the maximum size of all gross positions permitted under the spread transaction exemption. (2) The Commission reminds market participants that when utilizing a spread transaction exemption, compliance with Federal speculative position limits or an exemption thereto does not confer any type of safe harbor or good faith defense to a claim that the participant has engaged in an attempted or perfected manipulation or willfully circumvented or evaded speculative position limits, consistent with the Commission’s anti-evasion provision in § 150.2(i). (b) Guidance on transactions permitted under the spread transaction definition. (1) The Commission understands that market participants are generally familiar with the meaning of intra-market spreads, intermarket spreads, intra-commodity spreads, and inter-commodity spreads, as those terms are used in the spread transaction definition in § 150.1. However, for the avoidance of confusion, the Commission provides the following descriptions of such spread strategies to assist exchanges in their analysis of whether a spread position complies with the spread transaction definition. The Commission generally understands that the following spread strategies are typically defined as follows: (i) Intra-market spread means a long (short) position in one or more commodity derivative contracts in a particular commodity, or its products or by-products, and a short (long) position in one or more commodity derivative contracts in the same, or similar, commodity, or its products or byproducts, on the same designated contract market or swap execution facility. (ii) Inter-market spread means a long (short) position in one or more commodity derivative contracts in a particular commodity, or its products or by-products, at a particular designated contract market or swap execution facility and a short (long) position in one or more commodity derivative contracts in that same, or similar, commodity, or its products or by-products, away from that particular designated contract market or swap execution facility. (iii) Intra-commodity spread means a long (short) position in one or more commodity derivatives contracts in a particular commodity, or its product or by-products, and a short (long) position in one or more commodity derivative contracts in the same, or similar, commodity, or its products or byproducts. (iv) Inter-commodity spread means a long (short) position in one or more commodity derivatives contracts in a particular PO 00000 Frm 00248 Fmt 4701 Sfmt 4700 commodity, or its product or by-products, and a short (long) position in one or more commodity derivative contracts in a different commodity or its products or by-products. (2) The following is a non-exhaustive list of spread strategies that comply with the spread transaction definition in § 150.1: (i) An inter-market spread transaction in which the legs of the transaction are futures contracts in the same, or similar commodity, or its products or its by-products, and same calendar month or expiration; (ii) A spread transaction in which one leg is a referenced contract, as defined in § 150.1, and the other leg is a commodity derivative contract, as defined in § 150.1, that is not a referenced contract (including over-thecounter commodity derivative contracts); (iii) A spread transaction between a physically-settled contract and a cash-settled contract; (iv) A spread transaction between two cash-settled contracts; and (v) Spread transactions that are ‘‘legged in,’’ that is, carried out in two steps, or alternatively are ‘‘combination trades,’’ that is, all components of the spread are executed simultaneously or contemporaneously. (3) A spread transaction exemption cannot be used to exceed the conditional spot month limit exemption, in § 150.3(a)(4), for positions in natural gas. (4) The spread transaction definition does not include a single cash-settled agreement, contract or transaction that, by its terms and conditions: (i) Simply represents the difference (or basis) between the settlement price of a referenced contract and the settlement price of another contract, agreement, or transaction (whether or not a referenced contract), and (ii) Does not comprise separate long and short positions. (5) The spread transaction definition does not include a spread position involving a commodity index contract and one or more referenced contracts. (c) Guidance on cash-and-carry exemptions. The spread transaction definition in § 150.1 would permit transactions commonly known as ‘‘cash-andcarry’’ trades whereby a market participant enters a long futures position in the spot month and an equivalent short futures position in the following month, in order to guarantee a return that, at minimum, covers the costs of its carrying charges, such as the cost of financing, insuring, and storing the physical inventory until the next expiration (including insurance, storage fees, and financing costs, as well as other costs such as aging discounts that are specific to individual commodities). With this exemption, the market participant is able to take physical delivery of the product in the nearby month and may redeliver the same product in a deferred month. When determining whether to grant, and when monitoring, cash-and-carry spread transaction exemptions, the exchange should consider: (1) Implementing safeguards to require a market participant relying on such an exemption to reduce its position below the speculative Federal position limit within a timely manner once market prices no longer permit entry into a full carry transaction; E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations (2) Implementing safeguards that require market participants to liquidate all long positions in the nearby contract month before the price of the nearby contract month rises to a premium to the second (2nd) contract month; and (3) Requiring market participants that seek to rely on such exemption to: (i) Provide information about their expected cost of carrying the physical commodity, and the quantity of stocks currently owned in exchange-licensed warehouses or tank facilities; and (ii) Agree that before the price of the nearby contract month rises to a premium to the second (2nd) contract month, the market participant will liquidate all long positions in the nearby contract month. PART 151 [REMOVED AND RESERVED] 27. Under the authority of section 8a(5) of the Commodity Exchange Act, 7 U.S.C. 12a(5), remove and reserve part 151. ■ Issued in Washington, DC, on November 12, 2020, by the Commission. Christopher Kirkpatrick, Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. Appendices to Position Limits for Derivatives—Commission Voting Summary, Chairman’s Statement, and Commissioners’ Statements Appendix 1—Commission Voting Summary On this matter, Chairman Tarbert and Commissioners Quintenz and Stump voted in the affirmative. Commissioners Behnam and Berkovitz voted in the negative. Appendix 2—Statement of Support of Chairman Heath P. Tarbert khammond on DSKJM1Z7X2PROD with RULES2 I am very proud to bring to a final vote the Commission’s rule on speculative position limits. Like my fellow Commissioners and so many who have held these seats before us, I promised during my confirmation hearing that I would work to finalize this rule. So to the Senate Committee on Agriculture, Nutrition, and Forestry, to the market participants who rely on futures markets, and to the American people, I am pleased to say—promise made, promise kept. Today, we are removing a cloud that has hung over both the CFTC and the derivatives markets for a decade. Market participants, particularly Americans who need these markets to hedge the risks inherent in their businesses, will finally have regulatory certainty. Long Journey of Position Limits Ralph Waldo Emerson is quoted as saying ‘‘Life is a journey, not a destination.’’ Lucky for him, his journey did not involve position limits. This rule has been one of the most difficult undertakings in CFTC history. The Commission has issued five position limits proposals over the past 10 years. The VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 first was adopted in 2011, but vacated by the U.S. District Court for the District of Columbia before it took effect. One proposal issued in 2013, and two more in 2016, were never finalized. All told, those four proposals received thousands of comments from the public—the vast majority of which objected to the proposals for good reason. Much ink was spilled, and many trees were felled over those proposals. Finally, the Commission issued its fifth position limits proposal in January of this year. Today we will finalize that rule. But it is important to note we are not completely rejecting prior attempts. Instead, we build on the good from previous proposals while recognizing and fixing their shortcomings. Any position limits rule involves a balancing act. To paraphrase a famous saying—You can please some of the people all the time, and all the people some of the time, but—as is certainly the case with position limits—you can’t please all the people all the time. That is especially true given the three things the Commission is tasked with balancing for position limits: 1. Whether position limits on a particular contract are more helpful than harmful; 2. which positions should be subject to the limits and which should not; and 3. at what levels position limits should be set to allow for liquid markets but not excessive speculation. Recognizing Dead Ends Prior position limits proposals ultimately failed because they were unable to strike the correct balance on these three points. First, prior proposals were based on a plausible, but ultimately unsupportable, interpretation—‘‘the mandate.’’ The mandate would mean there is no balancing test; instead, all futures would be subject to Federal limits. Given the wide range of futures in our markets, this approach would require the CFTC to evaluate thousands of contracts. It also would necessitate limits on everything—regardless of the benefits those limits would bring or the burdens they would impose. Second, prior proposals failed to recognize all the ways that participants use futures markets to hedge price risks. Agricultural, energy, and metal futures markets are a vital to American businesses, which is why Congress explicitly excluded bona fide hedging positions from position limits. Reading the term bona fide hedging too broadly risks inviting the wolf of speculative activity into the market wearing sheep’s clothing. Reading it too narrowly creates the possibility of locking out the businesses that need these markets to manage their risks. And taking away that ability to manage risk jeopardizes economic growth. As a result, the Commission’s prior proposals were too restrictive on what constitutes bona fide hedging. They threw up too many roadblocks for businesses to access futures markets. Ultimately, an overly rigid interpretation of bona fide hedging stood in the way of finalizing a position limits rule. Finally, prior proposals set limits that were both too low and too rigid. Those limits did not balance the need for liquidity and price PO 00000 Frm 00249 Fmt 4701 Sfmt 4700 3483 discovery against the risks of excessive speculation, which is the real mandate of Congress. The proposed limits were frozen in time, not budging from limits last updated as far back as 1999. Getting Back on the Right Path Recognizing the missteps of the past yields a path to success. Unlike prior position limits proposals that garnered a library of negative comment letters, this proposal is overwhelmingly supported by businesses and trade groups across many facets of our real economy. There are several differences that will let today’s rule succeed where others failed. First, the rule recognizes the limits of limits. Position limits are one method to combat corners and squeezes, but that does not mean they are the singular tool that should always be deployed. Position limits are like a medicine that can help cure a disease, but also carries potential side effects. That is why Congress told us to use them only when ‘‘necessary.’’ The necessity finding is like a doctor’s prescription— someone needs to evaluate the risks of the disease against the side effects. In addition, the rule takes into account market participants’ needs. As I have always said, position limits is the rare case where the exception is as important as the rule. Today’s rule lays out a robust set of enumerated bona fide hedge exemptions to ensure that participants in the physical commodity markets can access the futures markets. Building on the proposal, we have added clarity around unfixed price transactions and storage. The rule also acknowledges the different ways people access the markets. We have streamlined the process for pass-through swap exemptions, making it easier for dealers to provide liquidity to commercial users in the swaps market. And the rule clarifies that someone can take a position during the Commission’s 10-day review period of an exchange-granted, non-enumerated exemption. In short, we have built a robust set of enumerated exemptions and a workable non-enumerated exemption process. The rule also strikes a balance with respect to the limits themselves. The January proposal included significant increases to spot and non-spot limits for the legacy agricultural products. Many commenters were concerned about these increases, particularly for non-spot limits. The level of the non-spot limits in the final rule are a function of the significant growth in the market and the long delay in making adjustments. Open interest in many of the legacy grains contracts has doubled or tripled since we last updated position limits, reflecting the usefulness of these contracts as a benchmark for cash market transactions and faith in CFTC-regulated markets. The non-spot limits we are adopting are the same percentage of today’s open interest as the 2011 limits were compared to open interest back then. Our markets have grown tremendously, and we cannot expect them to be subject to the same limits they were 10 years ago. It is important to remember that Federal position limits are a ceiling, not a floor. E:\FR\FM\14JAR2.SGM 14JAR2 3484 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Exchanges have their own limits, which can be no higher than what we specify. And exchanges can calibrate those limits quickly to account for issues with deliverable supply or other cash market issues. As we have seen play out over the past decade, the CFTC has a difficult time adjusting position limits. Therefore, exchange-set limits are a way to fine tune position limits on a particular market within the outer bounds of the Federal limits. Similar to the process for granting non-enumerated exemptions, we are leveraging the knowledge of the exchanges as well as their ability to act more nimbly to respond to market needs. Arriving at the Destination Some of my colleagues may see these features of the final rule as a flaw. While there are significant departures from prior proposals, after four failed attempts, that departure is exactly what we need. The flexibility in the necessity finding, the exemption process, and the adjusted limits are what make this rule workable. Otherwise, we are just repeating past mistakes and hoping for a different result—the very definition of insanity. So let me conclude by saying that we have come a long way. Today we have reached the end of an arduous journey. We have learned from our mistakes and adjusted our approach. We have balanced the interests of all the participants in these markets—some of which are in diametric opposition to one another. Most importantly, we have crafted a workable and flexible system. The rule sets hard limits, but leverages the flexibility of exchanges to adjust for a particular market. The rule recognizes the variety of ways that businesses use these markets to hedge their risks, while recognizing how vital it is to have a method to address the unknown unknowns. And the rule acknowledges that position limits are not always necessary and sets out a solid methodology for determining when they are. I again want to thank the CFTC staff and my fellow Commissioners for their tireless commitment to finishing this journey. I look forward to voting in favor of this final rule. Appendix 3—Supporting Statement of Commissioner Brian Quintenz khammond on DSKJM1Z7X2PROD with RULES2 I am pleased to support the agency’s revitalized approach to position limits. The rulemaking finalized today follows four proposals since the passage of the DoddFrank Act 1 and is, by far, the strongest of them all. I commend Chairman Tarbert for his leadership in completing this rulemaking. I am very pleased that today’s final rule echoes the key policy points I outlined in my remarks before the 2018 Commodity Markets Council State of the Industry Conference.2 The new position limits regime will provide 1 76 FR 4752 (Jan. 26, 2011); 78 FR 75680 (Dec. 12, 2013); 81 FR 38458 (June 13, 2016) (‘‘supplemental proposal’’); and 81 FR 96704 (Dec. 30, 2016). The Commodity Exchange Act (CEA) addresses position limits in Section (Sec.) 4a (7 U.S.C. 6a). 2 Remarks of Commissioner Brian Quintenz before the CMC State of the Industry 2018 Conference, https://www.cftc.gov/PressRoom/ SpeechesTestimony/opaquintenz5. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 commercial market participants with sufficient flexibility to hedge their risks efficiently and will promote liquidity and price discovery. Today’s rule promotes flexibility, certainty, and market integrity for end-users—farmers, ranchers, energy producers, transporters, processors, manufacturers, merchandisers, and all who use physically-settled derivatives to risk manage their exposure to physical goods. The rule includes an expansive list of enumerated and selfeffectuating bona fide hedge exemptions and spread exemptions, and a streamlined, exchange-centered process to adjudicate nonenumerated bona fide hedge exemption requests. I am pleased that the rule seriously considered the usability of hedging exemptions, and I thank Commissioner Stump for her leadership on that point. In contrast to the Commission’s failed proposed rulemakings in 2011, 2013, and 2016, this rule is the most true to the CEA in many significant respects. It requires, as has long been the Commission’s practice, a necessity finding before imposing limits. It includes economically equivalent swaps. And, perhaps most importantly, it balances the interests among promoting liquidity, deterring manipulation, and ensuring the price discovery function of the underlying market is not disrupted.3 The confluence of these factors occurs most acutely in the spot month for physically-settled contracts. In the spot month, price convergence is exceptionally vulnerable to potential manipulation or disruption due to outsized positions. By establishing position limits for non-legacy contracts only in the spot month, the rule elegantly balances the countervailing policy interests enumerated in the statute. Responding to the Public’s Concerns Through staff’s serious consideration of over 70 public comments, the final rule significantly improves on what appears in the proposal. Examples of modifications based on public comment include considerations of gross hedging, price risk, the pass-through swap exemption, spot month limits for natural gas and cotton, a special non-spot single-month limit for cotton, spread exemptions, and the Commission’s review of exchange-granted non-enumerated hedge exemptions. With regard to enumerated bona fide hedges, the final rule took into account several suggestions from commenters. The proposed enumerated hedges were already a significant improvement upon previously proposed hedge exemptions (for example, eliminating a mandatory ‘‘five-day rule’’ 4 and no longer conditioning cross-commodity hedging on a needlessly rigid quantitative test). Now, under the final rule, the enumerated hedges will be even more practical. For example, the final rule makes clear that a hedger with only an unfixedprice cash commodity sale or purchase, but not an offsetting pair, may rely on one of the three anticipatory hedges, provided that the 3 Sec. 4a(a)(3). versions of enumerated hedges had required a hedger to eliminate positions in excess of position limits during the last five days of the spot month. 4 Previous PO 00000 Frm 00250 Fmt 4701 Sfmt 4700 other elements of such hedge are also met, even though the hedger is ineligible to elect the hedge for a pair of unfixed-price sale and purchase transactions.5 The final rule also makes clear that the new anticipatory merchandising hedge can be used both by integrated energy firms and by firms that limit their business to merchandising. Furthermore, the final rule permits the anticipatory merchandising hedge to now be used in connection with storage hedges. I support the final rule’s determination to delay by two years two important elements that will require significant changes in the marketplace: The imposition of position limits on swaps economically equivalent to the referenced futures contracts and the required unwinding of previously elected risk management exemptions.6 It is prudent to allow for additional time for financial entities to adjust to these significant new policies. Necessity Finding Today’s rule correctly premises new limits on a finding that they are necessary to diminish, eliminate, or prevent the burden on interstate commerce from extraordinary price movements caused by excessive speculation (‘‘necessity finding’’) in specific contracts, as Congress has long required in the CEA and its legislative precursors since 1936.7 I am pleased that the rule complies with the District Court’s ruling in the ISDAposition limits litigation: That the Commission must decide whether Section 4a of the CEA mandates the CFTC set new limits or only permits the CFTC to set such limits pursuant to a necessity finding.8 As the District Court noted, ‘‘the Dodd-Frank amendments do not constitute a clear and unambiguous mandate to set position limits.’’ 9 I agree with the rule’s determination that, when read together, paragraphs (1) and (2) of Section 4a demand a necessity finding. Section 4a(a)(2)(A) states that the Commission shall establish limits ‘‘in accordance with the standards set forth in paragraph (1) of this subsection.’’ 10 Paragraph (1) establishes the Commission’s 5 Preamble discussion of Exemptions from Federal Position Limits. The hedge for a pair of offsetting unfixed-price transactions is described in Appendix B, paragraph (a)(3), and the anticipatory hedges are described in Appendix B, paragraphs (a)(4)–(6). 6 Whereas the general compliance date for the final rule is January 1, 2022, the compliance date for these two items is January 1, 2023. 7 Sec. 4a(1). 8 ISDA et al. v. CFTC, 887 F. Supp. 2d 259, 278 and 283–84 (D.D.C. Sept. 28, 2012). 9 Id. at 280. 10 Sec. 4a(a)(2)(A) (‘‘In accordance with the standards set forth in paragraph (1) of this subsection and consistent with the good faith exception cited in subsection (b)(2), with respect to physical commodities other than excluded commodities as defined by the Commission, the Commission shall by rule, regulation, or order establish limits on the amount of positions, as appropriate, other than bona fide hedge positions, that may be held by any person with respect to contracts of sale for future delivery or with respect to options on the contracts or commodities traded on or subject to the rules of a designated contract market.’’) E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 authority to, ‘‘proclaim and fix such limits on the amounts of trading . . . as the Commission finds are necessary to diminish, eliminate or prevent [the] burden’’ on interstate commerce caused by unreasonable or unwarranted price moves associated with excessive speculation. This language dates back almost verbatim to legislation passed in 1936, in which Congress directed the CFTC’s precursor to make a necessity finding before imposing position limits. The Congressional report accompanying the CEA from the 74th Congress includes the following directive, ‘‘[Section 4a of the CEA] gives the Commodity Exchange Commission the power, after due notice and opportunity for hearing and a finding of a burden on interstate commerce caused by such speculation, to fix and proclaim limits on futures trading . . .’’ 11 In its ISDA opinion, the District Court noted the following: ‘‘This text clearly indicated that Congress intended for the CFTC to make a ‘finding of a burden on interstate commerce caused by such speculation’ prior to enacting position limits.’’ 12 I support the rule’s view that the most natural reading of Section 4a(a)(2)(A)’s reference to paragraph (1)’s ‘‘standards’’ is that it logically includes the ‘‘necessity’’ standard. Paragraph (1)’s requirement to make a necessity finding, along with the aggregation requirement, provide substantive guidance to the Commission about when and how position limits should be implemented. If Congress intended to mandate that the Commission impose position limits on all physical commodity derivatives, there is little reason it would have referred to paragraph (1) and the Commission’s long established practice of necessity findings. Instead, Congress intended to focus the Commission’s attention on whether position limits should be considered for a broader set of contracts than the legacy agricultural contracts, but did not mandate those limits be imposed. Setting New Limits ‘‘As Appropriate’’ The rule determines that position limits are necessary to diminish, eliminate, or prevent the burden on interstate commerce posed by unreasonable or unwarranted prices moves that are attributable to excessive speculation in 25 referenced commodity markets that each play a crucial role in the U.S. economy. Conversely, the rule also finds that the contracts on which the referenced limits are placed are the only contracts which met the necessity finding. The rule explicitly states that no other contracts met this test. I am aware that there is significant skepticism in the marketplace and among academics as to whether position limits are an appropriate tool to guard against extraordinary price movements caused by extraordinarily large position size. Some argue there is no evidence that excessive speculation currently exists in U.S. derivatives markets.13 Others believe that 11 H.R. Rep. 74–421, at 5 (1935). F. Supp. 2d 259, 269 (fn 4). 13 Testimony of Erik Haas (Director, Market Regulation, ICE Futures U.S.) before the CFTC at 70 (Feb. 26, 2015) (‘‘We point out the makeup of these 12 887 VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 large and sudden price fluctuations are not caused by hyper-speculation, but rather by market participants’ interpretations of basic supply and demand fundamentals.14 In contrast, still others believe that outsized speculative positions, however defined, may aggravate price volatility, leading to price run-ups or declines that are not fully supported by market fundamentals.15 In my opinion, one thing is predominately clear: position limits should not be viewed as a means to counteract long-term directional price moves. The CFTC is not a price setting agency and we should not impede the market from reflecting long term supply and demand fundamentals. A case in point is palladium, the physically-settled contract which has seen the largest sustained price increase recently,16 and which has also seen its exchange-set position limit decline four times since 2014 to what is now the smallest limit of any contract in the referenced contract set.17 Nevertheless, between the start of 2018 and the end of 2019, palladium futures prices rose 76%.18 Taking these markets, primarily to show that any regulations aimed at excessive speculation is a solution to a nonexistent problem in these contracts.’’), available at: https://www.cftc.gov/idc/groups/public/@ aboutcftc/documents/file/ emactranscript022615.pdf. ¨ YU ¨ KS 14 BAHATTIN BU ¸ AHIN & JEFFREY HARRIS, CFTC, THE ROLE OF SPECULATORS IN THE CRUDE OIL FUTURES MARKET 1, 16–19 (2009) (‘‘Our results suggest that price changes leads the net position and net position changes of speculators and commodity swap dealers, with little or no feedback in the reverse direction. This uni-directional causality suggests that traditional speculators as well as commodity swap dealers are generally trend followers.’’), available at https:// www.cftc.gov/idc/groups/public/@swaps/ documents/file/plstudy_19_cftc.pdf; Testimony of Philip K. Verleger, Jr. before the CFTC, Aug. 5, 2009 (‘‘The increase in crude prices between 2007 and 2008 was caused by the incompatibility of environmental regulations with the then-current global crude supply. Speculation had nothing to do with the price rise.’’), available at: https:// www.cftc.gov/sites/default/files/idc/groups/public/ @newsroom/documents/file/hearing080509_ verleger.pdf. 15 For a discussion of studies discussing supply and demand fundamentals and the role of speculation, see 81 FR 96704, 96727 (Dec. 30, 2016). See, e.g., Hamilton, Causes and Consequences of the Oil Shock of 2007–2008, Brookings Paper on Economic Activity (2009); Chevallier, Price Relationships in Crude oil Futures: New Evidence from CFTC Disaggregated Data, Environmental Economics and Policy Studies (2012). 16 Platinum, gold slide as dollar soars; palladium eases off record, Reuters (Sept. 30, 2019), available at: https://www.reuters.com/article/global-precious/ precious-platinum-gold-slide-as-dollar-soarspalladium-eases-off-record-idUSL3N26L3UV. 17 Between 2014 and 2017, the CME Group lowered the spot month position limit in the contract four times, from 650, to 500, to 400, to 100, to the current limit of 50 (NYMEX regulation 40.6(a) certifications, filed with the CFTC, 14–463 (Oct. 31, 2014), 15–145 (Apr. 14, 2015), 15–377 (Aug. 27, 2015), and 17–227 (June 6, 2017)), available at: https://sirt.cftc.gov/sirt/ sirt.aspx?Topic=ProductTermsandConditions. 18 Palladium futures were at $1,087.35 on Jan. 2, 2018 and at $1,909.30 on Dec. 31, 2019. Historical prices available at: https:// futures.tradingcharts.com/historical/PA_/2009/0/ continuous.html. PO 00000 Frm 00251 Fmt 4701 Sfmt 4700 3485 conflicting views and facts into account, it is clear the Commission correctly stated in its 2013 proposal, ‘‘there is a demonstrable lack of consensus in the [academic] studies’’ as to the effectiveness of position limits.19 With that healthy dose of skepticism, and in strict accordance with the balance of factors which Dodd Frank added to the CEA for the Commission to consider, I think the rule appropriately focuses on the time period and contract type where position limits can have the most positive, and the least negative, impact—the spot month of physically settled contracts—while also calibrating those limits to function as just one of many tools in the Commission’s regulatory toolbox that can be used to promote credible, well-functioning derivatives and cash commodity markets. Because of the significance of these 25 core referenced futures contracts to the underlying cash markets, the level of liquidity in the contracts, as well as the importance of these cash markets to the national economy, I think it is appropriate for the Commission to protect the physical delivery process and promote convergence in these critical commodity markets. Further, the limits issued today are higher than in the past, notably because the rule utilizes current estimates of deliverable supply—numbers which haven’t been updated since 1999.20 Taking End-Users Into Account Perhaps more than any other area of the CFTC’s regulations, position limits directly affect the participants in America’s real economy: Farmers, ranchers, energy producers, manufacturers, merchandisers, transporters, and other commercial end-users that use the derivatives market as a risk management tool to support their businesses. I am pleased that today’s rule takes into account many of the serious concerns that end-users voiced in response to this rulemaking’s proposal, and in response to the CFTC’s previous four unsuccessful position limits proposals. Importantly, and in response to many comments, this rule, for the first time, expands the possibility for enterprise-wide hedging,21 (including additional clarification provided in the proposal in response to comments), establishes an enumerated anticipated merchandising exemption,22 eliminates the ‘‘five-day rule’’ for enumerated hedges,23 and no longer requires the filing of certain cash market information with the Commission that the CFTC can obtain from exchanges.24 Regarding enterprise-wide hedging—otherwise known as ‘‘gross hedging’’—the rule will provide an energy company, for example, with increased flexibility to hedge different units of its business separately if those units face different economic realities. The final rule eliminates the requirement that exchanges document their justifications when allowing 19 78 FR 75694 (Dec. 12, 2013). FR 24038 (May 5, 1999). 21 Appendix B, paragraph (a). 22 Appendix A, paragraph (a)(6). 23 Preamble discussion of Exemptions from Federal Position Limits. 24 Elimination of CFTC Form 204. 20 64 E:\FR\FM\14JAR2.SGM 14JAR2 3486 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations gross hedging; clarifies that market participants are not required to develop written policies or procedures that set forth when gross versus net hedging is appropriate; and clarifies that gross hedging is permissible for both enumerated and non-enumerated hedges.25 With respect to cross-commodity hedging, today’s rule completely rejects the arbitrary, unworkable, ill-informed, and frankly, ludicrous ‘‘quantitative test’’ from the 2013 proposal.26 That test would have required a correlation of at least 0.80 or greater in the spot markets prices of the two commodities for a time period of at least 36 months in order to qualify as a cross-hedge.27 Under this test, longstanding hedging practices in the electric power generation and transmission markets would have been prohibited. Today’s rule not only shuns this Government-Knows-Best approach, it also establishes new flexibility for the crosscommodity hedging exemption, allowing it to be used in conjunction with other enumerated hedges, such as hedges of anticipated merchandising transactions.28 For example, an energy marketer anticipating buying and selling jet fuel to supply airports will be eligible for a hedge exemption in connection with trading heating oil futures, a commonly-used cross-commodity hedge for jet fuel. khammond on DSKJM1Z7X2PROD with RULES2 Bona Fide Hedges and Coordination With Exchanges For those market participants who employ non-enumerated bona fide hedging practices in the marketplace, the final rule creates a streamlined, exchange-focused process to approve those requests for purposes of both exchange-set and Federal limits. I am pleased that commenters were generally supportive of the proposed process. As the marketplaces for the core referenced futures contracts addressed by the proposal, the DCMs have significant experience in, and responsibility towards, a workable position limits regime. CEA core principles require DCMs and swap execution facilities to set position limits, or position accountability levels, for the contracts that they list in order to reduce the threat of market manipulation.29 DCMs have long administered position limits in futures contracts for which the CFTC has not set limits, including in certain agricultural, energy, and metals markets. In addition, the exchanges have been strong enforcers of their own rules: During 2018 and 2019, CME Group and ICE Futures US concluded 32 enforcement matters regarding position limits. As part of their stewardship of their own position limits regimes, DCMs have long granted bona fide hedging exemptions in those markets where there are no Federal 25 Preamble discussion, Execution Summary, section 6. Legal Standards for Exemptions from Position Limits. 26 78 FR 75717 (Dec. 12, 2013). 27 Id. 28 Appendix A, paragraph (a)(11). 29 DCM Core Principle 5 (sec. 5 of the CEA, 7 U.S.C. 7) (implemented by CFTC regulation 38.300) and SEF Core Principle 6 (sec. 5h of the CEA, 7 U.S.C. 7b–3) (implemented by CFTC regulation 37.600). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 limits. Today’s final rule provides what I believe is a workable framework to utilize exchanges’ long standing expertise in granting exemptions that are not enumerated by CFTC rules.30 This rule also recognizes that the CEA does not provide the Commission with free rein to delegate all of the authorities granted to it under the statute.31 The Commission itself, through a majority vote of the five Commissioners, retains the ability to reject an exchangegranted non-enumerated hedge request within 10 days of the exchange’s approval.32 The Commission has successfully and responsibly used a similar process for both new contract listings as well as exchange rule filings, and I am pleased to see the final rule expand that approach to non-enumerated hedge exemption requests that will limit the uncertainty for bone fide commercial market participants. Limits on Swaps The CEA requires the Commission to consider limits not only on exchange-traded futures and options, but also on ‘‘economically equivalent’’ swaps.33 Today’s final rule provides the market with far greater certainty on the universe of such swaps than the previous proposed rulemakings. Prior proposals failed to sufficiently explain what constituted an ‘‘economically equivalent swap,’’ thereby ensuring that compliance with position limits was essentially unworkable, given real-time aggregation requirements and ambiguity over in-scope contracts. In stark contrast, today’s rule narrows the scope of ‘‘economically equivalent’’ swaps to those with material contractual specifications, terms, and conditions that are identical to exchangetraded contracts.34 For example, in order for a swap to be considered ‘‘economically equivalent’’ to a physically-settled core referenced futures contract, that swap would also have to be physically-settled, because settlement type is considered a material contractual term. I believe the narrowlytailored definition included in today’s rule will provide market participants with clarity over those contracts subject to position limits. I think it is prudent that the final rule took commenters’ concerns about updating compliance systems into account by delaying for an additional year, beyond the general compliance date of January 1, 2022, that is until January 1, 2023, the imposition of position limits on economically equivalent swaps. Conclusion During my confirmation hearing in front of the Senate Committee on Agriculture, Forestry and Nutrition on July 27, 2017, I was asked to directly commit to finalizing a position limits rule. My response was brief, but unquestionable: ‘‘Yes, I commit to support finalizing a position limits rule.’’ 30 Regulation 150.9. discussion of regulation 150.9, including references to cases pointing out the extent to which an agency can delegate to persons outside of the agency. 32 Regulation 150.9(e)(6). 33 Sec. 4a(5). 34 Regulation 150.1. 31 Preamble PO 00000 Frm 00252 Fmt 4701 Sfmt 4700 Making such a commitment to a committee of the U.S. Congress in sworn testimony is something I take very seriously, second only to taking my oath to defend the Constitution of the United States. With today’s vote, I am very pleased to have made good on that commitment three years in the making and am even more proud of the product with which I was able to fulfill it. Appendix 4—Dissenting Statement of Commissioner Rostin Behnam Introduction The last time we gathered as a Commission to discuss position limits I used some of my time to speak a bit about the award winning movie, Ford v. Ferrari.1 At that point, we were nearing the airing of the 92nd Academy Awards and this action-packed drama had earned four nominations—not to mention the distinction of being one of the few films I actually saw in a theater. For those of you who have not found it in one of your quarantine movie queues, Ford v. Ferrari tells the true story of American car designer Carroll Shelby and British-born driver Ken Miles who built a race car for Ford Motor Company—the GT40—and competed with Enzo Ferrari’s dominating, iconic red racing cars at the 1966 24 Hours of Le Mans.2 I used the film and racing metaphors throughout my speaking and written statements to highlight serious concerns that the proposed amendments to the CFTC rules addressing position limits (the ‘‘Proposal’’) signified yet one more instance where the Commission seemed to be comfortable with deferring core, congressionally mandated duties to others and calling it a victory.3 We are here today to finalize the Proposal.4 In just short of nine months, we have come to terms with life during a global pandemic complete with economic turmoil and pockets of historic market volatility. Amid the mere 60-day open comment period following the Proposal’s publication in the Federal Register (graciously extended by 16 days to May 15th in light of the pandemic 5), on April 20th, the price of the West Texas Intermediate crude oil futures contract (‘‘WTI contract’’), a key benchmark in the energy and financial markets, experienced an unprecedented collapse one day prior to the last day of trading and expiration for May delivery.6 Defying market mechanics, the 1 Statement of Dissent by Commissioner Rostin Behnam Regarding Position Limits for Derivatives; Proposed Rule, https://www.cftc.gov/PressRoom/ SpeechesTestimony/behnamstatement013020 (the ‘‘Dissent’’). 2 Ford v Ferrari, Fox Movies, https:// www.foxmovies.com/movies/ford-v-ferrari (Last visited Oct. 13, 2020). 3 Dissent. 4 See Position Limits for Derivatives, 85 FR 11596 (Feb. 27, 2020). 5 See Press Release Number 8146–20, CFTC, CFTC Extends Certain Comment Periods in Response to COVID–19 (Apr. 10, 2020), https:// www.cftc.gov/PressRoom/PressReleases/8146-20; Extension of Currently Open Comment Periods for Rulemakings in Response to the COVID–19 Pandemic, 85 FR 22690, 22691 (Apr. 23, 2020). 6 See Statement of Commissioner Dan M. Berkovitz on Recent Trading in the WTI Futures Contract before the Energy and Environmental E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations price of the contract fell from $17.73 per barrel at market open, to a closing settlement price of negative $37.63—with the price dropping approximately $40 in the last 20 minutes of trading.7 And, while we are still in recovery, with great fanfare after almost 10 years, the Commission is going to establish the position limits regime required under the Dodd-Frank Act. I am reminded again of Ken who, at the 1966 24 Hours of Le Mans, went against his gut, giving way and leaving behind a milestone in car racing that to this day remains elusive. If you have not seen the movie, this is a spoiler alert: Ken did not win Le Mans in ’66. While he was one and a half laps ahead of two other GT40s, he was given orders to slow down so that the three Fords in the lead would cross the finish line in a dead heat formation. Ken lost his well-deserved win because the 24 Hours of Le Mans awards the victory to the car that covers the greatest distance in 24 hours. In the event of a tie, the rules provided that the car that had started farther down the grid had traveled the greater distance. Ken’s GT 40 had started in the grid roughly 60 feet ahead of the GT40 driven by Bruce McLaren and Chris Amon, who were the declared winners.8 In the film, Ken seems to accept his loss with quiet dignity. However, in reality he was fully aware that in many respects, he had been robbed. From what I’ve read, Ken likely articulated his feelings a bit more colorfully.9 The point is that bringing something across the finish line doesn’t always equate to a success. As detailed in my questions today, I believe that by going against our Congressional mandate and clear statutory intent by overly deferring to the exchanges, we have relinquished a claim to victory in this final position limits rule which in many ways has itself felt like the CFTC’s version of the 24 hours of Le Mans. Therefore, I will go with my gut and not be part of the formation in supporting this final rule. khammond on DSKJM1Z7X2PROD with RULES2 A Long Road, But a Fast Finish It has been nine years since the Commission first set out to establish the position limits regime required by amendments to section 4a of the Commodity Exchange Act (the ‘‘Act’’ or ‘‘CEA’’) 10 under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.11 While Markets Advisory Committee Meeting (May 7, 2020), https://www.cftc.gov/PressRoom/ SpeechesTestimony/berkovitzstatement050720. 7 See Bloomberg News, The 20 Minutes that Broke the U.S. Oil Market, Bloomberg (Apr. 25, 2020), https://www.bloomberg.com/news/articles/2020-0425/the-20-minutes-that-broke-the-u-s-oilmarket?sref=DzeLiNol. 8 Press Release, Ford Division News Bureau, For Immediate Release at 8 (July 5, 1966), made available in PDF at Wikipedia, the Free Encyclopedia, 1966 24 Hours of Le Mans, at https:// en.wikipedia.org/wiki/1966_24_Hours_of_Le_Mans. 9 Matthew Phelan, What’s Fact and What’s Fiction in Ford v. Ferrari, Slate (Nov. 18, 2019), https://slate.com/culture/2019/11/ford-v-ferrarifact-vs-fiction-le-mans-ken-miles.html. 10 See Position Limits for Derivatives, 76 FR 4752 (proposed Jan. 26, 2011) (the ‘‘2011 Proposal’’). 11 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203 sec. 737, 124 Stat. 1376, 1722–25 (2010) (the ‘‘DoddFrank Act’’). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 today’s final rule purports to respect Congressional intent and the purpose and language of CEA section 4a, in reality, it pushes the bounds of reasonable interpretation by overly deferring to the exchanges 12 and allowing them to take the lead in administering a position limits regime. In passing the Dodd-Frank Act, Congress understood that for the derivatives markets in physical commodities to perform optimally, there needed to be limits on the amount of control exerted by a single person (or persons acting in agreement). In fact, Congress has understood this need since at least 1936, when it first authorized the Commission’s predecessor to impose limits on speculative positions in order to prevent the harms caused by excessive speculation. In tasking the Commission with establishing limits and the framework around their operation, Congress was aware of our relationship with the exchanges, but nevertheless opted for our experience and our expertise to meet the policy objectives of the Act. Last January, as the Commission voted on the Proposal that is being finalized today, I warned that we seemed to be pushing to go faster and just get to the finish line, making real-time adjustments without regard to even trying for that ‘‘perfect lap.’’ 13 Just nine months later, nothing has changed. If anything, we seem to be further prioritizing just crossing the finish line over achieving a rule that actually follows Congressional intent and its first order priority: Protecting market participants from excessive speculation. Letting the Exchanges Make the Call As I argued in regard to the proposal, my principal disagreement is with the Commission’s determination to in effect disregard the tenets supporting the statutorily created parallel Federal and exchange-set position limit regime, and take a back seat when it comes to administration and oversight.14 Like Ken Miles, the Commission is relinquishing a rightful lead in an act of deference. In doing so, the Commission claims victory for recognizing that the exchanges are better positioned in terms of resources, information, knowledge, and agility, and therefore ought to take the wheel. While this may seem like the logical move, it ignores that even if we operate as a team, our incentives and interests are not fully aligned. Based on consideration of the Commission’s mission, and Congressional intent as evinced in the Dodd-Frank Act amendments to CEA section 4a and elsewhere in the Act, I continue to believe that (1) the Commission is required to establish position limits based on its reasoned and expert judgment within the parameters of the Act; (2) the Commission has not provided a rational basis for its determination not to establish Federal limits outside of the spot month for referenced contracts based on commodities other than 12 Unless otherwise indicated, the use of the term ‘‘exchanges’’ throughout this statement refers to designated contract markets (‘‘DCMs’’) and swap execution facilities (‘‘SEFs’’). 13 Dissent. 14 Id. PO 00000 Frm 00253 Fmt 4701 Sfmt 4700 3487 the nine legacy agricultural commodities; and (3) the Commission’s seemingly unlimited flexibility in deciding to (a) significantly broaden the bona fide hedging definition, (b) codify an expanded list of selfeffectuating enumerated bona fide hedges, and (c) provide for exchange recognition of non-enumerated bona fide hedge exemptions with respect to Federal limits, is both inexplicably complicated to parse and inconsistent with Congressional intent. Not only does the final version of the rule fail to address these deficiencies in the proposal, it actually goes and makes many of these issues worse. Ignoring a Mandate Like the proposal, this final rule goes to great lengths to reconcile whether CEA section 4a(a)(2)(A) requires the Commission to make an antecedent necessity finding before establishing any position limit,15 with the implication that if a necessity finding is required, then the Commission could rationalize imposing no limits at all. Looking back at the record, what is necessary is that the Commission complies with the mandate in the Dodd-Frank Act.16 In the 2011 Proposal, the Commission provided a review of CEA section 4a(a)—interpreting the various provisions, giving effect to each paragraph, acknowledging the Commission’s own informational and experiential limitations regarding the swaps markets at that time, and focusing on the Commission’s primary mission of fostering fair, open and efficient functioning of the commodity derivatives markets.17 Of note, ‘‘Critical to fulfilling this statutory mandate,’’ the Commission pronounced, ‘‘is protecting market users and the public from undue burdens that may result from ‘excessive speculation.’ ’’ 18 Federal position limits, as predetermined by Congress, are most certainly the only means towards addressing the burdens of excessive speculation when such limits must address a ‘‘proliferation of economically equivalent instruments trading in multiple trading venues.’’ 19 Exchange-set position limits or accountability levels simply cannot meet the mandate. In exercising its authority, the Commission may evaluate whether exchange-set position limits, accountability provisions, or other tools for contracts listed on such exchanges are currently in place to protect against manipulation, congestion, and price distortions.20 Such an evaluation—while permissible—is just one factor for consideration. The existence of exchange-set limits or accountability levels, on their own, can neither predetermine deference nor be justified absent substantial consideration. As I argued in my dissenting statement regarding 15 See Final Rule at III. Commission’s analysis in support of its denial of a mandate misconstrues form over substance and assumes the answer it is looking for. The Commission seems to suggest that it is free to ignore a Congressional mandate if it determines that Congress is wrong about the underlying policy. See Final Rule at III.A. 17 76 FR at 4752–4754. 18 Id. at 4753. 19 Id. at 4754–4755. 20 See 76 FR at 4755. 16 The E:\FR\FM\14JAR2.SGM 14JAR2 3488 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations the Proposal, the authority and jurisdiction of individual exchanges are necessarily different than that of the Commission. They do not always have congruent interests to the Commission in monitoring instruments that do not trade on or subject to the rules of their particular platform or the market participants that trade them. They do not have the attendant authority to determine key issues such as whether a swap performs or affects a significant price discovery function, or what instruments fit into the universe of economically equivalent swaps. They are not permitted to define bona fide hedging transactions or grant exemptions for purposes of Federal position limits. It is therefore clear that CEA section 4a, as amended by the Dodd-Frank Act ‘‘warrants extension of Commission-set position limits beyond agricultural products to metals and energy commodities.’’ 21 khammond on DSKJM1Z7X2PROD with RULES2 ‘‘If it ain’t broke, don’t fix it’’ In spite of all of this—the foregoing mandate; the clear Congressional intent in CEA section 4a(a)(3)(A); and the Commission’s real experience and expertise (including its unique data repository)—the Commission’s final rule only maintains Federal non-spot month limits for the nine legacy agricultural contracts (with questionably appropriate modifications), ‘‘because the Commission has observed no reason to eliminate them.’’ 22 Essentially, the Commission concludes: ‘‘if it ain’t broke, don’t fix it.’’ In keeping with this relatively riskless course of action, the Commission similarly concludes that Federal non-spot month limits are not necessary for the remaining 16 proposed core referenced futures contracts identified in the Final Rule. In so doing, the Commission ignores Congressional intent. The Commission never considers that Congress directed the Commission to establish limits—not accountability levels. The Commission’s observation that exchange-set accountability levels have ‘‘functioned as-intended’’ until this point in time ignores the wider purpose and function of aggregate position limits established by the Commission, and is shortsighted given the ever expanding universe of economically equivalent instruments trading across multiple trading venues. As I pointed out in my dissenting statement regarding the Proposal, it seems odd to conclude that Congress envisioned that its painstaking amendments to CEA section 4a were a directive for the Commission to check the box that the current system is working perfectly. Hedging on Bona Fide Hedging Today’s Final Rule provides for significantly broader bona fide hedging opportunities that will be largely selfeffectuating, and the Commission defers to the exchanges in recognizing nonenumerated bona fide hedging. While I support enhancing the cooperation between the Commission and the exchanges, the Commission here is cooperating by dropping back. The Commission’s decision to essentially give up primary authority to recognize non-enumerated bona fide hedges seems both careless and inconsistent with Congressional intent. I raised these concerns last January when we voted on the Position Limits Proposal. Unfortunately, rather than retaking the lead, the Commission further cedes authority to the exchanges. The Proposal provided the Commission with the authority to reject an exchange’s grant of non-enumerated bona fide hedge recognition, and provided a window of ten business days (or two in the case of sudden or unforeseen circumstances) for the Commission to make this determination. I pointed out in my dissent that this did not give the Commission nearly enough time or guidance to properly make a determination. In today’s Final Rule, the Commission actually further reduces its ability to make an independent determination. Now, market participants will be able to establish positions based upon an exchange’s non-enumerated bona fide hedge recognition during the Commission’s 10-day review period, and the Commission cannot determine that the person holding the position has committed a position limits violation during the Commission’s ongoing review or upon issuing its determination. This reduces the Commission’s review to an ineffectual afterthought. Trust the Process A clear theme in my statements regarding our many rules over the last few years is this: Process matters. Sharing our viewpoints with the public matters. Following the Administrative Procedure Act,23 and giving the public an opportunity for meaningful comment on our proposals, matters. We are at our best when we involve all five Commissioners and our many stakeholders in the process. I want to thank the Chairman for consistently providing the Commissioners with drafts of proposed and final rules 30 days in advance of an open meeting. I believe there have only been two major exceptions over the course of our many laps in the last year: The position limits proposal, and the position limits final rule. In the case of the final rule, we did not receive a full draft until last Friday—six days before the open meeting. This simply is not enough time for the Commission to engage in a fulsome discussion of the merits of the rule, and makes the final rule more or less a fait accompli. Perhaps most perplexing is that we did not receive a draft of the cost benefit considerations until two weeks ago. This is literally a rule where a prior iteration resulted in a court challenge—one that the Commission lost.24 If ever a rule required more consideration by the Commission itself, this would seem to be it. Instead, the Commissioners actually had less time to review and consider the rule than we normally do. When we focus on just getting to the finish line, and do not take the time for meaningful 22 Final Rule at II.B.2.i. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 Conclusion Before concluding, I want to acknowledge and thank the Commission staff who worked on the Proposal, today’s final rule, and every related study, matter, and undertaking to support it for the better part of 10 years. You were the design team, the engineers, the production team and the pit crew. You kept us on course at a pace set by our Chairman, and you have performed at the top of your field. Back in ’66, by holding back, Ken Miles lost the win at Le Mans, which denied him the ‘‘Triple Crown’’ of endurance racing: The 24 Hours of Daytona, the 12 Hours of Sebring, and the 24 Hours of Le Mans. No driver has won all three races in the same year,26 and Ken missed out because he was part of a team and Ford had been good to him.27 He committed and moved forward without the victory that should have been his because he was the best driver that day. I am committed to vote and move forward, even if it means giving up the triple crown of the day. But I will not go against my gut. Appendix 5—Statement of Commissioner Dawn D. Stump Overview With all that has transpired in our country and in our lives this year, it feels like ages ago that we gathered together in person to consider proposing amendments to update the Commission’s rules regarding position limits back at the end of January. At the time, 25 Final Rule at I.G. Raffauf, Porsche and the Triple Crown of endurance racing, Porsche Road & Race (Dec. 7, 2018), https://www.porscheroadandrace.com/ porsche-and-the-triple-crown-of-endurance-racing/. 27 Phelan, supra note 9. 26 Martin 23 5 U.S.C. 553(b). Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, 887 F. Supp. 2d 259 (D.D.C. 2012). 24 Int’l 21 Id. consideration and dialogue, we risk failing to take into account everything that we should in our rulemakings. Subsequent to the issuance of the Position Limits Proposal, there was a major market event resulting from the ongoing pandemic that may have important implications for our position limits regime. As the NYMEX Light Sweet Crude Oil (CL) contract, also known as the WTI contract, neared expiration in April 2020, the contract experienced extreme volatility, with the market trading below zero for the first time. The Commission received at least eight comments that addressed this event; a number of commenters noted that the extreme volatility was driven by speculators. The speculators, unable to physically deliver upon expiration for various reasons, had no choice but to exit the contract at whatever price was available. Commission staff continues to review and analyze this event, and the rule today recognizes that the analysis may impact the rule itself. Today’s preamble states: ‘‘The Commission will continue to analyze the events of April 20 to evaluate whether any changes to the position limits regulations may be warranted in light of the circumstances surrounding the volatility in the WTI contract.’’25 This begs the question—if the Commission is currently in the midst of this analysis, why not wait to finalize position limits until the analysis is complete? PO 00000 Frm 00254 Fmt 4701 Sfmt 4700 E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 I said that there were three guideposts by which I would evaluate that proposal: First, is it reasonable in design? Second, is it balanced in approach? And third, is it workable in practice for both market participants and for the Commission? Since I believed the answer to each of these questions was yes, I supported issuing the proposal. And by and large, my belief has been confirmed by the comments we received from those who trade in this country’s derivatives markets. In the months since January, we have heard from all corners of the marketplace—agricultural interests, energy interests, managed fund advisors, and dealers that provide liquidity, to name a few—that have voiced support for the fundamental architecture of the position limits framework that we proposed. Their support stands in stark contrast to the serious concerns they had expressed about the several previous position limit proposals put forward by the Commission during the past decade. Of course, each interest had its issues with one aspect or another in the proposal. That is to be expected, given the varied and sometimes divergent objectives for our position limit rules set out in the Commodity Exchange Act (‘‘CEA’’).1 Congress has tasked us with adopting position limits that: (1) On the one hand, diminish, eliminate or prevent excessive speculation in derivatives and deter and prevent market manipulation, squeezes, and corners; while on the other hand, and simultaneously (2) ensuring sufficient market liquidity for bona fide hedgers and ensuring that the price discovery function of the underlying market is not disrupted and does not shift to foreign competitors. Reasonable minds will always differ as to exactly where to draw the line among these statutory objectives. But while we must always strive for perfection, we cannot permit that aspiration to paralyze us from acting to improve our rule sets. The final position limit rules before us smooth some of the rough edges in the proposal, and they address the areas in which I expressed some misgivings at the time. They incorporate valuable input we have received from the exchanges that operate the markets and the businesses that trade in those markets. And above all, the final rulemaking is reasonable in design, balanced in approach, and workable in practice. For these reasons, I am pleased to support it. Bona Fide Hedging and Spread Transactions: Policy and Process In commenting on the proposal in January, I noted two areas that I felt could be improved: (1) The list of enumerated bona fide hedging transactions and positions; and (2) the process for reviewing hedging transactions outside of that list. I want to briefly address each of these concerns, in turn. Enumerated Bona Fide Hedges The CEA prohibits the Commission from adopting position limit rules that apply to bona fide hedging transactions or positions, 1 CEA Section 4a(a), 7 U.S.C. 6a(a). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 as such terms are defined by the Commission. It gives the Commission the authority to define the term ‘‘bona fide hedging transactions and positions’’ to ‘‘permit producers, purchasers, sellers, middlemen, and users of a commodity or a product derived therefrom to hedge their legitimate anticipated business needs . . .’’ 2 Congress thereby recognized the critical function of our derivatives markets in enabling those whom we all depend upon to deliver goods and services to hedge their risks—both risks they currently bear as well as those they reasonably anticipate.3 The Commission’s proposal recognized this as well, as it expanded the list of ‘‘enumerated’’ bona fide hedging transactions that are identified in our current rules. Positions taken as a result of these enumerated hedging transactions constitute bona fide hedging, and therefore are not subject to Federal speculative position limits. This expansion of the list of enumerated bona fide hedges is entirely appropriate (indeed, it is long overdue). Hedging practices at companies that produce, process, trade, and use agricultural, energy, and metals commodities have become far more sophisticated, complex, and global over time, and the Commission’s list of enumerated hedging practices to which its position limit rules do not apply has failed to keep pace with these realities. And given Congress’ recognition of the appropriateness of hedging legitimate anticipated business needs,4 the proposal also added, at my request, anticipatory merchandising as an enumerated bona fide hedge. There is no policy basis for distinguishing hedging risks of anticipated merchandising from hedging risks of other activities in the physical supply chain. Yet, I was concerned in January that our proposed list of enumerated bona fide hedges still might not be as robust as it should be. We needed input on this question from market participants—especially those in the energy and metals sectors where we are applying Federal position limits for the first time. And that input was nearly unanimous in recommending that hedging the risk of unfixed-price forward transactions be added to the list of enumerated bona fide hedges. 2 CEA Section 4a(c)(1), 7 U.S.C. 6a(c)(1). CEA provides that a bona fide hedging transaction or position is one that, among other things, ‘‘is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise.’’ CEA Section 4a(c)(2)(A)(ii), 7 U.S.C. 6a(c)(2)(A)(ii). The Commission’s policy in administering Federal position limits in the agricultural sector over the years has been to limit this economically appropriate test to the hedging of price risk. However, as set forth in the final rulemaking release, the Commission acknowledges, consistent with that historical policy, that price risk can be impacted by various non-price risks. 4 CEA Section 4a(c)(1), 7 U.S.C. 6a(c)(1). See also CEA Section 4a(c)(2)(A)(iii)(I), 7 U.S.C. 6a(c)(2)(A)(iii)(I) (bona fide hedging transaction or position is a transaction or position that, among other things, ‘‘arises from the potential change in the value of . . . assets that a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising . . .’’ (emphasis added)). 3 The PO 00000 Frm 00255 Fmt 4701 Sfmt 4700 3489 Hedges of offsetting unfixed-price cash commodity sales and purchases have historically been recognized as an enumerated bona fide hedge under our rules, and that was carried over in the proposal, too. These are hedges of risk incurred where a market participant has both bought and sold the underlying cash commodity at unfixed prices. We received many comments, though, urging us to include as an enumerated bona fide hedge those situations in which the purchase or sale, but not both, is an unfixed-price forward transaction. Some commenters asked that the historical enumerated hedge for offsetting unfixedprice cash commodity sales and purchases be expanded to cover unfixed-price cash commodity sales or purchases; others asked the Commission to create a new, stand-alone enumerated bona fide hedge category for these unfixed-price transactions. The final rulemaking concludes that neither step is necessary because, as suggested by still other commenters, commercial market participants may qualify for one of the enumerated anticipatory bona fide hedges that will be available, to the extent of their demonstrated anticipated need.5 Spread Transactions Although the treatment of spread transactions for purposes of Federal position limits is distinct from the treatment of bona fide hedging transactions, I would like to take a short detour to note an important similarity between the two. That is, we also received numerous comments suggesting that the proposed definition of a spread transaction, which would be exempt from Federal position limits, was too narrow. At the suggestion of commenters, the final rulemaking adds the well-established categories of intra-market, inter-market, and intra-commodity spreads to the list of defined spreads that fall outside the Federal position limits regime. The release notes that as a result, the spread transaction definition captures most, if not all, spread exemptions currently granted by exchanges and used by market participants. The rulemaking appropriately recognizes that these spread positions simply do not raise the type of concerns that position limits are intended to address. The Non-Enumerated Bona Fide Hedge Recognition Process Getting the list of enumerated bona fide hedges right is important because they are ‘‘self-effectuating’’ for purposes of Federal position limits. In other words, a trader need not count positions that result from enumerated bona fide hedging transactions towards the Federal position limits, and does not need to apply to the Commission for approval (although the trader still must receive approval from the relevant exchange to exceed exchange-set limits). Other hedging practices, generally referred to as ‘‘non-enumerated’’ hedges, can still be 5 These enumerated anticipatory bona fide hedges include: (1) The existing enumerated bona fide hedge for unsold anticipated production; (2) the existing enumerated bona fide hedge for anticipated requirements; and (3) the new enumerated bona fide hedge established in this rulemaking for anticipated merchandising. E:\FR\FM\14JAR2.SGM 14JAR2 3490 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 recognized as bona fide hedging, but only after a review process. A trader can either ask the exchange and the Commission to separately review and approve the proposed non-enumerated hedging activity for purposes of exchange and Federal limits, respectively, or it can follow what the rulemaking calls a ‘‘streamlined’’ process. Under that process, if an exchange recognizes a non-enumerated transaction as a bona fide hedge for purposes of the exchange’s position limits, the Commission would then review the exchange’s bona fide hedge recognition for application to Federal limits as well. The Commission must notify the exchange and market participant of any denial within 10 business days, or 2 business days in the case of an application based on a sudden or unforeseen increase in the trader’s bona fide hedging needs (although that timeline can be extended if the Commission issues a stay or requests additional information). In January, I expressed reservations about whether this 10/2-day process would be workable in practice for either market participants or the Commission because it appeared to be both too long and too short: (1) Too long to be workable for market participants that may need to take a hedge position quickly; and (2) too short for the Commission to meaningfully review the relevant circumstances related to the exchange’s recognition of the hedge as bona fide. But while some commenters took the ‘‘too long’’ view and others took the ‘‘too short’’ view, the majority of commenters were generally supportive of this process. The final rulemaking adopts the 10/2-day process, with an adjustment recommended by several commenters as well as participants in a meeting of the Commission’s Energy and Environmental Markets Advisory Committee (‘‘EEMAC’’) 6 that discussed the position limits proposal. That is, the final rulemaking now provides that a trader can exceed Federal limits based on the exchange’s approval of the non-enumerated hedge while the Commission is conducting its assessment. This is not a delegation of authority to the exchange, since the Commission will still make the final determination whether positions resulting from the non-enumerated hedging transaction should count towards Federal position limits. Thus, a trader that exceeds Federal limits in reliance on the initial exchange determination runs the risk that the Commission will later deny the requested non-enumerated hedge. In that event, the trader will have to reduce the position to come into compliance with limits within a commercially reasonable period of time. Is it a perfect process? It is not. My preference would have been that recognition of non-enumerated hedges be the responsibility of the exchanges, which are most familiar with both their own markets 6 See, e.g., Transcript of CFTC Energy and Environmental Markets Advisory Committee Meeting at 103:14–17, Comment by Thomas LaSala, CME Group (May 7, 2020) (‘‘the Commission should permit a participant to exceed Federal position limits during the 10-day/2-day Commission review period of an exchange-granted exemption’’), available at https://www.cftc.gov/sites/default/files/ 2020/06/1591218221/eemactranscript050720.pdf. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 and the hedging practices of participants in those markets. The Commission, in turn, has the tools it needs to monitor this process through its routine, ongoing review of the exchanges. But those who participate in the markets have generally expressed the view that this is a reasonable, balanced, and workable process. And so, I support it. Response to Commenter Objections Before concluding, I would like to briefly respond to a couple of points raised by commenters that were critical of the proposed position limit rules. Some commenters argued that: (1) The amendments to the CEA’s position limit provisions that were enacted as part of the Dodd-Frank Act 7 constitute a mandate for the Commission to establish Federal position limits without having to make an antecedent finding that such limits are necessary to achieve the CEA’s objectives; and (2) the rules we are adopting improperly abdicate Commission responsibilities with respect to Federal position limits to the exchanges. The Commission’s Mandate To Impose Position Limits it Finds Are Necessary As I read the statute, the CEA’s position limit provisions, as amended by the DoddFrank Act, mandate the Commission to impose position limits that it finds are necessary. The basis for my view is set out in detail in my Statement in support of the proposal last January, which included an explanatory graphic. Both of these documents are available on the Commission’s website for those who are interested,8 and so I will not repeat that analysis here. Suffice it to say, though, that I have not seen anything in the comment letters we received that changes my view. The Role of the Exchanges I fundamentally disagree with the suggestion that the amended position limit rules that we are adopting in any way reflect an inappropriate reliance by the Commission on the exchanges. My disagreement is rooted in several considerations. First, the CEA itself states without limitation that it is the purpose of the CEA to serve the public interests described in the statute ‘‘through a system of effective selfregulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission.’’ 9 This is an overarching statement of purpose by Congress, and is the lens through which all other provisions of the CEA—including its position limit provisions—must be interpreted. And nothing in the amendments to those position 7 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203 (2010) (‘‘DoddFrank Act’’). 8 See Statement of Commissioner Dawn D. Stump Regarding Proposed Rule: Position Limits for Derivatives (January 30, 2020), and Commodity Exchange Act § 4a(a): Finding Position Limits Necessary is a Prerequisite to the Mandate for Establishing Such (January 30, 2020), available at https://www.cftc.gov/PressRoom/ SpeechesTestimony/stumpstatement013020. 9 CEA Section 3(b), 7 U.S.C. 5(b). PO 00000 Frm 00256 Fmt 4701 Sfmt 4700 limit provisions enacted as part of the DoddFrank Act indicate otherwise. Second, the rules we are adopting do not delegate any authority of the Commission to the exchanges. With respect to applications for non-enumerated bona fide hedges in particular, the Commission will be informed by an exchange’s determination whether to recognize the hedge for purposes of exchange-set limits. But the determination whether to do so with respect to Federal limits is the Commission’s alone to make, and a trader who trades in reliance on an exchange determination risks having to reduce the position if the Commission subsequently disagrees with the exchange’s determination. Third, the exchanges know their markets.10 They have a comprehensive understanding of the traders that participate in those markets as well as current hedging practices in agricultural, energy, and metals commodities. Indeed, the expertise of the exchanges makes them uniquely well-suited to make the initial determination on requests for nonenumerated bona fide hedges in real-time. Finally, I return once again to my foundational principles: Reasonable, balanced, and workable. A system in which a business must put its economic needs and risk management efforts on hold while the Commission undertakes to learn about its operations and hedging activities in order to pass upon a request for a non-enumerated bona fide hedge violates all three principles. Conclusion After nearly a decade of trying, we stand on the cusp of amending the Commission’s position limit rules, which are sorely in need of updating. Before us is a thorough and wellreasoned final rulemaking release that considers the extensive comments we received, and clearly presents the Commission’s rationale in addressing those comments and adopting the rules in the form that we are adopting them. The fact that this release is before us less than nine months after we issued the proposal—in the midst of a pandemic, no less—is a tribute to the dedication, perseverance, and analytical capabilities of the professionals in the Commission’s Division of Market Oversight, Office of General Counsel, and Chief Economist’s Office. Their work on this rulemaking has been nothing short of amazing. My fellow Commissioners and I have each publicly committed that we would work to finish a position limits rulemaking. The time has come to fulfill that commitment. The release that staff has presented is reasonable in design, balanced in approach, and workable for both market participants and the Commission. I am pleased to support it. 10 It is notable that, due to certain trading dynamics unique to natural gas contracts, including the existence of liquid cash-settled contracts trading on three different exchanges, the final rulemaking for the Federal conditional spot-month limit is derived from the existing exchange framework that has been in place for approximately a decade. E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Appendix 6—Dissenting Statement of Commissioner Dan M. Berkovitz khammond on DSKJM1Z7X2PROD with RULES2 I. Introduction I dissent from today’s position limits final rule (‘‘Final Rule’’). The Final Rule fails to achieve the most fundamental objective of position limits: To prevent the harms arising from excessive speculation. It is another disappointing chapter in the Commission’s 10-year saga to implement Congress’s mandate in the Dodd-Frank Act to impose speculative position limits in the energy, metals, and agricultural markets. In a number of instances, the Final Rule appears more intent on limiting the actions and discretion of the Commission than it does on actually limiting such speculation. As I previously observed, the proposed rule demoted the Commission from head coach to Monday-morning quarterback. The Final Rule declares that the players on the field are the referees. In this arena, the public interest loses. I support effective position limits to restrain excessive speculation in physical commodity markets, coupled with legitimate bona fide hedge exemptions for commercial market participants. The Final Rule, however, fails to address excessive speculation in several key respects: First, the Final Rule impermissibly permits private entities to devise new bona fide hedge exemptions, while simultaneously constricting the Commission’s review and enforcement of such privately-created exemptions. Second, the Final Rule fails to address trading at settlement (‘‘TAS’’) transactions. The potential for market manipulation through the use of TAS is well documented. The Final Rule was a valuable but wasted opportunity to address an important type of transaction in many commodity markets that, if abused, can present risks to orderly trading and price discovery. Third, while the Final Rule eliminates the risk management exemptions that had been granted to a limited number of index funds, it also increases the non-spot month limits to accommodate the speculative positions of these funds in the futures markets. Cumulatively, index funds can have a substantial price impact and exacerbate volatility. Their monthly position rolls can also distort inter-month spreads. Yet the Commission performed no assessment of the impact of potential increases in this type of speculation that these higher limits would permit.1 Fourth, the Final Rule misinterprets the Dodd-Frank Act and reverses decades of precedent by declaring, for the first time, that the Commission must make antecedent necessity findings on a commodity-bycommodity basis prior to imposing Federal speculative position limits. II. Physical Commodity Markets Benefit From Position Limits and Appropriate Bona Fide Hedge Exemptions Position limits help prevent market manipulation and price distortion arising 1 For detailed comments on the effects of large speculative positions of index funds, see Better Markets Comments Letter, at 8–12 (May 15, 2020). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 from excessively large speculative positions in futures, options, and swaps tied to physical commodities. Section 4a of the CEA reflects Congress’s long-standing determination that excessive speculation in a commodity can cause ‘‘sudden,’’ ‘‘unreasonable,’’ or ‘‘unwarranted’’ fluctuations and changes in commodity prices.2 Section 4a directs the Commission to establish speculative position limits to address these harms, while also providing that such limits shall not apply to ‘‘transactions or positions which are shown to be bona fide hedging transactions or positions, as those terms are defined by the Commission . . . .’’ 3 Experience from decades of limits in agricultural commodities teaches that a properly crafted position limits regime is an ‘‘effective prophylactic measure’’ to protect American businesses, consumers, and market participants that rely on physical commodity derivatives markets.4 The parameters of an effective position limits regime are well established. They include: (1) Meaningful limits on excessive speculation to help prevent market manipulation and price distortion; (2) recognition of bona fide hedging activities and exemptions to permit producers, end-users, merchants, and others to manage their commercial risks; and (3) clear divisions of responsibility, consistent with the CEA, that recognize the complimentary but distinct roles of exchanges, the Commission, and market participants in administering a position limits regime. Federal speculative position limits have been in place to protect derivatives markets since the 1930s. The Commission or its predecessors adopted position limits for grains in 1938, cotton in 1940, and soybeans in 1951. In 1981, the Commission adopted rules requiring exchange limits for all commodities for which there were no Federal limits—a rule which notably did not require an antecedent, commodity-by-commodity necessity finding. The Commission has also consistently relied on exchanges to help administer the position limits regime, including position accountability and enumerated bona fide hedge exemptions. These efforts, spanning over 80 years, have helped prevent manipulation and price distortion through a complementary system that relies on the respective expertise of Commission, exchange, and market participant stakeholders. The Final Rule discards this balance. The Final Rule relies excessively on exchanges and market participants to permit positions as bona fide hedges, and in so doing impermissibly delegates the Commission’s statutory responsibility to determine what constitutes a bona fide hedge.5 27 U.S.C. 6a. U.S.C. 6a(c)(1) (emphasis added). 4 Establishment of Speculative Position Limits, 46 FR 50938 (Oct. 16, 1981). 5 ‘‘[W]hile Federal agency officials may subdelegate their decision-making authority to subordinates absent evidence of contrary congressional intent, they may not sub-delegate to outside entities—private or sovereign—absent affirmative evidence of authority to do so.’’ U.S. Telecom Ass’n v. FCC, 359 F.3d 554, 565–68 (D.C. Cir. 2004) (citations omitted). 37 PO 00000 Frm 00257 Fmt 4701 Sfmt 4700 3491 III. Significant Flaws in the Final Rule A. The Final Rule Permits Market Participants To Violate Federal Speculative Position Limits With No Prior Commission Recognition of a Bona Fide Hedge Exemption The Final Rule explicitly permits market participants to violate Federal speculative position limits with no bona fide hedge exemption from the Commission. It impermissibly delegates the Commission’s statutory responsibility to define bona fide hedging to the very market participants with large speculative positions that section 4a is intended to restrain, as well as to the exchanges, who have no authority to determine what is a hedge under Federal law. First, the Final Rule authorizes market participants to create their own bona fide hedge exemptions and exceed speculative position limits for ‘‘sudden or unforeseen increases in their bona fide hedging needs.’’ No prior approval from the Commission or an exchange is required to exceed the limits established by the Commission, and market participants may file their hedge applications up to five days after violating the applicable position limit. The Final Rule offers no guardrails on what can be considered a ‘‘sudden or unforeseen’’ circumstance. In an efficient market, all future price movements are inherently unforeseeable; that is the reason for hedging to begin with.6 Further, in today’s interconnected markets, where the speed of light is the limiting factor on the transmission of information, sudden and unforeseen circumstances arise virtually every millisecond. This provision may swallow the Final Rule. Second, the Final Rule authorizes a market participant to exceed Federal speculative positon limits if an exchange permits it to exceed the exchange’s position limits. In other words, an exchange determination can enable a market participant to violate Federal limits even in the absence of a Commission determination. Here again, the Final Rule ignores the Commission’s statutory responsibility to define bona fide hedging. Exchanges have a critical role in any properly balanced position limits regime, but they are not authorized by the CEA to define Federal hedge exemptions, nor are they authorized to green-light violations of Federal position limits. This process for market participants to ‘‘self-recognize’’ non-enumerated hedges that 6 ‘‘The basic efficient market hypothesis positions that the market cannot be beaten because it incorporates all important determining information into current share prices. Therefore, stocks trade at the fairest value, meaning that they can’t be purchased undervalued or sold overvalued. The theory determines that the only opportunity investors have to gain higher returns on their investments is through purely speculative investments that pose a substantial risk.’’ J. B. Maverick, The Weak, Strong, and Semi-Strong Efficient Market Hypotheses, Investopedia, available at https://www.investopedia.com/ask/ answers/032615/what-are-differences-betweenweak-strong-and-semistrong-versions-efficientmarket-hypothesis.asp (updated Sept. 30, 2020). The unpredictability of the market has long been recognized. ‘‘If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me.’’ William Shakespeare, Macbeth, Act 1, Scene 3 (1623). E:\FR\FM\14JAR2.SGM 14JAR2 khammond on DSKJM1Z7X2PROD with RULES2 3492 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations they wish had been enumerated under Federal law undoes the existing, Commission-led procedures that have worked well for decades. The Final Rule reflects a multi-year, iterative process of notice and comment rulemaking to comprehensively determine which practices should constitute bona fide hedging. Members of the public and industry participants have enjoyed multiple opportunities to inform the Commission on this topic, including through additional proposed position limits rules in 2013 and twice in 2016. The Final Rule’s enumerated hedges reflect the Commission’s extensive dialogue and reasoned deliberations, and they recognize a wide array of hedging practices identified by commenters. To my knowledge, the Commission is not aware of any novel hedging practices that were not addressed during this rulemaking process. Commission regulations currently allow for the recognition of non-enumerated bona fide hedges through a 30-day, Commission-led review process. The Commission must recognize the requested hedge as bona fide before a market participant can put the hedge on the exchange and exceed position limits. This process has worked well for decades. The Final Rule replaces it with a new system that allows market participants to make their own bona fide hedge determinations and exceed Federal position limits in advance of any reasoned, considered evaluation by the Commission. 1. The 10 and 2 Day Review Periods Are Inadequate for the Commission To Consider Applications for Exemptions After an Exchange Determination The Final Rule attempts to cure the impermissible statutory delegation described above through crammed, after-the-fact reviews of market participants’ hedge applications and violations of position limits rules. Market participants who request prospective non-enumerated bona fide hedge exemptions from an exchange may violate Federal speculative position limits upon being granted the exemption. The exchange must then forward the application and other materials to the Commission for the beginning of a constricted 10-day review period. The Commission, for its part, must complete the difficult task of evaluating the law, facts, and circumstances with respect to cash market risks that have already been incurred and commodity positions that have already been posted on an exchange. Commission determinations regarding the validity of positions that have already been entered into will be complicated by the commercial implications involved in unwinding such positions. Further, in the event that the Commission determines to deny the application, the Commission must provide the applicant with notice and opportunity to respond. In the case of positions established due to ‘‘sudden or unforeseen’’ events, the Final Rule calls for a two-day review. This is an unrealistic and unworkable timeframe. This fig leaf of a ‘‘review’’ cannot provide legal cover for the impermissible delegation. VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 2. The Final Rule Adopts a Policy of NonEnforcement for Position Limit Violations Both the rule text and the preamble to the Final Rule leave no doubt that any person who puts on a position in excess of a position limit prior to receiving Commission approval of the exemption is in violation of the speculative position limits. However, where an application for a non-enumerated bona fide hedge is submitted retroactively to either an exchange or the Commission due to ‘‘sudden or unforeseen circumstances,’’ or where an exchange has approved an application for an exemption from the exchange limit, the Commission limits its ability to prosecute such violations by declaring that, ‘‘as a matter of policy,’’ it will not pursue an enforcement action as long as the application was submitted in ‘‘good faith.’’ The Final Rule does not define ‘‘good faith.’’ Perhaps this is because the concept of good faith traditionally is used as a safe harbor to protect persons who reasonably believe they are acting in compliance with the law. For example, when exercising its prosecutorial discretion for violations of the swap dealer business conduct standards, the Commission considers whether the swap dealer attempted in ‘‘good faith’’ to follow policies and procedures reasonably designed to comply with the CEA and Commission Regulations.7 This application of the good faith doctrine is consistent with the longestablished understanding of the term.8 In the Final Rule, however, the Commission turns this doctrine on its head and mandates prosecutorial discretion where a market participant knowingly acts in violation of the law by putting on a position in excess of the legal limit. Notably, the Commission describes its position not to enforce these violations as ‘‘a matter of policy.’’ So although this nonenforcement policy is adopted as part of this rulemaking, it is nonetheless just that—a statement of policy. As the Supreme Court has recognized, ‘‘general statements of policy,’’ or ‘‘statements issued by an agency to advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power,’’ are not subject to the notice-and-comment procedures of the Administrative Procedure Act.9 Accordingly, the Commission may 7 See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734, 9744, 9746, 9750 (Feb. 17, 2012). 8 See, e.g., CFTC v. Monex Credit Co., No. SACV– 171868, 2020 WL 1625808, at *4–5 (C.D. Cal. Feb. 12, 2020) (finding that controlling persons did not establish good faith defense to liability under 7 U.S.C. 13b where they knowingly or recklessly violated the CEA or were aware or should have been aware that employees were violating the CEA, or did not reasonably enforce system designed to promote legal compliance) (citing Monieson v. CFTC, 996 F.2d 852, 860–861 (7th Cir. 1993)); U.S. v. Leon, 468 U.S. 897 (1984) and Massachusetts v. Sheppard, 468 U.S. 981 (1984) (establishing good faith doctrine as exemption to Fourth Amendment exclusionary rule when police officer reasonably believed conduct to be legal). 9 Nor are blanket statements of policy that abandon an agency’s responsibility to enforce the law constitutionally permissible. Crowley PO 00000 Frm 00258 Fmt 4701 Sfmt 4700 change this enforcement policy at any time without engaging in a notice-and-comment rulemaking. Significantly, in its comment letter, the entity with the most experience in retroactive applications for hedge exemptions, the CME Group, pointed out to the Commission the importance of being able to take enforcement action for position limit violations that have occurred when retroactive applications are denied. It stated: Today at the exchange level, CME Group considers firms to be in violation of a position limit if they exceed a limit and the exemption application is denied. We believe the Commission should implement this standard rather than permitting the proposed grace period for denial of an exemption application. Otherwise, market participants with excessively large speculative positions could exploit the grace period accompanying an application for an exemption and intentionally go over the applicable limit without consequences—all the while disrupting orderly market operations. In our experience, the prospect of having an application denied and being found in violation of position limits has worked to deter market participants from attempting to exploit the retroactive exemption process.10 Although the Final Rule is replete with deference to the experience of the exchanges in implementing the position limits regime, and creates a process specifically reliant upon the exchange’s expertise in granting hedge exemptions, here in the context of enforcing violations and deterring abuse, the Commission oddly rejects that expertise. B. The Final Rule Fails To Address TAS Transactions or the Historic Collapse of WTI Crude Oil Futures On April 20, 2020, the price of the May futures contract for West Texas Intermediate (‘‘WTI’’) crude oil traded on the New York Mercantile Exchange collapsed from $17.73 per barrel at the market open to a closing price of negative $37.63. This single-day fall in prices of approximately $55 per barrel is unprecedented, and was accompanied by a massive disconnect between May crude oil futures and the price of crude oil in the physical market. WTI crude oil futures are a key benchmark in global energy markets and can impact the overall U.S. economy. Following the WTI event, I called upon the Commission to determine the causes of this unprecedented price movement and divergence from physical markets, and to work with CME to ‘‘take whatever measures may be appropriate to ensure that trading in the WTI futures contract is orderly and supports convergence of the futures and physical markets.’’ 11 Caribbean Transp., Inc. v. Pen˜a, 37 F.3d 671, 677 (DC Cir. 1994) (‘‘[A]n agency’s pronouncement of a broad policy against enforcement poses special risks that it ‘has consciously and expressly adopted a general policy that is so extreme as to amount to an abdication of its statutory responsibilities.’’’) (citing Heckler v. Chaney, 470 U.S. 821, 833 n.4 (1985)). 10 CME Comment Letter (May 14, 2020). 11 Statement of Commissioner Dan M. Berkovitz on Recent Trading in the WTI Futures Contract before the Energy and Environmental Markets E:\FR\FM\14JAR2.SGM 14JAR2 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations Almost six months later, the Commission has yet to complete its investigation or issue even preliminary results. It should not take this long for the world’s leading derivatives regulator to understand the historic collapse of a benchmark contract that it has overseen for decades. Independently of the Commission’s investigation, public commentary following the WTI event focused on TAS transactions and the well-known integrity concerns regarding TAS under certain market conditions.12 TAS transactions represent the purchase or sale of an underlying exchange commodity at the closing price for that commodity or at a specified differential. Notably, exchange rules may permit TAS transactions to be netted intraday against futures positions in that commodity established via outright purchases and sales. Such netting could permit a trader to establish very large long or short positions in the outright futures contracts, while remaining below speculative position limits on a net basis. The Final Rule recognizes the importance of netting practices and rules in several regards. For example, it prohibits the spotmonth netting of physically settled contracts with linked cash settled contracts. The Final Rule explains that allowing such netting during the spot month ‘‘could lead to disruptions in the price discovery function of the core referenced futures contract or allow a market participant to manipulate the price of the core referenced futures contract.’’ The Final Rule is silent, however, with respect to any limitations on the netting of TAS with outright futures. One commenter on the Final Rule reminded the Commission in significant detail of the market integrity issues associated with TAS orders.13 But even apart khammond on DSKJM1Z7X2PROD with RULES2 Advisory Committee Meeting (May 7, 2020), available at https://www.cftc.gov/PressRoom/ SpeechesTestimony/berkovitzstatement050720. 12 See, e.g., Matt Levine, It’s a Good Time to Cut Dividends, Money Stuff (Apr. 29, 2020), available at https://www.bloomberg.com/news/articles/202008-04/oil-s-plunge-below-zero-was-500-millionjackpot-for-a-few-london-traders?sref=DzeLiNol (‘‘If you combine these two facts—a lot of TAS contracts and not much volume around the settlement time— you get a well-known theoretical problem. . . . The basic pattern—agree in advance to buy (sell) stuff at the official settlement price at some fixed future time, and then sell (buy) a bunch of that stuff in the minutes leading up to the official settlement time with the effect of pushing down (up) the price at which you are buying (selling)—is incredibly common . . . .’’); Craig Pirrong, Streetwise Professor Blog, WTI–WTF? Part 3: Did CLK20 Get TAS-ed? (Apr. 30, 2020), available at https:// streetwiseprofessor.com/2020/04/. 13 Better Markets Comment Letter, at 13–14 (May 15, 2020). VerDate Sep<11>2014 03:06 Jan 14, 2021 Jkt 253001 from the comment letters on the proposed rule, and apart from the WTI event, the potential for manipulation through the use of offsetting TAS contracts has been wellknown.14 Further, the CFTC has direct experience with this issue: it has brought two manipulation cases where WTI TAS orders were an integral part of the manipulative scheme.15 Given the Commission’s familiarity with the potential for manipulation and disruption of the price discovery process arising from an abuse of the TAS order type, the failure of the Final Rule to address in any manner these wellknown dangers to market integrity is inexcusable. C. The Final Rule Misconstrues the CEA by Requiring Antecedent, Commodity-byCommodity Necessity Findings Prior to Imposing Federal Position Limits The Final Rule misinterprets the DoddFrank Act and reverses decades of Commission interpretation and finds that an antecedent, commodity-by-commodity necessity finding is required prior to imposing Federal speculative position limits. The Final Rule further states that this ‘‘is the best interpretation’’ of CEA section 4a(a)(2), and that the Commission’s prior interpretations are ‘‘not compelling.’’ I addressed this issue extensively in my dissenting opinion on the proposed position limits rule, and I reiterate those views now.16 Neither the statutory language of CEA section 4a(a)(2), nor the district court’s decision in ISDA v. CFTC, require an antecedent necessity finding prior to imposing position limits. The Final Rule’s new interpretation, 14 See, e.g., Craig Pirrong, Derived Pricing: Fragmentation, Efficiency, and Manipulation, Bauer College of Business, University of Houston, at 10 (Jan. 14, 2019), available at https:// streetwiseprofessor.com/2020/04/ (‘‘The analysis in Section 2 demonstrates that TAS contracts create trading opportunities with asymmetric price impacts. This suggests that TAS may therefore also create opportunities for profitable trade-based manipulation, and this is indeed the case.’’); see also Paul Peterson, Trading at Settlement for Agricultural Futures: Results from the First Month, farmdoc daily (July 29, 2015), available at https:// farmdocdaily.illinois.edu/2015/07/trading-atsettlement-for-agricultural-futures.html (‘‘Over the years TAS has been associated with several efforts to artificially influence the daily settlement price through ‘banging the close’ and other forms of manipulation [citations omitted].’’). 15 See In re Optiver US LLC, CFTC No. 08 Civ 6560, 2012 WL 1632613 (Apr. 19, 2012); In re Shak, CFTC No. 14–03, 2013 WL 11069360 (Nov. 25, 2013) (consent order). 16 See Dissenting Statement of Commissioner Dan M. Berkovitz Regarding Proposed Rule on Position Limits for Derivatives (Jan. 30, 2020), available at https://www.cftc.gov/PressRoom/ SpeechesTestimony/berkovitzstatement013020. PO 00000 Frm 00259 Fmt 4701 Sfmt 9990 3493 which the Commission concedes is a ‘‘change’’ from prior interpretations, is mistaken.17 As articulated in my prior dissent, the Final Rule’s interpretation of CEA section 4a(a)(2) ‘‘defies history and common sense.’’ 18 Following hard on the heels of the 2008 financial crisis and the collapse of the Amaranth hedge fund in 2006, it is implausible that the drafters of the DoddFrank Act intended what the Commission has now adopted. The Final Rule requires the Commission to believe that a Congress in the midst of the financial crisis, aware the CEA had never been interpreted to require predicate necessity findings for position limits, and engaged in a historic effort to regulate financial markets, would nonetheless make it harder for the Commission to impose Federal speculative position limits. The Commission’s revisionist legislative history is neither accurate nor credible. IV. Conclusion The Final Rule departs from both legal interpretations and policy frameworks that have served commodity markets well for decades. Most significantly, the Final Rule impermissibly delegates the authority to recognize non-enumerated hedge exemptions; provides farcically short review periods for private-entity hedge determinations; attempts to enshrine a policy of non-enforcement for position limits violations; fails to address the well-known risks of TAS transactions; and reinterprets the CEA to require antecedent necessity findings prior to imposing Federal position limits. I cannot support such a flawed rule. [FR Doc. 2020–25332 Filed 1–5–21; 11:15 am] BILLING CODE 6351–01–P 17 Significantly, however, at the Commission’s meeting on the proposal rule, the Commission’s Office of General Counsel clarified that a necessity finding is required only with respect to the Commission’s establishment of Federal position limits. The Office of General Counsel stated that a necessity finding was neither a prerequisite for a Commission directive to the exchanges to establish limits, nor prior to establishing the standards for such limits. The Commission’s legal interpretation in the Final Rule is identical to the interpretation in the proposed rule in this regard as well. 18 For a detailed discussion of how the Commission’s necessity finding misconstrues the CEA as amended by the Dodd-Frank Act, see Dissenting Statement of Commissioner Dan M. Berkovitz Regarding Proposed Rule on Position Limits for Derivatives (Jan. 30, 2020), available at https://www.cftc.gov/PressRoom/ SpeechesTestimony/berkovitzstatement013020b. E:\FR\FM\14JAR2.SGM 14JAR2

Agencies

Commodity Futures Trading Commission

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



[[Page 3235]]

Vol. 86

Thursday,

No. 9

January 14, 2021

Part II





Commodity Futures Trading Commission





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





Position Limits for Derivatives; Final Rule

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

[[Page 3236]]


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COMMODITY FUTURES TRADING COMMISSION

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

RIN 3038-AD99


Position Limits for Derivatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

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

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

SUPPLEMENTARY INFORMATION:

Table of Contents

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

I. Background

A. Introduction

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

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

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

[[Page 3237]]

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

    First, the Commission's existing regulations establish separate 
position limit levels for each of the nine legacy agricultural 
contracts. These Federal position limit levels set the maximum 
speculative positions in each of the nine legacy agricultural contracts 
that a person may hold in the spot month, individual month, and all-
months-combined.\3\
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    \3\ See 17 CFR 150.2.
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    Second, the existing Federal position limits framework provides 
exemptions to the Federal position limit levels for positions that 
constitute ``bona fide hedging transactions or positions'' and for 
certain ``spread or arbitrage'' positions.\4\
---------------------------------------------------------------------------

    \4\ See 17 CFR 150.3.
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    Third, the Commission's existing regulations determine which 
accounts and positions a person must aggregate for the purpose of 
determining compliance with the Federal position limit levels.\5\
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    \5\ See 17 CFR 150.4.
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    The existing Federal speculative position limits function in 
parallel to exchange-set position limits and/or exchange-set position 
accountability required by designated contract market (``DCM'') Core 
Principle 5.\6\ As a result, the nine legacy agricultural contracts are 
subject to both Federal and exchange-set limits, whereas other 
exchange-traded futures contracts and options on futures contracts are 
subject only to DCM-set limits and/or position accountability.
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    \6\ 7 U.S.C. 7(d)(5); 17 CFR 38.300. Paragraph (A) of DCM Core 
Principle 5 provides: To reduce the potential threat of market 
manipulation or congestion (especially during trading in the 
delivery month), the board of trade shall adopt for each contract of 
the board of trade, as is necessary and appropriate, position 
limitations or position accountability for speculators. Position 
limits generally cannot be exceeded absent an exemption, whereas 
position accountability allows an exchange to establish a level at 
which market participants, including those participants who do not 
qualify for an exemption, are required to: Provide position 
information to the exchange prior to increasing a position above the 
accountability level; halt further position increases; and/or reduce 
positions in an orderly manner. Core Principle 6 in part 37 of the 
Commission's regulations for swap execution facilities (``SEFs'') 
contains similar language. 17 CFR 38.600.
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    As part of the Dodd-Frank Act, Congress amended the CEA's position 
limits provisions, which since 1936 have authorized the Commission (and 
its predecessor) to impose limits on speculative positions to prevent 
the harms caused by excessive speculation. As discussed below, the 
Commission interprets these amendments as, among other things, tasking 
the Commission with establishing such position limits as it finds are 
``necessary'' for the purpose of ``diminishing, eliminating, or 
preventing'' excessive speculation causing sudden or unreasonable 
fluctuations or unwarranted changes in the price of such commodity.\7\ 
The Commission also interprets these amendments as tasking the 
Commission with establishing position limits on any ``economically 
equivalent'' swaps.\8\
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    \7\ 7 U.S.C. 6a(a)(1); see infra Section III.C. (discussion of 
the necessity finding).
    \8\ 7 U.S.C. 6a(a)(5); see also infra Section II.B.1.iii.
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    The Commission previously issued proposed and final rules in 2011 
(``2011 Final Rulemaking'') to implement the provisions of the Dodd-
Frank Act regarding position limits and the bona fide hedge 
definition.\9\ A September 28, 2012 order of the U.S. District Court 
for the District of Columbia vacated the 2011 Final Rulemaking, with 
the exception of the rule's amendments to 17 CFR 150.2.\10\
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    \9\ Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011) 
(``2011 Proposal''); Position Limits for Futures and Swaps, 76 FR 
71626 (Nov. 18, 2011) (``2011 Final Rulemaking'').
    \10\ Int'l Swaps & Derivatives Ass'n v. U.S. Commodity Futures 
Trading Comm'n, 887 F. Supp. 2d 259 (D.D.C. 2012) (``ISDA'').
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    Subsequently, the Commission proposed position limits regulations 
in 2013 (``2013 Proposal''), in June of 2016 (``2016 Supplemental 
Proposal''), and again in December of 2016 (``2016 Reproposal'').\11\ 
The 2016 Reproposal would have amended part 150 of the Commission's 
regulations to, among other things: Establish Federal position limits 
for 25 physical commodity futures contracts and their linked futures 
contracts, options on futures contracts, and ``economically 
equivalent'' swaps; revise the existing exemptions from such limits, 
including for bona fide hedges; and establish a framework for exchanges 
\12\ to recognize certain positions as bona fide hedges and thus exempt 
from position limits.
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    \11\ Position Limits for Derivatives, 78 FR 75680 (Dec. 12, 
2013) (``2013 Proposal''); Position Limits for Derivatives: Certain 
Exemptions and Guidance, 81 FR 38458 (June 13, 2016) (``2016 
Supplemental Proposal''); and Position Limits for Derivatives, 81 FR 
96704 (Dec. 30, 2016) (``2016 Reproposal'').
    \12\ Unless indicated otherwise, the use of the term 
``exchanges'' throughout this release refers to DCMs and SEFs.
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    To date, the Commission has not issued any final rulemaking based 
on the 2013 Proposal, 2016 Supplemental Proposal, or 2016 Reproposal. 
The 2016 Reproposal generally addressed comments received in response 
to the 2013 Proposal and the 2016 Supplemental Proposal. In a separate 
2016 proposed rulemaking, the CFTC also proposed, and later adopted in 
2016, amendments to rules in Sec.  150.4 of the Commission's 
regulations governing aggregation of positions for purposes of 
compliance with Federal position limits.\13\ These aggregation rules 
currently apply only to the nine legacy agricultural contracts subject 
to existing Federal position limits. Going forward, these aggregation 
rules will apply to all commodity derivative contracts that are subject 
to Federal position limits under this Final Rule.
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    \13\ Aggregation of Positions, 81 FR 91454 (Dec. 16, 2016) 
(``Final Aggregation Rulemaking''); see 17 CFR 150.4. Under the 
Final Aggregation Rulemaking, unless an exemption applies, a 
person's positions must be aggregated with positions for which the 
person controls trading or for which the person holds a 10% or 
greater ownership interest. The Division of Market Oversight has 
issued time-limited no-action relief from some of the aggregation 
requirements contained in that rulemaking. See CFTC Letter No. 19-19 
(July 31, 2019), available at https://www.cftc.gov/csl/19-19/download.
---------------------------------------------------------------------------

    The Commission published a notice of a proposed rulemaking in the 
Federal Register on February 27, 2020 for a new position limits 
proposal (``2020 NPRM''). After reconsidering the prior proposals, 
including reviewing the comments responding thereto, the Commission in 
the 2020 NPRM withdrew from further consideration the 2013 Proposal, 
the 2016 Supplemental Proposal, and the 2016 Reproposal.\14\
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    \14\ Because the earlier proposals were withdrawn in the 2020 
NPRM, comments on the earlier proposals are not part of the 
administrative record with respect to the 2020 NPRM nor with respect 
to this Final Rule, except where expressly referenced herein. In the 
2020 NPRM, the Commission stated that commenters to the 2016 
Reproposal should resubmit comments relevant to the subject 
proposal; commenters who wish to reference prior comment letters 
should cite those prior comment letters as specifically as possible. 
(85 FR at 11597). Accordingly, this Final Rule will not discuss 
comments submitted in connection with the 2016 Reproposal unless 
such comments were resubmitted for the 2020 NPRM.
---------------------------------------------------------------------------

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

[[Page 3238]]

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

    \15\ Comments were originally due by April 29, 2020. Due to the 
COVID-19 pandemic, the Commission extended the deadline to May 15, 
2020.
    \16\ The Commission states ``approximately 75 relevant comment 
letters'' since several commenters submitted additional, or 
supplemental, comments. As a result, the total could change slightly 
depending on whether one includes these supplemental comment letters 
in the total. Thus, for the avoidance of doubt, the Commission uses 
``approximately.'' The Commission received comments from: American 
Cotton Shippers Association (``ACSA''); American Feed Industry 
Association (``AFIA''); American Gas Association (``AGA''); AQR 
Capital Management, LLC (``AQR''); Archer Daniels Midland (``ADM''); 
AMCOT; Americans for Financial Reform (``AFR''); Arthur Dunavant 
Investments (``Dunavant''); ASR Group International, Inc. (``ASR''); 
Atlantic Cotton Association (``ACA''); Barnard, Chris (Individual); 
Better Markets, Inc. (``Better Markets''); Cargill, Inc. 
(``Cargill''); Castleton Commodities International LLC (``CCI''); 
Chevron USA Inc. (``Chevron''); Choice Cotton Company, Inc. 
(``Choice Cotton''); CHS Inc. (``CHS Inc.'') and CHS Hedging, LLC 
(``CHS Hedging'') (collectively, ``CHS''); Citadel; CME Group Inc. 
(``CME Group''); Commodity Markets Council (``CMC''); DECA Global 
LLC (``DECA''); East Cotton Company (``East Cotton''); Ecom 
Agroindustrial (``Ecom''); Edison Electric Institute (``EEI'') and 
Electric Power Supply Association (``EPSA'') (collectively, the 
``Joint Associations'' or ``EEI/EPSA''); Futures Industry 
Association (``FIA''); Glencore Agriculture Limited, Glencore 
Agriculture B.V. (collectively, ``Glencore''); ICE Futures U.S. 
(``IFUS''); IMC Companies (``IMC''); Industrial Energy Consumers of 
America; Institute for Agriculture & Trade Policy (``IATP''); 
Intercontinental Exchange, Inc. (``ICE''); International Energy 
Credit Association (``IECA''); International Swaps and Derivatives 
Association, Inc. (``ISDA''); Jess Smith & Sons (``Jess Smith''); 
Lawson/O'Neill Global Institutional Commodity (LOGIC) Advisors 
(``Lawson/O'Neill''); Long Island Power Authority (``LIPA''); Louis 
Dreyfus Company (``LDC''); Mallory Alexander International Logistics 
(``Mallory Alexander''); Managed Funds Association and Alternative 
Investment Management Association (collectively, the 
``Associations'' or ``MFA/AIMA''); Marshal, Gerald (Independent 
Trader); Matsen, Eric (Individual--Physical Commodity Risk 
Management Consultant); McMeekin Cotton LLC (``McMeekin''); Memtex 
Cotton Marketing, LLC (``Memtex''); Minneapolis Grain Exchange, Inc. 
(``MGEX''); Moody Compress & Warehouse Company (``Moody Compress''); 
Namoi Cotton Alliance (``Namoi''); National Cotton Council 
(``NCC''); National Council of Farmer Cooperatives (``NCFC''); 
National Council of Textile Organizations (``NCTO''); National 
Energy & Fuels Institute (``NEFI''); National Grain and Feed 
Association (``NGFA''); National Oilseed Processors Association 
(``NOPA''); National Rural Electric Cooperative; Association 
American Public Power Association; and American Public Gas 
Association (collectively, ``NRECA''); Natural Gas Supply 
Association (``NGSA''); Olam International Limited (``Olam''); 
Omnicotton Inc. (``Omnicotton''); Pacific Investment Management 
Company LLC (``PIMCO''); Parkdale Mills (``Parkdale''); Petroleum 
Marketers Association of America (``PMAA''); Public Citizen; Robert 
Rutkowski (``Rutkowski''); S. Canale Cotton Co. (``Canale Cotton''); 
Shell Energy North America (US), L.P. and Shell Trading (US) Company 
(collectively, ``Shell''); SIFMA Asset Management Group (``SIFMA 
AMG''); Skylar Capital Management LP (``SCM''); Southern Cotton 
Association (``Southern Cotton''); Southwest Ag Sourcing (``SW 
Ag''); Suncor Energy Marketing Inc. and Suncor Energy USA Marketing 
Inc. (collectively, ``SEMI''); Texas Cotton Association (``Texas 
Cotton''); The Coalition of Physical Energy Companies; The 
Commercial Energy Working Group (``CEWG''); The Walcot Trading 
Company, LLC (``Walcot''); Toyo Cotton Company (``Toyo''); VLM 
Commodities (``VLM''); Western Cotton Shippers Association 
(``WCSA''); White Gold Cotton Marketing, LLC (``White Gold'').
    \17\ The Final Rule's regulations are discussed in detail 
throughout this release.
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    Before addressing the specifics of the Final Rule, the Commission 
outlines several themes underscoring the Commission's approach in the 
Final Rule.
    First, the Commission believes that any position limits regime must 
take into account differences across commodities and contract types. 
The existing Federal position limits regulations apply only to the nine 
legacy agricultural contracts, all of which are physically-settled 
futures on agricultural commodities. Limits on these nine legacy 
agricultural contracts have been in place for decades, as have the 
Federal rules governing both the exemptions from these Federal position 
limits and the exchange-set position limits on the nine legacy 
agricultural contracts. The existing framework is largely a historical 
remnant of an approach that predates cash-settled futures contracts, 
institutional-investor interest in commodity indexes, highly liquid 
energy markets, and the Commission's jurisdiction over certain swaps.
    Congress has tasked the Commission with establishing such limits as 
it finds are ``necessary'' for the purpose of preventing the burdens 
associated with excessive speculation causing sudden or unreasonable 
fluctuations or unwarranted changes in the price of an underlying 
commodity; and establishing limits on swaps that are ``economically 
equivalent'' to any futures contracts or options on futures contracts 
subject to Federal position limits. An approach that is flexible enough 
to accommodate potential future, unpredictable developments in 
commercial hedging practices is well-suited for the current derivatives 
markets by accommodating differences in commodity types, contract 
specifications, hedging practices, cash-market trading practices, 
organizational structures of hedging participants, and liquidity 
profiles of individual markets.
    The Commission is building this flexibility into several parts of 
the Final Rule, including: (1) Exchange-set limits or accountability 
levels outside of the spot month for referenced contracts based on 
commodities other than the nine legacy agricultural contracts; (2) the 
ability for exchanges to use more than one formula when setting their 
own limit levels; (3) an updated formula for Federal non-spot month 
position limit levels on the nine legacy agricultural contracts that is 
calibrated to recently observed open interest, which has generally 
increased over time; (4) a bona fide hedging definition that is broad 
enough to accommodate common commercial hedging practices, including 
unfixed-price transactions as well as anticipatory hedging practices, 
such as anticipatory merchandising; (5) a simplified process for market 
participants to submit a single application to obtain non-enumerated 
bona fide hedge recognitions for purposes of Federal and exchange-set 
position limits that are in line with common commercial hedging 
practices; (6) the elimination of a restriction for purposes of Federal 
position limits on holding positions during the last trading days of 
the spot month; and (7) broader discretion for market participants to 
measure risk in the manner most suitable for their businesses.
    Second, the Final Rule establishes position limits with respect to 
16 additional commodities during the spot month, for a total of 25 core 
referenced futures contracts, and certain derivative contracts linked 
thereto, for which the Commission finds that speculative position 
limits are necessary.\18\ As described below, this necessity finding 
for the 25 core referenced futures contracts is based on two 
interrelated factors: (1) The importance of the 25 core referenced 
futures contracts to their respective underlying cash markets, 
including that they require physical delivery of the underlying 
commodity; and (2) the particular importance to the national economy of 
the commodities underlying the 25 contracts.\19\
---------------------------------------------------------------------------

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

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

[[Page 3239]]

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

B. Executive Summary

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

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

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[[Page 3240]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.000

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

    \21\ While the Final Rule includes Federal non-spot month limits 
only for referenced cintracts on the nine legacy agricultural 
contracts, the Final Rule requires exchanges to establish, 
consistent with Commission standards set forth in this Final Rule, 
exchange-set position limits and/or position accountability levels 
in the non-spot months for the 16 non-legacy core referenced futures 
contracts and for any associated referenced contracts.
    \22\ For clarity, clause (2) is intended to encompass potential 
physically-settled ``look-alike'' contracts that do not directly 
reference a core referenced futures contract but that are 
nonetheless based on the same commodity and delivery location as a 
core referenced futures contract.
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iii. Economically Equivalent Swaps
    The term referenced contracts also includes economically equivalent 
swaps, defined as swaps with ``identical material'' contractual 
specifications, terms, and conditions to a referenced contract. Swaps 
in a commodity other than natural gas that have identical material 
specifications, terms, and conditions to a referenced contract are 
still deemed economically equivalent swaps even if they differ from the 
referenced contract with respect to one or more of the following: (a) 
Lot size specifications or notional amounts, (b) delivery dates 
diverging by less than one calendar day for physically-settled swaps, 
or (c) post-trade risk management arrangement (e.g., uncleared swaps 
versus cleared futures contracts).
    The same general definition applies to natural gas swaps, except 
that the definition is expanded to include swaps with delivery dates 
diverging from the corresponding core referenced futures contract by 
less than two calendar days.
    Instruments that are exempt from Commission jurisdiction or 
otherwise not deemed to be swaps under the Commission's regulations 
(e.g., instruments that are excluded by the CEA's ``swap'' definition 
or Commission regulations as physically-settled forward contracts) are 
not ``economically equivalent swaps'' even if they otherwise fall 
within the ``economically equivalent swap'' definition.
2. Federal Position Limit Levels During the Spot Month

[[Page 3241]]

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


[[Page 3242]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.002

BILLING CODE 6351-01-C
     
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    \23\ As of October 15, 2020.
    \24\ The Federal spot month limit for Live Cattle adopted herein 
features a step-down limit similar to the CME's existing Live Cattle 
step-down exchange-set limit. The Federal spot month step-down limit 
is: (1) 600 at the close of trading on the first business day 
following the first Friday of the contract month; (2) 300 at the 
close of trading on the business day prior to the last five trading 
days of the contract month; and (3) 200 at the close of trading on 
the business day prior to the last two trading days of the contract 
month.
    \25\ ICE technically does not have an exchange-set spot month 
position limit level for ICE Sugar No. 16 (SF). However, it does 
have a single-month position limit level of 1,000 contracts, which 
effectively operates as a spot month position limit.
    \26\ As discussed below, the NYMEX Henry Hub Natural Gas (NG) 
Federal spot month limit for cash-settled look-alike referenced 
contracts will apply on a per-exchange and per-OTC swaps market 
basis rather than on an aggregate basis across exchanges.
    \27\ Currently, the cash-settled natural gas contracts are 
subject to an exchange-set spot month position limit level of 1,000 
equivalent-sized contracts per exchange. As of publication of the 
Final Rule, there are three exchanges that list cash-settled natural 
gas contracts: NYMEX, IFUS, and Nodal. As a result, a market 
participant may hold up to 3,000 equivalent-sized cash-settled 
natural gas contracts under existing exchange-set limits.
    The exchanges also have a conditional position limit framework 
for natural gas contracts. This exchange-set conditional spot month 
position limit permits up to 5,000 cash-settled NYMEX NG equivalent-
sized referenced contracts per exchange that lists such contracts, 
provided that the market participant does not hold positions in the 
physically-settled NYMEX NG referenced contract.
    \28\ The Federal spot month limit for Light Sweet Crude Oil 
adopted herein features the following step-down limit: (1) 6,000 
contracts as of the close of trading three business days prior to 
the last trading day of the contract; (2) 5,000 contracts as of the 
close of trading two business days prior to the last trading day of 
the contract; and (3) 4,000 contracts as of the close of trading one 
business day prior to the last trading day of the contract.

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[[Page 3243]]

i. Application of Federal Spot Month Limits to Commodities Other Than 
Natural Gas
    With the exception of natural gas, the Federal spot month position 
limit levels apply in the aggregate across exchanges and the over-the-
counter (``OTC'') swap markets.
    During the spot month, Federal position limits apply ``separately'' 
to physically-settled and cash-settled referenced contracts.\29\ 
Accordingly, during the spot month, a market participant is required to 
aggregate its net physically-settled positions, and separately its net 
cash-settled positions, across exchanges and the OTC swaps markets, but 
may not net cash-settled referenced contracts with physically-settled 
referenced contracts.
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    \29\ As discussed further under Section II.B.3.vi, cash-settled 
NYMEX NG referenced contracts under the Final Rule are subject to 
per-exchange and per-OTC swaps market Federal position limits. As a 
result, market participants are not required to aggregate their 
positions in natural gas referenced contracts across different 
exchanges and the OTC swaps markets but also may not net such 
positions across different exchanges or the OTC swaps market.
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ii. Application of Federal Spot Month Limits to Natural Gas
    For the NYMEX Henry Hub Natural Gas (``NYMEX NG'') physically-
delivered core referenced futures contract and its associated cash-
settled referenced contracts, the Final Rule modifies the 2020 NPRM by 
providing that Federal position limits apply to NYMEX NG cash-settled 
referenced contracts on a per-exchange and per-OTC swaps market basis 
(i.e., cash-settled positions are not aggregated across different 
exchanges and the OTC swaps market).
    Specifically, a market participant may hold up to 2,000 cash-
settled NYMEX NG referenced contracts (i.e., the NYMEX NG Federal spot 
month position limit) on each exchange that lists for trading a cash-
settled NYMEX NG referenced contract as well as the OTC swap market. 
Currently, three exchanges (NYMEX, IFUS, and Nodal) \30\ list cash-
settled ``look-alike'' NYMEX NG referenced contracts. Thus, a market 
participant is able to hold 2,000 cash-settled NYMEX NG referenced 
futures contracts on each exchange, which is 6,000 cash-settled look-
alike NYMEX NG referenced contracts in total. In addition, a market 
participant is able to hold a position of 2,000 cash-settled NYMEX NG 
equivalent-sized economically equivalent swaps in the OTC swaps markets 
for a total position of 8,000 cash-settled NYMEX NG referenced 
contracts across the four markets (i.e., NYMEX, IFUS, Nodal, and the 
OTC swaps market).
---------------------------------------------------------------------------

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

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

[[Page 3244]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.003

     
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    \31\ With the exception of the ICE Cotton No. 2 (CT) contract 
discussed below, for each of the legacy agricultural contracts, the 
single month limit is equal to the all-months-combined limit under 
the Final Rule.
    \32\ As of October 15, 2020.
    \33\ The single month limit for ICE Cotton No. 2 (CT) is set at 
50% of the all-months-combined limit, or 5,950 contracts, as 
discussed more fully below.
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4. Exchange-Set Limits and Exemptions Therefrom
i. Contracts Subject to Federal Position Limits
    An exchange that lists a contract subject to Federal position 
limits, as specified above, is required to set its own limits for such 
contracts at a level that is no higher than the Federal level. 
Exchanges may grant exemptions from their own limits to a level that 
exceeds the applicable Federal limit, provided the exemption is self-
effectuating (e.g., an enumerated bona fide hedge or a spread that 
satisfies the ``spread transaction'' definition) or provided the 
exemption is recognized by the Commission for purposes of Federal 
position limits (pursuant to an application submitted either directly 
to the Commission under Sec.  150.3 or indirectly to the Commission 
through an exchange under Sec.  150.9, as applicable). Exchanges may 
grant exemptions that are not recognized by the Final Rule; however, 
such exemptions must be capped at a level that is not higher than the 
applicable Federal position limit level.
ii. Physical Commodity Contracts Not Subject to Federal Position Limits
    For physical commodity contracts, for which no necessity finding 
was supported, and which are therefore not subject to Federal position 
limits, an exchange is generally required to set spot month position 
limit levels at no greater than 25% of deliverable supply, but has 
flexibility to submit other approaches for review by the Commission, 
provided the approach results in spot month position limit levels that 
are ``necessary and appropriate to reduce the potential threat of 
market manipulation or price distortion of the contract's or the 
underlying commodity's price or index'' and complies with all other 
applicable regulations.
    Outside of the spot month, an exchange has additional flexibility 
to set either position limits or position accountability levels, 
provided the levels are ``necessary and appropriate to reduce the 
potential threat of market manipulation or price distortion of the 
contract's or the underlying commodity's price or index.'' Non-
exclusive Acceptable Practices are included in new Appendix F to part 
150 under the Final Rule and provide several examples of formulas that 
the Commission has determined meet this standard, but an exchange has 
flexibility to develop other approaches.
    An exchange has flexibility to grant a variety of exemption types. 
Exchanges must take into account whether the exemption results in a 
position that is

[[Page 3245]]

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

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

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

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

    A person who holds a position that qualifies as a bona fide hedge 
and that is one of the enumerated hedges in Appendix A to part 150 is 
not required to request prior approval from the Commission to hold such 
bona fide hedge position above the Federal position limit. That is, the 
enumerated bona fide hedges are ``self-effectuating'' for purposes of 
Federal position limits. A person with an enumerated bona fide hedge 
position, however, would still need to request an exemption from the 
relevant exchange for any exchange-set limits.\36\
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    \36\ The processes for obtaining bona fide hedge recognitions 
and non-enumerated bona fide hedge recognitions are summarized in 
Section 7 below of this executive summary (Processes for Requesting 
Bona Fide Hedge Recognitions and Spread Exemptions).
---------------------------------------------------------------------------

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

[[Page 3246]]

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

    \37\ The phrase ``risk management'' as used in this instance 
refers to derivatives positions, typically held by a swap dealer, 
used to offset a swap position, such as a commodity index swap, with 
another entity for which that swap is not a bona fide hedge.
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ii. Spread Exemption
    A transaction or position may also exceed Federal position limits 
if it qualifies as a ``spread transaction,'' which includes the 
following common types of spreads: Intra-market spreads; inter-market 
spreads; intra-commodity spreads; inter-commodity spreads; calendar 
spreads; quality differential spreads; processing spreads (such as 
energy ``crack'' or soybean ``crush'' spreads); product and by-product 
differential spreads; and futures-options spreads.\38\
---------------------------------------------------------------------------

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

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

[[Page 3247]]

person filed the application in good faith and brings the position into 
compliance with the applicable Federal position limit within a 
commercially reasonable amount of time, as applicable.
    The Final Rule also allows a market participant with sudden or 
unforeseen hedging needs to file a request for a bona fide hedge 
exemption within five business days after exceeding the Federal limit 
(i.e., commonly referred to as a ``retroactive'' exemption 
application). If the Commission denies such application, the market 
participant will not be subject to a Federal position limit violation, 
provided the market participant filed the application in good faith and 
brings the position into compliance with the applicable Federal 
position limit within a commercially reasonable amount of time, as 
applicable.
    Among other changes, market participants are no longer required to 
file Forms 204 or 304, as applicable, with the Commission on a monthly 
basis to demonstrate cash-market positions justifying position limit 
overages. Under the Final Rule, the Commission will instead leverage 
cash-market information submitted directly to the exchanges.
iii. Spread Exemptions
    For a referenced contract on any commodity, a spread exemption is 
self-effectuating for purposes of Federal position limits, provided 
that (1) the position falls within one of the categories set forth in 
the ``spread transaction'' definition, and (2) the market participant 
separately applies to the applicable exchange for a spread exemption 
from exchange-set position limits.\39\
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    \39\ The Commission understands that certain exchanges may 
distinguish between the terms ``spread,'' ``arbitrage,'' and 
``straddle.'' For the purposes of the Commission's discussion and 
the Final Rule in general, the Commission's use of the term 
``spread'' is meant to include all of these related trading 
strategies, and any Commission reference to ``spread'' rather than 
``arbitrage'' or ``straddle'' is not intended to suggest a 
substantive difference in meaning.
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    A market participant with a spread position that does not fit 
within the ``spread transaction'' definition with respect to any of the 
commodities subject to Federal position limits may apply directly to 
the Commission, and must also separately apply to the applicable 
exchange.
8. Compliance Date and Effective Date
i. Summary
    The Final Rule's effective date is March 15, 2021 (the ``Effective 
Date''). This means that all aspects of the Final Rule will be 
effective as of the Effective Date, including the new enumerated bona 
fide hedges (e.g., anticipated merchandising) as well as the higher 
Federal position limits for the nine legacy agricultural contracts. 
However, as discussed below, the Commission is also providing for 
compliance dates that extend beyond the Effective Date in connection 
with several of the Final Rule's requirements.
    The Final Rule provides market participants with a compliance date 
of January 1, 2022 for purposes of compliance with the Federal position 
limits for the 16 non-legacy core referenced futures contracts that are 
subject to Federal position limits for the first time under this Final 
Rule. This compliance date also applies to any referenced contracts 
(other than economically equivalent swaps, which have a separate 
compliance date as discussed further below) related to these 16 non-
legacy core referenced futures contracts.
    The Final Rule also provides exchanges with a compliance date of 
January 1, 2022 for purposes of establishing exchange-set position 
limits and provisions associated with exemptions therefrom, including 
certain obligations to collect cash-market information from market 
participants in connection with market participants' applications for 
bona fide hedging exemptions to exchange-set limits, and to share the 
same with the Commission, consistent with the requirements under the 
Final Rule.
    Additionally, the Final Rule provides a compliance date of January 
1, 2023 with respect to (i) the elimination of previously-granted risk 
management exemptions,\40\ and (ii) Federal position limits for 
economically equivalent swaps.
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    \40\ As discussed above in Section 6 of this executive summary 
(Legal Standards for Exemptions from Federal Position Limits), the 
Commission is no longer recognizing risk management exemptions as 
bona fide hedges under the Final Rule.
---------------------------------------------------------------------------

    Because the nine legacy agricultural contracts are currently 
subject to Federal position limits under the existing Federal 
framework, the Final Rule does not provide a compliance date for the 
new Federal position limits under the Final Rule for such contracts, or 
a formal phase-in period. Therefore, such limits go into effect on the 
Effective Date. Thus, as of the Effective Date, market participants 
will be able to avail themselves of the Federal position limits under 
the Final Rule for the nine legacy agricultural contracts, all of which 
are higher than the existing Federal position limits (except for CBOT 
Oats, which will maintain the existing Federal position limit levels). 
However, the Commission notes that exchange-set position limits will 
remain at current levels unless and until the relevant exchange submits 
a rule amendment pursuant to part 40 of the Commission's regulations to 
amend the relevant exchange-set position limit.
    Furthermore, the Commission is delaying implementation of exchange-
set position limits on swaps since exchanges cannot view market 
participants' positions in swap positions across the various places 
they trade, including on competitor exchanges.\41\ However, after the 
January 1, 2023 compliance date for economically equivalent swaps 
(discussed above), the Commission underscores that it will enforce 
Federal position limits in connection with swaps.
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    \41\ In two years, the Commission will reevaluate the ability of 
exchanges to establish and implement appropriate surveillance 
mechanisms to implement DCM Core Principle 5 and SEF Core Principle 
6 with respect to swaps.
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    For convenience, the Commission is providing a table below 
identifying the Final Rule's Effective Date and compliance dates for 
market participants and exchanges in connection with certain 
obligations.
BILLING CODE 6351-01-P

[[Page 3248]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.004


[[Page 3249]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.005

BILLING CODE 6351-01-C

C. Section-by-Section Summary of Final Rule
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    \42\As noted above, under the Final Rule the Federal position 
limit levels for all of the nine legacy agricultural contracts will 
increase, other than CBOT Oats. However, the Commission notes that 
exchange-set position limits will remain at current levels unless 
and until the relevant exchange submits a rule amendment pursuant to 
part 40 of the Commission's regulations to amend the relevant 
exchange-set position limit.
    \43\As discussed further in this release, the Commission will no 
longer recognize risk management exemptions under the Final Rule. 
However, positions that are entered into based on a market 
participant's previously-granted risk management exemptions will be 
subject to an extended compliance date until January 1, 2023 with 
respect to Federal position limits. That is, a market participant 
with a previously granted risk management exemption will have a 
compliance date of January 1, 2023 with respect to the elimination 
of such risk management exemption.
    \44\Form 204 (for all nine legacy agricultural contracts other 
than cotton) and Parts I and II of Form 304 (for cotton) are 
submitted by a market participant to the Commission under the 
existing Federal position limits regulations in connection with 
Federal enumerated bona fide hedges employed by the market 
participants.
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    The Commission is adopting revisions to Sec. Sec.  150.1, 150.2, 
150.3, 150.5, and 150.6 and to parts 1, 15, 17, 19, 40, and 140, as 
well as adding Sec. Sec.  150.8, 150.9, and Appendices A-G to part 
150.\45\ Most noteworthy, the Commission is adopting the following 
amendments to the foregoing rule sections, each of which, along with 
all other changes in the Final Rule, is discussed in greater detail in 
Section II of this release. The following summary is not intended to 
provide a substantive overview of this Final Rule, but rather is 
intended to provide a guide to the rule sections that address each 
topic. For an overview of this Final Rule organized by topic (rather 
than by section number), please see the executive summary above.
---------------------------------------------------------------------------

    \45\ The 2020 NPRM proposed to remove and reserve part 151. It 
did not propose to amend current Sec.  150.4 dealing with 
aggregation of positions for purposes of compliance with Federal 
position limits, which was amended in 2016 in a prior rulemaking. 
See Final Aggregation Rulemaking, 81 FR at 91454.
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     The Commission finds that Federal speculative position 
limits are necessary for 25 core referenced futures contracts, and for 
any futures contracts and options on futures contracts linked thereto. 
The Commission adopts Federal position limits on physically-settled and 
linked cash-settled futures contracts, options on futures contracts, 
and ``economically equivalent swaps'' for such commodities. The 25 core 
referenced futures contracts include the nine ``legacy'' agricultural 
contracts currently subject to Federal position limits and 16 
additional non-legacy contracts, which include: Seven additional 
agricultural contracts, four energy contracts, and five metals 
contracts.\46\ Federal spot and non-spot

[[Page 3250]]

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

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

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

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

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

D. Effective Date and Compliance Period

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

[[Page 3251]]

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

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

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

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

[[Page 3252]]

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

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

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

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

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

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

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

    The Commission is required by ISDA to determine whether CEA section 
4a(a)(2)(A) requires the Commission to find, before establishing a 
position limit, that such limit is ``necessary.'' \55\ The provision 
states in relevant part that ``the Commission shall'' establish 
position limits ``as appropriate'' for futures contracts in physical 
commodities other than excluded commodities ``[i]n accordance with the 
standards set forth in'' the preexisting section 4a(a)(1).\56\ That 
preexisting provision requires the Commission to establish position 
limits as it ``finds are necessary to diminish, eliminate, or prevent'' 
certain enumerated burdens on interstate commerce.\57\ In the 2011 
Final Rulemaking, the Commission interpreted this language as an 
unambiguous mandate to establish position limits without first finding 
that such limits are necessary, but with discretion to determine the 
``appropriate'' levels for each.\58\ In ISDA, the U.S. District Court 
for the District of Columbia disagreed and held that section 
4a(a)(2)(A) is ambiguous as to whether the ``standards set forth in 
paragraph (1)'' include the requirement of an antecedent finding that a 
position limit is necessary.\59\ The court vacated the 2011 Final 
Rulemaking and directed the Commission to apply its experience and 
expertise to resolve that ambiguity.\60\ The Commission has done so and 
determines that section 4a(a)(2)(A) should be interpreted to require 
that before establishing position limits, the Commission must determine 
that limits are necessary.\61\ A full legal analysis is set forth infra 
at Sections III.C.-E.
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    \55\ ISDA, 887 F.Supp.2d at 281.
    \56\ 7 U.S.C. 6a(a)(2)(A).
    \57\ 7 U.S.C. 6a(a)(1).
    \58\ 76 FR at 71626, 71627.
    \59\ ISDA, 887 F.Supp.2d at 279-280.
    \60\ Id. at 281.
    \61\ See infra Section III.B.
---------------------------------------------------------------------------

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

F. The Commission's Use of Certain Terminology

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

[[Page 3253]]

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

G. Recent Volatility in the WTI Contract

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

[[Page 3254]]

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

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

H. Brief Summary of Comments Received

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

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

II. Final Rule

A. Sec.  150.1--Definitions

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

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

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

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

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

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

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

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

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

[[Page 3255]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3256]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3257]]

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

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

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

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

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

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

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

    \106\ See MiFID II Review report on position limits and position 
management (April 1, 2020), available at https://www.esma.europa.eu/sites/default/files/library/esma70-156-2311_mifid_ii_review_report_position_limits.pdf. The exemption under 
consideration for financial counterparties appears to be in line 
with the Final Rule's pass-through provision, in that the 
``exemption would apply to the positions held by that financial 
counterparty that are objectively measurable as reducing risks 
directly related to the commercial activities of the non-financial 
entities of the group . . . . this hedging exemption should not be 
considered as an additional exemption to the position limit regime 
but rather as a `transfer' to the financial counterparty of the 
group of the hedging exemption otherwise available to the commercial 
entities of the group.'' Id. at 32-33.
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    The Commission is, however, making several changes and 
clarifications to address commenter concerns:
    First, the Commission is extending the compliance date by which 
risk management exemption holders must reduce their risk management 
exemption positions to comply with Federal position limits under the 
Final Rule to January 1, 2023.\107\ This provides approximately two 
years beyond the Effective Date for the nine legacy agricultural 
contracts.\108\ The Commission believes that this will provide 
sufficient time for existing positions to roll off and/or be replaced 
with positions that conform with the Federal position limits adopted in 
this Final Rule, without adversely affecting market liquidity.
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    \107\ For clarity, a risk management exemption holder may enter 
into new positions based on, and in accordance with, its previously-
granted risk management exemption, during this compliance period, 
until January 1, 2023.
    \108\ For further discussion of the Final Rule's compliance and 
effective dates, see Section I.D. Both existing risk management 
exemptions, as discussed herein, and swap positions, will be subject 
to the extended compliance data to January 1, 2023.
---------------------------------------------------------------------------

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

[[Page 3258]]

appropriate to the reduction of risks in the conduct and management of 
a commercial enterprise.\109\ The Commission has, when defining bona 
fide hedging, historically focused on transactions that offset price 
risk.\110\
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    \109\ 7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3.
    \110\ For example, in promulgating existing Sec.  1.3, the 
Commission explained that a bona fide hedging position must, among 
other things, be economically appropriate to risk reduction, such 
risks must arise from operation of a commercial enterprise, and the 
price fluctuations of the futures contracts used in the transaction 
must be substantially related to fluctuations of the cash-market 
value of the assets, liabilities or services being hedged. Bona Fide 
Hedging Transactions or Positions, 42 FR 14832, 14833 (Mar. 16, 
1977) (emphasis added). ``Value'' is generally understood to mean 
price times quantity. The Dodd-Frank Act added CEA section 4a(c)(2), 
which copied the economically appropriate test from the Commission's 
definition in Sec.  1.3. See also 78 FR at 75702, 75703 (stating 
that the core of the Commission's approach to defining bona fide 
hedging over the years has focused on transactions that offset a 
recognized physical price risk).
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(2) Summary of the 2020 NPRM--Economically Appropriate Test
    In the 2020 NPRM, the Commission proposed to amend the economically 
appropriate prong of the bona fide hedge definition with one 
clarification: Consistent with the Commission's longstanding practice 
regarding what types of risk may be offset by bona fide hedging 
positions in excess of Federal position limits,\111\ the Commission 
made explicit in the proposed bona fide hedging definition that the 
word ``risks'' refers to, and is limited to, ``price risk.'' This 
proposed clarification did not reflect a change in policy, as the 
Commission has a longstanding policy that hedges of non-price risk 
alone cannot be recognized as bona fide hedges.\112\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3259]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3260]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3261]]

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

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

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

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

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

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

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

    \148\ The Working Group BFH Petition is available at https://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgbfhpetition012012.pdf. In the 2013 Proposal, the Commission 
provided that the transactions contemplated under the working 
group's examples Nos. 1, 2, 6, 7 (scenario 1), and 8 would be 
permitted under the proposed definition of bona fide hedging. In the 
2020 NPRM, the Commission preliminarily determined that transactions 
described in four additional CEWG examples would comply with the 
proposed expanded bona fide hedging definition in the 2020 NPRM: 
examples #4 (Binding, Irrevocable Bids or Offers), #5 (Timing of 
Hedging Physical Transactions), #9 (Holding a cross-commodity hedge 
using a physical delivery contract into the spot month) and #10 
(Holding a cross-commodity hedge using a physical delivery contract 
to meet unfilled anticipated requirements).
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    In the 2020 NPRM, the Commission preliminarily determined that 
commodity derivative positions described in two examples related to 
unfixed-price transactions did not fit within any of the proposed 
enumerated hedges. Specifically, the Commission preliminarily 
determined that the positions described in examples #3 (unpriced 
physical purchase or sale commitments) and #7 (scenario 2) (use of 
physical delivery referenced contracts to hedge physical transactions 
using calendar month average pricing) of the BFH Petition did not fit 
within any of the proposed enumerated bona fide hedges, but that market 
participants could apply for a non-enumerated exemption.\149\
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    \149\ 85 FR at 11612.
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    The Commission requested comment on the extent to which the 
proposed enumerated bona fide hedges should encompass the types of 
positions discussed in examples #3 (unpriced physical purchase or sale 
commitments) and #7 (scenario 2) (use of physical delivery reference 
contracts to hedge physical transactions using calendar month averaging 
pricing) of the CEWG's BFH Petition.\150\
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    \150\ 85 FR at 11622.
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c. Comments--Treatment of Unfixed Price Transactions
    In response to the 2020 NPRM, many commenters requested the 
Commission either clarify or make explicit that the proposed bona fide 
hedge definition would apply to commodity derivatives contracts used to 
hedge exposure to price risk arising from unfixed-price 
transactions.\151\
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    \151\ See, e.g., Ecom at 1; ACA at 2; CEWG at 22-24; Chevron at 
11; CME Group at 8-9; DECA at 2; East Cotton at 2; Gerald Marshall 
at 2; IFUS at 5-7; IMC at 2; Jess Smith at 2; LDC at 2; Mallory 
Alexander at 2; McMeekin at 2; Memtex at 2; Moody Compress 1; NCC at 
1; NGFA at 7; Olam at 2; Omnicotton at 2; Canale Cotton at 2; Shell 
at 7; Southern Cotton at 2; Suncor at 7; SW Ag at 2; Toyo at 2; 
Texas Cotton at 2; Walcot at 2; White Gold at 2.

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[[Page 3262]]

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

    \152\ CMC at 4; FIA at 16; ICE at 4-5; ACSA at 6-7; ADM at 3; 
CME Group at 8-9; CEWG at 19-21.
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    Comments on the treatment of unfixed price transactions often were 
submitted in connection with discussions on the scope of the proposed 
enumerated bona fide hedge for anticipated merchandising. As discussed 
further below, under the Final Rule's enumerated anticipated 
merchandising bona fide hedge section, many commenters requested the 
Commission clarify whether the proposed enumerated hedge for 
anticipated merchandising could be used to manage price risk arising 
from unfixed-price physical commodity transactions.
    With regards to CEWG's BFH Petition example #3 (unpriced physical 
purchase or sale commitments), many commenters disagreed with the 
Commission's preliminary determination in the 2020 NPRM that this type 
of transaction would not qualify for an enumerated bona fide hedge. 
Generally, commenters expressed the view that unfixed-price 
transactions for physical commodities are a common and standard market 
practice. The CEWG indicated that unfixed physical purchase or sale 
commitments are routinely conducted in numerous markets and commodities 
on a daily basis.\153\
---------------------------------------------------------------------------

    \153\ CEWG at 20 (also providing a similar example as it 
submitted in the original petition which included Example #3 
(unpriced physical purchase and sale commitments)).
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    Similar to the BFH Petition's example #3 (unpriced physical 
purchase or sale commitments), ACSA provided examples intended to 
demonstrate that merchants are exposed to calendar spread and supply 
price risk because they typically fulfill sales contracts by selling a 
commodity for future delivery in advance of purchasing the commodity 
needed to fulfill the sale.\154\ ACSA, along with other 
commenters,\155\ stated that unfixed-price transactions for the 
purchase or sale of the physical commodities are common, where a market 
participant buys the commodity at a price that is based on (i.e., is 
``indexed'' to) the settlement price of the nearby (or spot) futures 
month contract and later sells the commodity at a price that is indexed 
to the deferred month futures contract. ACSA and other commenters 
indicated that merchants do this to ``effectively bridge the gap 
between timing mismatches of supply and demand in the global 
marketplace.'' \156\
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    \154\ ACSA at 12-14; Several commenters concurred with ACSA 
regarding exposure to calendar spread. Mallory Alexander at 2; DECA 
at 2; CMC at 4; IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2; 
Walcot at 2.
    \155\ ACSA at 4-7; CMC at 4; Mallory Alexander at 2; DECA at 2; 
IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2; Walcot at 2.
    \156\ ACSA at 5.
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    Related to the BFH Petition example #7 (scenario 2) (use of 
physical delivery reference contracts to hedge physical transactions 
using calendar month averaging pricing ``CMA''), commenters requested 
that the Commission clarify that hedges of underlying physical 
transactions that utilize CMA pricing structures fall within the 
enumerated bona fide hedge for anticipated merchandising.\157\ Chevron 
requested the Commission clarify that commercial firms that price 
commercial transactions to purchase or sell physical crude oil or 
natural gas using a CMA pricing structure (whether they are solely 
merchants or conduct merchant activities as part of an integrated 
energy company), should receive bona fide hedge treatment for their 
commodity derivative contract positions that offset the risks arising 
from those CMA priced purchases or sales.\158\
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    \157\ MGEX at 2; IMC at 2; Mallory Alexander at 2; Walcot at 2; 
White Gold at 2; Olam at 2; LDC at 1; Canale at 2; Moody Compress at 
1; Gerald Marshall at 2; SW Ag at 2; DECA at 2; Chevron at 12; 
Suncor at 11; CEWG at 21.
    \158\ Chevron at 11.
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    Similarly, other commenters asked for clarification regarding 
whether the existing enumerated bona fide hedge for unfilled 
anticipated requirement extends to scenarios that involve unfixed-price 
contracts that many electric generators enter into to address their 
anticipated supply requirements.\159\ These commenters asked for 
clarification that unfixed-price purchase commitments do not ``fill'' 
an anticipated requirement such that the market participant would be 
able to still qualify for the enumerated unfilled anticipated 
requirement bona fide hedge.\160\
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    \159\ EPSA at 5; IECA at 8.
    \160\ Id.
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d. Discussion of Final Rule--Treatment of Unfixed Price Transactions
    As discussed above, the Commission is affirming and broadening the 
application of the interpretation articulated in Staff Letter No. 12-
07. As a result, commercial market participants in the physical 
marketing channel that enter into unfixed price transactions may 
qualify for bona fide hedge treatment under the enumerated bona fide 
hedges for anticipatory merchandising, anticipated unsold production, 
or anticipated unfilled requirements because, as discussed below, 
unfixed price transactions do not give rise to outright price risk and 
do not otherwise fix an outright price.\161\
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    \161\ As a result, based on this rationale, a commercial market 
participant that has an unfixed-price commitment is treated the same 
as a commercial market participant that has no unfixed-price 
commitment for purposes of determining whether one qualifies for 
these enumerated anticipatory bona fide hedges.
---------------------------------------------------------------------------

    Consistent with Staff Letter No. 12-07, commercial market 
participants in the physical marketing channel that enter into unfixed-
price transactions may continue to qualify for the enumerated bona fide 
hedge for unfilled anticipated requirements for those unfixed price 
transactions. Further, the Commission is broadening this rationale to 
additionally include the existing enumerated bona fide hedge for 
``unsold anticipated production'' \162\ and the new enumerated bona 
fide hedge for anticipated merchandising.\163\ A commercial market 
participant that enters into an unfixed-price transaction may qualify 
for one of these enumerated anticipatory bona fide hedges as long as 
the commercial entity otherwise satisfies all requirements for such 
anticipatory bona fide hedge, including demonstrating its anticipated 
need in the physical marketing channel related to either its unsold 
production, unfilled requirements, and/or merchandising, as 
applicable.\164\
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    \162\ For further discussion regarding the enumerated bona fide 
hedge for ``unsold anticipated production,'' see Section 
II.A.1.vi.d.
    \163\ For further discussion regarding the new enumerated bona 
fide hedge for ``anticipated merchandising,'' see Section 
II.A.1.vi.f.
    \164\ As such, merely entering into an unfixed-price transaction 
is not alone sufficient to demonstrate compliance with one of the 
enumerated anticipatory bona fide hedges. The specific requirements 
associated with each enumerated bona fide hedge, including each 
anticipatory bona fide hedge, are described in detail further below.
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    Under this Final Rule, the Commission is clarifying that a 
commercial market participant may still qualify for an enumerated 
anticipatory bona fide hedge for an anticipated need, based on a good-
faith expectation of that need, even if the market participant has 
entered into an unfixed-price transaction, since the Commission does 
not deem the unfixed-price transaction to ``fill'' or ``address'' the 
anticipated need. This rationale is predicated on the fact that an 
unfixed-price commitment does not offset the price risk associated with 
an anticipated need (i.e.,

[[Page 3263]]

anticipated unsold production, anticipated unfilled requirements, and/
or anticipated merchandising, as applicable). This is because unfixed-
price transactions do not give rise to outright price risk and 
therefore do not alter the outright price risks faced by a commercial 
market participant, even though the market participant has 
contractually assured either a supply of the commodity (in the case of 
anticipated unfilled requirements), the sale of its output (in the case 
of anticipated unsold production), or the purchase or sale of the 
commodity to be merchandised (in the case of anticipated 
merchandising).\165\
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    \165\ Consistent with the existing Federal position limits 
framework, under the Final Rule, commercial market participants may 
not qualify for any anticipatory bona fide hedge merely to offset 
risks associated with non-commercial (i.e., financial) activities.
---------------------------------------------------------------------------

    In other words, a trader with an unfixed-price commitment still has 
price risk related to its anticipated need until the price is fixed. 
Once the price has become fixed, the market participant may no longer 
avail itself of the enumerated anticipatory bona fide hedge, but may 
potentially avail itself of another enumerated bona fide hedge, (such 
as the bona fide hedges for fixed-price purchase contracts or for 
fixed-price sales contracts, as applicable), provided all applicable 
requirements of such other enumerated bona fide hedges are satisfied.
    Under the Final Rule, a commercial market participant must continue 
to be able to demonstrate an anticipated need related to unsold 
production, unfilled requirements, and/or merchandising.
    Accordingly, the Commission determines that the commercial market 
participant engaged in unfixed-price transactions in the BFH Petition's 
example #3 (unpriced physical purchase or sale commitments) and example 
#7 (scenario 2) (use of physical delivery referenced contracts to hedge 
physical transactions using calendar month average pricing) can qualify 
for one of the enumerated anticipatory bona fide hedges under the Final 
Rule to the extent the market participant otherwise complies with the 
applicable conditions of the relevant enumerated anticipatory bona fide 
hedge in connection with the market participant's commercial 
activities.
    For clarity, the Commission also underscores that under the 
Commission's existing portfolio hedging policy, market participants, 
including vertically-integrated firms (i.e., those firms that may 
qualify as more than one of a producer; processor, manufacturer, or 
utility; and/or merchandiser), may continue to manage their price risks 
by utilizing more than one enumerated bona fide hedge (including more 
than one anticipatory bona fide hedge).
    The Commission recognizes that there are many ways in which market 
participants both structure their organizations and engage in 
commercial hedging practices. As such, market participants may manage 
the price risk from their various commercial activities by utilizing 
multiple enumerated bona fide hedge exemptions in the manner that is 
most suitable to their particular circumstances. Nevertheless, for 
illustrative purposes, the Commission provides a general example of how 
market participants may utilize the enumerated anticipatory bona fide 
hedges in connection with their unfixed price transactions:
    For example, Producer X has the physical capacity to produce 
100,000 barrels of physical WTI crude oil on an annual basis. Producer 
X agrees to sell 80,000 barrels of WTI crude oil to Merchandiser Y via 
a floating/unfixed-price contract in which the delivery will be priced 
at the NYMEX March 2020 WTI crude oil futures final settlement price. 
Producer X still does not have a buyer for its remaining 20,000 
barrels, but anticipates selling all of its production, as it has in 
previous years. Under this scenario, Producer X may utilize the 
enumerated unsold anticipated production enumerated hedge to offset the 
price risk from its unsold production, which includes both the 80,000 
barrels of oil sold to Merchandiser Y at an unfixed price, as well as 
the unsold 20,000 barrels.\166\ On the other hand, Merchandiser Y may 
utilize the enumerated hedge for anticipated merchandising to hedge its 
anticipated merchandising transactions, which include the 80,000 
barrels it purchased from Producer X at an unfixed price. Because 
Merchandiser Y has a history of merchandising more than 80,000 barrels 
a year, and it anticipates merchandising more than 80,000 barrels in 
the next twelve months, Merchandiser Y's anticipated merchandising 
hedge may include the 80,000 barrels it purchased from Producer X at an 
unfixed price and its remaining anticipated twelve-months' 
merchandising. Separately, assuming Merchandiser Y also has crude oil 
it purchased at a fixed price in a storage tank, Merchandiser Y may 
also utilize the enumerated hedge for inventory and cash-commodity 
fixed-price purchase contracts to hedge the price risk from those fixed 
price purchases of crude oil.
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    \166\ In the case where Producer X fixes the price of its sale 
before delivery, while it no longer holds an anticipatory hedge, 
Producer X may qualify for the enumerated hedge for fixed price 
sales, assuming all applicable requirements for that hedge are 
satisfied.
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    In response to commenters requesting that the Commission create a 
new enumerated bona fide hedge for unfixed-price transactions, the 
Commission does not believe that this is necessary because, as 
described above, commercial market participants may qualify for the 
enumerated anticipatory bona fide hedges while also entering into 
unfixed-price transactions. Further, the Commission believes that it is 
not suitable to create a new enumerated bona fide hedge expressly 
covering all unfixed price transactions to accomplish the same since 
there is an inherent difficulty in evaluating the propriety of a hedge 
of an unfixed price obligation with a fixed-price futures contract as 
there is basis risk until the unfixed price obligation is fixed. Given 
differences among markets, creating a new enumerated bona fide hedge 
for any unfixed price transaction could, under certain circumstances, 
harm market integrity, enable potential market manipulation, and/or 
allow excessive speculation by potentially affording bona fide hedging 
treatment for speculative transactions.
    For example, assume a market participant enters into an unfixed-
price sales contract (e.g., priced at a fixed differential to a 
deferred month futures contract), and immediately enters into a 
calendar month spread to reduce the risk of the fixed basis moving 
adversely. It may not be economically appropriate to recognize as bona 
fide a long futures position in the spot (or nearby) month and a short 
futures position in a deferred calendar month matching the market 
participant's cash delivery obligation, in the event the spot (or 
nearby) month price is higher than the deferred contract month price 
(referred to as backwardation, and characteristic of a spot cash market 
with supply shortages), because such a calendar month futures spread 
would lock in a loss. A position locking in a loss generally is not 
economically appropriate to the reduction of risk, as it increases risk 
by generating a loss, and such a transaction may be indicative of an 
attempt--or at the very least provides inappropriate incentives--to 
manipulate the spot (or nearby) futures price.\167\
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    \167\ See 81 FR at 96750.
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    Finally, the Commission emphasizes that to the extent that a market 
participant does not qualify for an enumerated anticipatory bona fide 
hedge in connection with an unfixed-price transaction, the market 
participant

[[Page 3264]]

could still avail itself of the process under Sec. Sec.  150.3 and 
150.9 for requesting approval of non-enumerated bona fide hedges.
v. The Enumerated Bona Fide Hedge Exemptions, Generally
a. Background--Bona Fide Hedge Exemptions, Generally
    As discussed earlier in this release, the list of bona fide hedges 
explicitly contained in paragraph (2) of the existing bona fide hedging 
definition in Sec.  1.3 of the Commission's regulations lists (or 
``enumerates'') seven bona fide hedges, which are generally referred to 
as the ``enumerated bona fide hedges,'' in four general categories. 
These four existing categories of enumerated hedges include: (1) Sales 
of futures contracts to hedge (i) ownership or fixed-price cash 
commodity purchases and (ii) unsold anticipated production; (2) 
purchases of futures contracts to hedge (i) fixed-price cash commodity 
sales and (ii) unfilled anticipated requirements; (3) offsetting sales 
and purchases of futures contracts to hedge offsetting unfixed-price 
cash commodity sales and purchases; and (4) cross-commodity 
hedges.\168\
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    \168\ 17 CFR 1.3.
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    The list of enumerated bona fide hedges found in paragraph (2) of 
the existing bona fide hedging definition was developed at a time when 
only agricultural commodities were subject to Federal position limits, 
and has not been updated since 1987.\169\ The Commission believes, as 
discussed further below, that such list is too narrow to reflect common 
commercial hedging practices, including for metal and energy contracts. 
Numerous market and regulatory developments have taken place since 
1987, including, among other things, increased futures trading in the 
metals and energy markets, the development of the swaps markets, and 
the shift in trading from pits to electronic platforms. In addition, 
the Commodity Futures Modernization Act of 2000 \170\ and the Dodd-
Frank Act introduced various regulatory reforms, including the 
enactment of position limits core principles.\171\ The Commission thus 
proposed in the 2020 NPRM to update its bona fide hedging definition to 
better conform to the current state of the law and to better reflect 
market developments over time.
---------------------------------------------------------------------------

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

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

    With respect to the treatment of the enumerated bona fide hedges 
under the Final Rule, the Commission notes that positions in referenced 
contracts subject to Federal position limits that meet any of the 
enumerated bona fide hedges will, for purposes of Federal position 
limits, be deemed to meet the bona fide hedging definition in CEA 
section 4a(c)(2)(A), as well as the Commission's bona fide hedging 
definition in Sec.  150.1 under the Final Rule. As a result, enumerated 
bona fide hedges are self-effectuating for purposes of Federal position 
limits, provided the market participant separately requests an 
exemption from the applicable exchange-set limit established pursuant 
to Sec.  150.5(a).\173\
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    \173\ For further discussion of the exchange exemption process, 
see Section II.D.3.i.b.
---------------------------------------------------------------------------

    The enumerated hedges are each described below, followed by a 
discussion of the Five-Day Rule. When first proposed, the Commission 
viewed the enumerated bona fide hedges as conforming to the general 
definition of bona fide hedging ``without further consideration as to 
the particulars of the case.'' \174\ Similarly, the list of enumerated 
bona fide hedges under the Final Rule reflects categories of bona fide 
hedges for which the Commission has determined, based on experience 
over time, that no case-by-case determination or review of additional 
details by the Commission is needed to determine that the position or 
transaction is a bona fide hedge. This Final Rule does not foreclose 
the recognition of other hedging practices as bona fide hedges, as 
discussed below.
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    \174\ Bona Fide Hedging Transactions or Positions, 42 FR 14832 
(Mar. 16, 1977).
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    While the enumerated bona fide hedges adopted herein are self-
effectuating for purposes of Federal position limits,\175\ the 
Commission and the exchanges will continue to exercise close oversight 
over such positions to confirm that market participants' claimed 
exemptions are consistent with their cash-market activity. In 
particular, because all contracts subject to Federal position limits 
are also subject to exchange-set limits, all traders seeking to exceed 
Federal position limits must request an exemption from the relevant 
exchange for purposes of the exchange

[[Page 3265]]

position limit, regardless of whether the position falls within one of 
the enumerated hedges. In other words, enumerated bona fide hedge 
exemptions that are self-effectuating for purposes of Federal position 
limits are not self-effectuating for purposes of exchange-set position 
limits.
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    \175\ See infra Section II.C. (discussing Sec.  150.3) and 
Section II.G. (discussing Sec.  150.9).
---------------------------------------------------------------------------

    Exchanges have well-established programs for granting exemptions, 
including, in some cases, experience granting exemptions for 
anticipatory merchandising for certain traders in markets not currently 
subject to Federal position limits. As discussed in greater detail 
below, Sec.  150.5 as adopted herein helps ensure that such programs 
conform to standards established by the Commission.\176\ The Commission 
expects exchanges will continue to be thoughtful and deliberate in 
granting exemptions, including anticipatory exemptions. The Commission 
predicates this expectation on its decades of experience working 
together with the relevant exchanges and observations generally of the 
applicable exchange-traded futures markets.
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    \176\ See infra Section II.D. For example, Sec.  150.5 requires, 
among other things, that: Exemption applications filed with an 
exchange include sufficient information to enable the exchange and 
the Commission to determine whether the exchange may grant the 
exemption, including an indication of whether the position qualifies 
as an enumerated hedge for purposes of Federal limits and a 
description of the applicant's activity in the underlying cash 
markets; and the exchange provides the Commission with a monthly 
report showing the disposition of all exemption applications, 
including cash-market information justifying the exemption.
---------------------------------------------------------------------------

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

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

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

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

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

    \179\ Appendix A to part 150 lists the following enumerated bona 
fide hedges: (a)(1) Hedges of Inventory and Cash Commodity Fixed-
Price Purchase Contracts; (a)(2) Hedges of Cash Commodity Fixed-
Price Sales Contracts; (a)(3) Hedges of Offsetting Unfixed Price 
Cash Commodity Sales and Purchases; (a)(4) Hedges of Unsold 
Anticipated Production; (a)(5) Hedges of Unfilled Anticipated 
Requirements; (a)(6) Hedges of Anticipated Merchandising; (a)(7) 
Hedges by Agents; (a)(8) Short Hedges of Anticipated Mineral 
Royalties; (a)(9) Hedges of Anticipated Services; (a)(10) Offsets of 
Commodity Trade Options; (a)(11) Cross-Commodity Hedges. As 
previously mentioned, the Commission has also reorganized the order 
of the list of enumerated hedges. The Final Rule reorders Appendix A 
so that the bona fide hedges are listed by hedges of purchases, 
sales, anticipated activities, or other new types of hedges.
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a. Hedges of Inventory and Cash Commodity Fixed-Price Purchase 
Contracts
(1) Background--Inventory and Cash Commodity Fixed-Price Purchase 
Contracts
    Inventory and fixed-price cash commodity purchase contracts have 
long served as the basis for a bona fide hedging position.\180\ This 
bona fide hedge is enumerated in paragraph (2)(i)(A) of the existing 
bona fide hedging definition in Sec.  1.3, and recognizes as a bona 
fide hedge sales of any commodity for future delivery on a contract 
market which do not exceed in quantity ownership (i.e., inventory) or 
fixed-price purchase of the same commodity by the same person.
---------------------------------------------------------------------------

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

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

    \181\ 81 FR at 96964; 78 FR at 75713; 76 FR at 11609.
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(2) Summary of the 2020 NPRM--Inventory and Cash Commodity Fixed-Price 
Purchase Contracts
    This proposed enumerated bona fide hedge recognized that a 
commercial enterprise is exposed to price risk if it has obtained 
inventory in the normal course of business or has entered into a fixed-
price spot or forward purchase contract calling for delivery in the 
physical marketing channel of a cash-market commodity (or a combination 
of the two), and has not offset that price risk exposure (e.g., that 
the market price of the inventory could decrease). In connection with 
the proposed enumerated hedge, any such inventory, or a fixed-price 
purchase contract, must be on hand, as opposed to a non-fixed purchase 
contract or an anticipated purchase.
    An appropriate hedge to offset the price risk arising from 
inventory or a fixed-price purchase contract under the 2020 NPRM would 
be to establish a short position in a commodity derivative contract. 
The Commission also stated in the 2020 NPRM that an exchange may 
require such short position holders to demonstrate the ability to 
deliver against the short

[[Page 3266]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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[[Page 3267]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3268]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3269]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3270]]

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

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

    For example, under Sec.  150.5(a)(2)(ii)(A), finalized herein, all 
market participants seeking a bona fide hedge exemption for referenced 
contracts subject to Federal position limits, including those market 
participants with enumerated bona fide hedges that are self-
effectuating for purposes of Federal position limits, must still file 
an application to the exchange requesting an exemption from the 
applicable exchange-set position limits prior to exceeding the 
exchange-set limits. The application for an exemption from exchange-set 
limits must include information the exchange needs to determine, and 
the Commission can use that information to independently determine, 
whether the facts and circumstances support the exchange granting such 
an exemption. The market participant must include a description of the 
applicant's activity in the cash markets and swaps markets for the 
commodity underlying the position for which the application is 
submitted, including, but not limited to, information regarding the 
offsetting cash positions.\222\ The exchange is required to take into 
account whether the exemption would result in positions that would not 
be in accord with sound commercial practices and whether the position 
would exceed an amount that may be established and liquidated in an 
orderly fashion.\223\ Accordingly, if hedging more than twelve months' 
quantity of unfilled anticipated requirements would not be in accord 
with sound commercial practices, or would exceed an amount that may be 
established and liquidated in an orderly fashion, the exchange would be 
prohibited from granting the exemption.
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    \222\ 150.5(a)(2)(ii)(A).
    \223\ 150.5(a)(2)(ii)(G).
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    Even in the absence of a Federal twelve-month restriction, when 
administering exchange-set limits, exchanges may, as they do today, 
implement a variety of restrictions and limitations on position size to 
maintain orderly markets and to fulfill their regulatory obligations. 
As described in further detail below, the Commission is finalizing 
guidance in paragraph (b) of Appendix B to part 150 to help exchanges 
determine when any such restrictions during the spot month might be 
appropriate, and when such restrictions may not be needed. For example, 
consistent with the guidance in Appendix B to part 150, paragraph (b), 
an exchange may consider adopting rules to require that during the 
lesser of the last five days of trading (or such time period for the 
spot month), such positions must not exceed the person's unfilled 
anticipated requirements of the underlying cash commodity for that 
month and for the next succeeding month.\224\ Depending on the specific 
facts and circumstances, and particular market dynamics, any such 
quantity limitation may prevent the use of long futures to source large 
quantities of the underlying cash commodity. The Commission may be able 
to determine that an exchange's adoption of a two-month limitation 
would allow for an amount of activity that is economically appropriate 
and in line with common commercial hedging practices, without 
jeopardizing any statutory objectives.
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    \224\ This is essentially a less-restrictive version of the 
Five-Day rule, allowing a participant to hold a position during the 
end of the spot period if economically appropriate, but only up to 
two months' worth of anticipated requirements. The two-month 
quantity limitation has long-appeared in existing Sec.  1.3 as a 
measure to prevent the sourcing of massive quantities of the 
underlying in a short time period. 17 CFR 1.3.
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(ii) Scope of Unfilled Anticipated Requirements and Unfixed-Price 
Transactions
    Commenters questioned the extent to which anticipated requirements 
may be considered to be ``filled'' by unfixed-price purchase supply 
contracts under the proposed enumerated bona fide hedge for unfilled 
anticipated requirements. COPE, IECA, EPSA and EEI requested 
clarification on whether this enumerated hedge covers anticipated 
requirements ``filled'' by an unfixed-price purchase contract common to 
many electric generators.\225\
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    \225\ COPE at 6; IECA at 7-8; EPSA and EEI jointly at 5.
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    IECA recommended the Commission should either (i) adopt a broad 
definition of the word ``unfilled'' that would include anticipated 
requirements that are ``filled'' by unfixed-price transactions, or (ii) 
expand this bona fide hedge to include both ``unfilled'' and 
``unpriced'' \226\ anticipated requirements.\227\
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    \226\ The Commission recognizes that market participants may 
utilize different nomenclature to refer to unfixed-price contracts. 
For example, some commenters may refer to these contracts as 
``unpriced'' contracts, while others may refer to these physical 
contracts as being at an unfixed spot index price. See FIA at 17, 
31; COPE at 6.
    \227\ IECA at 7-8.
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    AGA also requested clarification \228\ regarding the 2020 NPRM's 
statement that this bona fide hedge would recognize a position where a 
utility is ``required or encouraged'' by its public utility commission 
to hedge.\229\ AGA noted that while the ``required or encouraged'' 
language is not in the proposed regulatory text, clarification of the 
scope for the exemption would result in more certainty for those 
utilities in states where the public utility commission may not 
directly address or require hedging activities, but instead may allow 
or permit hedging for the potential benefits to customers.\230\
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    \228\ AGA at 6-7.
    \229\ See 7 U.S.C. 6a(c)(2)(A)(iii); 85 FR at 11610 (``This 
would recognize a bona fide hedging position where a utility is 
required or encouraged by its public utility commission to hedge'').
    \230\ AGA at 6-7.
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(a) Discussion of Final Rule--Scope of Unfilled Anticipated 
Requirements
    Regarding the requests for clarification on the scope of the term 
``unfilled'' in this enumerated hedge, the Commission clarifies that 
anticipated ``unfilled'' requirements are not ``filled'' by unfixed-
price transactions. Accordingly, a market participant with a purchase 
or sale of a physical commodity, entered into at an unfixed price, may 
continue to avail itself of this anticipatory hedge even though the 
participant has entered into a firm, albeit unfixed-price, commitment, 
and provided all applicable requirements are satisfied.\231\
---------------------------------------------------------------------------

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

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

[[Page 3271]]

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

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

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

    \233\ 81 FR at 96752.
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    Under this anticipatory hedge, once the price is fixed on a supply 
contract, the market participant holding the anticipatory hedge 
position must, to the extent the position is above an applicable 
Federal position limit, liquidate the position in an orderly manner in 
accordance with sound commercial practices. Nevertheless, subject to 
the specific facts and circumstances, the market participant at that 
point may have established the basis for a different bona fide hedge 
exemption to offset the price risk arising from its fixed price 
exposure.
    Finally, the Commission agrees with the commenters' request for 
clarification that a utility qualifies for the unfilled anticipated 
requirements enumerated hedge even if the utility is not ``required or 
encouraged'' by its public utility commission to hedge.

f. Hedges of Anticipated Merchandising

(1) Background--Anticipated Merchandising
    The existing bona fide hedge definition in Sec.  1.3 includes 
enumerated bona fide hedges that recognize offsets of certain 
anticipated activities,\234\ but does not currently include an 
enumerated bona fide hedge for anticipated merchandising. While the 
Commission's 2011 Final Rule included an enumerated hedge for 
anticipated merchandising, it was a narrow hedge focused on the leasing 
of storage capacity,\235\ and that rulemaking was ultimately vacated.
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    \234\ See, e.g., Sec. Sec.  1.3(z)(2)(i)(B) (unsold anticipated 
production) and 1.3(z)(2)(ii)(C) (unfilled anticipated 
requirements).
    \235\ The 2011 Final Rule was the first time the Commission 
recognized that in some circumstances, a market participant that 
owns or leases an asset in the form of storage capacity could 
establish positions to reduce the risk associated with returns 
anticipated from owning or leasing that capacity. In those narrow 
circumstances, the Commission found that those transactions 
satisfied the statutory definition of a bona fide hedging 
transaction.
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(2) Summary of the 2020 NPRM--Anticipated Merchandising
    The Commission proposed a new enumerated bona fide hedge for 
anticipated merchandising. The proposed anticipated merchandising hedge 
recognized long or short positions in commodity derivative contracts 
that offset the anticipated change in value of the underlying commodity 
that a person anticipates purchasing or selling.\236\
---------------------------------------------------------------------------

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

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

    \237\ Id.
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(3) Summary of the Commission Determination--Anticipated Merchandising
    The Commission is adopting the anticipated merchandising enumerated 
hedge as proposed, and makes certain clarifications below to respond to 
specific questions from commenters summarized below.
    The Commission recognizes that anticipated merchandising is a 
hedging practice commonly used by some commodity market participants, 
and that merchandisers play an important role in the physical supply 
chain. The Commission also recognizes that the derivative transactions 
utilized by commercial participants to manage such merchandising 
activity are beneficial to price discovery.
(4) Comments--Anticipated Merchandising
(i) Generally
    A majority of commenters strongly supported the addition of an 
enumerated bona fide hedge for anticipatory merchandising.\238\ In 
particular, market participants from the energy industry strongly 
supported the inclusion of this enumerated hedge, subject to certain 
clarifications described in detail further below.\239\ On the other 
hand, Better Markets indicated that the enumerated anticipatory bona 
fide hedges generally, and particularly the enumerated hedge for 
anticipatory merchandising, pose a regulatory avoidance risk.\240\ 
Better Markets expressed concern that market participants could attempt 
to claim an underlying risk is anticipated in a cash commodity in order 
to justify positions in referenced contracts that exceed Federal 
position limits.\241\
---------------------------------------------------------------------------

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

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

[[Page 3272]]

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

    \242\ CMC at 5 (stating that n.105 of the 2020 NPRM casts a 
significant shadow of uncertainty and that if the Commission 
believes limits are necessary, it must be clear with the exchanges 
and the end-user community about what activities are enumerated).
    \243\ Cargill at 5-6; NGFA at 7.
    \244\ 85 FR at 11612. Footnote 105 from the 2020 NPRM provided: 
``Similarly, other examples of anticipatory merchandising that have 
been described to the Commission in response to request for comment 
on proposed rulemakings on position limits (i.e., the storage hedge 
and hedges of assets owned or anticipated to be owned) would be the 
type of transactions that market participants may seek through one 
of the proposed processes for requesting a non-enumerated bona fide 
hedge recognition.''
    \245\ Cargill at 5-6; NGFA at 7.
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(ii) Requirements for Anticipated Merchandising
(a) Requirement to Hedge Only Twelve Months' Worth of Anticipated 
Requirements
    Although many public comments addressed the new anticipated 
merchandising bona fide hedge, only a few commenters opposed the 
proposed requirement to limit this hedge to only twelve months' worth 
of current or anticipated purchase or sale requirements of the same 
cash commodity that is anticipated to be purchased or sold. FIA opposed 
the twelve-month restriction, stating that CEA section 4a(c)(2) does 
not tie the validity of a bona fide hedge to the duration of the 
commercial requirement being hedged.\246\ FIA also provided an example 
pointing out that market participants often need hedges of anticipated 
purchases or sales longer than twelve months, such as when a merchant 
has a reasonable expectation of anticipated sales beyond a twelve-month 
quantity.\247\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3273]]

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

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

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

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

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

    \258\ 85 FR at 11611.
    \259\ Id.
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(v) Scope of Anticipated Merchandising Activity
    In response to comments from the exchanges and market participants, 
the Commission is providing further clarity on the scope of the 
enumerated anticipated merchandising bona fide hedge. The Commission 
discusses below certain non-exclusive types of activities that are 
covered by the enumerated anticipated merchandising bona fide hedge.
(a) Request for Clarification--Unfixed-Price Contracts and Enumerated 
Anticipated Merchandising Hedge
    Commenters requested clarification on whether the enumerated bona 
fide hedge for anticipated merchandising may be used to manage price 
risk arising from unfixed-price physical commodity transactions. 
Specifically, several commenters requested clarification on whether a 
firm may use the anticipated merchandising bona fide hedge to manage 
the risk associated with a single-sided unfixed purchase or sale at a 
moment when the same firm does not have an offsetting sale or 
purchase.\260\ In

[[Page 3274]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3275]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3276]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3277]]

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

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

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

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

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

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

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

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

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

[[Page 3278]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3279]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3280]]

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

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

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

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

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

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

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

[[Page 3281]]

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

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

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

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

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

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

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

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

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

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

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

    \339\ 85 FR at 11612.

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

[[Page 3282]]

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

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

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

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

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

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

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

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

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

[[Page 3283]]

remain valid. The Commission has determined, however, that with an 
expanded list of contracts subject to Federal position limits, it is 
best to provide the exchanges additional discretion when granting 
exemptions to protect their markets using tools other than a Five-Day 
Rule, and to supplement that discretion with guidance highlighting the 
importance of the spot month to ensure price convergence and an orderly 
delivery process.
    For certain referenced contract markets, rather than imposing a 
complete restriction on holding positions in excess of limits during 
the spot period, an exchange may, when appropriate, grant an exemption 
which allows exceeding the position limit by a small increment. Such 
approach would be an effective way of protecting convergence while 
still maintaining orderly trading. Similarly, exchanges currently 
utilize other tools in administering their position limits. For 
example, CME and CBOT establish certain exchange-set speculative 
position limits that include a ``step down'' feature so that the 
permitted position limit level is lower each day as the contract nears 
its last trading days. Further, when granting position limit 
exemptions, exchanges may grant such exemptions subject to a ``step 
down'' level restriction as well. The Commission expects that exchanges 
would closely scrutinize any participant who requests recognition 
during the last five days of the spot period or in the time period for 
the spot month.
    The Commission clarifies that any exchange, for the purposes of 
exchange-set position limits, that elects to grant an exemption subject 
to terms, conditions, or limitations, that restrict the size of a 
position during the time period for the spot month of a physically-
settled contract under Sec.  150.5(a)(2)(ii)(H) may do so on any 
referenced contract subject to Federal position limits under the Final 
Rule, not just the nine legacy agricultural contracts. As such, the 
Commission clarifies for the avoidance of doubt that exemptions in 
energy contracts may be subject to an exchange's restriction aimed to 
monitor the spot period for that energy contract.
    Since price convergence and an orderly trading environment serve as 
a deterrent or mitigate certain types of market manipulation schemes 
such as corners and squeezes, the guidance is intended to include a 
non-exclusive list of considerations the Commission expects the 
exchanges to consider when determining whether to allow a position in 
excess of limits throughout the spot month.
    Regarding various comments contending that the proposed guidance 
was too prescriptive, the Commission reiterates the appendix is not 
intended to be used as a mandatory checklist. Further, the Commission 
is finalizing various amendments to Appendix B, paragraph b, to respond 
to commenters' requests.
    First, the Commission is amending the introductory paragraph of the 
guidance to clarify that under Sec.  150.5(a)(2)(ii)(H) as finalized 
herein, exchanges may impose restrictions on bona fide hedge exemptions 
in the spot month. This discretion does not require any express 
designation by the exchange.
    Second, the Commission is modifying the proposed guidance to 
clarify that the guidance may be used when considering either an 
enumerated or non-enumerated bona fide hedge exemption. Third, the 
Commission clarifies here that the guidance imposes no additional 
reporting requirements on market participants as the factors described 
in the guidance apply simply to the exchanges' evaluation of the 
specific contract market when considering whether an exemption shall be 
granted subject to any condition or limitation in the spot month. 
Fourth, the Commission is eliminating the proposed factor which would 
have required a market participant to provide materials to the exchange 
supporting a classification of the position as a bona fide hedge. The 
Commission notes that the exchange application requirements already 
require market participants to provide relevant cash-market 
information. In addition, the Commission is amending language 
throughout the guidance to clarify that exchanges have flexibility when 
considering applying the guidance. For example, the Commission is 
removing proposed language that would have required the exchange to 
verify the market participant's cash-market exposure. The Commission is 
comfortable removing this language because the cash-market information 
is already required as part of the exemption application process 
described elsewhere in this release.\351\ Finally, the Commission is 
making technical edits to clarify that any delivery under a physical 
delivery contract is economically appropriate and the ``most 
economical'' source for that commodity.
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    \351\ See Sections II.D. and II.G.
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ix. Guidance on Measuring Risk
a. Background--Measuring Risk
    In prior proposals, the Commission discussed the issue of whether 
to recognize as bona fide both ``gross hedging'' and ``net hedging.'' 
\352\ While the Commission has previously expressed a willingness to 
consider gross hedging in certain limited circumstances, such proposals 
reflected the Commission's longstanding preference for net 
hedging.\353\ That preference, although not stated explicitly in prior 
releases, has been underpinned by a concern that unfettered recognition 
of gross hedging could potentially allow for the cherry picking of 
positions in a manner that subverts the position limits rules.\354\
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    \352\ 81 FR at 96747-96747.
    \353\ See 81 FR at 96747 (stating that gross hedging was 
economically appropriate in circumstances where ``net cash positions 
do not necessarily measure total risk exposure due to differences in 
the timing of cash commitments, the location of stocks, and 
differences in grades or the types of cash commodity.'') See also 
Bona Fide Hedging Transactions or Positions, 42 FR at 14832, 14834 
(Mar. 16, 1977) and Definition of Bona Fide Hedging and Related 
Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 1977).
    \354\ For example, using gross hedging, a market participant 
could potentially point to a large long cash position as 
justification for a bona fide hedge, even though the participant, or 
an entity with which the participant is required to aggregate, has 
an equally large short cash position. The presence of such 
offsetting cash positions would result in the participant having no 
net price risk to hedge. Instead, the participant created price risk 
exposure to the commodity by establishing the derivative position.
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b. Summary of the 2020 NPRM--Measuring Risk
    The Commission recognized in the 2020 NPRM that additional 
flexibility to hedge on a gross basis may be warranted given that there 
are myriad ways in which organizations, particularly those not 
currently subject to Federal position limits, are structured and engage 
in commercial hedging practices.\355\ For example, in the energy space, 
it is common for market participants to use multi-line business 
strategies where risks are managed by trading desk or business line 
rather than on a global basis. Accordingly, in an effort to clarify its 
view on this issue, the Commission proposed guidance on gross hedging 
positions in paragraph (a) to Appendix B.
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    \355\ See 85 FR at 11613.
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    The proposed guidance provided flexibility for a person to measure 
risk either on a net or gross basis, provided that: (A) The manner in 
which the person measures risk is consistent over time and follows the 
person's regular, historical practice (meaning the person

[[Page 3284]]

is not switching between net hedging and gross hedging on a selective 
basis simply to justify an increase in the size of the person's 
derivatives positions); (B) the person is not measuring risk on a gross 
basis to evade the limits set forth in proposed Sec.  150.2 and/or the 
aggregation rules currently set forth in Sec.  150.4; (C) the person is 
able to demonstrate (A) and (B) above to the Commission and/or an 
exchange upon request; and (D) an exchange that recognizes a particular 
gross hedging position as a bona fide hedge pursuant to proposed Sec.  
150.9 documents the justifications for doing so and maintains records 
of such justifications in accordance with proposed Sec.  150.9(d).
c. Summary of the Commission Determination--Measuring Risk
    The Commission is adopting the proposed guidance with modifications 
and clarifications to address commenter concerns.
d. Comments--Measuring Risk
    While Better Markets expressed concern that gross hedging could be 
used to conduct an ``end-run'' around position limits,\356\ many other 
commenters expressed support for flexibility to hedge on a net or gross 
basis.\357\ Multiple commenters who expressed support for such 
flexibility also requested discrete changes to the proposed guidance 
and/or associated preamble, including: (i) Elimination of the 
requirement that exchanges document their justifications when allowing 
gross hedging; \358\ (ii) clarification that gross hedging is 
permissible for both enumerated and non-enumerated hedges; \359\ and 
(iii) clarification that market participants do not need to develop 
procedures setting forth when gross vs. net hedging is 
appropriate.\360\ Finally, IFUS requested that the Commission eliminate 
the proposed guidance on the grounds that the guidance reflects 
considerations currently taken by exchange staff when reviewing 
exemptions.\361\
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    \356\ Better Markets at 60.
    \357\ ASR at 2; LDC at 2; NGSA at 3; COPE at 3; Chevron at 4; 
Suncor at 4.
    \358\ MGEX at 3; FIA at 14; CEWG at 4.
    \359\ Chevron at 4-5; Suncor at 4-5; CCI at 4-5; CEWG at 7-10.
    \360\ FIA at 14-15 (stating that risk managers decide on a case-
by-case basis whether to hedge on a net or gross basis).
    \361\ IFUS at 3.
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e. Discussion of Final Rule--Measuring Risk
    The Commission continues to believe that the guidance on gross 
hedging is important because it will allow market participants to 
measure risk in the manner most suited to their particular 
circumstances, while preventing the use of gross hedging to subvert the 
Federal position limits regime.\362\
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    \362\ The guidance will help ensure the integrity of the 
position limits regime for the reasons discussed below in response 
to comments from Better Markets. The Commission thus disagrees with 
IFUS that the guidance is unnecessary, but agrees with IFUS that the 
proposed guidance reflects considerations currently taken by 
exchange staff. In particular, the guidance is consistent in many 
ways with the manner in which exchanges require their participants 
to measure and report risk, which is consistent with the 
Commission's requirements with respect to the reporting of risk. For 
example, under Sec.  17.00(d), futures commission merchants 
(``FCMs''), clearing members, and foreign brokers are required to 
report certain reportable net positions, while under Sec.  17.00(e), 
such entities may report gross positions in certain circumstances, 
including if the positions are reported to an exchange or the 
clearinghouse on a gross basis. 17 CFR 17.00. The Commission's 
understanding is that certain exchanges generally prefer, but do not 
require, their participants to report positions on a net basis. For 
those participants that elect to report positions on a gross basis, 
such exchanges require such participants to continue reporting that 
way, particularly through the spot period. Such consistency is a 
strong indicator that the participant is not measuring risk on a 
gross basis simply to evade regulatory requirements.
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    First, the Commission is eliminating proposed prong (D) of the 
guidance, which provided that an exchange that recognizes a gross 
position as a non-enumerated bona fide hedge pursuant to Sec.  150.9 
documents the justifications for doing so. Prong (D) is unnecessary 
given that the Commission and exchanges have other tools for accessing 
such information. In particular, prong (C) of the guidance allows the 
Commission and exchanges to request, on an as-needed basis, information 
about the manner in which market participants are measuring risk.\363\ 
To ensure the Commission and exchanges have access to sufficient 
information in light of the removal of prong (D), the Commission is 
expanding prong (C) to require that a person also demonstrate, upon 
request by the Commission or an exchange, justifications for measuring 
risk on a gross basis. Additionally, the proposed prong (D) reference 
to the non-enumerated process in Sec.  150.9 may have created confusion 
regarding the applicability of the proposed gross hedging guidance to 
enumerated hedges. Thus, the Commission is also revising the 
introductory language of the guidance to clarify that the guidance 
applies equally to enumerated and non-enumerated bona fide hedges.
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    \363\ Additionally, market participants seeking exemptions 
remain subject to a variety of recordkeeping requirements, including 
Commission regulation Sec.  1.31, and the Commission will receive 
information about all exchange-granted exemptions, including cash-
market information, via the monthly spreadsheet submission required 
by Sec.  150.5(a)(4).
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    Second, the Commission is clarifying that the guidance does not 
require market participants to develop written policies or procedures 
setting forth when gross or net hedging is appropriate. However, having 
such policies or procedures may help market participants demonstrate 
compliance with prongs (A), (B), and (C) of the guidance as finalized 
herein.
    Finally, the Commission believes the concerns regarding subversion 
of position limits raised by Better Markets are already addressed by a 
combination of the guardrails in prongs (A)-(C) of the guidance as well 
as other Commission provisions, including some finalized herein. First, 
to receive recognition as a bona fide hedge, a position must comply 
with the bona fide hedging definition, regardless of whether the 
underlying risk is measured on a net or gross basis. A market 
participant thus may not use gross hedging to receive bona fide hedge 
treatment for a speculative position,\364\ and measuring risk on a 
gross basis to willfully circumvent or evade speculative position 
limits would potentially run afoul of the Sec.  150.2(i)(2) anti-
evasion provision finalized herein. Similarly, market participants must 
comply with the Commission's aggregation requirements regardless of 
whether the participants are measuring risk on a net or gross 
basis.\365\
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    \364\ The introductory language to the guidance provides in 
relevant part that a person's ``gross hedging positions may be 
deemed in compliance . . . provided that all applicable regulatory 
requirements are met, including that the position is economically 
appropriate to the reduction of risks in the conduct and management 
of a commercial enterprise and otherwise satisfies the bona fide 
hedging definition . . .''
    \365\ Under Sec.  150.4, unless an exemption applies, a person's 
positions must be aggregated with positions for which the person 
controls trading or for which the person holds a 10% or greater 
ownership interest. Commission Regulation Sec.  150.4(b) sets forth 
several permissible exemptions from aggregation. See Final Rule, 
Aggregation of Positions, 81 FR 91454, (December 16, 2016).
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    Second, concerns about cherry-picking are addressed by the 
guidance. By focusing on consistency and historical practice with 
respect to the manner in which a person measures risk, the guidance 
enables market participants to measure risk on a gross basis when 
dictated by the nature of the exposure,\366\ but not simply when

[[Page 3285]]

utilizing gross hedging will yield a larger exposure than net hedging 
or will otherwise subvert Federal position limit or aggregation 
requirements. Use of gross or net hedging that is inconsistent with an 
entity's historical practice, or a change from gross to net hedging (or 
vice versa), could be an indication that an entity is seeking to evade 
position limits regulations.\367\
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    \366\ The Commission continues to believe that a gross hedge may 
be a bona fide hedge in circumstances where net cash positions do 
not necessarily measure total risk exposure due to differences in 
the timing of cash commitments, the location of stocks, and 
differences in grades or types of the cash commodity. See, e.g., 
Bona Fide Hedging Transactions or Positions, 42 FR at 14834. 
However, the Commission clarifies that these may not be the only 
circumstances in which gross hedging may be recognized as bona fide. 
Like the analysis of whether a particular position satisfies the 
proposed bona fide hedge definition, the analysis of whether gross 
hedging may be utilized would involve a case-by-case determination 
made by the Commission and/or by an exchange using its expertise and 
knowledge of its participants.
    \367\ If an entity's (including a vertically-integrated 
entity's) practice is to switch between net and gross hedging based 
on particular circumstances, and those circumstances do not involve 
evading position limits or aggregation requirements, then such 
switching would not run afoul of prong (A). See Section II.B.9. 
(discussing anti-evasion).
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    Third, all market participants seeking to exceed Federal position 
limits must request hedge exemptions at the exchange level, regardless 
of whether they are measuring risk on a gross or net basis, and 
regardless of whether they are seeking an enumerated or non-enumerated 
exemption at the Federal level. Under the Final Rule, the exchanges 
would have an opportunity to confirm whether such participants' use of 
gross hedging is consistent with the proposed guidance, including by 
reviewing detailed position information. The Commission will also have 
access to such information through a variety of means, including: 
Records maintained by market participants pursuant to Commission 
regulation Sec.  1.31; the monthly spreadsheets that exchanges must 
submit to the Commission under Sec.  150.5(a)(4) summarizing exchange-
granted exemptions and related cash-market information; and the ability 
for the Commission to request such information directly from a market 
participant pursuant to prong (C) of the gross hedging guidance.
x. Pass-Through Swap and Pass-Through Swap Offset Provisions
a. Background--Pass-Through Swap and Pass-Through Swap Offset
    As the Commission has noted above, CEA section 4a(c)(2)(B) \368\ 
contemplates bona fide hedges that by themselves do not meet the 
criteria of CEA section 4a(c)(2)(A), but that are used to offset the 
swap exposure of a market participant (e.g., a dealer) to the extent 
that the swap exposure does satisfy CEA section 4a(c)(2)(A) for such 
market participant's counterparty (e.g., a commercial end user).\369\ 
The Commission believes that, in affording bona fide hedging 
recognition for such offsets, Congress in CEA section 4a(c)(2)(B) 
intended to: (1) Encourage the provision of liquidity to commercial 
entities that are hedging physical commodity price risk in a manner 
consistent with the bona fide hedging definition; and (2) only 
recognize risk management positions as bona fide hedges when such 
positions are opposite a bona fide hedging swap counterparty.\370\ The 
Commission has proposed a pass-through swap provision in each of its 
position limits rulemakings since 2011.
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    \368\ 7 U.S.C. 6a(c)(2)(B).
    \369\ CEA section 4a(c)(2)(B)(i) recognizes as a bona fide 
hedging position a position that reduces risks attendant to a 
position resulting from a swap that was executed opposite a 
counterparty for which the transaction would qualify as a bona fide 
hedging transaction pursuant to'' 4a(c)(2)(A). 7 U.S.C. 
6a(c)(2)(B)(i). CEA section 4a(c)(2)(B)(ii) further recognizes as a 
bona fide hedging position a position that ``reduce risks attendant 
to a position resulting from a swap that meets the requirements of 
4a(c)(2)(A). 7 U.S.C. 6a(c)(2)(B)(ii).
    \370\ As described above, the Commission interprets the revised 
statutory temporary substitute test as limiting the Commission's 
authority to recognize risk management positions as bona fide hedges 
unless the position is used to offset exposure opposite a bona fide 
hedging swap counterparty.
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b. Summary of the 2020 NPRM--Pass-Through Swap and Pass-Through Swap 
Offset
    The Commission proposed to implement the statutory pass-through 
swap provision in paragraph (2) of the bona fide hedging definition for 
physical commodities in proposed Sec.  150.1. Proposed paragraph (2)(i) 
of the 2020 NPRM's bona fide hedging definition addressed a situation 
where: (a) A particular swap qualifies as a bona fide hedge by 
satisfying the temporary substitute test, the economically appropriate 
test, and the change in value requirement under proposed paragraph (1) 
of the bona fide hedging definition for one of the counterparties (the 
``bona fide hedging swap counterparty''), but not for the other 
counterparty; and (b) the bona fide hedge treatment ``passes through'' 
from the bona fide hedging swap counterparty to the other counterparty 
(the ``pass-through swap counterparty''). The pass-through swap 
counterparty could be an entity that provides liquidity to the bona 
fide hedging swap counterparty (such as a swap dealer or a non-dealer 
that offers swaps).
    Under the 2020 NPRM, the pass-through of the bona fide hedge 
treatment from the bona fide hedging swap counterparty to the pass-
through swap counterparty was contingent on: (1) The pass-through swap 
counterparty's ability to demonstrate upon request from the Commission 
and/or from an exchange that the pass-through swap is a bona fide 
hedge; \371\ and (2) the pass-through swap counterparty entering into a 
futures, option on a futures, or swap position in the ``same physical 
commodity'' as the pass-through swap to offset and reduce the price 
risk attendant to the pass-through swap.
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    \371\ While the 2020 NPRM's proposed paragraph (2)(i) of the 
bona fide hedging definition in Sec.  150.1 required the pass-
through swap counterparty to be able to demonstrate the bona fides 
of the pass-through swap upon request, the 2020 NPRM did not 
prescribe the manner by which the pass-through swap counterparty 
obtains the information needed to support such a demonstration. The 
2020 NPRM noted that the pass-through swap counterparty could base 
such a demonstration on a representation made by the bona fide 
hedging swap counterparty, and such determination may be made at the 
time when the parties enter into the swap, or at some later point. 
The 2020 NPRM also stated that for the bona fides to pass-through as 
described above, the swap position need only qualify as a bona fide 
hedging position at the time the swap was entered into.
---------------------------------------------------------------------------

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

[[Page 3286]]

swap was entered into, as a bona fide hedge under paragraph (1)) seeks, 
at some later time, to offset that bona fide hedge swap position using 
a futures position, option on a futures position, or a swap in excess 
of Federal position limits. Such step might be taken, for example, to 
respond to a change in the bona fide hedging swap counterparty's risk 
exposure in the underlying commodity.\372\ Proposed paragraph (2)(ii) 
would allow such a bona fide hedging swap counterparty to use a futures 
position, option on a futures position, or a swap in excess of Federal 
position limits to offset the price risk of the previously-entered into 
swap, even though the offsetting position itself does not qualify for 
that participant as a bona fide hedge under paragraph (1).
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    \372\ Examples of a change in the bona fide hedging swap 
counterparty's cash-market price risk could include a change in the 
amount of the commodity that the hedger will be able to deliver due 
to drought, or conversely, higher than expected yield due to growing 
conditions.
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    The proposed pass-through exemption under paragraph (2) of the bona 
fide hedging or transaction definition would only apply to the pass-
through swap counterparty's offset of the bona fide hedging swap, and/
or to the bona fide hedging swap counterparty's offset of its bona fide 
hedging swap. Any further offset would not be eligible for a pass-
through exemption under paragraph (2) unless the offsetting position 
itself meets paragraph (1) of the proposed bona fide hedging 
definition.
    The Commission stated in the 2020 NPRM that it believes the pass-
through swap provision may help mitigate some of the potential impact 
resulting from the removal of the ``risk management'' exemptions that 
are currently in effect.\373\
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    \373\ See supra Section II.A.1.iii.a. (discussion of the 
temporary substitute test).
---------------------------------------------------------------------------

c. Summary of the Commission Determination--Pass-Through Swap and Pass-
Through Swap Offset; Related Recordkeeping Requirement; Cross-Commodity 
Hedging Under the Pass-Through Swap Provision
    The Commission is finalizing the pass-through swap and pass-through 
swap offset provision of the ``bona fide hedging transaction or 
position'' definition largely as proposed, with certain amendments in 
response to commenters' requests discussed below:
    First, the Commission is amending the 2020 NPRM's proposed 
provision that would have required that the pass-through swap 
counterparty demonstrate upon request that its offsetting position is 
attendant to a position resulting from a bona fide hedging pass-through 
swap. Instead, under the Final Rule, in order for a pass-through swap 
counterparty to treat a pass-through swap offset as a bona fide hedge, 
the pass-through swap counterparty must receive from the bona fide 
hedging swap counterparty a written representation that the pass-
through swap qualifies as a bona fide hedge. Under the Final Rule, the 
Commission is also amending the proposed regulatory text to add that 
the pass-through swap counterparty may rely in good faith on such 
written representation(s) made by the bona fide hedging swap 
counterparty, unless the pass-through swap counterparty has information 
that would cause a reasonable person to question the accuracy of the 
representation.
    Second, the Commission is adopting a revised paragraph (i)(B) of 
the bona fide hedging transaction or position definition in Sec.  150.1 
to delete the language in the pass-through swap provision that requires 
the offset to be in the ``same physical commodity'' as the pass-through 
swap.
d. Comments--Application of Pass-Through Swap Offset to Affiliates; 
Recordkeeping; Cross-Commodity Hedging Under the Pass-Through Swap 
Provision
    Comments generally fell into three categories, each discussed in 
turn below: (1) Application of pass-through swap offsets to affiliates; 
(2) pass-through recordkeeping requirements; and (3) pass through swaps 
and cross-commodity hedging.
(1) Application of Pass-Through Swap Offset to Affiliates
    Commenters generally supported amending the bona fide hedge 
definition in accordance with the statutory language in CEA section 
4a(c)(2)(B) to include a pass-through swap and pass-through swap 
offset.\374\ Some commenters requested clarification on the application 
of the pass-through swap offset exemption to corporate affiliates. For 
example, Shell stated that an overly strict interpretation of ``pass-
through swap counterparty'' may limit the application of the pass-
through swap offset exemption to only one entity within a corporate 
structure, and such entity may not be the affiliate entity used by the 
firm for its market-facing activities or to execute transactions with 
exchanges to manage portfolios and position limits on an aggregated 
basis.\375\ NGSA similarly requested that the Commission's 
interpretation of a pass-through swap counterparty apply to affiliates 
who may pass through their bona fide hedge position exemption to a 
market-facing, ``treasury-affiliate'' subsidiary within a corporate 
structure.\376\
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    \374\ CEWG at 4; CMC at 5-6; FIA at 3; ICE at 6-7; ISDA at 12-
13; and Shell at 2, 4-5.
    \375\ Shell at 4.
    \376\ NGSA at 8.
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(i) Discussion of Final Rule--Application of Pass-Through Swap Offset 
to Affiliates
    The Commission clarifies that within a group of entities that 
aggregates its positions under Sec.  150.4 \377\ (such as an aggregated 
corporate group), any entity that is part of the aggregated group may 
avail itself of the pass-through swap offset exemption. For example, 
the pass-through swap offset provision extends to market-facing 
affiliates that are part of an aggregated group pursuant to Sec.  
150.4, such as treasury affiliate subsidiaries that firms commonly use 
to manage market-facing activities and portfolios. In such 
circumstances, recognition of a secondary pass-through swap transaction 
would not be necessary among an aggregated group because an aggregated 
group is treated as one person for purposes of Federal position limits.
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    \377\ Aggregation of Positions, 81 FR 91454 (Dec. 16, 2016).
---------------------------------------------------------------------------

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

[[Page 3287]]

document, and upon request, demonstrate the bona fides of the pass-
through swap.\378\ Commenters also requested that the Commission 
clarify the nature of the required documentation,\379\ and/or eliminate 
the required demonstration/documentation altogether, provided that the 
pass-through swap counterparty has a legitimate, good-faith belief the 
swap is a bona fide hedge.\380\
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    \378\ Cargill at 10; FIA at 11-12; CMC at 5; Shell at 6-7; ICE 
at 6-7; and ISDA at 11-12.
    \379\ ICE at 6-7; Shell at 6.
    \380\ Cargill at 10; CMC at 5; FIA at 11-12; and ISDA at 11-12.
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(i) Discussion of Final Rule--Pass-Through Swap Provision and 
Recordkeeping
    The Commission is amending the 2020 NPRM's proposed provision that 
would have required that the pass-through swap counterparty demonstrate 
upon request that its offsetting position is attendant to a position 
resulting from a bona fide hedging pass-through swap. For the Final 
Rule, the Commission is amending the pass-through swap provision's 
regulatory text to clarify that in order for a pass-through swap 
counterparty to treat a pass-through swap as a bona fide hedge, the 
pass-through swap counterparty must receive from the bona fide hedging 
swap counterparty a written representation that the pass-through swap 
qualifies as a bona fide hedge. The Commission is further amending the 
regulatory text to add that the pass-through swap counterparty may rely 
in good faith on such written representation(s) made by the bona fide 
hedging swap counterparty, unless the pass-through swap counterparty 
has information that would cause a reasonable person to question the 
accuracy of the representation. The Commission is adding the written 
representation requirement to enable to Commission to verify that only 
market participants with bona fide hedge exemptions are able to pass-
through those exemptions to their swap counterparties.
    The Commission agrees with commenters who stated that the bona fide 
hedging counterparty is the suitable party to determine the bona fide 
hedging status of the pass-through swap. This is because the bona fide 
hedging status is determined based upon the bona fide hedging 
counterparty's confidential, proprietary information. The Commission 
clarifies that the Commission is not requiring the bona fide hedging 
counterparty to share the proprietary, confidential information upon 
which it is basing its determination with its counterparties.
    Similar to the 2020 NPRM, this Final Rule does not prescribe the 
form or manner by which the pass-through swap counterparty obtains the 
written representation. The Commission recognizes that the bona fide 
hedging counterparty may make such representations on a relationship 
basis through counterparty relationship documentation (e.g., through 
ISDA documentation or other forms of documentation as agreed upon by 
the parties) or on a transaction basis (e.g., through trade 
confirmations or in other forms as agreed upon by the parties).\381\
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    \381\ The Commission believes that allowing market participants 
to determine the form and manner of how they will document the 
written representation by the bona fide hedging counterparty and 
allowing the pass-through swap counterparty to rely on such 
representation addresses NRECA's comments on the pass-through swap 
provision recordkeeping obligations. NRECA at 23.
---------------------------------------------------------------------------

    For example, if agreed to by the counterparties, the pass-through 
swap counterparty may rely on a written representation made by the bona 
fide hedging swap counterparty that an original pass-through swap and 
any subsequent pass-through swaps entered into by and between the bona 
fide hedging swap counterparty and the pass-through swap counterparty 
are bona fide hedges, unless the bona fide hedging swap counterparty 
provides written notice to the pass-through swap counterparty that a 
particular swap is not a bona fide hedge. The Commission believes 
providing market participants with flexibility recognizes 
counterparties' ongoing relationships, while enabling the Commission to 
verify that the pass-through swap offset reduces the risks of a bona 
fide hedging swap.
    The Commission considered comments requesting the elimination of 
the pass-through swap provision recordkeeping requirement in Sec.  
150.3(d) based on arguments that requiring this recordkeeping was not 
practical. The Commission is not persuaded by those arguments as the 
recordkeeping requirements assist the Commission in verifying that the 
pass-through swap provision is only being utilized to offset risks 
arising from bona fide hedges. Accordingly, the Commission is 
finalizing the proposed pass-through swap recordkeeping requirement in 
Sec.  150.3(d), subject to certain conforming changes to reflect 
amendments to the pass-through swap paragraph of the bona fide hedging 
definition.
    Since not all swaps entered into by a commercial entity would 
qualify as a bona fide hedge, the Commission declines commenters' 
requests that a pass-through swap counterparty may reasonably rely 
solely upon the fact that the counterparty is a commercial end user 
and, absent an agreement between the counterparties, that the swap 
appears to be consistent with hedges entered into by end users in the 
same line of business.
(3) Comments--Pass-Through Swap Provision and Cross-Commodity Hedging
    Commenters requested amending paragraph (i)(B) of the proposed bona 
fide hedge definition to permit the pass-through swap provision to 
apply to cross-commodity hedges by eliminating the proposed requirement 
that the pass-through swap offset must be in the ``same physical 
commodity'' as the pass-through swap.\382\
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    \382\ FIA at 13 (quoting 85 FR at 11614); Shell at 5 (quoting 85 
FR at 11614).
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(i) Discussion of Final Rule--Pass-Through Swap Provision and Cross-
Commodity Hedging
    The Commission is adopting a revised paragraph (i)(B) of the bona 
fide hedging transaction or position definition in Sec.  150.1 to 
delete the language in the pass-through swap provision that requires 
the offset to be in the ``same physical commodity'' as the pass-through 
swap. The Commission's enumerated cross-commodity bona fide hedge 
adopted herein thus applies to all the enumerated hedges, as well as to 
the pass-through swap provision in the bona fide hedge definition. The 
revised regulatory text confirms the Commission's intent to allow a 
pass-through swap counterparty to utilize the pass-through swap offset 
exemption when the offset itself is a cross-commodity hedge of the 
underlying pass-through swap, provided that such cross-commodity hedge 
meets all applicable requirements, including being substantially 
related to the commodity being offset.
2. ``Commodity Derivative Contract''
i. Summary of the 2020 NPRM--Commodity Derivative Contract
    The Commission proposed to create the defined term ``commodity 
derivative contract'' for use throughout part 150 of the Commission's 
regulations as shorthand for any futures contract, option on a futures 
contract, or swap in a commodity (other than a security futures product 
as defined in CEA section 1a(45)).

[[Page 3288]]

ii. Comments and Summary of the Commission Determination--Commodity 
Derivative Contract
    No commenter addressed the proposed definition of ``commodity 
derivative contract.'' The Commission is adopting the definition as 
proposed, with some non-substantive technical modifications.
    These technical changes include the Final Rule's reference to 
``futures contract'' rather than merely ``futures,'' and ``swap'' 
rather than ``swap contract'' to conform to other uses in final Sec.  
150.1.\383\
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    \383\ The Commission notes that these technical changes are to 
conform more closely to CEA section 4a(a), which refers to 
``contracts of sale of such commodity for future delivery'' (7 
U.S.C. 6a(a)(1) (emphasis added)), ``contracts of sale for future 
delivery'' (7 U.S.C. 6a(a)(2)(A) (emphasis added)), or similar 
phraseology. Accordingly, the Commission is making the technical 
change to refer to ``futures contracts'' rather than merely 
``futures'' in order to more closely conform to the CEA's terms. 
Similarly, CEA section 4a(a)(6) and section 1a(47) both refer to 
``swap'' but not '' swap contract,'' and so the Commission is making 
a similar conforming change.
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3. ``Core Referenced Futures Contract''
i. Summary of the 2020 NPRM--Core Referenced Futures Contract
    The Commission proposed to create the term ``core referenced 
futures contract'' as a short-hand phrase to refer to the futures 
contracts listed in proposed Sec.  150.2(d) to which the Federal 
position limit rules would apply.\384\ As per the ``referenced 
contract'' definition described below, position limits would also apply 
to any contract that is directly or indirectly linked to, or that has 
certain pricing relationships with, a core referenced futures contract.
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    \384\ The selection of the proposed core referenced futures 
contracts is explained below in the discussions of Sec.  150.2 at 
Section II.B. and the necessity finding infra at Section III.C.
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ii. Comments and Summary of the Commission Determination--Core 
Referenced Futures Contract
    No commenter addressed the proposed definition of ``core referenced 
futures contract.'' The Commission is adopting the definition as 
proposed.
4. ``Economically Equivalent Swap''
i. Background--Economically Equivalent Swap
    The Commission's existing regulations do not currently subject 
swaps to Federal position limits. Similarly, the Commission is unaware 
of any exchange-set limits for swaps on any of the 25 core referenced 
futures contracts. Pursuant to CEA section 4a(a)(5), when the 
Commission imposes position limits on futures and options on futures 
pursuant to CEA section 4a(a)(2), the Commission also must develop 
limits ``concurrently'' and establish limits ``simultaneously'' for 
``economically equivalent'' swaps ``as appropriate.'' \385\ As the 
statute does not define the term ``economically equivalent,'' the 
Commission must apply its expertise in construing such term, and, as 
discussed further below, must do so consistent with the policy goals 
articulated by Congress, including in CEA sections 4a(a)(2)(C) and 
4a(a)(3).
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    \385\ CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA 
section 4a(a)(4) separately authorizes, but does not require, the 
Commission to impose Federal position limits on swaps that meet 
certain statutory criteria qualifying them as ``significant price 
discovery function'' swaps. 7 U.S.C. 6a(a)(4). The Commission 
reiterates, for the avoidance of doubt, that the definitions of 
``economically equivalent'' in CEA section 4a(a)(5) and 
``significant price discovery function'' in CEA section 4a(a)(4) are 
separate concepts and that contracts can be economically equivalent 
without serving a significant price discovery function. See 81 FR at 
96736 (the Commission noting that certain commenters may have been 
confusing the two definitions).
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ii. Summary of the 2020 NPRM--Economically Equivalent Swap
    The 2020 NPRM proposed a new term, ``economically equivalent 
swap.'' Under the 2020 NPRM, a swap would be deemed an ``economically 
equivalent swap'' with respect to a referenced contract so long as the 
swap shared identical ``material'' contractual specifications, terms, 
and conditions with the referenced contract, and provided that any 
differences between the swap and referenced contract with respect to 
the following would be disregarded: (i) Lot size or notional amount; 
(ii) for a swap and relevant referenced contract that are both 
physically-settled, delivery dates diverging by less than one calendar 
day, except for a physically-settled natural gas swap which could 
diverge by less than two calendar days; and (iii) post-trade risk 
management arrangements. Because the proposed ``economically equivalent 
swap'' definition referred to ``referenced contracts,'' under the 2020 
NPRM's approach a swap could be deemed to be ``economically 
equivalent'' to not just a core referenced futures contract, but also 
to any cash-settled look alike futures contract or option on a futures 
contract.\386\
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    \386\ As discussed under the ``referenced contract'' definition, 
the term ``referenced contract'' includes core referenced futures 
contracts, linked cash-settled futures contracts, and options 
thereon. For further discussion, see Section II.A.16.
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iii. Comments and Discussion of Final Rule--Economically Equivalent 
Swap
a. The Inclusion of Certain Swaps Within the Federal Position Limits 
Framework
    Many commenters generally supported the proposed definition.\387\ 
However, other commenters argued that swaps should not be subject to 
Federal position limits at all \388\ or that subjecting swaps to 
position limits would increase costs without commensurate 
benefits.\389\ Nevertheless, several of these same commenters that 
stated that swaps should not be subject to Federal position limits also 
generally supported the proposed ``economically equivalent swap'' 
definition to the extent the Commission determined to include swaps 
within Federal position limits.\390\ Similarly, IATP stated that it was 
unclear why swaps are part of the 2020 NPRM given the Commission's 
limited information on the swaps market.\391\
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    \387\ E.g., AQR at 10; FIA at 2-3; NCFC at 5; Suncor at 2; SIFMA 
AMG at 7; ISDA at 5; Chevron at 2; CEWG at 3; Citadel at 6.
    \388\ SIFMA AMG at 6-8; IATP at 19.
    \389\ CHS at 4-5; NCFC at 5; SIFMA AMG at 6-7; and ISDA at 5.
    \390\ Chevron at 2; FIA at 2, 3, 5; MFA/AIMA at 3; SIFMA AMG at 
7; Suncor at 2; AQR at 10-11; COPE at 3; Better Markets at 4; 31; 
NCFC at 5; ISDA at 5; CEWG at 3; and Citadel at 6.
    \391\ IATP at 19.
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    In response to these comments, as an initial matter, the Commission 
emphasizes that Congress has determined, through the Dodd-Frank Act's 
amendments to CEA section 4a(a)(5), that the Commission must develop 
Federal position limits for economically equivalent swaps 
``concurrently,'' and must establish such limits ``simultaneously,'' 
with the Federal position limits for futures and options on futures. 
Accordingly, the Commission has determined that, as a legal matter, a 
swap that qualifies as ``economically equivalent'' to any referenced 
contract must be included within the Federal position limits framework.
    While it did not oppose the proposed definition, NCFC expressed a 
similar concern with respect to the costs that the proposed definition 
could impose on commercial end users and small- and mid-sized FCMs. To 
mitigate these costs, NCFC suggested that any swap that qualifies for 
an exception to the Commission's clearing requirement under existing 
Sec.  50.50 of the Commission's regulations should not be deemed to be 
an ``economically equivalent swap.'' According to NCFC, such ``swap 
contracts already must meet the test `to hedge or mitigate commercial

[[Page 3289]]

risk,' and are `not used for a purpose that is in the nature of 
speculation, investing, or trading,''' pursuant to Sec.  50.50.\392\ 
The Commission understands NCFC's concern, but believes NCFC's 
alternative is unnecessary for two reasons. First, to the extent a swap 
described by NCFC would ``hedge or mitigate commercial risk,'' such 
swap likely would qualify for an enumerated bona fide hedge under the 
Final Rule and therefore would not contribute to a commercial end-
user's net position for Federal position limits purposes.\393\ Second, 
commodity swaps are not required to be cleared under the Commission's 
existing regulations, so determining whether the end-user clearing 
exemption applies is not necessarily a helpful proxy in determining 
whether a swap is ``economically equivalent'' for purposes of CEA 
section 4a(a)(5).
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    \392\ NCFC at 5-6.
    \393\ To the extent an FCM would not be able to qualify for a 
bona fide hedge, the Commission believes that excepting such swaps 
for purely financial firms would functionally have the same effect 
as maintaining the risk-management exemption, which Congress, 
through the Dodd-Frank Act's amendments to the CEA, has directed the 
Commission to eliminate. See Section IV.A.4.ii.a(1) (discussing 
elimination of the risk management exemption).
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b. Statutory Basis for the Commission's ``Economically Equivalent 
Swap'' Definition
    In promulgating the Federal position limits framework, Congress 
instructed the Commission to consider several factors. First, CEA 
section 4a(a)(3)(B) requires the Commission when establishing Federal 
position limits, to the maximum extent practicable, in its discretion, 
to: (i) Diminish, eliminate, or prevent excessive speculation; (ii) 
deter and prevent market manipulation, squeezes, and corners; (iii) 
ensure sufficient market liquidity for bona fide hedgers; and (iv) 
ensure that the price discovery function of the underlying market is 
not disrupted. Second, CEA section 4a(a)(2)(C) requires the Commission 
to strive to ensure that any limits imposed by the Commission will not 
cause price discovery in a commodity subject to Federal position limits 
to shift to trading in foreign markets.
    Accordingly, any definition of ``economically equivalent swap'' 
must consider these statutory objectives. The Commission also 
recognizes that swaps may include customized (i.e., ``bespoke'') terms 
and are largely negotiated bilaterally and traded off-exchange (i.e., 
OTC). In contrast, futures contracts have standardized terms and are 
generally exchange-traded or otherwise traded subject to the rules of 
an exchange. As explained further below, due to these differences 
between swaps and exchange-traded futures and related options, the 
Commission has preliminarily determined that Congress's underlying 
policy goals in CEA section 4a(a)(2)(C) and (3)(B) are best achieved by 
adopting a narrow definition of ``economically equivalent swap,'' 
compared to the broader definition of ``referenced contract.'' \394\
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    \394\ The definition of ``referenced contract'' adopted herein 
will incorporate cash-settled look-alike futures contracts and 
related options that are either (i) directly or indirectly linked, 
including being partially or fully settled on, or priced at a fixed 
differential to, the price of that particular core referenced 
futures contract; or (ii) directly or indirectly linked, including 
being partially or fully settled on, or priced at a fixed 
differential to, the price of the same commodity underlying that 
particular core referenced futures contract for delivery at the same 
location or locations as specified in that particular core 
referenced futures contract. See infra Section II.A.16. (definition 
of ``referenced contract''). The definition of ``economically 
equivalent swap'' adopted herein is a type of ``referenced 
contract,'' but, as discussed herein, the ``economically equivalent 
swap'' definition includes a relatively narrower class of swaps 
compared to other types of ``referenced contracts,'' such as look-
alike futures and options on futures contracts, for the reasons 
discussed below.
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    The ``referenced contract'' definition adopted in Sec.  150.1 will 
include ``economically equivalent swaps,'' meaning any economically 
equivalent swap is subject to Federal position limits. Thus, a swap 
that is deemed economically equivalent would be required to be added 
to, and could be netted against, as applicable, an entity's other 
referenced contracts in the same commodity for the purpose of 
determining one's aggregate positions for Federal position limits.\395\ 
Any swap that is not deemed economically equivalent is not a referenced 
contract, and thus could not be netted with referenced contracts nor 
required to be aggregated with any referenced contract for Federal 
position limits purposes.
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    \395\ See infra Section II.B.10. (discussion of netting).
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    The Commission has determined that the ``economically equivalent 
swap'' definition adopted herein supports the statutory objectives in 
CEA section 4a(a)(3)(B)(i) and (ii) by helping to prevent excessive 
speculation and market manipulation, including corners and squeezes, 
respectively, by: (1) Focusing on swaps that are the most economically 
equivalent in every significant way to the futures contracts and 
options on futures contracts for which the Commission deems position 
limits to be necessary; \396\ and (2) limiting the ability of 
speculators to obtain excessive positions through netting. Any swap 
that meets the economically equivalent swap definition offers identical 
risk sensitivity to its associated referenced contract with respect to 
the underlying commodity, and thus could be used to effect a 
manipulation, benefit from a manipulation, or otherwise potentially 
distort prices in the same or similar manner as the associated futures 
contract or option on the futures contract. The Commission further has 
determined that the relatively narrow definition supports the statutory 
objective in CEA section 4a(a)(2)(C) by not causing price discovery to 
shift to trading in foreign markets.\397\
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    \396\ See infra Section III. (necessity finding).
    \397\ For clarity, a swap may be eligible for treatment under 
the pass-through swap provision as either a pass-through swap or a 
pass-through swap offset, discussed above under the bona fide hedge 
definition, and not necessarily be deemed to be an ``economically 
equivalent swap'' since the pass-through swap provision focuses on 
whether the swap serves as a bona fide hedge to one of the 
counterparties. Similarly, status as an economically equivalent swap 
is not dispositive for treatment under the pass-through swap 
provision.
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c. The Definition Balances Competing Statutory Goals and Is Neither Too 
Broad Nor Too Narrow
    Several commenters argued that the proposed ``economically 
equivalent swap'' definition was too narrow and would therefore allow 
market participants to avoid Federal position limits.\398\ In 
particular, CME Group and Better Markets requested the general 
``referenced contract'' definition that applies to futures and options 
on futures also apply to swaps.\399\ The Commission agrees with these 
commenters' general concerns that the ``economically equivalent swap'' 
definition should not allow market participants to avoid Federal 
position limits. In fact, the Commission believes that the approach 
adopted in this Final Rule achieves that goal better than the approach 
proposed by Better Markets and CME Group, first and foremost by 
preventing parties from using netting of swaps to create large 
positions in the futures market. The Final Rule's definition, compared 
to the relatively broader ``referenced contract'' definition that 
applies to futures and options on futures, better prevents 
inappropriate netting of market participants' positions and advances 
Congress's underlying policy goals in

[[Page 3290]]

CEA section 4a(a)(2)(C) and (3)(B) for the following three reasons.
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    \398\ CME Group at 3; NEFI at 3; Better Markets at 31-33 
(generally arguing that the ``economically equivalent swap'' and 
``referenced contract'' definitions should be consistent to prevent 
loopholes).
    \399\ CME Group at 3-4; Better Markets at 33-34 (arguing that 
excluding penultimate swaps creates a technical delineation that is 
largely divorced from the economic realities relating to physical 
commodities underlying both contracts).
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    First, as the Commission stated above, it believes that a narrow 
``economically equivalent swap'' definition that focuses on swaps with 
identical material terms and conditions reduces the ability of market 
participants to structure tangentially-related (i.e., non-identical) 
swaps simply to net down large, speculative positions in excess of 
Federal position limits in futures or options on futures. Because 
referenced contracts in the same commodity are generally netted,\400\ 
and because OTC swaps are bilaterally negotiated and customizable, 
market participants could structure swaps that do not necessarily offer 
identical risk or economic exposure or sensitivity simply to net down 
large positions in other referenced contracts. This is less of a 
concern with exchange-traded futures and related options, which are 
subject to exchange rules and oversight, and which have standardized 
terms, meaning they cannot be structured simply to net down large 
speculative positions in core referenced futures contracts.
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    \400\ See Section II.B.10. (discussing the application of 
netting).
---------------------------------------------------------------------------

    The Commission recognizes as reasonable the concerns of CME Group 
and Better Markets that a relatively narrow ``economically equivalent 
swap'' definition, compared to a broader definition, could enable 
market participants to build excessive speculative risk exposure on one 
side of the market through OTC swap transactions. As discussed herein, 
the Commission is equally concerned that a broader definition similarly 
would permit a market participant to acquire a large position in a core 
referenced futures contract through inappropriate netting.\401\ 
However, the Commission believes that a broader ``economically 
equivalent swap'' definition as advocated by these commenters also 
would be more likely to lead to the additional harms discussed below. 
Accordingly, while the Commission shares the same ultimate concerns as 
CME Group and Better Markets with respect to protecting market 
integrity, the Commission has determined that the relatively narrow 
definition concurrently protects market integrity while also better 
supporting the statutory directives in CEA sections 4a(a)(2)(C) and 
4a(a)(3)(B) as discussed below.
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    \401\ For example, a broader economically equivalent swap 
definition would allow a market participant to hold a long position 
in a physically-settled futures contract that exceeds the applicable 
Federal position limit levels by netting down with an ``offsetting'' 
short OTC swap, even if the swap has a different material term than 
the futures contract. That is, the ``offsetting'' short swap could 
have different delivery location(s), delivery date(s), quality 
differential(s), or even a different underlying commodity (depending 
on how broad the definition would be) than the physically-settled 
futures contract. Such an ``offsetting'' short swap would allow the 
market participant to more profitably engage in--and therefore more 
likely to successfully effect--a corner or squeeze in two respects. 
First, the ``offsetting'' short swap would allow the market 
participant to obtain a larger long futures position, thus creating 
a more dominant position on the long side of the market. Second, the 
``offsetting'' short swap would allow the market participant to more 
easily ``dispose'' of or ``bury the corpse'' at smaller expense by 
enabling the market participant to deliver the underlying physical 
commodity, which the market participant received pursuant to its 
long physically-settled futures positions, under more profitable 
circumstances compared to the terms specified in the futures 
contract. For example, the ``offsetting'' short swap could allow the 
market participant to deliver the commodity (i.e., ``dispose of'' or 
``bury the corpse'') at a different, more profitable (or at least 
for less of a loss) delivery location and/or wait for more favorable 
delivery dates with more favorable prices.
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    Second, the Commission believes that the Final Rule's definition 
addresses statutory objectives by focusing Federal position limits on 
those swaps that pose the greatest threat for facilitating corners and 
squeezes. That is, the Final rule addresses those swaps with similar 
delivery dates and identical material economic terms to futures and 
options on futures subject to Federal position limits while also 
minimizing market impact and liquidity for bona fide hedgers for other 
positions and transactions. For example, if the Commission were to 
adopt a broader economically equivalent swap definition that included 
delivery dates that diverge by one or more calendar days, perhaps by 
several days or weeks, a liquidity provider (including a market maker 
or a speculator) with a large portfolio of swaps may be more likely to 
be constrained by the applicable position limits and therefore may have 
incentive either to minimize its swaps activity or move its swaps 
activity to foreign jurisdictions, resulting in reduced liquidity. If 
there were many similarly situated market participants, the market for 
such swaps could become less liquid, which in turn could harm liquidity 
for bona fide hedgers. As a result, the Commission has determined that 
the relatively narrow scope of the Final Rule's definition reasonably 
balances the factors in CEA section 4a(a)(3)(B)(ii) and (iii) by 
decreasing the possibility of illiquid markets for bona fide hedgers on 
the one hand while, on the other hand, focusing on the prevention of 
market manipulation during the most sensitive period of the spot month.
    Third, the ``economically equivalent swap'' definition helps 
prevent regulatory arbitrage as required by CEA section 4a(a)(2)(C) and 
additionally will strengthen international comity. For example, if the 
Commission instead adopted a broader definition, U.S.-based swaps 
activity could potentially migrate to other jurisdictions with a 
narrower definition, such as the European Union (``EU''). In this 
regard, the Final Rule's definition is similar in certain ways to the 
EU definition for OTC contracts that are ``economically equivalent'' to 
commodity derivatives traded on an EU trading venue.\402\ The 
Commission's ``economically equivalent swap'' definition thus furthers 
the statutory

[[Page 3291]]

goals set forth in CEA section 4a(a)(2)(C), which requires the 
Commission to strive to ensure that any Federal position limits are 
``comparable'' to foreign exchanges and will not cause ``price 
discovery . . . to shift to trading'' on foreign exchanges.\403\ 
Further, market participants trading in both U.S. and EU markets should 
find the Commission's and the EU's respective definitions to be 
familiar, which may help reduce compliance costs for those market 
participants that already have systems and personnel in place to 
identify and monitor such swaps.
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    \402\ See EU Commission Delegated Regulation (EU) 2017/591, 2017 
O.J. (L 87). The applicable EU regulations define an OTC derivative 
to be ``economically equivalent'' when it has ``identical 
contractual specifications, terms and conditions, excluding 
different lot size specifications, delivery dates diverging by less 
than one calendar day and different post trade risk management 
arrangements.'' While the Final Rule's ``economically equivalent 
swap'' definition is similar, the Final Rule's definition requires 
``identical material'' terms rather than merely ``identical'' terms. 
Further, the Final Rule's definition excludes different ``lot size 
specifications or notional amounts'' rather than referencing only 
``lot size'' since swaps terminology usually refers to ``notional 
amounts'' rather than to ``lot sizes.'' The Commission notes that 
SIFMA AMG argued in its comment letter that the Commission should 
adopt the economically equivalent swap definition proposed by the 
EU. See SIFMA AMG at 7. However, while the Commission's definition 
will be similar to the EU's definition, to the extent that the 
Commission's definition differs from the EU's by requiring 
``material identical'' rather than merely ``identical'' terms, the 
Commission discusses its reasoning below.
     Both the Commission's definition and the applicable EU 
regulation are intended to prevent harmful netting. See European 
Securities and Markets Authority, Draft Regulatory Technical 
Standards on Methodology for Calculation and the Application of 
Position Limits for Commodity Derivatives Traded on Trading Venues 
and Economically Equivalent OTC Contracts, ESMA/2016/668 at 10 (May 
2, 2016), available at https://www.esma.europa.eu/sites/default/files/library/2016-668_opinion_on_draft_rts_21.pdf (``[D]rafting the 
[economically equivalent OTC swap] definition in too wide a fashion 
carries an even higher risk of enabling circumvention of position 
limits by creating an ability to net off positions taken in on-venue 
contracts against only roughly similar OTC positions.'').
     The applicable EU regulator, the European Securities and 
Markets Authority (``ESMA''), released a ``consultation paper'' 
discussing the status of the existing EU position limits regime and 
specific comments received from market participants. According to 
ESMA, no commenter, with one exception, supported changing the 
definition of an economically equivalent swap (referred to as an 
``economically equivalent OTC contract'' or ``EEOTC''). ESMA further 
noted that for some respondents, ``the mere fact that very few EEOTC 
contracts have been identified is no evidence that the regime is 
overly restrictive.'' See European Securities and Markets Authority, 
Consultation Paper MiFID Review Report on Position Limits and 
Position Management Draft Technical Advice on Weekly Position 
Reports, ESMA70-156-1484 at 46, Question 15 (Nov. 5, 2019), 
available at https://www.esma.europa.eu/document/ consultation-
paper-position-limits.
    \403\ 7 U.S.C. 6a(a)(2)(C).
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    Each element of the Final Rule's definition, including the 
exclusions from the definition, and related comments, is discussed 
below.
d. Scope of Identical Material Terms
    Under the Final Rule's definition, only ``material'' contractual 
specifications, terms, and conditions are relevant to the analysis of 
whether a particular swap qualifies as an economically equivalent swap. 
The definition thus does not require that a swap be identical in all 
respects to a referenced contract in order to be deemed ``economically 
equivalent'' to that referenced contract. Under the Final Rule, 
``material'' specifications, terms, and conditions are limited to those 
provisions that drive the economic value of a swap, including with 
respect to pricing and risk. Examples of ``material'' provisions 
include, for example: The underlying commodity, including commodity 
reference price and grade differentials; maturity or termination dates; 
settlement type (i.e., cash-settled versus physically-settled); and, as 
applicable for physically delivered swaps, delivery specifications, 
including commodity quality standards and delivery locations.\404\
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    \404\ In developing its definition of an ``economically 
equivalent swap,'' the Commission, based on its experience, has 
determined that for a swap to be ``economically equivalent'' to a 
futures or option on a futures contract, the material contractual 
specifications, terms, and conditions must be identical. In making 
this determination, the Commission took into account, in regards to 
the economics of swaps, how a swap and a corresponding futures 
contract or option on a futures contract react to certain market 
factors and movements, the pricing variables used in calculating 
each instrument, the sensitivities of those variables, the ability 
of a market participant to gain the same type of exposures, and how 
the exposures move to changes in market conditions.
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    In addition, a swap that either references another referenced 
contract, or incorporates by reference the other referenced contract's 
terms, is deemed to share identical terms with the referenced contract 
and therefore qualifies as an economically equivalent swap.\405\ Any 
change in the material terms of such a swap, however, could render the 
swap no longer economically equivalent for Federal position limits 
purposes.
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    \405\ For example, a cash-settled swap that either settles to 
the pricing of a corresponding cash-settled referenced contract, or 
incorporates by reference the terms of such referenced contract, 
would be deemed to be economically equivalent to the referenced 
contract.
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    The Commission recognizes that the material swap terms noted above 
are essential to determining the pricing and risk profile for swaps. 
However, there may be other contractual terms that also may be 
important for the counterparties in determining the pricing and 
transaction risks, but that are not necessarily ``material'' for 
purposes of position limits. For example, as discussed below, certain 
other terms, such as clearing arrangements or governing law, may not be 
material for the purpose of determining economic equivalence for 
Federal position limits, but may nonetheless affect pricing and risk or 
otherwise be important to the counterparties.
    Accordingly, the Commission generally considers those swap 
contractual terms, provisions, or terminology (e.g., ISDA terms and 
definitions) that are unique to swaps (whether standardized or bespoke) 
not to be material for purposes of determining whether a swap is 
economically equivalent to a particular referenced contract, even 
though such terms may be important when negotiating the swap or 
contribute to the valuation and/or the counterparties' risk analysis. 
For example, the following swap provisions or terms are generally 
unique to swaps and/or otherwise not material, and therefore are not to 
be dispositive for determining whether a swap is economically 
equivalent: Designating business day or holiday conventions; day count 
(e.g., 360 or actual); calculation agent; dispute resolution 
mechanisms; choice of law; or representations and warranties.\406\
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    \406\ Commodity swaps, which generally are traded OTC, are less 
standardized compared to exchange-traded futures and therefore must 
include these provisions in an ISDA master agreement between 
counterparties. While certain provisions, for example choice of law, 
dispute resolution mechanisms, or the general representations made 
in an ISDA master agreement, may be important considerations for the 
counterparties, the Commission would not deem such provisions 
material for purposes of determining economic equivalence under the 
Federal position limits framework for the same reason the Commission 
would not deem a core referenced futures contract and a look-alike 
referenced contract to be economically different, even though the 
look-alike contract may be traded on a different exchange with 
different contractual representations, governing law, holidays, 
dispute resolution processes, or other provisions unique to the 
exchanges. Similarly, with respect to day counts, a swap could 
designate a day count that is different than the day count used in a 
referenced contract but adjust relevant swap economic terms (e.g., 
relevant rates or payments, fees, basis, etc.) to achieve the same 
economic exposure as the referenced contract. In such a case, the 
Commission would not find such differences to be material for 
purposes of determining the swap to be economically equivalent for 
Federal position limits purposes.
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    Because the Commission considers settlement type to be a material 
``contractual specification, term, or condition,'' a cash-settled swap 
could only be deemed to be economically equivalent to a cash-settled 
referenced contract, and a physically-settled swap could only be deemed 
to be economically equivalent to a physically-settled referenced 
contract. However, a cash-settled swap that initially did not qualify 
as ``economically equivalent'' due to no corresponding cash-settled 
referenced contract (i.e., no cash-settled look-alike futures contract) 
could subsequently become an ``economically equivalent swap'' if a 
cash-settled futures contract market were to develop.
    Commenters had various views on the treatment of cash-settled and 
physically-settled swaps. First, certain commenters requested the 
Commission exclude physically-settled swaps from Federal position 
limits \407\ or at least clarify the class of instruments that would be 
deemed to be physically-settled swaps.\408\ Second, other commenters 
requested the opposite--that the Commission instead exclude cash-
settled swaps from Federal position limits.\409\ Third, Better Markets 
argued that differentiating between cash-settled and physically-settled 
swaps by including settlement type as a material term would 
``incentivize[ ] speculative liquidity formation away from more liquid, 
more transparent, and more restrictive futures exchanges and to the 
swaps markets.'' \410\
---------------------------------------------------------------------------

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

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

[[Page 3292]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3293]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3294]]

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

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

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

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

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

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

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

[[Page 3295]]

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

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

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

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

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

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

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

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

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

[[Page 3296]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3297]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3298]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3299]]

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

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

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

[[Page 3300]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3301]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3302]]

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

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

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

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

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

[[Page 3303]]

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

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

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

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

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

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

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

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

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

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

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

    \504\ AGA at 9; ICE at 10.

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

[[Page 3304]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3305]]

determined that excluding commodity index contracts from the 
``referenced contract'' definition will ensure that market participants 
cannot use a position in a commodity index contract to net down an 
outright position in a referenced contract that was a component of the 
commodity index contract.
    Regarding Better Markets' and IATP's requests that the Commission 
alter the proposed ``referenced contract'' definition to include 
commodity index contracts (i.e., to remove commodity index contracts 
from the list of excluded contracts in paragraph (3) of the 
``referenced contract'' definition), the Commission notes that if it 
did not exclude commodity index contracts, the Commission's rules would 
allow speculators to take on massive outright positions in referenced 
contracts by netting against a position in a commodity index contract, 
which could lead to excessive speculation.
    For example, the Commission understands that it is common for swap 
dealers to enter into commodity index contracts with participants for 
which the contract would not qualify as a bona fide hedging position 
(e.g., with a pension fund). Failing to exclude commodity index 
contracts from the referenced contract definition could enable a swap 
dealer to use positions in commodity index contracts to net down 
offsetting outright futures positions in the components of the index. 
Additionally, this would have the effect of subverting the statutory 
pass-through swap provision in CEA section 4a(c)(2)(B), which is 
intended to foreclose the recognition of positions entered into for 
risk management purposes as bona fide hedges unless the swap dealer is 
entering into positions opposite a counterparty for which the swap 
position is a bona fide hedge.\518\
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    \518\ 7 U.S.C. 6a(c)(2)(B).
---------------------------------------------------------------------------

    The Commission recognizes that although excluding commodity index 
contracts from the ``referenced contract'' definition would prevent the 
potentially risky netting circumstance described above, it would also 
mean that commodity index contracts would not be subject to Federal 
position limits. The Commission concludes that this is an acceptable 
outcome because the contracts comprising the index would themselves be 
subject to limits, and because commodity index contracts generally tend 
to exhibit low volatility since they are diversified across many 
different commodities.
    With respect to Better Markets', ICEA's, and PMAA's requests to 
impose separate standalone, or aggregate, position limits on commodity 
index contracts, the Commission does not believe doing so is useful to 
the extent that the individual components of a commodity index contract 
are subject to Federal position limits under the Final Rule. The 
Commission also is concerned that adopting a standalone limit for a 
commodity index contract could inadvertently limit transactions in 
commodity derivatives contracts outside the Final Rule's scope. 
Specifically, a commodity index contract may contain components that 
are subject to Federal position limits, as well as additional 
components that are not. If the Commission were to place standalone 
limits on these commodity index contracts, it would impose de facto 
constraints on commodity derivative contracts that are not intended to 
be the subject to the Final Rule and for which the Commission has not 
found position limits to be necessary.
(iii) Trade Options
    The Commission also is finalizing, as proposed, the exclusion of 
trade options that meet the requirements of Sec.  32.3 from the 
definition of referenced contract. The Commission has traditionally 
exempted trade options from a number of Commission requirements because 
trade options are typically employed by end-users to hedge physical 
risk and thus do not contribute to excessive speculation. Trade options 
are not subject to position limits under current regulations, and the 
proposed exclusion of trade options from the referenced contract 
definition would simply codify existing practice.\519\
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    \519\ In the trade options final rule, the Commission stated its 
belief that Federal position limits should not apply to trade 
options, and expressed an intention to address trade options in the 
context of any final rulemaking on position limits. See Trade 
Options, 81 FR at 14971.
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(iv) Swap Guarantees
    The Commission additionally is excluding, as proposed, swap 
guarantees from the ``referenced contract'' definition. In connection 
with further defining the term ``swap'' jointly with the Securities and 
Exchange Commission in the ``Product Definition Adopting Release,'' 
\520\ the Commission interpreted the term ``swap'' (that is not a 
``security-based swap'' or ``mixed swap'') to include a guarantee of 
such swap, to the extent that a counterparty to a swap position would 
have recourse to the guarantor in connection with the position.\521\ 
Excluding guarantees of swaps from the definition of ``referenced 
contract'' will help avoid any potential confusion regarding the 
application of position limits to guarantees of swaps. The Commission 
understands that swap guarantees generally serve as insurance, and, in 
many cases, swap guarantors guarantee the performance of an affiliate 
in order to entice a counterparty to enter into a swap with such 
guarantor's affiliate. As a result, the Commission believes that swap 
guarantees do not contribute to excessive speculation, market 
manipulation, squeezes, or corners. Furthermore, the Commission 
believes that swap guarantees were not contemplated by Congress when 
Congress articulated its policy goals with respect to position limits 
in CEA section 4a(a).\522\ Accordingly, the Commission is finalizing 
the exclusion of swap guarantees from the definition of ``referenced 
contract.''
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    \520\ See generally Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 
2012) (``Product Definitions Adopting Release'').
    \521\ 77 FR at 48226.
    \522\ To the extent that swap guarantees may lower costs for 
uncleared OTC swaps in particular by incentivizing a counterparty to 
enter into a swap with the guarantor's affiliate, excluding swap 
guarantees may improve market liquidity, which is consistent with 
the CEA's statutory goals in CEA section 4a(a)(3)(B) to ensure 
sufficient liquidity for bona fide hedgers when establishing its 
position limit framework.
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(v) New Exclusions from the ``Referenced Contract'' Definition--Price 
Reporting Agency Index Contracts and Monthly Average Pricing Contracts
    Finally, the Commission is modifying prong (3) of the proposed 
``referenced contract'' definition to additionally exclude from the 
Final Rule: (a) Monthly average pricing contracts and (b) outright 
price reporting agency index contracts.
(a) Monthly Average Pricing Contracts
    In response to commenter suggestions, the Commission is providing 
non-binding guidance in Appendix C to this Final Rule to assist market 
participants and exchanges in determining whether a particular contract 
qualifies as a ``monthly average pricing contract,'' that the Final 
Rule is excluding from the ``referenced contract'' definition. 
Specifically, in response to Question 15 of the 2020 NPRM, CME Group 
commented that contract types that are generally referred to in 
industry nomenclature as calendar-month average (``CMA''), trade-month 
average (``TMA''), and balance-of-the-month (``BALMO'') contracts 
should be excluded from the list of referenced contracts and subject 
solely to exchange-set position limits.\523\ CME

[[Page 3306]]

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

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

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

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

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

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

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

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

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

[[Page 3307]]

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

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

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

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

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

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

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

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

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

[[Page 3308]]

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

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

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

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

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

[[Page 3309]]

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

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

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

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

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

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

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[[Page 3310]]

    In addition, commenters requested that the Commission clarify that: 
(1) The ``spread transaction'' definition is a non-exhaustive list, and 
therefore, permit exchanges to grant spread exemptions that are not 
covered by Sec.  150.3(a)(2) by using the streamlined process in Sec.  
150.9 for recognizing non-enumerated bona fide hedges; \552\ and (2) a 
calendar spread would permit a market participant to net down its 
positions for the purposes of Federal spot-month and single-month 
limits.\553\
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    \552\ ICE at 7.
    \553\ Citadel at 8-9.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Spread Transaction
    The Commission is adopting the proposed definition of ``spread 
transaction'' with certain modifications, as described below, to 
address commenters' views and other considerations. First, the 
Commission is expanding the definition to include additional types of 
spreads. Second, the Commission is clarifying the treatment of cash-
and-carry exemptions as permissible calendar spreads and providing 
additional guidance to exchanges in connection with such spreads. 
Third, the Commission addresses the application of spread exemptions in 
connection with the NYMEX NG core referenced futures contract. The 
Commission is also providing additional guidance on the use of exempt 
spread transactions in Appendix G of this Final Rule.
a. The ``Spread Transaction'' Definition Includes Several Additional 
Spread Types Under the Final Rule
    First, the Commission is expanding the proposed ``spread 
transaction'' definition to make clear that the definition as finalized 
includes intra-market, inter-market, and intra-commodity spread 
positions in addition to the spread strategies listed in the proposed 
definition. The final ``spread transaction'' definition will cover: 
Intra-market spreads, inter-market spreads, intra-commodity spreads, 
and inter-commodity spreads, including calendar spreads, quality 
differential spreads, processing spreads, product or by-product 
differential spreads, and futures-options spreads.\554\ The Commission 
intends for the spread transaction definition to be sufficiently broad 
to capture most, if not all, spread strategies currently granted by 
exchanges and used by market participants. The Commission believes this 
is consistent with, but provides more clarity than, its existing 
approach to spread exemptions in existing Sec.  150.3(a)(3), which 
broadly exempts ``spread or arbitrage positions.'' \555\
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    \554\ For example, trading activity in many commodity derivative 
markets is concentrated in the nearby contract month, but a hedger 
may need to offset risk in deferred months where derivative trading 
activity may be less active. A calendar spread trader could provide 
liquidity without exposing himself or herself to the price risk 
inherent in an outright position in a deferred month. Processing 
spreads can serve a similar function. For example, a soybean 
processor may seek to hedge his or her processing costs by entering 
into a ``crush'' spread, i.e., going long soybeans and short soybean 
meal and oil. A speculator could facilitate the hedger's ability to 
do such a transaction by entering into a ``reverse crush'' spread 
(i.e., going short soybeans and long soybean meal and oil). Quality 
differential spreads, and product or by-product differential 
spreads, may serve similar liquidity-enhancing functions when 
spreading a position in an actively traded commodity derivatives 
market such as CBOT Wheat (W) against a position in another actively 
traded market, such as MGEX Wheat.
    \555\ Under existing regulations, the Commission views its use 
of the term ``spread'' to mean the same as ``arbitrage'' or 
``straddle'' as those terms are used in CEA section 4a(a) and 
existing Sec.  150.3(a)(3) of the Commission's regulations. 
Consistent with existing regulations, the Commission's sole use of 
the term ``spread'' in this rulemaking is intended to also capture 
arbitrage or straddle strategies, and is not intended to be a 
substantive change from its existing regulations. The Commission 
notes that certain exchanges may distinguish between ``spread'' and 
``arbitrage'' positions for purposes of exchange exemptions, but the 
Commission does not make that distinction here for purposes of its 
``spread transaction'' definition.
---------------------------------------------------------------------------

    In light of the revised ``spread transaction'' definition, the 
Commission expects that most spread strategies will qualify as intra-
market, inter-market, inter-commodity, or intra-commodity spreads, and 
is providing a non-exhaustive list of the most common specific types of 
spread strategies that fall within those four categories. Any requests 
for spread exemptions that fall outside of the spread transaction 
definition are required to be submitted to the Commission in advance 
pursuant to Sec.  150.3(b) of the Final Rule. Accordingly, the 
Commission has determined not to allow exchanges to grant new types of 
spread exemptions using the streamlined process in Sec.  150.9 for 
various reasons explained below in detail under the discussion of Sec.  
150.3.\556\
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    \556\ See infra Section II.C.4. (discussing statutory and policy 
reasons why the Commission will not permit exchanges to process 
requests for spread exemptions that are not included in the ``spread 
transaction'' definition using the Sec.  150.9 process).
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 3311]]

Commission understands that IFUS has granted this type of calendar 
spread exemption for some time, and has experience monitoring the use 
of such exemptions to ensure that its market operates in a manner that 
is consistent with the applicable DCM Core Principles.\560\ The 
Commission has, however, previously expressed concern about these 
exemptions and their impact on the spot month price for a particular 
futures contract.\561\ In particular, the Commission has explained that 
a large demand for delivery on cash-and-carry positions might distort 
the price of the expiring futures contract upwards.\562\ This would 
particularly be a concern in those commodity markets where price 
discovery for the cash spot price occurred in the expiring futures 
contract.\563\
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    \559\ As final Appendix G provides, the spread transaction 
definition in Sec.  150.1 permits transactions commonly known as 
``cash-and-carry'' trades whereby a market participant enters a long 
futures positions in the spot month and an equivalent short futures 
position in the following month, in order to guarantee a return 
that, at minimum, covers the costs of its carrying charges. With 
this exemption, the market participant is able to take physical 
delivery of the product in the nearby month and may redeliver the 
same product in a deferred month.
    \560\ See IFUS at 7-9 and ICE Futures U.S. Rule 6.29(e).
    \561\ See 81 FR at 96833.
    \562\ Id.
    \563\ See 81 FR at 96833.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

[[Page 3312]]

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

B. Sec.  150.2--Federal Position Limit Levels

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

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

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

    \569\ 17 CFR 150.2.

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[[Page 3313]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.006

    While not explicitly stated in Sec.  150.2, the Commission's 
practice has been to set Federal spot month position limit levels at or 
below 25% of deliverable supply based on exchange estimates of 
deliverable supply (``EDS'') that are verified by the Commission, and 
to set Federal position limit levels outside of the spot month at 10% 
of open interest for the first 25,000 contracts of open interest, with 
a marginal increase of 2.5% of open interest thereafter.
2. Application of Federal Position Limits During the Spot Month and the 
Non-Spot Month
i. Summary of the 2020 NPRM--Application of Federal Position Limits 
During the Spot Month and the Non-Spot Month
    The 2020 NPRM imposed Federal position limits during all contract 
months for the nine legacy agricultural contracts (and their associated 
referenced contracts), and only during the spot month for the 16 non-
legacy core referenced futures contracts (and their associated 
referenced contracts) that would be subject to Federal position limits 
for the first time.\570\ For the 16 non-legacy core referenced futures 
contracts (and their associated referenced contracts), the 2020 NPRM 
also required that they be subject to exchange-set position limits or 
position accountability outside of the spot month.\571\
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    \570\ As noted in further detail in Section II.A.16., their 
associated referenced contracts are also subject to Federal position 
limits.
    \571\ Proposed Sec.  150.5(b)(2). For existing exchange-set 
position limits, see Market Resources, ICE Futures U.S. Website, 
available at https://www.theice.com/futures-us/market-resources (ICE 
exchange-set position limits); Position Limits, CME Group website, 
available at https://www.cmegroup.com/market-regulation/position-limits.html; Rules and Regulations of the Minneapolis Grain 
Exchange, Inc., MGEX, available at https://www.mgex.com/documents/Rulebook_051.pdf (MGEX exchange-set position limits).
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 3314]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3315]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3316]]

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

    \603\ As described below, under the 2020 NPRM, Federal non-spot 
month position limit levels would only apply to the nine legacy 
agricultural contracts and their associated referenced contracts. 
The 16 non-legacy core referenced futures contracts and their 
associated referenced contracts would be subject to Federal position 
limits during the spot month, and exchange-set position limits or 
position accountability outside of the spot month.
    \604\ See Section II.B.10.
    \605\ Id.
    \606\ Proposed 150.2(e) additionally provided that market 
participants would not need to comply with the Federal position 
limit levels until 365 days after publication of the Final Rule in 
the Federal Register. For further discussion of the Final Rule's 
compliance and effective dates, see Section I.D. (Effective Date and 
Compliance Period).
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BILLING CODE 6351-01-P
[GRAPHIC] [TIFF OMITTED] TR14JA21.007

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

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

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[[Page 3317]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.008

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

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

BILLING CODE 6351-01-C

[[Page 3318]]

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

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

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

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

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

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

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

    \622\ 85 FR at 11625-11626.
    \623\ Id.
---------------------------------------------------------------------------

    The Commission also believes that the Federal spot month position 
limit levels adopted herein are high enough to ensure that there is 
sufficient market liquidity for bona fide hedgers.\624\ The

[[Page 3319]]

Commission has not observed a general lack of liquidity for bona fide 
hedgers in the markets for the 25 core referenced futures contracts, 
which are some of the most liquid markets overseen by the 
Commission.\625\ By generally increasing the existing Federal spot 
month position limit levels for the nine legacy agricultural contracts 
based on updated data, and by adopting Federal spot month position 
limit levels that are generally equal to or higher than existing 
exchange-set levels for the 16 non-legacy core referenced futures 
contracts, the Commission does not expect the final Federal position 
limit levels to reduce liquidity for bona fide hedgers.\626\
---------------------------------------------------------------------------

    \624\ CEA section 4a(a)(1) requires the Commission to address 
``[e]xcessive speculation . . . causing sudden or unreasonable 
fluctuations or unwarranted [price] changes . . . .'' Speculative 
activity that is not ``excessive'' in this manner is not a focus of 
CEA section 4a(a)(1). Rather, speculative activity may generate 
liquidity, including liquidity for bona fide hedgers, by enabling 
market participants with bona fide hedging positions to trade more 
efficiently. Setting position limits too low could result in reduced 
liquidity, including for bona fide hedgers. 85 FR at 11626.
    \625\ 85 FR at 11626. The Commission notes that it has observed 
a brief period of illiquidity during the early part of the spot 
month for ICE Cotton No. 2 (CT), which is discussed in Section 
II.B.3.v.
    \626\ Id. Eighteen of the core referenced futures contracts will 
have Federal spot month position limit levels that are higher than 
current exchange-set spot month position limit levels. CME Live 
Cattle (LC), COMEX Gold (GC), COMEX Copper (HG), CBOT Oats (O), 
NYMEX Platinum (PL), and NYMEX Palladium (PA) will have Federal spot 
month position limit levels that are equal to the current exchange-
set spot month position limit levels. Finally, although currently 
there is technically no exchange-set spot month position limit for 
ICE Sugar No. 16 (SF), this contract is subject to a single month 
position limit level of 1,000 contracts, which effectively serves as 
its spot month position limit level. As a result, the Federal spot 
month position limit level for ICE Sugar No. 16 (SF) will 
effectively be higher than its current exchange-set spot month 
position limit level.
---------------------------------------------------------------------------

    Furthermore, the Commission has previously stated that ``there is a 
range of acceptable limit levels,'' \627\ and continues to believe that 
is true.\628\ There is no single ``correct'' spot month position limit 
level for a given contract, and it is likely that a number of limit 
levels within a certain range could effectively achieve the four policy 
objectives in CEA section 4a(a)(3)(B).\629\ The Commission believes 
that the spot month position limit levels adopted herein fall within a 
range of acceptable levels.\630\ This determination is based on the 
Commission's experience in administering its own Federal position 
limits regime, overseeing exchange-set position limits, and being 
closely involved in determining the EDS figures underlying the position 
limit levels, as well as the fact that the Federal spot month position 
limit levels are generally set at or below 25% of EDS.\631\
---------------------------------------------------------------------------

    \627\ See, e.g., Revision of Federal Speculative Position 
Limits, 57 FR 12766, 12770 (Apr. 13, 1992).
    \628\ 85 FR at 11627.
    \629\ Id.
    \630\ Id.
    \631\ The exception to this is the cash-settled NYMEX NG 
referenced contracts, which is discussed in detail in Section 
II.B.3.vi.
---------------------------------------------------------------------------

    In addition, the Federal spot month position limit levels are 
properly calibrated to account for differences between markets. For 
example, the Commission considered the unique delivery mechanisms for 
CME Live Cattle (LC) and the NYMEX metals core referenced futures 
contracts in calibrating the Federal spot month position limit levels 
for those contracts.\632\ The Commission also considered the volatility 
of the EDS for COMEX Copper (HG) in determining its limit level.\633\ 
Furthermore, with respect to NYMEX NG, the Commission, in fine-tuning 
the proposed limits, considered: the underlying natural gas 
infrastructure vis-[agrave]-vis commodities underlying other energy 
core referenced futures contracts; the relatively high liquidity in the 
cash-settled markets; and the public comments received in response to 
the 2020 NPRM.\634\
---------------------------------------------------------------------------

    \632\ 85 FR at 11627.
    \633\ Id. at 11628.
    \634\ Id.
---------------------------------------------------------------------------

(2) Federal Position Limit Levels Operate as Ceilings
    Finally, consistent with the 2020 NPRM and the Final Rule's 
position limits framework that leverages existing exchange-level 
programs and expertise, the Federal position limit levels operate as 
ceilings. This framework, with Federal spot month limits layered over 
exchange-set limits, achieves the Commission's objectives in preventing 
market manipulation, squeezes, corners, and excessive speculation while 
also ensuring sufficient market liquidity for bona fide hedgers and 
avoiding a disruption of the price discovery function of the underlying 
market. This is, in part, because a layered approach facilitates more 
expedited responses to rapidly evolving market conditions through 
exchange action. Under the Final Rule, exchanges are required to set 
their own spot month position limit levels at or below the respective 
Federal spot month position limit levels.\635\ They are also permitted 
to adjust those levels based on market conditions as long as they are 
set at or below the Federal spot month position limit levels. Exchanges 
may also impose liquidity and concentration surcharges to initial 
margin if they are vertically integrated with a derivatives clearing 
organization.\636\ All of these exchange actions can be implemented 
significantly faster than Commission action, and an immediate response 
is critical in managing rapidly evolving market conditions. As a 
result, by having the Federal position limit levels function as 
ceilings, the position limits framework adopted in this Final Rule will 
allow exchanges to lower or raise their position limit levels across a 
greater range of acceptable Federal position limit levels, which will 
facilitate a faster response to more varied market conditions than if 
the Federal position limit levels did not operate as ceilings.
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    \635\ Final Sec.  150.5(a). For the nine legacy agricultural 
contracts, the Final Rule also requires exchanges to set their own 
non-spot month position limit levels at or below the respective 
Federal non-spot month position limit level. For the 16 non-legacy 
core referenced futures contracts, final Sec.  150.5(b)(2) requires 
exchanges to implement either position limits or position 
accountability during the non-spot month for physical commodity 
derivatives that are not subject to Federal position limits ``at a 
level that is necessary and appropriate to reduce the potential 
threat of market manipulation or price distortion of the contract's 
or the underlying commodity's price or index.''
    \636\ 85 FR at 11633.
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iii. Comments and Discussion of Final Rule--Federal Spot Month Position 
Limit Levels
    Many commenters supported the proposed Federal spot month position 
limit levels and the method by which the Commission determined those 
limit levels.\637\ However, some commenters raised concerns or 
otherwise commented with respect to: (1) The proposed Federal spot 
month position limit levels and the methodology used to arrive at those 
levels generally; (2) the Commission's review of exchanges' EDS figures 
and their recommended spot month position limit levels; (3) a lack of a 
phase-in for Federal spot month position limit levels; (4) the proposed 
spot month position limit level for ICE Cotton No. 2 (CT); (5) the 
proposed spot month position limit level for NYMEX NG and other issues 
relating to NYMEX NG; and (6) the issue of parity among the proposed 
Federal spot month position limit levels for the three wheat core 
referenced futures contracts. The Commission will discuss each of these 
issues, the related comments, and the Commission's corresponding 
determination in greater detail below.
---------------------------------------------------------------------------

    \637\ See ASR at 2; CCI at 2; Shell at 3; EEI/EPSA at 3; Suncor 
at 2, CEWG at 3; COPE at 2, 4; SIFMA AMG at 3-4; MGEX at 1; 3; MFA/
AIMA at 1; AFIA at 1; CMC at 6; NGFA at 3; PIMCO at 6; CME Group at 
4-6; NOPA at 1; FIA at 2; and AQR at 8-10.
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a. Federal Spot Month Position Limit Levels and the Commission's 
Underlying Methodology, Generally
(1) Comments--Federal Spot Month Position Limit Levels and the 
Commission's Underlying Methodology, Generally
    Better Markets objected to the Commission's proposed Federal spot 
month position limit levels and

[[Page 3320]]

suggested that there should be a presumption that the Federal spot 
month position limit levels be set at 10% of EDS, which could be 
adjusted as needed.\638\ Another commenter, PMAA, requested Federal 
spot month position limit levels of less than 25% of EDS, but did not 
provide a specific level or a range of levels.\639\ Other commenters 
believed that the proposed spot month levels were generally too high 
merely because they were higher than existing levels.\640\
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    \638\ Better Markets at 41.
    \639\ PMAA at 2.
    \640\ AFR at 2 and Rutkowski at 2.
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    In support of its suggestion, Better Markets claimed that, 
``speculative trading has been sufficient to accommodate legitimate 
hedging at currently permissible levels,'' noting that the Commission 
has previously stated that ``open interest and trading volume have 
reached record levels'' and ``the 25 [core referenced futures 
contracts] represent some of the most liquid markets overseen by the 
[CFTC].'' \641\ Better Markets also claimed that, if the Commission 
conducted a study as to whether the increase in open interest for 
``particular [core referenced futures contracts] would warrant lower 
speculative position limits,'' those studies would have shown that 
substantially lower position limit levels would be warranted.\642\ 
Better Markets also took issue with the Commission's 25% or less of EDS 
formula as a basis for determining Federal spot month position limit 
levels by stating, ``while deliverable supply must be one key measure 
for constraining speculation, it is not sufficient to address all 
statutory objectives for Federal position limits.'' \643\
---------------------------------------------------------------------------

    \641\ Better Markets at 37-38.
    \642\ Id. at 38.
    \643\ Id. at 37.
---------------------------------------------------------------------------

(2) Discussion of Final Rule--Federal Spot Month Position Limit Levels 
and the Commission's Underlying Methodology, Generally
    The Commission declines to adopt a 10% of EDS across-the-board 
Federal spot month position limit level, or a general reduction in 
Federal spot month position limit levels to a level below 25% of EDS 
for those core referenced futures contracts with a proposed position 
limit level set at 25% of EDS.
    In response to Better Markets' suggestion to adopt Federal spot 
month position limit levels set at 10% of EDS, the Commission first 
notes that, although Better Markets provided some arguments for why the 
Commission should consider lower Federal position limit levels, Better 
Markets did not provide any support for the 10% level that it 
suggested, including any support for the comment letter's implication 
that setting limits at or below 25% of EDS is insufficient to prevent 
corners and squeezes. Likewise, PMAA did not provide any support for 
adopting Federal spot month position limit levels of less than 25% of 
EDS, other than claiming that a ``spot month limit of 25 percent of 
deliverable supply is not sufficiently aggressive to deter excessive 
speculation'' and ``prevent market manipulation.'' \644\
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    \644\ PMAA at 2.
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    The 25% or less of EDS formula that the Commission is utilizing, 
and has utilized for many years, is a longstanding methodology that was 
adopted to address corners and squeezes based on the Commission's 
experience.\645\ Also, as described in detail above, the Commission 
believes that the position limits framework in both the 2020 NPRM and 
the Final Rule that incorporates the 25% or less of EDS formula 
achieves the Commission's statutory objectives in preventing market 
manipulation, squeezes, corners, and excessive speculation while also 
ensuring sufficient market liquidity for bona fide hedgers and avoiding 
a disruption of the price discovery function of the underlying market.
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    \645\ See e.g., Chicago Board of Trade Futures Contracts in Corn 
and Soybeans; Order To Change and To Supplement Delivery 
Specifications, 62 FR 60831, 60838 (Nov. 13, 1997) (``The 2,400-
contract level of deliverable supplies constitutes four times the 
speculative position limit for the contract, a benchmark 
historically used by the Commission's staff in analyzing the 
adequacy of deliverable supplies for new contracts'').
---------------------------------------------------------------------------

    In addition, the Final Rule's position limits framework further 
addresses the statutory objectives of CEA section 4a(a)(3)(B) by 
utilizing the Federal position limit levels as a ceiling and leveraging 
the exchanges' expertise and experience in determining and adjusting 
exchange-set position limit levels for their referenced contracts as 
appropriate, as long as they are under the Federal position limit 
levels.\646\ This exchange action can be effectuated significantly 
faster than a Federal position limit level adjustment, which requires 
the Commission to engage in a rulemaking process that includes a 
notice-and-comment period. As a result, compared to the alternative 
approaches suggested by commenters, this framework will generally 
facilitate a more expedited response to a more varied set of market 
conditions, because the exchanges can lower or raise their position 
limit levels across a greater range of acceptable Federal position 
limit levels.
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    \646\ See 85 FR at 11629, 11633.
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    In response to Better Markets' claim that the Federal spot month 
position limit levels should not be adjusted upward as a result of the 
higher open interest levels and trading volumes that exist today 
because they demonstrate that there are sufficient levels of 
speculation and liquidity under the current rules, the Commission first 
notes that Better Markets did not provide a methodology based on open 
interest and/or trading volume that the Commission should consider as 
an alternative to the Commission's 25% or less of EDS approach.
    Regardless, the Commission believes that EDS is the more 
appropriate basis by which the Commission should adjust Federal spot 
month position limit levels, rather than open interest and/or trading 
volume, because the likelihood of a corner or squeeze occurring in the 
spot month is more closely correlated with the percentage of 
deliverable supply that a market participant controls. Corners and 
squeezes are possible in the spot month only because of the imminent 
prospect of making or taking delivery in the physically-settled 
contract. Therefore, understanding the amount of deliverable supply in 
the spot month is critically important.\647\ Accordingly, the 
Commission, in consultation with the exchanges, estimated the amount of 
the underlying commodity available at the specified delivery points in 
the core referenced futures contract that meet the quality standards 
set forth in the core referenced futures contract's terms and 
conditions in order to understand the size of the relevant commodity 
market underlying each core referenced futures contract. Once the 
Commission determined that information in the form of an EDS figure, 
the Commission was able to determine whether a Federal spot month 
position limit level would advance the statutory objectives of CEA 
section 4a(a)(3)(B), including preventing corners and squeezes.
---------------------------------------------------------------------------

    \647\ Deliverable supply is the quantity of the commodity that 
meets contract specifications that is reasonably expected to be 
readily available to short traders and salable by long traders at 
its market value in normal cash-marketing channels at the contract's 
delivery points during the specified delivery period, barring 
abnormal movements in interstate commerce. 17 CFR part 38, Appendix 
C.
---------------------------------------------------------------------------

    A spot month position limit methodology based on open interest and/
or trading volume does not take into account the central factors that 
make corners and squeezes possible (i.e., the imminent prospect of 
delivery on a physically-settled contract and the deliverable supply of 
an underlying

[[Page 3321]]

commodity). Also, open interest and trading volume in an expiring 
physically-settled contract generally declines as the contract nears 
expiration, as most traders are not looking to make or take delivery of 
the underlying commodity. As a result, they would likely not provide 
additional insights that would materially inform the Commission's 
determination of Federal spot month position limit levels in a way that 
is responsive to CEA section 4a(a)(3)(B).
    Furthermore, the Commission did not adjust the Federal spot month 
position limit levels merely by applying a percentage to EDS. As 
discussed in further detail below, the Commission proposed Federal spot 
month position limit levels only after the Commission: (1) Extensively 
reviewed and verified the underlying methodology for each core 
referenced futures contract's EDS figure; and (2) reviewed the 
recommended Federal spot month position limit levels from exchanges 
that are thoroughly knowledgeable about their own respective core 
referenced futures contracts' markets in order to determine whether 
they advanced the policy objectives of CEA section 4a(a)(3)(B). Also, 
in adopting the final Federal spot month position limit levels, the 
Commission also considered comments from market participants, including 
comments from the end-users of these markets.
    On a related note, Better Markets and PMAA appear to have 
misunderstood the proposed Federal spot month position limit levels and 
the methodology on which they were based.\648\ The Commission did not 
propose an across-the-board Federal level set at 25% of EDS. As noted 
above, the Commission's methodology sets Federal spot month position 
limit levels at or below 25% of EDS for each particular commodity.\649\ 
As a result, under the Final Rule, only seven of 25 core referenced 
futures contracts have Federal spot month position limit levels at 25% 
of EDS. With respect to the 18 remaining core referenced futures 
contracts, all 18 are set below 20% of EDS, 14 are below 15% of EDS, 
and eight are already below the 10% of EDS threshold recommended by 
Better Markets.\650\ With respect to the petroleum core referenced 
futures contracts with which PMAA is most likely concerned (i.e., NYMEX 
Light Sweet Crude Oil (CL), NYMEX NYH ULSD Heating Oil (HO), and NYMEX 
RBOB Gasoline (RB)), all three levels are at or below 11.16% of EDS.
---------------------------------------------------------------------------

    \648\ See Better Markets at 39-40 and PMAA at 2.
    \649\ 85 FR at 11624.
    \650\ For CME Live Cattle (LC) and NYMEX Light Sweet Crude Oil 
(CL), which have step-down Federal spot month position limit levels, 
these percentages were calculated using the first and highest step.
---------------------------------------------------------------------------

b. Commission Review of Exchanges' EDS Figures and Recommended Federal 
Spot Month Position Limit Levels
(1) Additional Background Information--Commission Review of Exchanges' 
EDS Figures and Recommended Federal Spot Month Position Limits
    In connection with the 2020 NPRM, the Commission received 
deliverable supply estimates and recommended Federal spot month 
position limit levels from CME Group, ICE, and MGEX for their 
respective core referenced futures contracts.\651\ Commission staff 
reviewed these recommendations and conducted its own analysis of them 
using its own experience, observations, and knowledge.\652\ This 
included closely and independently assessing the EDS figures upon which 
the recommended limit levels were based.\653\ In reviewing the 
recommended spot month position limit levels, the Commission considered 
the four policy objectives in CEA section 4a(a)(3)(B) and preliminarily 
determined that none of the recommended levels appeared improperly 
calibrated such that they might hinder liquidity for bona fide hedgers 
or invite excessive speculation, manipulation, corners, or squeezes, 
including activity that could impact price discovery.\654\ As a result, 
the Commission proposed to adopt each of the exchange-recommended spot 
month position limit levels as Federal spot month position limit 
levels.\655\
---------------------------------------------------------------------------

    \651\ See supra n.616, n.617, and n.618.
    \652\ 85 FR at 11625.
    \653\ Id. at 11625-11626.
    \654\ Id. at 11625.
    \655\ Id. Also, a more detailed discussion about the methodology 
employed by the Commission in determining proposed Federal spot 
month position limit levels can be found at 85 FR at 11625-11628.
---------------------------------------------------------------------------

(2) Comments--Commission Review of Exchanges' EDS Figures and 
Recommended Federal Spot Month Position Limit Levels
    The Commission received several comments concerning the 
Commission's review and verification of the EDS figures and the 
rationale used by the Commission in accepting the spot month position 
limit levels that were recommended by exchanges.
    One commenter, EPSA, supported adopting CME Group's EDS figures for 
energy commodities, stating that exchanges are in the ``best position 
to provide accurate and current information on the markets.'' \656\ 
However, other commenters expressed concerns. Better Markets commented 
that the Commission failed to ``explain the means by which the DCM-
provided data was collected and later `verified' in arriving at 
proposed spot month position limits, nor the dependencies of the DCM 
methodologies employed to arrive at those estimates.'' \657\ Similarly, 
IATP commented that the 2020 NPRM provided insufficient detail about 
how the Commission concluded that the exchange-recommended spot month 
position limit levels were appropriate and how the Commission 
determined that the EDS figures submitted by the exchanges were 
reasonable.\658\ On a related note, PMAA commented that the exchanges 
should not be providing EDS figures and that the Commission instead 
should ``retain exclusive discretion in determining `deliverable 
supply' for the purposes of establishing speculative position limits'' 
and ``consult with . . . market experts when determining `deliverable 
supply' and formulating limits.'' \659\ Furthermore, CME Group 
recommended ``that the Commission not adopt final spot month position 
limit levels at 25% of deliverable supply as a rigid formula and . . . 
work with the exchange to determine an appropriate limit based on the 
market dynamics.'' \660\ Likewise, MGEX commented that it 
``fundamentally disagrees with the 25% formulaic calculation for the 
spot month position, especially if a limit is codified by rule and does 
not allow for adjustments as deliverable supply changes.'' \661\
---------------------------------------------------------------------------

    \656\ EPSA at 3.
    \657\ Better Markets at 36.
    \658\ IATP at 9.
    \659\ PMAA at 2-3 (these market experts include governmental 
entities, such as the Department of Energy's Energy Information 
Administration and the U.S. Department of Agriculture, academics, 
and representatives of industries that produce, refine, process, 
store, transport, market, and consume the underlying commodity).
    \660\ CME Group at 5-6. Specifically, CME Group believed that 
using a 25% of EDS formula ``as a fixed formula for establishing 
recommended limits . . . is unsound as a matter of policy and 
incompatible with the Commission's statutory authority to determine 
that a specific position limit is necessary and set it at an 
appropriate level.''
    \661\ Updated Deliverable Supply Data--Potential Position Limits 
Rulemaking, MGEX Comment Letter (Aug. 31, 2018) at 2, available at 
https://comments.cftc.gov (comment file for Proposed Rule 85 FR 
11596).
---------------------------------------------------------------------------

    Finally, Better Markets also raised concerns about the incentives 
of exchanges as public, for-profit enterprises, presumably, in part, 
because the exchanges submitted the EDS figures, upon which the Federal 
spot month position limit levels are

[[Page 3322]]

based.\662\ Specifically, Better Markets stated that exchanges ``must 
balance the interests of their shareholders against the public interest 
and their commercial interests in market integrity'' and, as a result, 
may be incentivized to permit ``speculation--even excess speculation,'' 
because it ``is a key revenue driver.'' \663\
---------------------------------------------------------------------------

    \662\ Better Markets at 22.
    \663\ Id. at 22-23. Better Markets referenced CME Group Inc.'s 
Form 10-K filings, which stated that ``[t]he adoption and 
implementation of position limits rules . . . could have a 
significant impact on our commodities business if Federal rules for 
position limit management differ significantly from current 
exchange-administered rules.''
---------------------------------------------------------------------------

(3) Discussion of Final Rule--Commission Review of Exchanges' EDS 
Figures and Recommended Federal Spot Month Position Limit Levels
    The Commission declines to utilize a different methodology and 
process for determining EDS figures and Federal spot month position 
limit levels.
(i) Determination of EDS Figures
    In response to comments concerning the Commission's EDS 
determinations, the Commission notes that its process for reviewing and 
verifying the EDS figures provided by exchanges entailed extensive 
independent review and analysis of each EDS figure and its underlying 
methodology, and the Commission retained exclusive discretion to 
determine the reasonableness of the EDS figures. This review and 
analysis by Commission staff occurred prior to the exchanges' formal 
EDS submissions, during which time Commission staff verified that each 
exchange's EDS figure for each commodity underlying a core referenced 
futures contract was reasonable. In doing so, Commission staff 
confirmed that the methodology and the data \664\ for the underlying 
commodity for each core referenced futures contract reflected the 
commodity characteristics \665\ described in the core referenced 
futures contract's terms and conditions, while also recognizing that 
more than one methodology and one set of assumptions, allowances, and 
data sources could result in a reasonable EDS figure for a commodity. 
In addition, Commission staff replicated the exchanges' EDS figures 
using the methodology provided. For some commodities, Commission staff 
also determined the reasonableness of an exchange's EDS by constructing 
an alternate EDS using an alternate methodology using other available 
data and comparing that internal EDS with the exchange's EDS. In some 
cases, Commission staff consulted industry experts and market 
participants to verify that the assumptions and allowances used by the 
EDS methodology were reasonable and that the EDS figure itself was 
reasonable.
---------------------------------------------------------------------------

    \664\ The data underlying the EDS figures are from sources that 
Commission staff had determined as accurately representing the 
underlying commodity. These were typically from publicly available 
sources. For example, these include data published by the U.S. 
Department of Energy for NYMEX Light Sweet Crude Oil (CL), data 
published by the U.S. Department of Agriculture for CBOT Soybeans 
(S), data published by the Florida Department of Citrus for ICE 
FCOJ-A (OJ), and data published by CME Group concerning the gold 
inventories at its approved depositories for COMEX Gold (GC). 
Furthermore, most data sources were also adjusted based on 
interviews with market experts and market participants in order to 
better reflect the actual deliverable supply by taking into 
consideration the amount of time it takes to move the commodity to/
from the delivery points, quality standards, and supplies that are 
not readily available due to being tied up in long-term contracts.
    \665\ These characteristics are provided in the guidance in 
section (b)(1)(i) of Appendix C to part 38, and include, among other 
things, the commodity's quality and grade specifications, delivery 
points (including storage capacity), historic storage levels, 
processing capacity, and adjustments to remove supply that is 
committed for long-term contracts and not available to underlie a 
futures contract. The verified EDS for each commodity reflects the 
quantity of the commodity that can be reasonably expected to be 
readily available to short traders and salable by long traders at 
its market value in normal cash-marketing channels at the contract's 
delivery points during the specified delivery period, barring 
abnormal movements in interstate commerce.
---------------------------------------------------------------------------

    When Commission staff identified any issues during the review 
process, they raised those concerns with the exchanges in order to 
revise the methodologies, including the assumptions, allowances, and 
data sources used therein. As a result, when the exchanges formally 
submitted their EDS figures, both the EDS figures and the methodologies 
underlying their calculations had been thoroughly reviewed and analyzed 
by Commission staff, and some had been refined based on input from 
Commission staff. The EDS figures and the methodologies used were 
published in the comment section of the 2020 NPRM on the Commission's 
website and have been available for review by the public.\666\
---------------------------------------------------------------------------

    \666\ See IFUS--Estimated Deliverable Supply--Softs Methodology, 
IFUS Comment Letter (May 14, 2019); Updated Deliverable Supply 
Data--Potential Position Limits Rulemaking, MGEX Comment Letter 
(Aug. 31, 2018); and Summary DSE Proposed Limits, CME Group Comment 
Letter (Nov. 26, 2019) (CME Group also provided separate EDS 
methodology submissions for each of its 18 core referenced futures 
contracts, which can also be found in the comment file), all 
available at https://comments.cftc.gov (comment file for Proposed 
Rule 85 FR 11596).
---------------------------------------------------------------------------

    Additionally, for the past 10 years, commenters to previous Federal 
position limits rule proposals have consistently recommended that the 
EDS figures should be supplied by exchanges, given the exchanges' 
expertise with their own contract markets and because of the experience 
they have in producing such figures.\667\ The Commission has agreed and 
continues to agree with those comments. As a result, Commission staff 
has also previously worked in collaboration with the exchanges as part 
of an iterative process to review and refine the methodologies, 
assumptions, allowances, and data sources used in calculating the EDS 
figure for each commodity underlying a core referenced futures 
contract.
---------------------------------------------------------------------------

    \667\ See e.g. 81 FR at 96754, n.495 (listing the commenters 
that expressed the view that exchanges are best able to determine 
appropriate spot month position limits and that the Commission 
should defer to their expertise).
---------------------------------------------------------------------------

(ii) Determination of Federal Spot Month Position Limit Levels
    In response to comments concerning the Commission's determination 
of the Federal spot month position limit levels, the Commission first 
notes that exchanges were invited to submit their recommended Federal 
spot month position limit levels for their respective core referenced 
futures contracts. In response, CME Group,\668\ ICE,\669\ and MGEX 
\670\ provided recommended levels for their core referenced futures 
contracts.
---------------------------------------------------------------------------

    \668\ See supra n.616.
    \669\ See supra n.617.
    \670\ See supra n.618.
---------------------------------------------------------------------------

    When deciding whether to adopt, reject, or modify the exchange-
recommended position limit levels, the Commission considered a variety 
of factors, including whether the recommended level: (i) Was consistent 
with the 25% or less of EDS formula, as provided in the guidance in 
Appendix C to part 38; (ii) reflected changes in the EDS of the 
underlying commodity and trading activity in the core referenced 
futures contract; and (iii) achieved the four policy objectives in CEA 
section 4a(a)(3)(B). Furthermore, as described in detail above, the 
Commission also thoroughly reviewed the methodologies for determining 
the EDS figures upon which the exchange-recommended spot month position 
limit levels are based.
    Finally, the Commission also considered input from market 
participants concerning the EDS figures and the exchange-recommended 
Federal position limit levels in recalibrating the Federal position 
limit levels, as it has done for ICE Cotton No. 2 (CT) and NYMEX Henry 
Hub Natural Gas (NG) in this Final Rule, as discussed further below.

[[Page 3323]]

(iii) Concern Over Exchanges' Conflict of Interest and Improper 
Incentives in Maintaining Their Markets
    In response to Better Markets' concern about the incentives of 
exchanges as public, for-profit businesses, as a preliminary matter, 
the Commission acknowledges that exchanges have a financial interest in 
increased trading volume, whether speculative or hedging, and, as a 
result, may be incentivized to increase EDS figures and recommend 
higher position limit levels. However, as previously discussed, the 
Commission independently assessed and verified the exchanges' EDS 
estimates. Specifically, the Commission: (1) Worked closely with the 
exchanges to independently verify that all EDS methodologies and 
figures were reasonable; \671\ and (2) reviewed each exchange-
recommended level for compliance with the requirements established by 
the Commission and/or by Congress, including those in CEA section 
4a(a)(3)(B).\672\ Also, as discussed at length above, the Commission 
conducted its own analysis of the exchange-recommended Federal spot 
month position limit levels and determined that the levels adopted 
herein: (1) Are low enough to diminish, eliminate, or prevent excessive 
speculation and also protect price discovery; (2) are high enough to 
ensure that there is sufficient market liquidity for bona fide hedgers; 
(3) fall within a range of acceptable limit levels; and (4) are 
properly calibrated to account for differences between markets. Thus, 
the Commission believes that the impact, if any, of such financial 
incentives were sufficiently mitigated through the Commission's close 
review of the methodology underlying the EDS figures, the EDS figures 
themselves, and the recommended Federal position limit levels.
---------------------------------------------------------------------------

    \671\ As discussed in detail above, the verification involved: 
Confirming that the methodology and data for the underlying 
commodity reflected the commodity characteristics described in the 
core referenced futures contract's terms and conditions; replicating 
exchange EDS figures using the methodology provided by the exchange; 
and working with the exchanges to revise the methodologies as 
needed.
    \672\ See Section II.B.3.iii.b.(3).
---------------------------------------------------------------------------

    The Commission also notes that exchanges have significant 
incentives and obligations to maintain well-functioning markets as 
self-regulatory organizations that are themselves subject to regulatory 
requirements. Specifically, the DCM and SEF Core Principles, as 
applicable, require exchanges to, among other things, list contracts 
that are not readily susceptible to manipulation, and surveil trading 
on their markets to prevent market manipulation, price distortion, and 
disruptions of the delivery or cash-settlement process.\673\ Exchanges 
also have significant incentives to maintain well-functioning markets 
to remain competitive with other exchanges. Market participants may 
choose exchanges that are less susceptible to sudden or unreasonable 
fluctuations or unwarranted changes caused by excessive speculation or 
corners, squeezes, and manipulation, which could, among other things, 
harm the price discovery function of the commodity derivative contracts 
and negatively impact the delivery of the underlying commodity, bona 
fide hedging strategies, and market participants' general risk 
management.\674\ Furthermore, several academic studies, including one 
concerning futures exchanges and another concerning demutualized stock 
exchanges, support the conclusion that exchanges are able to both 
satisfy shareholder interests and meet their self-regulatory 
organization responsibilities.\675\
---------------------------------------------------------------------------

    \673\ 17 CFR 38.200; 17 CFR 38.250; 17 CFR 37.300; and 17 CFR 
37.400.
    \674\ Kane, Stephen, Exploring price impact liquidity for 
December 2016 NYMEX energy contracts, n.33, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_priceimpact.pdf.
    \675\ See David Reiffen and Michel A. Robe, Demutualization and 
Customer Protection at Self-Regulatory Financial Exchanges, Journal 
of Futures Markets, Vol. 31, 126-164, Feb. 2011 (in many 
circumstances, an exchange that maximizes shareholder (rather than 
member) income has a greater incentive to aggressively enforce 
regulations that protect participants from dishonest agents); and 
Kobana Abukari and Isaac Otchere, Has Stock Exchange Demutualization 
Improved Market Quality? International Evidence, Review of 
Quantitative Finance and Accounting, Dec 09, 2019, https://doi.org/10.1007/s11156-019-00863-y (demutualized exchanges have realized 
significant reductions in transaction costs in the post-
demutualization period).
---------------------------------------------------------------------------

iv. Phase-In of Federal Spot Month Position Limit Levels
a. Summary of the 2020 NPRM--Phase-In of Federal Spot Month Position 
Limit Levels
    The 2020 NPRM did not include a phase-in mechanism in which the 
Commission would gradually adjust the Federal position limit levels 
over a period of time. As a result, under the 2020 NPRM, the proposed 
Federal spot month position limit levels for all core referenced 
futures contracts would immediately go into effect on the proposed 
effective date.
b. Summary of the Commission Determination--Phase-In of Federal Spot 
Month Position Limit Levels
    The Commission declines to adopt a formal phase-in for the Federal 
spot month position limit levels, because it believes that the markets 
would operate in an orderly fashion with the Federal position limit 
levels adopted under this Final Rule. However, as a practical matter, 
the Commission notes that the operative spot month position limit 
levels for market participants trading in exchange-listed referenced 
contracts will be the exchange-set spot month position limit levels, 
which will continue to remain at their existing levels unless and until 
an exchange affirmatively modifies its exchange-set spot month position 
limit levels pursuant to part 40 of the Commission's regulations.\676\
---------------------------------------------------------------------------

    \676\ 17 CFR part 40.
---------------------------------------------------------------------------

c. Comments--Phase-In of Federal Spot Month Position Limit Levels
    The Commission received comments requesting that the Commission 
``consider phasing in these adjustments for agricultural commodities to 
assess the impacts of increasing limits on contract performance.'' 
\677\ CMC also noted that, ``A phased approach could provide market 
participants, exchanges, and the Commission a way to build in scheduled 
pauses to evaluate the effects of increased limits, thereby fostering 
confidence and trust in the markets.'' \678\
---------------------------------------------------------------------------

    \677\ AFIA at 2 and CMC at 6.
    \678\ CMC at 6. Although commenters did not provide specific 
details about what they meant by ``phase-in,'' the Commission 
understands these comments to mean that they are requesting a 
gradual, step-up increase in Federal spot month and non-spot month 
position limit levels over time for agricultural core referenced 
futures contracts, instead of having an abrupt change to the new 
Federal position limit levels. This section only addresses the 
Commission's response to commenters' request for phased-in Federal 
spot month position limit levels. The Commission separately 
addresses commenters' request for phased-in Federal non-spot month 
position limit levels below in Section II.B.4.iv.a.(2)(v).
---------------------------------------------------------------------------

d. Discussion of the Final Rule--Phase-In of Federal Spot Month 
Position Limit Levels
    In response to comments, the Commission first notes that, although 
the Federal spot month position limit levels will generally be higher 
than existing Federal and/or exchange-set spot month position limit 
levels, the Commission believes that the referenced contract markets 
will be able to function in an orderly fashion when the final Federal 
spot month position limit levels

[[Page 3324]]

go into effect.\679\ This is because, among other things, these final 
Federal spot month position limit levels are supported by the updated 
EDS figures and are set at or below 25% of EDS.\680\
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    \679\ A phase-in is unnecessary with respect to the Federal spot 
month position limit level for CBOT Oats (O), because the Federal 
spot month position limit level for the contract remains at the 
current level.
    \680\ The final Federal spot month position limit levels for 
cash-settled NYMEX NG referenced contracts may exceed 25% of EDS 
because the Federal spot month position limit level is being applied 
separately for each exchange and OTC swaps market, but the 
Commission believes that this approach will not cause any issues, in 
part, because of the highly liquid nature of that particular market. 
For additional details concerning the NYMEX NG market, see Section 
II.B.3.vi.a.
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    However, as a practical matter, the operative spot month position 
limit level for market participants with respect to exchange-listed 
referenced contracts is not the Federal spot month position limit 
levels, but the exchange-set spot month position limit levels, which 
must be set at or below the corresponding Federal spot month position 
limit levels. As a result, despite the changes in the Federal spot 
month position limit levels (or the imposition of a Federal spot month 
position limit level for the first time) in this Final Rule, there will 
be no practical impact on market participants trading in exchange-
listed referenced contracts unless and until an exchange affirmatively 
modifies its exchange-set spot month position limit levels through a 
rule submission to the Commission pursuant to part 40 of the 
Commission's regulations.\681\
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    \681\ 17 CFR part 40.
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v. ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level
a. Summary of the 2020 NPRM--ICE Cotton No. 2 (CT) Federal Spot Month 
Position Limit Level
    The Commission proposed to increase the Federal spot month position 
limit level for ICE Cotton No. 2 (CT) from the existing Federal 
position limit of 300 contracts to 1,800 contracts. Like all of the 
Federal spot month position limit levels, the Commission's proposed 
level for ICE Cotton No. 2 (CT) was based on Commission staff's review, 
analysis, and verification of IFUS's updated EDS figure and Commission 
staff's review and analysis of IFUS's initial recommended Federal spot 
month position limit level.\682\
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    \682\ See IFUS--Estimated Deliverable Supply--Softs Methodology, 
IFUS Comment Letter (May 14, 2019) and Reproposal--Position Limits 
for Derivatives (RIN 3038-AD99); ICE Comment Letter (Feb. 28, 2017) 
(attached Sept. 28, 2016 comment letter), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596 and 
Proposed Rule 81 FR 96704, respectively). IFUS did not formally 
provide recommended Federal spot month position limit levels for 
each of its core referenced futures contracts. However, ICE had 
previously recommended setting Federal spot month position limit 
levels for IFUS's core referenced futures contracts at 25% of EDS in 
its comment letter in connection with the 2016 Reproposal and 
Commission staff also confirmed with ICE/IFUS's representatives that 
ICE/IFUS's position has remained the same with respect to the 
Federal spot month position limit levels since the 2016 Reproposal. 
The Commission notes, however, with respect to ICE Cotton No. 2 
(CT), IFUS submitted an updated recommended Federal spot month 
position limit level recommending a Federal spot month position 
limit level of 900 contracts. See IFUS--Estimated Deliverable 
Supply--Cotton Methodology, August 2020, IFUS Comment Letter (August 
27, 2020), available at https://comments.cftc.gov (comment file for 
Proposed Rule 85 FR 11596).
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b. Summary of the Commission Determination--ICE Cotton No. 2 (CT) 
Federal Spot Month Position Limit Level
    In the Final Rule, the Commission is adopting a Federal spot month 
position limit level of 900 contracts instead of the proposed level of 
1,800 contracts for ICE Cotton No. 2 (CT). The reasons for this change 
are based on the comments received in response to the 2020 NPRM.
c. Comments--ICE Cotton No. 2 (CT) Federal Spot Month Position Limit 
Level
    The Commission received numerous comments objecting to the higher 
proposed Federal spot month position limit level for ICE Cotton No. 2 
(CT) in the 2020 NPRM.\683\ The commenters requested that the 
Commission either maintain the current 300 contract limit level or 
drastically lower the limit from the proposed 1,800 contract limit 
level.\684\ In doing so, commenters argued that they disagreed with the 
EDS figure for ICE Cotton No. 2 (CT) because it does ``not reflect the 
cotton industry's historical ability to deliver the physical 
commodity.'' \685\ AMCOT similarly noted that the ``methodology used in 
determining the limits is flawed and lacks consideration of the 
industry's intricacies including the non-fungible quality as well as 
warehousing, location, and logistical challenges.'' \686\ Furthermore, 
AMCOT believed that the Federal spot month position limit level ``would 
likely be disruptive to orderly market flows.'' \687\ Likewise, ACSA 
noted that, ``[i]n a smaller market like cotton, such a drastic 
increase and high limit will cause excessive volatility and hinder 
convergence in the spot month.'' \688\
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    \683\ AMCOT at 1-2; ACSA at 8; Ecom at 1; Southern Cotton at 2; 
NCC at 1; Mallory Alexander at 2; Canale Cotton at 2; IMC at 2; Olam 
at 3; DECA at 2; Moody Compress at 1; ACA at 2; Choice at 1; East 
Cotton at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; NCC at 2; 
Omnicotton at 2; Toyo at 2; Texas Cotton at 2; Walcot at 2; White 
Gold at 1; LDC at 1; SW Ag at 2; NCTO at 2; and Parkdale at 2.
    \684\ Id.
    \685\ See, e.g., ACA at 2.
    \686\ AMCOT at 1.
    \687\ Id.
    \688\ ACSA at 8.
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    In addition to the market participants, IFUS also submitted a 
comment letter with respect to ICE Cotton No. 2 (CT), in which it 
provided an updated recommended Federal spot month position limit level 
of 900 contracts.\689\
---------------------------------------------------------------------------

    \689\ IFUS--Estimated Deliverable Supply--Cotton Methodology, 
August 2020, IFUS Comment Letter (Aug. 14, 2020), available at 
https://comments.cftc.gov (comment file for Proposed Rule 85 FR 
11596).
---------------------------------------------------------------------------

d. Discussion of Final Rule--ICE Cotton No. 2 (CT) Federal Spot Month 
Position Limit Level
    As a preliminary matter, and as discussed previously, the 
Commission believes that there is a range of acceptable Federal 
position limit levels that will achieve the objectives of CEA section 
4a(a)(3)(B). Thus, the Commission acknowledges that there may be other 
acceptable Federal spot month position limit levels in addition to the 
proposed 1,800 contract level for ICE Cotton No. 2 (CT). Commenters to 
the 2020 NPRM suggested three alternatives to the proposed Federal spot 
month position limit level for ICE Cotton No. 2 (CT): (1) 300 
contracts; (2) 900 contracts; or (3) a level ``drastically lower'' than 
1,800 contracts. All of these alternatives are below 25% of EDS. The 
Commission considered the two specifically enumerated levels (i.e., 300 
contracts and 900 contracts) and the proposed 1,800 contract level, and 
has determined that the 900 contract level is the most appropriate 
among the three for ICE Cotton No. 2 (CT).
(1) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level 
Should Be Above 300 Contracts
    The Commission believes that it is more appropriate to raise the 
Federal spot month position limit level than to maintain its existing 
level of 300 contracts, as long as that level is set at or below 25% of 
EDS. One reason is because the current 300 contract Federal spot month 
position limit level for ICE Cotton No. 2 (CT) has been in place since 
at least 1987 while the size of the ICE Cotton No. 2 (CT) market has 
significantly increased over the years, as evidenced by the material 
increases in deliverable supply and open interest.\690\
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    \690\ For example, between the periods of 1994-1999 and 2015-
2018, the maximum open interest in ICE Cotton No. 2 (CT) increased 
from 122,989 contracts to 344,302 contracts. Also, the EDS for ICE 
Cotton No. 2 (CT) increased from 6,005 contracts to 6,948 contracts 
between 2016 and 2019.

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[[Page 3325]]

    A second reason why the Commission believes that it is appropriate 
to raise the Federal spot month position limit level above the existing 
level of 300 contracts for ICE Cotton No. 2 (CT) is because of 
potential liquidity concerns. At 300 contracts, the Federal spot month 
position limit level for ICE Cotton No. 2 (CT) would be set at 4.32% of 
EDS, which would be the lowest Federal spot month position limit level, 
by far, in terms of percentage of EDS among all core referenced futures 
contracts.\691\ At such a low level, the Commission is concerned that 
this could hamper liquidity in the market, especially if the ICE Cotton 
No. 2 (CT) market continues to grow as it has done over the years. This 
concern is supported by the Commission's observation that there has 
been a lack of liquidity at the start of the spot month period in 
recent years as speculative traders exited the market or reduced their 
positions to the Federal spot month position limit level of 300 
contracts. The Commission's observation is based on its assessment of 
the daily price impact liquidity in basis points with the gauge: \692\
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    \691\ CBOT KC HRS Wheat (KW) generally has the lowest Federal 
spot month position limit level in terms of percentage of EDS at 
6.82%, which is 58% higher than 4.32%. However, following the close 
of trading on the business day prior to the last two trading days of 
the contract month, CME Live Cattle (LC) has the lowest Federal spot 
month position limit level in terms of percentage of EDS at 5.29%, 
which is 22% higher than 4.32%.
    \692\ Pi is the price of trade i. Pi* is the proxy for the 
current market price (the price of the last trade, 
Pi--1). Q1 is the quantity traded (the number of futures 
contracts traded in trade i). See Kane, Stephen, Exploring price 
impact liquidity for December 2016 NYMEX energy contracts, p.5-6, 
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_priceimpact.pdf.
[GRAPHIC] [TIFF OMITTED] TR14JA21.030

    Raising the limit level above 300 contracts to a higher level, such 
as 900 contracts, should help alleviate some of the liquidity problems 
that market participants have experienced because they will not have to 
reduce their positions to such a low level (i.e., 300 contracts).
    A third reason for raising the Federal spot month position limit 
level above its existing level of 300 contracts is because a 300 
contract level may not provide adequate headroom under which exchanges 
may set and adjust their own position limit levels, up or down, in 
response to market conditions within this position limits framework. 
This is an especially acute issue because, as noted above, a Federal 
spot month position limit level of 300 contracts is extremely low in 
terms of percentage of EDS when compared to other core referenced 
futures contracts, and there is no market-based reason (e.g., higher 
susceptibility for corners and squeezes) for why the level should be 
set so low.
    A final reason for supporting a Federal spot month position limit 
level higher than 300 contracts is because IFUS, which is the exchange 
that lists ICE Cotton No. 2 (CT), has recommended a level higher than 
300 contracts.\693\ This is significant because exchanges have deep 
knowledge about their markets and are particularly well-positioned to 
recommend position limit levels for the Commission's 
consideration.\694\
---------------------------------------------------------------------------

    \693\ IFUS--Estimated Deliverable Supply--Cotton Methodology, 
August 2020, IFUS Comment Letter (Aug. 14, 2020), available at 
https://comments.cftc.gov (comment file for Proposed Rule 85 FR 
11596).
    \694\ 85 FR at 11598. However, as noted before, the Commission 
independently reviewed and analyzed the exchange-recommended levels, 
including the EDS figures that support such levels.
---------------------------------------------------------------------------

    The Commission recognizes that the comments from the end-users of 
ICE Cotton No. 2 (CT) unanimously requested that the Commission 
consider, among other options, maintaining the 300 contract Federal 
position limit level. The main justifications underlying this request 
are that: (1) The ICE Cotton No. 2 (CT) market is small; and (2) the 
EDS figure is extremely high. In response to commenters' claim about 
the size of the market, the Commission notes that the market for ICE 
Cotton No. 2 (CT) is not as small as suggested. Open interest data 
indicate that the ICE Cotton No. 2 (CT) futures market had a larger 
average notional open interest in 2019 than nine other core referenced 
futures contracts.\695\ Six of these contracts have higher Federal 
position limit levels in terms of percentage of EDS in this Final 
Rule.\696\
---------------------------------------------------------------------------

    \695\ These are CBOT Oats (O), CBOT KC HRW Wheat (KW), MGEX HRS 
Wheat (MWE), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE FCOJ-A (OJ), 
ICE Sugar No. 16 (SF), NYMEX Platinum (PL), and NYMEX Palladium 
(PA). See Section III.C.
    \696\ These are CBOT Oats (O), MGEX HRS Wheat (MWE), ICE Cocoa 
(CC), ICE FCOJ-A (OJ), ICE Sugar No. 16 (SF), and NYMEX Platinum 
(PL).
---------------------------------------------------------------------------

    In response to commenters' issue with the EDS, the Commission notes 
that the cotton merchants may have focused on too narrow of a scope in 
their comment letters. The commenters appear to focus on the actual 
cotton that was delivered pursuant to holding the physically-settled 
ICE Cotton No. 2 (CT) core referenced futures contract to expiration, 
and they use that data as evidence that the EDS is extremely high.\697\ 
The Commission's EDS figures are not meant to reflect the actual 
commodity delivered. Rather, as the term estimated deliverable supply 
indicates, it is the quantity of the commodity that meets contract 
specifications that is reasonably expected to be readily available to 
short traders and salable by long traders at its market value in normal 
cash-marketing channels at the contract's delivery points during the 
specified delivery period, barring abnormal movements in interstate 
commerce.\698\ The Commission believes that limiting a speculative 
trader from controlling more than 25% of this supply, and not the 
actual commodity delivered, is critical for ensuring that corners and 
squeezes do not happen.\699\
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    \697\ See ACSA at 7-8.
    \698\ 17 CFR part 38, Appendix C.
    \699\ Generally, only a small percentage of futures contracts 
actually go to delivery. Basing a speculative position limit on past 
deliveries for a futures contract would be far too limiting for a 
speculative position limit and would not reasonably achieve the four 
policy objectives of CEA section 4a(a)(3)(B).

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[[Page 3326]]

    Furthermore, commenters did not provide specific issues with 
respect to the methodology used to determine EDS for ICE Cotton No. 2 
(CT), which has been available for review by the public since the 2020 
NPRM was published.\700\ As a result, the Commission believes that the 
EDS for ICE Cotton No. 2 (CT) is appropriate and reasonable based on 
its review and analysis of the methodology used.\701\
---------------------------------------------------------------------------

    \700\ IFUS--Estimated Deliverable Supply--Softs Methodology, 
IFUS Comment Letter (May 14, 2019), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596).
    \701\ Specifically, the estimate took into account cotton 
certified stocks, which are reported daily for the five delivery 
points specified in the contract specifications, as well as the 
exchange estimated deliverable stocks close to the delivery points 
that are not included as certified stocks based on the USDA's Weekly 
Bales Made Available to Ship (``BMAS'') Summary report. The exchange 
estimated the deliverable stocks contained in or near exchange 
warehouses, both certified and non-certified, during notice and 
delivery periods for the futures contract. BMAS deliverable stocks 
data was also adjusted to exclude cotton at locations that were far 
away from the delivery points.
---------------------------------------------------------------------------

(2) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level 
Should Be Below 1,800 Contracts
    However, the Commission believes that it is appropriate to lower 
the Federal spot month position limit for ICE Cotton No. 2 (CT) from 
the proposed 1,800 contract level. First, as noted previously, the 
Commission received an updated recommended Federal spot month position 
limit level from IFUS that is lower than 1,800 contracts.\702\ Second, 
although the Commission believes that there are issues with the cotton 
industry commenters' justifications for lowering the Federal spot month 
position limit level, the Commission still believes that their comments 
are informative. Specifically, the Commission believes that the 
unanimous comments from the end-users of the ICE Cotton No. 2 (CT) core 
referenced futures contract suggest that lowering the Federal spot 
month position limit level from 1,800 contracts will not have a 
material detrimental effect on liquidity for bona fide hedgers in the 
market. All things being equal, a lower spot month position limit level 
will better protect the markets against corners and squeezes, but at 
the expense of a reduction in liquidity for bona fide hedgers as 
positions held by speculators will be more constrained. However, in 
this instance, the Commission believes that it could improve 
protections against corners and squeezes without materially impacting 
liquidity for bona fide hedgers by adopting a Federal spot month 
position limit level that is lower than 1,800 contracts, based on the 
comments received.\703\
---------------------------------------------------------------------------

    \702\ IFUS--Estimated Deliverable Supply--Cotton Methodology, 
August 2020, IFUS Comment Letter (Aug. 14, 2020), available at 
https://comments.cftc.gov (comment file for Proposed Rule 85 FR 
11596).
    \703\ However, for the reasons discussed previously, the 
Commission does not believe that lowering the Federal spot month 
position limit level to 300 contracts is appropriate, given the 
observed issues in liquidity during the early part of the spot month 
period.
---------------------------------------------------------------------------

(3) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level 
Should Be Set at 900 Contracts
    Given that the Commission believes that it is preferable to set a 
Federal spot month position limit level higher than 300 contracts but 
lower than 1,800 contracts for the aforementioned reasons, the 
Commission believes that a Federal position limit level of 900 
contracts is preferable to those alternatives. Specifically, the 
Commission notes that IFUS, which has deep knowledge about the ICE 
Cotton No. 2 (CT) market and is particularly well-positioned to 
recommend the position limit level for the Commission's consideration, 
has recommended a Federal spot month position limit level of 900 
contracts. This is also supported by commenters who requested a 
``drastically lower'' Federal spot month position limit level as an 
alternative to maintaining a Federal spot month position limit level of 
300 contracts.
    The Commission also believes that a level of 900 contracts is 
sufficiently high to address concerns about a lack of liquidity. This 
is, in part, because a Federal spot month position limit level of 900 
contracts would result in a level that is set at 12.95% of EDS, which 
would coincidentally place ICE Cotton No. 2 (CT) exactly at the median 
among the legacy agricultural contracts and all core referenced futures 
contracts in terms of percentage of EDS. Finally, based on the comments 
received and because, all things being equal, lower spot month position 
limit levels provide better protection against corners and squeezes, 
the Commission believes that a level of 900 contracts will provide 
stronger protection against corners and squeezes without materially 
impacting liquidity for bona fide hedgers vis-[agrave]-vis a level of 
1,800 contracts.\704\
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    \704\ The Commission recognizes that this will limit the range 
through which an exchange may set and adjust its own exchange-set 
position limit level. However, based on the comments received, the 
Commission believes that the stronger protections against corners 
and squeezes is appropriate.
---------------------------------------------------------------------------

vi. NYMEX Henry Hub Natural Gas (NG)
    This section will address the following issues concerning NYMEX NG: 
(i) The Federal spot month position limit level for NYMEX NG; (ii) the 
conditional spot month position limit exemption for positions in 
natural gas referenced contracts, which is located in final Sec.  
150.3(a)(4); and (iii) NYMEX NG penultimate referenced contracts. The 
Commission is addressing the latter two issues in this section in order 
to allow the reader to review all discussions regarding natural gas in 
one place in this Final Rule.
a. NYMEX Henry Hub Natural Gas (NG) Federal Spot Month Position Limit 
Level
(1) Summary of the 2020 NPRM and Additional Background Information--
NYMEX NG Federal Spot Month Position Limit Level
    Under the existing Federal position limits framework, there are no 
Federal position limits for NYMEX NG in either the spot month or the 
non-spot month. There is, however, an exchange-set spot month position 
limit for NYMEX NG, which is set at 1,000 contracts for the physically-
settled NYMEX NG contract and 1,000 contracts per exchange for cash-
settled equivalent-sized natural gas contracts. Because there are three 
exchanges that list such cash-settled natural gas contracts (NYMEX, 
IFUS, and Nodal), a market participant can currently hold up to 3,000 
such cash-settled contracts during the spot month.
    In the 2020 NPRM, the Commission proposed a Federal spot month 
position limit level of 2,000 contracts for NYMEX NG. The 2,000 
contract level was determined based on 25% of updated EDS and was 
recommended by CME Group. Consistent with the other core referenced 
futures contracts, the proposed netting and aggregation requirements 
permitted a market participant to hold up to 2,000 physically-settled 
NYMEX NG referenced contracts and another 2,000 cash-settled NYMEX NG 
referenced contracts across all exchanges and in the OTC swaps 
market.\705\
---------------------------------------------------------------------------

    \705\ For further discussion of netting and aggregation, see 
Section II.B.10. (Application of Netting and Related Treatment of 
Cash-settled Referenced Contracts).
---------------------------------------------------------------------------

(2) Summary of the Commission Determination--NYMEX NG Federal Spot 
Month Position Limit Level
    The Commission is adopting its proposed approach with respect to 
physically-settled NYMEX NG referenced contracts, but is modifying its 
proposed approach with respect to cash-settled NYMEX NG referenced 
contracts, as discussed below.

[[Page 3327]]

(3) Comments--NYMEX NG Federal Spot Month Position Limit Level
    With respect to the proposed NYMEX NG Federal spot month position 
limit level, NGSA requested that the Commission ``increase the spot 
month limit on the NG Contract by recognizing the transportation 
capacity available now at Henry Hub provided by displacement and the 
increasing capacity which is coming from future but imminent 
displacement.'' \706\ In support, NGSA noted that CME Group's EDS 
figure has ``incorporated displacement into its estimate of deliverable 
supply at Henry Hub for years.'' \707\
---------------------------------------------------------------------------

    \706\ NGSA at 10-11.
    \707\ Id. at 11.
---------------------------------------------------------------------------

    MFA/AIMA, Citadel, and SIFMA AMG requested that the Commission 
raise the Federal spot month position limit level for NYMEX NG 
referenced contracts to at least 3,000 contracts, because the 2020 NPRM 
effectively decreases the total number of exchange-traded cash-settled 
NYMEX NG referenced contracts that a market participant may hold in the 
spot month from the current level of 3,000 contracts to 2,000 
contracts.\708\ In support of this request, MFA/AIMA argued that the 
2020 NPRM ``could adversely affect the ability of traders to optimize 
the proportion of physically-settled and cash-settled natural gas 
contracts that they wish to hold in their portfolio.'' \709\ SIFMA AMG 
argued that the 2020 NPRM ``would disrupt existing trading practices 
and business models without any corresponding regulatory or policy 
benefit.'' \710\
---------------------------------------------------------------------------

    \708\ MFA/AIMA at 11-12; Citadel at 7-8; and SIFMA AMG at 10-11 
(SIFMA AMG supported the 2,000 contract limit level for physically-
settled NYMEX NG referenced contracts, but requested at least a 
3,000 contract limit level for the cash-settled NYMEX NG referenced 
contracts).
    \709\ MFA/AIMA at 11-12.
    \710\ SIFMA AMG at 11.
---------------------------------------------------------------------------

(4) Discussion of Final Rule--NYMEX NG Federal Spot Month Position 
Limit Level
    Under the Final Rule, market participants may hold up to 2,000 
cash-settled NYMEX NG referenced contracts per exchange during the spot 
month and an additional 2,000 cash-settled economically equivalent OTC 
swaps, rather than being subject to an aggregate position limit level 
of 2,000 cash-settled NYMEX NG referenced contracts across all 
exchanges and the OTC swaps market as proposed under the 2020 NPRM. 
Because there are currently three exchanges that list natural gas 
referenced contracts, this will allow market participants to hold a 
total of 8,000 cash-settled NYMEX NG referenced contracts between 
positions held in cash-settled futures and in cash-settled economically 
equivalent OTC swaps.\711\ This is in addition to the 2,000 physically-
settled NYMEX NG referenced contracts a market participant may hold 
during the spot month. These amendments to the proposal are reflected 
in a revised Appendix E to part 150 that the Commission is adopting in 
this Final Rule.
---------------------------------------------------------------------------

    \711\ 2,000 cash-settled referenced contracts multiplied by 
three exchanges plus 2,000 cash-settled economically equivalent OTC 
swaps equals 8,000 cash-settled NYMEX NG referenced contracts.
---------------------------------------------------------------------------

(i) Request To Increase the Federal Spot Month Position Limit Level To 
Account for Displacement
    In response to NGSA's request, the Commission first notes that CME 
Group provided the EDS figure that was used as a basis for determining 
its exchange-recommended Federal spot month position limit level, which 
the Commission ultimately used as a basis for its own proposed Federal 
spot month position limit level for NYMEX NG after independently 
reviewing and assessing the methodology underlying the EDS figure and 
the EDS figure itself.\712\ As NGSA noted, CME Group's EDS has 
``incorporated displacement into its estimate of deliverable supply at 
Henry Hub for years,'' \713\ which means that the EDS figure on which 
the proposed Federal spot month position limit level was based already 
``recogniz[ed] the transportation capacity available now at Henry Hub 
provided by displacement.'' \714\ As a result, the proposed Federal 
spot month position limit level took this into account as well. With 
respect to future increases in EDS based on ``future but imminent 
displacement,'' \715\ in the event that this occurs, CME Group may 
submit an updated EDS figure pursuant to Sec.  150.2(f), at which time 
the Commission would consider whether to modify the Federal spot month 
position limit level.
---------------------------------------------------------------------------

    \712\ Summary DSE Proposed Limits, CME Group Comment Letter 
(Nov. 26, 2019), available at https://comments.cftc.gov (comment 
file for Proposed Rule 85 FR 11596).
    \713\ NGSA at 11.
    \714\ Id. at 10. Furthermore, CME Group's methodology for 
determining EDS for NYMEX NG explicitly states, ``Additionally, the 
Exchange has taken into consideration backhaul in estimating the 
deliverable supply.'' New York Mercantile Exchange, Inc., Analysis 
of Deliverable Supply Henry Hub Natural Gas Futures, December 2018 
(Dec. 1, 2018), available at https://comments.cftc.gov (comment file 
for Proposed Rule 85 FR 11596).
    \715\ NGSA at 10.
---------------------------------------------------------------------------

(ii) Request To Increase the Cash-Settled Federal Spot Month Position 
Limit Level
    As previewed above, in response to comments from MFA/AIMA, Citadel, 
and SIFMA AMG, the Commission is modifying the proposed NYMEX NG 
Federal spot month position limit level for cash-settled NYMEX NG 
referenced contracts, so that the Federal spot month position limit 
applies separately per each exchange and the OTC swaps market, rather 
than across exchanges and the OTC swaps market.
    The Commission believes that this modification is warranted in 
order to avoid disrupting the well-developed, unique liquidity 
characteristics of the natural gas derivatives markets. As detailed 
below, the cash-settled natural gas market is significantly more liquid 
than the physically-settled natural gas market during the spot month. 
This is in contrast with typical commodity markets, in which the 
physically-settled contracts are generally more liquid than the cash-
settled contracts during the spot month.\716\
---------------------------------------------------------------------------

    \716\ Typically, this is because the physically-settled contract 
is established first and the natural formation of liquidity in the 
physically-settled contract historically stays in the established 
contract due to first mover advantage. More liquid markets provide 
for better bid/ask spreads and can execute larger transaction sizes 
without substantial effects on the price of the contract. Thus, in 
the past, cash-settled look-alike contracts historically have not 
been as liquid as the original physically-settled futures contract.
---------------------------------------------------------------------------

    The unique nature of the natural gas markets is reflected in the 
current exchange-set natural gas position limit framework, in which 
market participants may hold up to 1,000 cash-settled natural gas 
contracts per exchange, which can result in a position of up to 3,000 
cash-settled natural gas contracts (instead of 1,000 cash-settled 
natural gas contracts altogether), despite only being able to hold up 
to 1,000 physically-settled NYMEX NG contracts. The Commission believes 
that, absent the modification adopted herein to apply the spot month 
limit to NYMEX NG on a per exchange basis, the proposed Federal spot 
month position limit level could disrupt the cash-settled natural gas 
markets, in part, because, as commenters have noted: (1) Market 
participants would be able to hold fewer cash-settled NYMEX NG 
referenced contracts (i.e., 2,000 contracts) than they were previously 
permitted under the exchange-set position limit framework (i.e., 3,000 
contracts); and (2) some market participants may not be able to hold 
the same proportion of physically-settled to cash-settled NYMEX NG 
referenced contracts that they are

[[Page 3328]]

currently able to hold if they wish to maximize their positions in 
physically-settled NYMEX NG referenced contracts. The Commission also 
believes that it is appropriate to maintain consistency vis-[agrave]-
vis the exchange-set position limit framework in order to minimize 
disruptions, since the Commission has not observed any issues with the 
exchange-set position limit framework with respect to natural gas.
    Accordingly, under the Final Rule, market participants (that are 
not availing themselves of the Federal spot month conditional position 
limit exemption for NYMEX NG, which is discussed below) may hold up to 
2,000 cash-settled NYMEX NG referenced contracts on each exchange that 
lists a cash-settled NYMEX NG referenced contract (which is currently 
NYMEX, IFUS, and Nodal), a total position of 6,000 exchange-listed 
cash-settled NYMEX NG referenced contracts.\717\ Furthermore, under the 
Final Rule, traders may also hold an additional position in cash-
settled economically equivalent NYMEX NG OTC swaps that has a notional 
amount of up to 2,000 equivalent-sized contracts. The Commission is 
separately permitting up to 2,000 referenced contracts in the NYMEX NG 
OTC swaps market in order to avoid disruptions to that market, given 
that traders may be currently participating in that market as well. As 
a result, under the Final Rule, traders may hold up to a total of 8,000 
cash-settled NYMEX NG referenced contracts \718\ and 2,000 physically-
settled NYMEX NG referenced contracts.\719\
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    \717\ The Commission notes that market participants are not 
permitted to net cash-settled NYMEX NG referenced contract positions 
across exchanges or the OTC swaps market for Federal spot month 
position limit purposes.
    \718\ 2,000 cash-settled NYMEX NG referenced contracts 
multiplied by three exchanges plus 2,000 cash-settled economically 
equivalent NYMEX NG OTC swaps equals 8,000 cash-settled NYMEX NG 
referenced contracts.
    \719\ CME Group also commented that it ``objects to any 
disparities in the spot-month limits and would rigorously disagree 
if the Commission adopts any other disparities in treatment between 
physically-settled and cash-settled contracts,'' in the context of 
the proposed Federal conditional limit, which is discussed in the 
section below. CME Group at 6. This comment could also be viewed as 
an objection to the Final Rule's Federal spot month position limit 
level for cash-settled NYMEX NG referenced contracts. The Commission 
believes that the rationale set forth in this section and the 
Federal conditional limit section below is responsive to CME Group's 
possible concern with respect to the Final Rule's Federal spot month 
position limit level for cash-settled NYMEX NG referenced contracts.
---------------------------------------------------------------------------

    The Commission notes that, as discussed further below, as an 
initial legal matter, the Commission interprets CEA section 4a(a)(6) as 
generally requiring aggregate Federal position limits across 
exchanges.\720\ Notwithstanding the requirements of CEA section 
4a(a)(6), the Commission is adopting this approach with respect to 
NYMEX NG referenced contracts pursuant to its exemptive authority in 
CEA section 4a(a)(7). In doing so, the Commission believes that, based 
on the foregoing reasons, applying the Federal spot month position 
limit level for cash-settled NYMEX NG referenced contracts separately 
per exchange and the OTC swaps market does not undermine the purposes 
of the Federal position limits framework pursuant to CEA section 4a.
---------------------------------------------------------------------------

    \720\ For further discussion of the Commission's aggregation and 
netting rules, see Section II.B.10. (application of netting 
section).
---------------------------------------------------------------------------

b. NYMEX NG Federal Spot Month Conditional Position Limit Level
(1) Summary of 2020 NPRM and Additional Background Information--NYMEX 
NG Federal Spot Month Conditional Position Limit Level
    In addition to the proposed 2,000 contract Federal spot month 
position limit level for NYMEX NG, proposed Sec.  150.3(a)(4) also 
included a spot month conditional position limit exemption (``Federal 
conditional limit'') from the standard Federal spot month position 
limit level for NYMEX NG for market participants that do not hold a 
position in the physically-settled NYMEX NG referenced contract.\721\ 
The proposed Federal conditional limit would allow, during the spot 
month, market participants that do not hold a position in the 
physically-settled NYMEX NG referenced contract to hold: (1) Up to 
10,000 cash-settled NYMEX NG referenced contracts per exchange that 
lists a cash-settled NYMEX NG referenced contract; and (2) an 
additional position in cash-settled economically equivalent NYMEX NG 
OTC swaps that has a notional amount of up to 10,000 equivalent-sized 
contracts. As a result, the proposed Federal conditional limit would 
permit a market participant that does not hold a physically-settled 
NYMEX NG referenced contract to hold a total of 40,000 cash-settled 
NYMEX NG referenced contracts (up to 10,000 contracts on each of the 
three exchanges (NYMEX, IFUS, and Nodal) that lists a cash-settled 
NYMEX NG referenced contract and in the OTC swaps market) during the 
spot month.
---------------------------------------------------------------------------

    \721\ The Commission is adopting the Federal conditional limit 
pursuant to its exemptive authority in CEA section 4a(a)(7). 7 
U.S.C. 6a(a)(7).
---------------------------------------------------------------------------

    The proposed framework for the Federal conditional limit was 
derived from the existing exchange-set spot month conditional position 
limit framework that has been in place for approximately a decade. This 
existing conditional position limit framework permits, during the spot 
month, up to 5,000 equivalent-sized cash-settled natural gas contracts 
per exchange that lists a cash-settled natural gas contract, provided 
that the market participant does not hold a position in the physically-
settled NYMEX NG contract.\722\ The 5,000 contract conditional spot 
month position limit level equals five-times the existing exchange-set 
1,000 contract spot month position limit level for the physically-
settled NYMEX NG contract.\723\ Noting the unique circumstances of the 
natural gas futures markets, the Commission's proposed Federal 
conditional limit level applied the same multiplier of five to its 
proposed Federal spot month position limit level for the physically-
settled NYMEX NG contract in order to arrive at the 10,000 contract 
Federal conditional limit level that applies for each exchange and OTC 
swaps market.
---------------------------------------------------------------------------

    \723\ See IFUS Rule 6.20(c), NYMEX Rule 559.F, and Nodal Rule 
6.5.7. The spot month for such contracts is three days. See also 
Position Limits, CMG Group website, available at https://www.cmegroup.com/market-regulation/position-limits.html (NYMEX 
position limits spreadsheet); Market Resources, IFUS website, 
available at https://www.theice.com/futures-us/market-resources 
(IFUS position limits spreadsheet). NYMEX rules establish an 
exchange-set spot month limit of 1,000 contracts for its physically-
settled NYMEX NG core referenced futures contract and a separate 
spot month limit of 1,000 contracts for its cash-settled Henry Hub 
Natural Gas Last Day Financial Futures contract. IFUS's natural gas 
contract is one quarter the size of the NYMEX contract. IFUS thus 
has rules in place establishing an exchange-set spot month limit of 
4,000 contracts (equivalent to 1,000 NYMEX NG contracts) for its 
cash-settled Henry Hub LD1 Fixed Price Futures contract.
---------------------------------------------------------------------------

    The 2020 NPRM included the Federal conditional limit to accommodate 
certain trading dynamics unique to the natural gas contracts.\724\ For 
example, the Commission has observed that, as the physically-settled 
NYMEX NG core referenced futures contract approaches expiration, open 
interest tends to decline in NYMEX NG and tends to increase rapidly in 
ICE's cash-settled Henry Hub LD1 contract.\725\ This is in contrast 
with other commodities in which the physically-settled markets are more 
liquid than the cash-settled markets during the spot month. These 
dynamics suggest that cash-settled natural gas contracts serve an 
important function for hedgers and speculators who wish to recreate 
and/or hedge the physically-settled NYMEX NG contract price during the 
spot month without being required to make or take

[[Page 3329]]

delivery.\726\ In addition, the Commission also proposed the 
divestiture requirement in the Federal conditional limit in order to 
address historical concerns over the potential for manipulation of 
physically-settled natural gas contracts during the spot month in order 
to benefit positions in cash-settled natural gas contracts.\727\
---------------------------------------------------------------------------

    \724\ 85 FR at 11641.
    \725\ Id.
    \726\ Id.
    \727\ Id.
---------------------------------------------------------------------------

(2) Summary of the Commission Determination--NYMEX NG Federal Spot 
Month Conditional Position Limit Level
    The Commission is adopting the Federal conditional limit as 
proposed.
(3) Comments--NYMEX NG Federal Spot Month Conditional Position Limit 
Level
    With respect to the proposed Federal conditional limit, several 
commenters generally supported its adoption.\728\ COPE believed that 
the proposed conditional limit ``permits market liquidity . . . without 
sacrificing the benefits of position limits.''\729\ ICE supported the 
Federal conditional limit, noting that ``cash-settled contracts present 
a reduced potential for manipulation of the price of the physically-
settled contract.'' \730\ CME Group, on the other hand, objected to the 
proposal, arguing that it could ``drain liquidity for bona fide hedgers 
in the physically-settled market and could prevent physical delivery 
markets from serving the price discovery function that they have long 
provided'' and believed that it ``could incentivize the manipulation of 
a cash commodity price in order to benefit a position in a cash-settled 
contract.'' \731\
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    \728\ COPE at 2-3; EEI/EPSA at 4; and ICE at 13.
    \729\ COPE at 2-3.
    \730\ ICE at 13 (referencing a sentiment previously expressed by 
the Commission).
    \731\ CME Group at 6.
---------------------------------------------------------------------------

    A number of commenters also requested that the Federal conditional 
limit levels be available to market participants that do not exit 
positions in the physically-settled NYMEX NG referenced contract during 
the spot month, which would effectively establish the Federal 
conditional limit level as the operative Federal spot month limit level 
for cash-settled NYMEX NG referenced contracts. In support of this 
request, several commenters argued that the 2020 NPRM's approach to the 
Federal conditional limit would result in liquidity leaving the 
physically-settled NYMEX NG referenced contract when it is needed the 
most.\732\ EEI/EPSA also commented that the Federal conditional limit 
framework in the 2020 NPRM is ``excessive and is an overly rigid 
solution that may unnecessarily restrict legitimate trading activity.'' 
\733\ NGSA commented that the 2020 NPRM ``removes important hedging 
optionality for physical market participants.'' \734\ Citadel argued 
that the 2020 NPRM would limit flexibility and impair market efficiency 
by preventing ``market participants with a meaningful position in the 
cash-settled market from participating in the physically-settled 
market--limiting flexibility and impairing market efficiency.'' \735\ 
CCI also believed that the 2020 NPRM would ``impair price discovery'' 
and ``negatively impact price convergence.'' \736\
---------------------------------------------------------------------------

    \732\ ISDA at 8; SIFMA AMG at 10-11; FIA at 7-8; NGSA at 12-14; 
Citadel at 7; and CCI at 4.
    \733\ EEI/EPSA at 4.
    \734\ NGSA at 12.
    \735\ Citadel at 7.
    \736\ CCI at 4.
---------------------------------------------------------------------------

    Finally, ICE requested that ``the Commission revert back to the 
five-time conditional limit for cash settled contracts . . . instead of 
the conditional limit of 10,000 contracts in the Proposed Rule,'' 
because ``[a]pplying a five-time multiplier versus a hard limit, would 
allow the conditional limit to track any changes in the spot month 
limits over time, which in turn will reflect changes in deliverable 
supply.'' \737\
---------------------------------------------------------------------------

    \737\ ICE at 13.
---------------------------------------------------------------------------

(4) Discussion of Final Rule--NYMEX NG Federal Spot Month Conditional 
Position Limit Level
(i) Availability of the Federal Conditional Limit for NYMEX NG
    In response to CME Group's comment supporting the elimination of 
the Federal condition limit, the Commission is concerned that 
eliminating the proposed conditional limit could result in potential 
market disruptions, given that a conditional limit framework for 
natural gas has been in place at the exchange level for many years. For 
example, eliminating the existing conditional limit structure could 
restrict the positions that market participants may hold in cash-
settled NYMEX NG referenced contracts during the spot month, resulting 
in reduced liquidity, including for commercial hedgers seeking to 
offset price risks but not necessarily looking to make or take 
delivery. Additionally, since it was instituted approximately a decade 
ago, the exchange-set conditional limit framework has functioned 
well.\738\ The Commission has not observed any of the concerns raised 
by CME Group come to fruition, and the physically-settled NYMEX NG 
referenced contract remains highly liquid. Furthermore, as discussed 
above, other commenters supported the availability of the Federal 
conditional limit.
---------------------------------------------------------------------------

    \738\ 85 FR at 11640.
---------------------------------------------------------------------------

(ii) Federal Conditional Limit's Divestiture Requirement
    In response to comments requesting that the Federal conditional 
limit be available to market participants that do not exit the spot 
month physically-settled NYMEX NG referenced contract, the Commission 
first notes that the requirement that market participants exit the 
physically-settled NYMEX NG referenced contract has been reflected in 
exchange rulebooks for many years, in part because the requirement is 
critically important to discouraging manipulation.\739\ Without this 
requirement, a trader could hold up to 40,000 cash-settled NYMEX NG 
referenced contracts (or more, if additional exchanges list cash-
settled NYMEX NG referenced contracts in the future), which is at 500% 
of EDS, and 2,000 physically-settled NYMEX NG referenced contracts, 
which is at 25% of EDS. At these levels, it may not require much 
movement in the physically-settled markets to disproportionately 
benefit the cash-settled holdings. As a result, the requirement to exit 
the physically-settled contract is critical for reducing the market 
participant's incentive to manipulate the cash settlement price by, for 
example, banging-the-close or distorting physical delivery prices in 
the physically-settled contract to benefit leveraged cash-settled 
positions.\740\
---------------------------------------------------------------------------

    \739\ 85 FR at 11641.
    \740\ See 85 FR 11626, 11641.
---------------------------------------------------------------------------

    With respect to commenters' concerns about removing flexibility and 
options for market participants, as well as a potential decrease in 
liquidity in the physically-settled NYMEX NG referenced contract, the 
Commission notes that the physically-settled NYMEX NG referenced 
contract remains highly liquid even in spite of the implementation of 
the exchange-set conditional limit framework instituted approximately a 
decade ago. Also, market participants should have more flexibility and 
options than before because the Federal spot month position limit level 
for NYMEX NG adopted herein will now permit up to 8,000 cash-settled 
NYMEX NG referenced contracts, even if the market participant holds 
2,000 physically-settled NYMEX

[[Page 3330]]

NG referenced contracts.\741\ Finally, the Commission reiterates that 
Federal position limit levels only apply to speculative positions and, 
as a result, bona fide hedging positions will continue to be allowed to 
exceed the Federal position limit levels, including the Federal 
conditional limit level, from the Federal position limits 
perspective.\742\
---------------------------------------------------------------------------

    \741\ Under the Final Rule's Federal spot month position limit 
level for NYMEX NG, a trader may hold 2,000 physically-settled NYMEX 
NG referenced contracts, 2,000 cash-settled NYMEX NG referenced 
contracts per exchange that lists such contracts, and 2,000 cash-
settled economically equivalent NYMEX NG OTC swaps. Currently, there 
are three exchanges that list cash-settled NYMEX NG referenced 
contracts--NYMEX, IFUS, and Nodal. As a result, a trader may hold up 
to 6,000 exchange-listed cash-settled NYMEX NG referenced contracts 
and 2,000 cash-settled economically equivalent NYMEX NG OTC swaps, 
which brings the total number of cash-settled NYMEX NG referenced 
contracts a trader may hold to 8,000 under the Federal spot month 
position limit level.
    \742\ This also answers EEI/EPSA's request to confirm ``that a 
participant may rely upon the conditional limit in the first 
instance but may also utilize a hedge exemption to exceed the 
conditional limit.'' EEI/EPSA at 4. However, the Commission notes 
that exchanges have rarely, if ever, allowed a market participant to 
exceed the exchange-set natural gas conditional limit by layering a 
bona fide hedge position on top of the cash-settled natural gas 
contract position permitted under the natural gas conditional limit. 
Similar to this existing practice, the Commission expects that, 
under the Final Rule, a market participant will rarely be permitted 
to hold: (1) A bona fide hedge position in the physically-settled 
NYMEX NG referenced contract while taking advantage of the 
conditional limit for cash-settled NYMEX NG referenced contracts; or 
(2) a bona fide hedge position in cash-settled NYMEX NG referenced 
contracts on top of the maximum position permitted under the 
conditional limit for cash-settled NYMEX NG referenced contracts.
---------------------------------------------------------------------------

(iii) Application of a Five-Times Multiplier for the Federal 
Conditional Limit Level
    The Commission clarifies that, in accordance with historical 
practice, if the Federal spot month position limit level for the 
physically-settled NYMEX NG referenced contract is updated in the 
future through rulemaking, the Commission expects to simultaneously 
adjust the Federal conditional limit in the same rulemaking, such that 
the Federal conditional limit level is set at a multiple of five of the 
new Federal spot month position limit level for NYMEX NG, provided that 
the Commission does not observe any issues in the markets.
c. NYMEX NG Penultimate Referenced Contracts
(1) Summary of the 2020 NPRM and Additional Background Information--
NYMEX NG Penultimate Referenced Contracts
    With respect to NYMEX NG, the Commission proposed that penultimate 
contracts, which are cash-settled contracts that settle on the trading 
day immediately preceding the final trading day of the corresponding 
referenced contract, are also considered referenced contracts that are 
subject to Federal spot month position limits.\743\ The Commission also 
proposed a slightly broader economically equivalent swap definition for 
natural gas, so that swaps with delivery dates that diverge by less 
than two calendar days (instead of one calendar day) from an associated 
referenced contract could still be deemed economically equivalent and 
therefore subject to Federal position limits. The Commission made these 
adjustments to: Recognize the active and vibrant penultimate natural 
gas contract markets; prevent and disincentivize manipulation and 
regulatory arbitrage; and prevent volume from shifting away from non-
penultimate cash-settled NYMEX NG markets to penultimate NYMEX NG 
contract futures and/or penultimate NYMEX NG swaps markets in order to 
avoid Federal position limits.\744\
---------------------------------------------------------------------------

    \743\ Such penultimate contracts include: ICE's Henry Financial 
Penultimate Fixed Price Futures (PHH) and options on Henry 
Penultimate Fixed Price (PHE), and NYMEX's Henry Hub Natural Gas 
Penultimate Financial Futures (NPG).
    \744\ The Commission proposed a relatively narrow ``economically 
equivalent swap'' definition in order to prevent market participants 
from inappropriately netting positions in core referenced futures 
contracts against swap positions further out on the curve. The 
Commission acknowledges that liquidity could shift to penultimate 
swaps as a result, but believes that, with the exception of natural 
gas, this concern is mitigated since certain constraints exist that 
militate against this from occurring, including basis risk between 
the penultimate swap and the core referenced futures contract. 
However, this constraint does not necessarily apply to the natural 
gas futures markets, because natural gas has a relatively liquid 
penultimate futures market that enables a market participant to 
hedge or off-set its penultimate swap positions. As a result, the 
Commission believes that liquidity may be incentivized to shift from 
NYMEX NG to penultimate natural gas swaps in order to avoid Federal 
position limits in the absence of the Commission's exception for 
natural gas in the ``economically equivalent swap'' definition.
---------------------------------------------------------------------------

(2) Comments--NYMEX NG Penultimate Referenced Contracts
    In response to this part of the 2020 NPRM, ICE requested ``that the 
Commission continue to allow exchanges to impose spot month 
accountability levels which expire during the period when spot month 
limits for the Henry Hub core-referenced futures contract are in effect 
and to not aggregate penultimate options into the Henry Hub LD1 cash-
settled limit.'' \745\ One of the ways in which ICE supported this 
request was by claiming that, ``The Commission states that penultimate 
contracts are economically the same as the last day contract, however, 
empirically, this statement is not correct as settlement prices have 
demonstrated.'' \746\
---------------------------------------------------------------------------

    \745\ ICE at 14.
    \746\ Id.
---------------------------------------------------------------------------

(3) Discussion of Final Rule--NYMEX NG Penultimate Referenced Contracts
    The Commission declines to exclude NYMEX NG penultimate contracts 
from Federal position limits for the reasons set forth in this Final 
Rule's section addressing ``Referenced Contract.'' \747\ In doing so, 
the Commission notes, in particular, that ICE's specific assertion that 
penultimate natural gas contracts are not economically the same as last 
day contracts based on settlement prices runs counter to the 
Commission's review of a sample of the daily settlement prices for 
NYMEX NG (the physically-settled natural gas contract), ICE Henry Hub 
LD1 (the ICE natural gas contract cash-settled to NYMEX NG), and ICE 
Henry Hub Penultimate (the ICE penultimate natural gas contract cash-
settled to NYMEX NG).\748\
---------------------------------------------------------------------------

    \747\ For further discussion of the Commission's determination 
to include penultimate contracts within the Federal position limits 
framework, see Section II.A.16.iii.a.(2)(iii).
    \748\ Id.
---------------------------------------------------------------------------

vii. Wheat Core Referenced Futures Contracts' Federal Spot Month 
Position Limit Levels
a. Summary of the 2020 NPRM and Additional Background Information--
Wheat Federal Spot Month Position Limit Levels
    The Commission proposed to increase the Federal spot month position 
limit levels for all three wheat core referenced futures contracts 
(CBOT Wheat (W), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE)) from 
600 contracts to 1,200 contracts. The proposed Federal limit levels 
were based on the underlying EDS figures for each wheat core referenced 
futures contract and CME's and MGEX's recommended Federal spot month 
position limit levels of 1,200 contracts for each of their respective 
wheat core referenced futures contracts.
b. Summary of the Commission Determination--Wheat Federal Spot Month 
Position Limit Levels
    The Commission is adopting the Federal spot month position limit 
levels for all three wheat core referenced futures contracts as 
proposed.
c. Comments--Wheat Federal Spot Month Position Limit Levels
    The Commission received one comment, from MGEX, fully supporting

[[Page 3331]]

the 2020 NPRM's Federal spot month parity among the three wheat core 
referenced futures contracts.\749\
---------------------------------------------------------------------------

    \749\ MGEX at 3.
---------------------------------------------------------------------------

4. Federal Non-Spot Month Position Limit Levels
i. Background--Federal Non-Spot Month Position Limit Levels
    The Commission most recently updated the Federal non-spot month 
position limit levels in 2011.\750\ At that time, the Commission 
utilized a formula that was called the ``10/2.5% formula,'' \751\ which 
calculated the Federal non-spot month position limit levels by 
multiplying the first 25,000 contracts in open interest by 10% and 
multiplying the remaining contracts by 2.5% and adding the two numbers 
together.\752\ The 10/2.5% formula was first adopted in 1999 based on 
two primary factors: Growth in open interest and the size of large 
traders' positions.\753\ The existing Federal non-spot month position 
limit levels that were adopted in 2011 have not been updated to reflect 
changes in open interest data in over a decade.\754\
---------------------------------------------------------------------------

    \750\ The Commission notes that the 2011 Final Rulemaking that 
adopted the most recent Federal non-spot month position limit levels 
was vacated by an order of the U.S. District Court for the District 
of Columbia on September 28, 2012. However, that order did not apply 
with respect to the 2011 Final Rulemaking's amendments to the 
Federal non-spot month position limit levels in Sec.  150.2. ISDA, 
887 F.Supp.2d 259 (2012).
    \751\ See, e.g., Revision of Federal Speculative Position Limits 
and Associated Rules, 64 FR at 24038 (May 5, 1999) (increasing 
deferred-month limit levels based on 10% of open interest up to an 
open interest of 25,000 contracts, with a marginal increase of 2.5% 
thereafter). Prior to 1999, the Commission had given little credence 
to the size of open interest in the contract in determining the 
position limit level. Instead, the Commission's traditional standard 
was to set limit levels based on the distribution of speculative 
traders in the market. See, e.g., 64 FR at 24039; Revision of 
Federal Speculative Position Limits and Associated Rules, 63 FR at 
38525, 38527 (July 17, 1998).
    \752\ For example, assume a commodity contract has an aggregate 
open interest of 200,000 contracts over the past 12 month period. 
Applying the 10/2.5% formula to an aggregate open interest of 
200,000 contracts would yield a non-spot month position limit level 
of 6,875 contracts. That is, 10% of the first 25,000 contracts would 
equal 2,500 contracts (25,000 contracts x 0.10 = 2,500 contracts). 
Then add 2.5% of the remaining 175,000 of aggregate open interest or 
4,375 contracts (175,000 contracts x 0.025 = 4,375 contracts) for a 
total non-spot month position limit level of 6,875 contracts (2,500 
contracts + 4,375 contracts = 6,875 contracts).
    \753\ See 64 FR at 24038. See also 63 FR at 38525, 38527 (The 
1998 proposed revisions to non-spot month levels, which were 
eventually adopted in 1999, were based upon two criteria: ``(1) The 
distribution of speculative traders in the markets; and (2) the size 
of open interest.'').
    \754\ In setting the Federal non-spot month position limit 
levels in 2011, the Commission used open interest data from 2009. 76 
FR at 71642.
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Federal Non-Spot Month Position Limit 
Levels
    Proposed Sec.  150.2(e) provided that Federal non-spot month 
position limit levels were set forth in proposed Appendix E to part 150 
and were as follows: \755\
---------------------------------------------------------------------------

    \755\ 85 FR at 11624. As discussed above, the proposed Federal 
non-spot month position limits would apply to only the nine legacy 
agricultural contracts and any associated referenced contracts. All 
other referenced contracts subject to Federal position limits would 
be subject to Federal position limits only during the spot month, as 
specified above, and would only be subject to exchange-set position 
limits or position accountability levels outside of the spot month.
[GRAPHIC] [TIFF OMITTED] TR14JA21.009


[[Page 3332]]


    In generally calculating the above levels, the Commission proposed 
to maintain the existing 10/2.5% formula for non-spot month position 
limit levels, but with the following limited changes: (1) The 10% rate 
would apply to the first 50,000 contracts of open interest (instead of 
the first 25,000 contracts); (2) the 2.5% rate would apply to open 
interest above 50,000 contracts (rather than above the current level of 
25,000 contracts); and (3) the modified 10/2.5% formula would apply to 
updated open interest data for the applicable futures and delta-
adjusted options for the periods from July 2017 to June 2018 and July 
2018 to June 2019.\756\ All Federal non-spot month position limit 
levels that were calculated based on the 10/2.5% formula (i.e., all 
legacy agricultural contracts, with the exception of CBOT Oats (O), 
CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), and the single month 
position limit level for ICE Cotton No. 2 (CT)) were rounded up to the 
nearest 100 contracts.
---------------------------------------------------------------------------

    \756\ The 12-month period yielding the higher open interest 
level is selected as the basis for the Federal non-spot month 
position limit level.
---------------------------------------------------------------------------

    As outlined in the table above, the proposed Federal non-spot month 
position limit levels are generally higher than the existing Federal 
non-spot month position limit levels, with the exception of CBOT Oats 
(O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), for which the 
proposed limit levels would remain at existing levels. As described in 
detail below, this proposed general increase is primarily due to the 
increases in open interest that have occurred since the Federal non-
spot month position limit levels were last updated approximately a 
decade ago.\757\
---------------------------------------------------------------------------

    \757\ See 85 FR at 11630. The 2020 NPRM's proposed modification 
to the 10/2.5% formula from 25,000 to 50,000 contracts results in a 
modest increase in the Federal non-spot month position limit level 
of 1,875 contracts over what the limit level would be if the 10/2.5% 
formula were applied at 25,000 contracts, assuming that the market 
for the core referenced futures contract has an open interest of at 
least 50,000 contracts.
---------------------------------------------------------------------------

iii. Summary of the Commission Determination--Federal Non-Spot Month 
Position Limit Levels
    The Commission is adopting each of the Federal non-spot month 
position limit levels as proposed in Sec.  150.2(e) and Appendix E to 
part 150, with the exception of setting a lower single month position 
limit for ICE Cotton No. 2 (CT). The Commission will first describe the 
general rationale for the final Federal non-spot month position limit 
levels that are being adopted. Next, the Commission will describe the 
comments it received in connection with the proposed Federal non-spot 
month position limit levels. Finally, the Commission will provide 
responses to such comments, including further rationale for the 
Commission's position concerning the final Federal non-spot month 
position limit levels.
a. Rationale for the Final Federal Non-Spot Month Position Limit Levels
    As explained below, the Commission believes that the final Federal 
non-spot month position limit levels, in conjunction with the rest of 
the Federal position limits framework, will achieve the four policy 
objectives in CEA section 4a(a)(3)(B). Namely, they will: (1) Diminish, 
eliminate, or prevent excessive speculation; (2) deter and prevent 
market manipulation, squeezes, and corners; (3) ensure sufficient 
market liquidity for bona fide hedgers; and (4) ensure that the price 
discovery function of the underlying market is not disrupted.\758\
---------------------------------------------------------------------------

    \758\ 7 U.S.C. 6a(a)(3)(B).
---------------------------------------------------------------------------

    As a preliminary matter, the Commission continues to believe that a 
formula based on a percentage of open interest, such as the 10/2.5% 
formula, will permit position limit levels to better reflect the 
changing needs and composition of the futures markets.\759\ Open 
interest is a measure of market activity that reflects the number of 
contracts that are ``open'' or live, where each contract of open 
interest represents both a long and a short position.\760\ The 
Commission believes that limiting positions to a percentage of open 
interest: (1) Helps ensure that positions are not so large relative to 
observed market activity that they risk disrupting the market; (2) 
allows speculators to hold sufficient contracts to provide a healthy 
level of liquidity for bona fide hedgers; and (3) allows for increases 
in position limits and position sizes as markets expand and become more 
active.\761\
---------------------------------------------------------------------------

    \759\ 85 FR at 11630.
    \760\ Id.
    \761\ Id.
---------------------------------------------------------------------------

(1) Modification of the 10/2.5% Formula
    However, the Commission believes that the current 10/2.5% formula 
should be updated based on market developments since it was adopted in 
1999. As a result, the Commission proposed modifying the 10/2.5% 
formula by adjusting the inflection point between the 10% rate and the 
2.5% rate from 25,000 contracts to 50,000 contracts.\762\ The 
Commission also proposed applying updated open interest data to the 
modified 10/2.5% formula.
---------------------------------------------------------------------------

    \762\ This results in a modest increase in the Federal non-spot 
month position limit level of 1,875 contracts over what the limit 
level would be if the 10/2.5% formula were applied at 25,000 
contracts, assuming that the market for the core referenced futures 
contract has an open interest of at least 50,000 contracts.
---------------------------------------------------------------------------

    The Commission is adopting these changes as proposed because: (1) 
Open interest has increased significantly since the 10/2.5% formula was 
originally adopted in 1999; and (2) futures market composition has 
changed significantly since 1999. The Commission discusses both 
developments in turn below.
(i) Increases in Open Interest
    As noted in the 2020 NPRM, there has generally been a significant 
increase in maximum open interest for each of the legacy agricultural 
contracts (except for CBOT Oats (O)) since the existing 10/2.5% formula 
was first adopted in 1999.\763\ Under the existing 10/2.5% formula, 
because the 2.5% incremental increase applies after the first 25,000 
contracts of open interest, limit levels with respect to contracts with 
open interest above 25,000 contracts (i.e., all applicable core 
referenced futures contracts other than CBOT Oats (O)) continue to 
increase at the much slower rate of 2.5% rather than the 10% rate 
that's applicable for the first 25,000 contracts. As a result, the 
existing 10/2.5% formula has become proportionally more restrictive as 
the percentage of open interest above 25,000 contracts increased.
---------------------------------------------------------------------------

    \763\ 85 FR at 11631.
---------------------------------------------------------------------------

    The table below provides data that describes the market environment 
during the period prior to, and subsequent to, the adoption of the 
existing 10/2.5% formula by the Commission in 1999. The data includes 
futures contracts and the delta-adjusted options on futures open 
interest.\764\ The first column of the table provides the maximum open 
interest in the nine legacy agricultural contracts over the five year 
period ending in 1999. The CBOT Corn (C) contract had a maximum open 
interest of approximately 463,000 contracts, and the CBOT Soybeans (S) 
contract had a maximum open interest

[[Page 3333]]

of approximately 227,000 contracts. The other seven contracts had 
maximum open interest figures that ranged from less than 20,000 
contracts for CBOT Oats (O) to approximately 172,000 for CBOT Soybean 
Oil (SO). Hence, when adopting the 10/2.5% formula in 1999, the 
Commission's experience in these markets was of aggregate futures and 
options on futures open interest well below 500,000 contracts.
---------------------------------------------------------------------------

    \764\ Delta is a ratio comparing the change in the price of an 
asset (a futures contract) to the corresponding change in the price 
of its derivative (an option on that futures contract) and has a 
value that ranges between zero and one. In-the-money call options 
get closer to 1 as their expiration approaches. At-the-money call 
options typically have a delta of 0.5, and the delta of out-of-the-
money call options approaches 0 as expiration nears. The deeper in-
the-money the call option, the closer the delta will be to 1, and 
the more the option will behave like the underlying asset. Thus, 
delta-adjusted options on futures will represent the total position 
of those options as if they were converted to futures.
[GRAPHIC] [TIFF OMITTED] TR14JA21.010

    The table also displays the maximum open interest figures for 
subsequent periods up to, and including, 2018. The maximum open 
interest for all legacy agricultural contracts, except for CBOT Oats 
(O), generally increased over the period. By the 2015-2018 period 
covered in the last column of the table, five of the contracts had 
maximum open interest greater than 500,000 contracts. Also, the 
contracts for CBOT Corn (C), CBOT Soybeans (S), and CBOT Hard Red 
Winter Wheat (KW) saw maximum open interest increase by a factor of 
four to five times the maximum open interest observed during the 1994-
1999 period when the Commission adopted the 10/2.5% formula in 1999.
    As open interest has increased, the current Federal non-spot month 
position limit levels have become significantly more restrictive over 
time. In particular, as discussed above, because the 2.5% incremental 
increase applies after the first 25,000 contracts of open interest 
under the existing 10/2.5% formula, Federal non-spot month position 
limit levels on legacy agricultural contracts with open interest above 
25,000 contracts (i.e., all contracts other than CBOT Oats (O)) 
continue to increase at a much slower rate of 2.5% rather than the 10% 
that applies for the first 25,000 contracts.
    The existing 10/2.5% formula's inflection point of 25,000 contracts 
was less of a problem in the latter part of the 1990s, for example, 
when open interest in each of the nine legacy agricultural contracts 
was below 500,000, and in many cases below 200,000. More recently, 
however, open interest has grown above 500,000 for a majority of the 
legacy agricultural contracts. The existing 10/2.5% formula has thus 
become more restrictive for market participants, including, as 
discussed immediately below, certain banks and dealers with positions 
that may not be eligible for a bona fide hedging exemption, but who 
might otherwise provide valuable liquidity to commercial firms.
(ii) Changes in Market Composition
    The potentially restrictive nature of the existing Federal non-spot 
month position limit levels has become more problematic over time 
because dealers play a much more significant role in the market today 
than at the time the Commission adopted the 10/2.5% formula. Prior to 
1999, the Commission regulated physical commodity markets where the 
largest participants were often large commercial interests who held 
short positions. The offsetting positions were often held by small, 
individual traders, who tended to be long.\765\
---------------------------------------------------------------------------

    \765\ Stewart, Blair, An Analysis of Speculative Trading in 
Grain Futures, Technical Bulletin No. 1001, U.S. Department of 
Agriculture (Oct. 1949). See also Draper, Dennis, ``The Small Public 
Trader in Futures Markets'', pp. 211-269, Futures Markets: 
Regulatory Issues (ed. Anne Peck, 1985): American Enterprise 
Institute.
---------------------------------------------------------------------------

    Several years after the Commission adopted the 10/2.5% formula, the 
composition of futures market participants changed as dealers began to 
enter the physical commodity futures market in larger size. These 
dealers, including ones affiliated with banks or large financial 
institutions that are now provisionally registered and regulated as 
swap dealers, sometimes held significant positions in these markets by 
acting as aggregators or market makers and providing swaps to 
commercial hedgers and to other market participants.\766\ The existing 
10/2.5% formula has thus become particularly restrictive for dealers, 
including those with positions that may not be eligible for a bona fide 
hedging exemption, but

[[Page 3334]]

that might otherwise provide valuable liquidity to commercial 
firms.\767\
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    \766\ Staff Report on Commodity Swap Dealers & Index Traders 
with Commission Recommendations, U.S. Commodity Futures Trading 
Commission (Sept. 2008), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf.
    \767\ The Commission notes that this issue with respect to swap 
dealers is being addressed through a combination of a modification 
of the 10/2.5% formula and the pass-through swap provision, the 
latter of which is described in Section II.A.1.x. (Pass-Through Swap 
and Pass-Through Swap Offset Provisions).
---------------------------------------------------------------------------

    The table below demonstrates the trend of increased dealer 
participation by presenting data from the Commission's publicly 
available ``Bank Participation Report'' (``BPR''), as of the December 
report for 2002-2018.\768\ The table displays the number of banks 
holding reportable positions for the seven futures contracts for which 
Federal position limits apply and that were reported in the BPR.\769\ 
The report presents data for every market where five or more banks hold 
reportable positions. The BPR is based on the same large-trader 
reporting system database used to generate the Commission's Commitments 
of Traders (``COT'') report.\770\
---------------------------------------------------------------------------

    \768\ Bank Participation Reports, available at https://www.cftc.gov/MarketReports/BankParticipationReports/index.htm.
    \769\ The term ``reportable position'' is defined in Sec.  
15.00(p) of the Commission's regulations. 17 CFR 15.00(p).
    \770\ Commitments of Traders, available at www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm. Commitments of Traders 
reports indicate that there are generally still as many large 
commercial traders in the markets today as there were in the 1990s.
---------------------------------------------------------------------------

    No data was reported for the seven futures contracts in December 
2002, indicating that fewer than five banks held reportable positions 
at the time of the report. The December 2003 report shows that five or 
more banks held reportable positions in four of the commodity futures. 
The number of banks with reportable positions generally increased in 
the early to mid-2000s, which included dealers that operated in the 
swaps markets by acting as aggregators or market makers, providing 
swaps to commercial hedgers and to other market participants while 
using the futures markets to hedge their own exposures.\771\ When the 
Commission adopted the 10/2.5% formula in 1999, it had limited 
experience with physical commodity derivatives markets in which such 
banks were significant participants.
---------------------------------------------------------------------------

    \771\ Staff Report on Commodity Swap Dealers & Index Traders 
with Commission Recommendations, U.S. Commodity Futures Trading 
Commission (Sept. 2008), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf.
---------------------------------------------------------------------------

BILLING CODE 6351-01-P
[GRAPHIC] [TIFF OMITTED] TR14JA21.011

    For 2003, which was the first year in the report with reported data 
on the futures for these physical commodities, the BPR showed, as 
displayed in the table below, that the reporting banks held modest 
positions, totaling 3.4% of futures long open interest for CBOT Wheat 
(W) and smaller positions in other futures. The positions displayed in 
the table below increased over the next several years, generally 
peaking around 2005/2006 as a percentage of the long open interest.

[[Page 3335]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.012

BILLING CODE 6351-01-C
    The Commission believes that the application of the modified 10/
2.5% formula adopted herein to updated open interest data will prevent 
the Federal non-spot month limits from becoming overly restrictive by 
providing an appropriate increase in the non-spot month position limit 
levels for most contracts to better reflect the above-described changes 
in market dynamics observed since the late 1990s.
(2) Non-Spot Month Position Limit Levels for CBOT Oats (O), CBOT KC HRW 
Wheat (KW), and MGEX HRS Wheat (MWE)
    The Commission is adopting the proposed Federal non-spot month 
position limit levels with respect to CBOT Oats (O), CBOT KC HRW Wheat 
(KW), and MGEX HRS Wheat (MWE). These remain at the current Federal 
non-spot month position limit levels, which are 2,000 contracts for 
CBOT Oats (O) and 12,000 contracts for both CBOT KC HRW Wheat (KW) and 
MGEX HRS Wheat (MWE). These Federal non-spot month position limit 
levels are higher than the levels that would have been determined using 
the modified 10/2.5% formula and updated open interest data, which 
would have resulted in 700 contracts for CBOT Oats (O), 11,900 
contracts for CBOT KC HRW Wheat (KW), and 5,700 contracts for MGEX HRS 
Wheat (MWE). However, the Commission saw no reason to reduce these 
Federal non-spot month position limit levels in accordance with the 10/
2.5% formula because the Commission has observed that the existing 
limit levels have functioned well for these core referenced futures 
contracts and the Commission believes that strictly following the 10/
2.5% formula to determine Federal non-spot month position limit levels 
could harm liquidity in those markets.
(3) Single Month Position Limit Level for ICE Cotton No. 2 (CT)
    The Commission is adopting a modified single month Federal position 
limit level for ICE Cotton No. 2 (CT). The Commission proposed a 
uniform single month and all-months-combined position limit for the ICE 
Cotton No. 2 (CT) contract, as well as uniform single month and all-
months-combined position limits for the eight other legacy agricultural 
contracts. However, in the 2020 NPRM the Commission requested comments 
from the public concerning whether the Commission should adopt a lower 
single month position limit level for ICE Cotton No. 2 (CT) compared to 
the all-months-combined position limit level.\772\
---------------------------------------------------------------------------

    \772\ 85 FR 11637 (Request for Comment #26).
---------------------------------------------------------------------------

    The Commission received numerous comments from the end users of ICE 
Cotton No. 2 (CT) in the cotton industry, including growers and 
merchants, who requested that the Commission establish a lower Federal 
single month position limit level for ICE Cotton No. 2 (CT) compared to 
the all-months-combined position limit level, including establishing 
the single month position limit level at 50% of the all-months-combined 
position limit level.\773\ The Commission did not receive any comments 
from commercial end-users opposing a lower Federal single month 
position limit level for ICE Cotton No. 2 (CT) compared to the all-
months-combined position limit level. In response to the comments 
received, the Commission is adopting a lower Federal single month 
position limit level of 5,950 contracts for ICE Cotton No. 2 (CT), 
which is 50% of the proposed Federal non-spot month position limit 
level. However, the Commission is adopting the proposed all-months-

[[Page 3336]]

combined position limit level of 11,900 contracts, which is based on 
the modified 10/2.5% formula. This change is discussed further below.
---------------------------------------------------------------------------

    \773\ ACSA at 2, 8; LDC at 2; Olam at 2; Ecom at 1; ACA at 2; 
Canale Cotton at 2; Choice at 2; Jess Smith at 2; East Cotton at 2; 
Memtex at 2; NCC at 1-2; Southern Cotton at 2-3; Texas Cotton at 2; 
Toyo Cotton Co. at 2; WCSA at 2; and Omnicotton at 2.
---------------------------------------------------------------------------

(4) The Final Rule's Federal Non-Spot Month Position Limits Achieve the 
Four Statutory Objectives in CEA Section 4a(a)(3)(B)
    As noted above, in the Final Rule, the Commission is not reducing 
Federal non-spot month position limit levels for any of the legacy 
agricultural contracts and will be raising them for six of the nine 
such contracts in accordance with the updated open interest data and 
the modified 10/2.5% formula.\774\ As a result, the Commission believes 
that the final Federal non-spot month position limit levels will 
generally improve liquidity for bona fide hedgers and, at the very 
least, not harm liquidity compared to the status quo.
---------------------------------------------------------------------------

    \774\ As noted previously, the Commission is not following the 
modified 10/2.5% formula for determining the single month position 
limit level for ICE Cotton No. 2 (CT). However, the Final Rule still 
increases that limit level compared to its existing limit level.
---------------------------------------------------------------------------

    The Commission also believes that the final Federal non-spot month 
position limit levels remain low enough to diminish, eliminate, or 
prevent excessive speculation, and to deter and prevent market 
manipulation. This is because, as discussed above, by taking into 
account the amount of observed market activity through open interest, 
the modified 10/2.5% formula adopted herein helps ensure, among other 
things, that positions are not so large relative to observed market 
activity that they risk disrupting the market.\775\ This, in turn, also 
helps ensure that the price discovery function of the underlying market 
is not disrupted, because markets that are free from manipulative 
activity reflect fundamentals of supply and demand rather than 
artificial pressures. The Commission also notes that the 10/2.5% 
formula has functioned well, based on the Commission's decades of 
experience administering the formula.\776\
---------------------------------------------------------------------------

    \775\ 85 FR at 11630.
    \776\ Id. at 11675.
---------------------------------------------------------------------------

    The Commission reiterates that the modified 10/2.5% formula 
provided in this Final Rule is generally a continuation of the same 
approach the Commission has taken for decades. The increased levels 
adopted herein are primarily driven by utilizing updated open interest 
figures. With respect to the slight modification to the 10/2.5% 
formula, the Commission does not believe that the modification will 
negatively impact the formula's effectiveness in ensuring that the 
Federal non-spot month position limit levels remain low enough to 
diminish, eliminate, or prevent excessive speculation, and to deter and 
prevent market manipulation. This is because the difference between 
utilizing the existing 10/2.5% formula and the modified 10/2.5% formula 
results in a modest increase in Federal non-spot month position limit 
level of 1,875 contracts, which is generally counterbalanced by the 
increased amount of open interest that is subject to the 2.5% 
rate.\777\ Additionally, the Commission has previously studied prior 
increases in Federal non-spot month position limit levels and concluded 
that the overall impact was modest, and that any changes in market 
performance were most likely attributable to factors other than changes 
in the Federal position limit rules.\778\ The Commission has since 
gained additional experience which supports that conclusion, including 
by monitoring amendments to position limit levels by exchanges. 
Further, given the significant increases in open interest and changes 
in market composition that have occurred since the 1990s, the 
Commission is comfortable that the Federal non-spot month position 
limit levels adopted herein will adequately address each of the policy 
objectives set forth in CEA section 4a(a)(3)(B), including preventing 
manipulation and excessive speculation.
---------------------------------------------------------------------------

    \777\ When the Commission adopted the existing Federal non-spot 
month position limit levels in 2011, the Federal non-spot month 
position limit levels for four of the nine legacy agricultural 
contracts were based on the existing 10/2.5% formula and utilized 
open interest data from 2009. These were CBOT Corn (C), CBOT 
Soybeans (S), CBOT Wheat (W), and CBOT Soybean Oil (SO). For those 
four contracts, the ratio of Federal non-spot month position limit 
level to open interest changes as follows: CBOT Corn (C) (the ratio 
increases from 0.026 to 0.027); CBOT Soybeans (S) (the ratio 
increases from 0.028 to 0.029); CBOT Wheat (W) (the ratio increases 
from 0.029 to 0.031); and CBOT Soybean Oil (SO) (the ratio increases 
from 0.030 to 0.032).
     The other five legacy agricultural contracts' Federal non-spot 
month position limit levels deviated from the 10/2.5% formula. The 
ratio changes for these five contracts are as follows (based on 2009 
open interest data): ICE Cotton No. 2 (CT) (the ratio increases from 
0.025 to 0.037 for the all-months-combined and decreases from 0.025 
to 0.018 for the single month); CBOT Soybean Meal (SM) (the ratio 
decreases from 0.038 to 0.032); CBOT Oats (O) (the ratio increases 
from 0.130 to 0.291); MGEX Hard Red Spring Wheat (MWE) (the ratio 
decreases from 0.323 to 0.162); and CBOT KC Hard Red Winter Wheat 
(KW) (the ratio decreases from 0.113 to 0.037).
    \778\ 64 FR at 24039.
---------------------------------------------------------------------------

(5) Federal Non-Spot Month Position Limits as Ceilings
    The Commission reiterates that, under this position limits 
framework, the Federal non-spot month position limit levels serve as 
ceilings. Exchanges are required to establish their own non-spot month 
position limit levels with respect to the nine legacy agricultural 
contracts pursuant to final Sec.  150.5(a)(1). A discussion of the 
implications of this approach is provided above in Section 
II.B.3.ii.a(2).
iv. Comments and Discussion of Final Rule--Federal Non-Spot Month 
Position Limit Levels
    Most commenters did not express concerns with respect to the 
proposed Federal non-spot month position limit levels and the method by 
which the Commission determined those levels.\779\ However, some 
commenters raised concerns with respect to: (1) The Federal non-spot 
month position limit levels, generally; (2) the proposed non-spot month 
position limit level for ICE Cotton No. 2 (CT); and (3) the issue of 
partial parity for the three wheat core referenced futures contracts 
with respect to their Federal non-spot month position limit levels. The 
Commission will discuss each of these issues, the related comments, and 
the Commission's corresponding determination in greater detail below.
---------------------------------------------------------------------------

    \779\ See, e.g., COPE at 2; CMC at 6; CCI at 2; and CHS at 2.
---------------------------------------------------------------------------

a. Federal Non-Spot Month Position Limit Levels, Generally
(1) Comments--Federal Non-Spot Month Position Limit Levels, Generally
    Several commenters raised concerns about the proposed Federal non-
spot month position limit levels generally. Two commenters, NGFA and 
LDC, advocated for lowering the Federal non-spot month position limit 
levels for the nine legacy agricultural contracts.\780\ NGFA stated 
that the proposed increases are ``very large'' and that the Commission 
should not view increasing non-spot month position limit levels as a 
``tradeoff'' for eliminating the risk management exemption, but should 
instead establish limits that ``will telescope down to relatively much-
smaller spot-month limits in an orderly fashion.'' \781\ LDC and 
several others

[[Page 3337]]

believed that adopting lower Federal single month position limit levels 
would ``prevent speculative activity from concentrating in a single 
contract month and thus jeopardizing convergence.'' \782\ NGFA and LDC 
also offered the following alternatives to the proposed Federal non-
spot month position limit levels: (1) Set single-month limits at some 
percentage of the all-months-combined limit, such as 50%; or (2) 
maintain existing single-month limits while adopting the proposed all-
months-combined limits.\783\ NGFA also offered a third alternative, 
which was to adopt a phased-in approach to the higher non-spot month 
position limits, ``together with very active monitoring of contract 
performance, though NGFA does not favor this option.'' \784\
---------------------------------------------------------------------------

    \780\ NGFA at 3 and LDC at 2.
    \781\ NGFA at 3. NGFA also commented that, ``NGFA still is not 
completely convinced that open interest is the best yardstick for 
this exercise,'' because ``[a]s volume and open interest grow, 
Federal non-spot limits expand correspondingly . . . which leads to 
yet higher volume and open interest. . .which again prompts expanded 
Federal non-spot limits . . . and so on.'' However, NGFA did not 
provide any alternatives to utilizing open interest for determining 
Federal non-spot month position limit levels. As discussed 
previously, the Commission believes that open interest is an 
appropriate means of measuring market activity for a particular 
contract and that a formula based on open interest, such as the 10/
2.5% formula: (1) Helps ensure that positions are not so large 
relative to observed market activity that they risk disrupting the 
market; (2) allows speculators to hold sufficient contracts to 
provide a healthy level of liquidity for hedgers; and (3) allows for 
increases in position limits and position sizes as markets expand 
and become more active. Furthermore, the Commission notes that under 
the Final Rule, Federal non-spot month position limit levels do not 
automatically increase with higher open interest levels. In order to 
make any amendments to the Federal position limit levels, the 
Commission is required to engage in notice-and-comment rulemaking.
    \782\ LDC at 2. See also e.g., Moody Compress at 1; ACA at 2; 
Jess Smith at 2; McMeekin at 2; Memtex at 2; Mallory Alexander at 2; 
Walcot at 2; and White Gold at 1.
    \783\ NGFA at 4 and LDC at 2.
    \784\ NGFA at 4. IATP also provided a similar suggestion, by 
stating that, ``it is prudent to phase in new non-spot month limit 
levels so that the Commission can acquire data and experience with 
how the new Federal non-spot limits are working for the commercial 
hedging of those legacy contracts.'' IATP at 11.
---------------------------------------------------------------------------

    On the other hand, ISDA requested higher Federal non-spot month 
position limit levels.\785\ ISDA stated that the proposed levels ``for 
the legacy agricultural contracts are not high enough to provide [ ] 
significant liquidity to these markets based on the experience of 
market participants and anticipated growth in these markets.'' \786\ 
ISDA also appeared to suggest that higher levels could ``help markets 
offset any liquidity that may be lost if the risk management exemption 
is not retained.'' \787\ Finally, ISDA also provided a table with 
suggested Federal non-spot month position limit levels that ranged from 
18% to 191% higher than the proposed levels, except for CBOT Oats (O), 
which remained the same.\788\
---------------------------------------------------------------------------

    \785\ ISDA at 7.
    \786\ Id.
    \787\ Id.
    \788\ Id.
---------------------------------------------------------------------------

    Another commenter, MGEX, disagreed with the 10/2.5% formula, 
stating that ``a formulaic approach is too rigid and inflexible'' and 
that the ``Commission needs to be flexible in the future and should not 
preclude further limits or discussion.'' \789\
---------------------------------------------------------------------------

    \789\ MGEX at 3.
---------------------------------------------------------------------------

(2) Discussion of Final Rule--Federal Non-Spot Month Position Limit 
Levels, Generally
    With the exception of ICE Cotton No. 2 (CT), as discussed below, 
the Commission declines to modify the proposed Federal non-spot month 
position limit levels or the general methodology underlying the 
determination of those levels for the remaining legacy agricultural 
contracts, and also declines to adopt a phase-in for Federal non-spot 
month position limit levels.
(i) Request To Generally Lower Federal Non-Spot Month Position Limits
    In response to these comments, the Commission believes that the 
modified 10/2.5% formula is generally an appropriate way to calculate 
Federal non-spot month position limit levels. The Commission also 
believes that the final non-spot month position limit levels are 
supported by updated open interest data, some of which have increased 
significantly since 2009.
    The Commission continues to believe that a formula based on a 
percentage of open interest, such as the 10/2.5% formula, is 
appropriate for establishing limit levels outside of the spot month, as 
discussed above and in the 2020 NPRM.\790\ The Commission believes that 
limiting positions to a percentage of open interest, such as through 
the 10/2.5% formula: (1) Helps ensure that positions are not so large 
relative to observed market activity that they risk disrupting the 
market; (2) allows speculators to hold sufficient contracts to provide 
a healthy level of liquidity for bona fide hedgers; and (3) allows for 
increases in position limits and position sizes as markets expand and 
become more active.\791\ Furthermore, the 10/2.5% formula has 
functioned well for Federal non-spot month position limit purposes for 
many years.\792\ Also, the Commission does not believe that the slight 
modification to the 10/2.5% formula materially impacts the formula's 
efficacy in determining an appropriate Federal non-spot month position 
limit level as well,\793\ because the modification is modest and is 
supported by the general increase in open interest among the legacy 
agricultural contracts and the change in the composition of market 
participants in those markets, as discussed above.\794\
---------------------------------------------------------------------------

    \790\ See 85 FR at 11630-11633.
    \791\ Id.
    \792\ See id. at 11675.
    \793\ The Commission notes, as discussed elsewhere in this Final 
Rule, that CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), CBOT Oats 
(O), and ICE Cotton No. 2 (CT) (single month limit only) are subject 
to unique circumstances or other factors that counsel in favor of 
deviating from the 10/2.5% formula.
    \794\ The modification results in a modest increase in the 
Federal non-spot month position limit level of 1,875 contracts over 
what the limit level would be if the inflection point for the 10/
2.5% formula was set at 25,000 contracts, assuming that the market 
for the core referenced futures contract has an open interest of at 
least 50,000 contracts.
---------------------------------------------------------------------------

(ii) Request To Generally Lower Single Month Position Limit Levels
    In response to comments generally requesting lower single month 
position limit levels, the Commission first acknowledges that it has 
set single-month position limit levels lower than all-months-combined 
position limit levels in the past. However, since the Commission set 
both single month and all-months-combined levels set at the same level 
in 2011, the Commission has not observed any issues with respect to the 
nine legacy agricultural contracts as a result of that change.
    In response to commenters' concern about possible convergence 
issues from setting the single-month and all-months-combined levels set 
at the same level, the Commission notes that positions in the non-spot 
months have minimal impact on convergence. This is because convergence 
occurs in the spot month, and, specifically, at the expiration of the 
physically-settled spot month contract.\795\
---------------------------------------------------------------------------

    \795\ The Commission, however, recognizes that it is possible 
that unusually large positions in contracts outside of the spot 
month could distort the natural spread relationship between contract 
months. For example, if traders hold unusually large positions 
outside of the spot month, and if those traders exit those positions 
immediately before the spot month, that could cause congestion and 
also affect the pricing of the spot month contract. While such 
congestion or price distortion cannot be ruled out, exchange-set 
position limits and position accountability function to mitigate 
against such risks.
---------------------------------------------------------------------------

    Furthermore, the Commission notes that an important benefit of 
having a single Federal non-spot month limit level for both the single-
month and all-months-combined is the ability for market participants to 
enter into calendar spread transactions that would normally be 
constrained by the lower single month position limit level. However, 
the Commission notes that, in response to comments received, it is 
adopting a lower Federal single month position limit level for ICE 
Cotton No. 2 (CT), the reasons for which is discussed below.

[[Page 3338]]

(iii) Request To Increase Federal Non-Spot Month Position Limit Levels
    In response to ISDA's comment that the proposed Federal non-spot 
month position limit levels should be higher to compensate for the 
proposed loss of risk management exemptions for swap dealers, the 
Commission believes that any potential impact on existing risk 
management exemption holders may be mitigated by the finalized pass-
through swap provision, to the extent swap dealers can utilize it.\796\ 
The Commission believes that this is a preferable approach to either a 
hypothetical alternative formula or ISDA's own suggested Federal non-
spot month position limit levels that would allow higher limit levels 
beyond those adopted in this Final Rule for all market participants. 
This is because, while the pass-through swap provision adopted herein 
is narrowly-tailored to enable liquidity providers to continue 
providing liquidity to bona fide hedgers, higher limit levels beyond 
those adopted in this Final Rule for all market participants could also 
permit excessive speculation and increase the possibility of market 
manipulation or harm to the underlying price discovery function.\797\
---------------------------------------------------------------------------

    \796\ See 85 FR at 11676. See also Section II.A.1.x. (Pass-
Through Swap and Pass-Through Swap Offset Provisions).
    \797\ See 85 FR at 11676.
---------------------------------------------------------------------------

(iv) Concern With the Commission's ``Formulaic'' Approach
    In response to MGEX's concern that the Commission's approach is too 
formulaic and rigid, the Commission notes that the Federal non-spot 
month position limit levels will operate as ceilings within a broader 
Federal position limits framework in which exchanges, including MGEX, 
are always free to determine their own exchange-set position limit 
levels and position accountability levels below the Federal position 
limit levels as they see fit based on market conditions. In fact, by 
having the Federal position limit levels operate as ceilings, this 
framework will enable exchanges to respond to market conditions through 
a greater range of acceptable position limit levels than if the Federal 
position limit levels did not operate as ceilings.
    In addition, as described further below, the Commission has 
deviated from the 10/2.5% formula with respect to CBOT Oats (O), ICE 
Cotton No. 2 (CT) (single month only), CBOT KC HRW Wheat (KW), and MGEX 
HRS Wheat (MWE) based on the unique circumstances concerning those core 
referenced futures contracts. Furthermore, the Commission also notes 
that this Final Rule does not ``preclude further limits or 
discussion.'' \798\ The Commission is also continually monitoring 
market conditions to evaluate whether different Federal position limit 
levels may be warranted.
---------------------------------------------------------------------------

    \798\ MGEX at 3.
---------------------------------------------------------------------------

(v) Request To Implement a Phase-In Period
    The Commission declines to adopt a formal phase-in period for 
Federal non-spot month position limits, in which the Commission 
gradually implements the Federal non-spot month position limit levels 
over a period of time. The Commission believes that the markets will 
operate in an orderly fashion with the Federal position limit levels 
adopted under this Final Rule, because the final Federal non-spot month 
position limit levels are supported by increased open interest and are 
generally set pursuant to the modified 10/2.5% formula, which, as 
discussed above, achieves the policy objectives set forth in CEA 
section 4a(a)(3)(B).\799\
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    \799\ A phase-in is not necessary with respect to the Federal 
non-spot month position limit levels for CBOT Oats (O), KC HRW Wheat 
(KW), and MGEX HRS Wheat (MWE), because the Federal non-spot month 
position limit levels will remain at the current levels.
---------------------------------------------------------------------------

    However, as noted in the Federal spot month position limit level 
phase-in discussion above, as a practical matter, the Commission 
emphasizes that the operative non-spot month position limit levels for 
a market participant trading in exchange-listed referenced contracts is 
not the Federal non-spot month position limit levels, but the exchange-
set non-spot month position limit levels. As a result, despite the 
changes in the Federal non-spot month position limit levels in this 
Final Rule, there will be no practical impact on market participants 
trading in exchange-listed referenced contracts unless and until an 
exchange affirmatively modifies its exchange-set non-spot month 
position limit levels through a rule submission to the Commission 
pursuant to part 40 of the Commission's regulations.\800\
---------------------------------------------------------------------------

    \800\ 17 CFR part 40.
---------------------------------------------------------------------------

c. ICE Cotton No. 2 (CT) Federal Non-Spot Month Position Limit Level
(1) Summary of the 2020 NPRM and Additional Background Information--ICE 
Cotton No. 2 (CT) Federal Non-Spot Month Position Limit Level
    In the 2020 NPRM, the Commission proposed to increase both the 
Federal single month and all-months-combined position limit levels for 
ICE Cotton No. 2 (CT) from the existing Federal level of 5,000 
contracts to 11,900 contracts by applying the updated open interest 
data into the proposed modified 10/2.5% formula. The Commission also 
solicited comments asking whether the Commission should consider 
lowering the Federal single month position limit level to a percentage 
of the Federal all-months-combined position limit level for ICE Cotton 
No. 2 (CT), and if so, what percentage of the all-months-combined 
position limit level should be used.\801\
---------------------------------------------------------------------------

    \801\ 85 FR at 11637 (Request for Comment #26).
---------------------------------------------------------------------------

(2) Comments--ICE Cotton No. 2 (CT) Federal Non-Spot Month Position 
Limit Level
    In response to the 2020 NPRM, numerous commenters from the cotton 
industry, including growers and merchants, requested that the 
Commission ``maintain its single-month limit, particularly for smaller 
markets like cotton,'' \802\ or, in the alternative, set a Federal 
single month position limit level of 50% of the all-months-combined 
limit (i.e., 5,950 contracts).\803\ In support, commenters also noted 
that the proposed non-spot month position limit level for ICE Cotton 
No. 2 (CT) was ``not in line with historical limits.'' \804\ One 
commenter also stated, ``Experience with modern trading has shown a 
propensity by speculators to focus too heavily on the nearest futures 
contract, leaving later months with poor liquidity from time to time.'' 
\805\ In contrast, ISDA argued that the proposed Federal non-spot month 
position limit levels, including that for ICE Cotton No. 2 (CT), were 
too low and asserted that the level for ICE Cotton No. 2 (CT) should be 
increased to 24,000 contracts to make up for the elimination of the 
risk management exemption.\806\
---------------------------------------------------------------------------

    \802\ See e.g., East Cotton at 2; Omnicotton at 2; Choice at 2; 
Canale Cotton at 2; Ecom at 1; Olam at 2; Texas Cotton at 2; Toyo 
Cotton at 2; Walcot Trading at 2; White Gold at 2; and NCTO at 2. 
See also ACA at 2; Gerald Marshall at 1-2; Jess Smith at 2; LDC at 
2; Mallory Alexander at 2; McMeekin at 2; MemTex at 2; Moody 
Compress at 2; Parkdale at 2; Southern Cotton at 2-3; SW Ag at 2; 
and ACSA at 8.
    \803\ ACSA at 8; LDC at 2; and Olam at 2. The following 
commenters also supported ACSA's comment letter: ACA at 2; Ecom at 
1; East Cotton at 2; Jess Smith at 2; IMC at 2; Mallory Alexander at 
2; McMeekin at 2; Memtex at 2; Moody Compress at 2; Omnicotton at 2; 
Canale Cotton at 2; SW Ag at 2; Texas Cotton at 2; Toyo Cotton at 2; 
Walcot at 2; and White Gold at 2.
    \804\ AMCOT at 1-2 and Parkdale at 2.
    \805\ Gerald Marshall at 2.
    \806\ ISDA at 7 (providing specific alternative levels).
---------------------------------------------------------------------------

(3) Discussion of Final Rule--ICE Cotton No. 2 (CT) Federal Non-Spot 
Month Position Limit Level
    The Commission is adopting the proposed all-months-combined 
position limit level of 11,900 contracts, but is

[[Page 3339]]

adopting a modified single month position limit level of 5,950 
contracts for ICE Cotton No. 2 (CT).
    The Commission is adopting the proposed 11,900 contract Federal 
all-months-combined position limit level for ICE Cotton No. 2 (CT) 
because, as discussed earlier, the Commission believes that a formula 
based on a percentage of open interest--specifically the modified 10/
2.5% formula--is an appropriate tool for establishing limits outside of 
the spot month. However, the Commission does not believe that it is 
appropriate to raise either the Federal single month or all-months-
combined position limit level for ICE Cotton No. 2 (CT) to 24,000 
contracts as suggested by ISDA, because the open interest levels do not 
support such a drastic increase and there is no other reason to deviate 
so significantly upward from the modified 10/2.5% formula.\807\
---------------------------------------------------------------------------

    \807\ The Commission acknowledges ISDA's comment that the 
proposed Federal non-spot month position limit levels should be 
higher to compensate for the proposed loss of risk management 
exemptions for swap dealers. However, as noted previously, the 
Commission believes that any potential impact on existing risk 
management exemption holders may be mitigated by the pass-through 
swap provision adopted herein, and that this is a preferable and 
more tailored approach than increasing the non-spot month position 
limit levels for all market participants.
---------------------------------------------------------------------------

    On the other hand, the Commission believes that it is appropriate 
to adopt a lower Federal single month position limit level at this 
time. As noted in the Commission's request for comment in the 2020 
NPRM, the Commission believed that there could be concerns with respect 
to the Federal single month position limit level for ICE Cotton No. 2 
(CT), especially from the commercial end-users of the core referenced 
futures contract.\808\ In response to the Commission's request for 
comment, the Commission received approximately 25 comment letters from 
the cotton industry (out of approximately 75 comment letters on the 
2020 NPRM from all commenters) unanimously requesting a lower Federal 
single month position limit level compared to the Federal all-months-
combined position limit level for ICE Cotton No. 2 (CT). The Commission 
believes that these unanimous comments from the commercial end-users of 
the ICE Cotton No. 2 (CT) core referenced futures contract are 
informative, because they suggest that lowering the 2020 NPRM's Federal 
single month position limit level from the proposed 11,900 contract 
level to either the existing 5,000 contract level or a 5,950 contract 
level (which is 50% of the all-months-combined position limit level of 
11,900 contracts) may not have a material detrimental effect on 
liquidity for bona fide hedgers in the market.
---------------------------------------------------------------------------

    \808\ 85 FR 11637 (Request for Comment #26).
---------------------------------------------------------------------------

    All things being equal, a lower single month position limit level 
will better protect the markets against manipulation and price 
distortion,\809\ but at the expense of reduced liquidity for bona fide 
hedgers. However, in this instance, in light of the comments received, 
the Commission believes that it could improve protections against 
manipulation and price distortion without materially impacting 
liquidity for bona fide hedgers by adopting a lower Federal single 
month position limit level of either 5,000 contracts or 5,950 
contracts. Of these two suggested levels, the Commission believes that 
it is more appropriate to adopt the 5,950 contract level over the 
existing 5,000 contract level to account, in part, for the increase in 
open interest levels since the single month position limit level of 
5,000 contracts was adopted in 2011.\810\
---------------------------------------------------------------------------

    \809\ Specifically, the Commission is referring to the price 
distortion that could be caused by a speculative trader who, after 
amassing a large position during the non-spot month, exits the 
entire position immediately before the spot month.
    \810\ The maximum open interest for ICE Cotton No. 2 (CT) was 
197,191 contracts in 2009, 161,582 contracts in 2011, and 324,952 
contracts in 2019.
---------------------------------------------------------------------------

d. Wheat Core Referenced Futures Contracts' Federal Non-Spot Month 
Position Limit Levels
(1) Summary of the 2020 NPRM and Additional Background Information--
Wheat Federal Non-Spot Month Position Limit Levels
    There are three wheat contracts: CBOT Wheat (W), CBOT KC HRW Wheat 
(KW), and MGEX HRS Wheat (MWE). Currently, the Federal non-spot month 
position limit levels for all three are set at 12,000 contracts. This 
has been referred to as ``full wheat parity.''
    In the 2020 NPRM, the Commission proposed ``partial wheat parity'' 
by increasing the Federal non-spot month position limit level for CBOT 
Wheat (W) from 12,000 contracts to 19,300 based on the application of 
the modified 10/2.5% formula and updated open interest levels, while 
maintaining the existing levels of 12,000 contracts for CBOT KC HRW 
Wheat (KW) and MGEX HRS Wheat (MWE). The 12,000 contract Federal non-
spot month position limit levels for CBOT KC HRW Wheat (KW) and MGEX 
HRS Wheat (MWE) are above the levels that would be calculated based on 
the application of the modified 10/2.5% formula and recent open 
interest levels, which would be 11,900 contracts for CBOT KC HRW Wheat 
(KW) and 5,700 contracts for MGEX HRS Wheat (MWE).
    The Commission proposed partial wheat parity between CBOT KC HRW 
Wheat (KW) and MGEX HRS Wheat (MWE) at 12,000 contracts for two 
reasons. First, both contracts provide exposure to hard red wheats. As 
a result, the Commission believed that drastically decreasing the 
Federal non-spot month position limit level for MGEX HRS Wheat (MWE) 
vis-[agrave]-vis CBOT KC HRW Wheat (KW) by following the 10/2.5% 
formula could impose liquidity costs on the MGEX HRS Wheat (MWE) market 
and harm bona fide hedgers, which could further harm liquidity for bona 
fide hedgers in the related CBOT KC HRW Wheat (KW) market.\811\ Second, 
the existing Federal non-spot month position limit levels for CBOT KC 
HRW Wheat (KW) and MGEX HRS Wheat (MWE) appear to have functioned well, 
and the Commission saw no market-based reason to reduce those levels 
based on recent open interest data.\812\
---------------------------------------------------------------------------

    \811\ 85 FR at 11633.
    \812\ Id. at 11632.
---------------------------------------------------------------------------

(2) Comments--Wheat Federal Non-Spot Month Position Limit Levels
    The Commission received several comments concerning the proposed 
Federal non-spot month position limit levels with respect to the three 
wheat core referenced futures contracts. One commenter, MGEX, stated 
that it ``supports maintaining partial wheat parity by keeping the 
existing non-spot month limits for [MGEX HRS Wheat (MWE)] and CBOT KC 
Hard Red Wheat at 12,000.'' \813\ Another commenter agreed ``with the 
increase in the non-spot month for CBOT Wheat (W).'' \814\
---------------------------------------------------------------------------

    \813\ MGEX at 3.
    \814\ MFA/AIMA at 12.
---------------------------------------------------------------------------

    However, other commenters requested that the Federal non-spot month 
position limit level for CBOT KC HRW Wheat (KW) be at least the same as 
CBOT Wheat (W) (i.e., raise it to 19,300 contracts).\815\ In support, 
commenters contended that the ``physical market for the wheat crop that 
is deliverable under [CBOT KC HRW Wheat (KW)] is much larger than the 
wheat crop that is deliverable under [CBOT Wheat (W)].'' \816\ Also, 
commenters stated that the ``characteristics of the physical wheat that 
is deliverable under [CBOT KC HRW Wheat (KW)] is more similar to the 
global wheat crop than the wheat that is deliverable under [CBOT Wheat

[[Page 3340]]

(W)].'' \817\ As a result, commenters stated that, ``[CBOT KC HRW Wheat 
(KW)] may be important for hedging for many market participants.'' 
\818\ Similarly, MFA/AIMA stated that ``open interest data and supply 
data published by the USDA for hard red winter wheat, which is the 
underlying commodity for [CBOT KC HRW Wheat (KW)], would also justify 
an increase in the [CBOT KC HRW Wheat (KW)] non-spot month limit.'' 
\819\
---------------------------------------------------------------------------

    \815\ SIFMA AMG at 3-4; ISDA at 12; PIMCO at 4-5; MFA/AIMA at 
12; and Citadel at 6-7.
    \816\ PIMCO at 4. See also ISDA at 12 and SIFMA AMG at 3-4.
    \817\ SIFMA AMG at 3. See also ISDA at 12 and PIMCO at 4.
    \818\ SIFMA AMG at 4. See also ISDA at 12.
    \819\ MFA/AIMA at 12. See also Citadel at 6-7.
---------------------------------------------------------------------------

(3) Discussion of Final Rule--Wheat Federal Non-Spot Month Position 
Limit Levels
    The Commission declines to raise the proposed 12,000 contract 
Federal non-spot month position limit level for CBOT KC HRW Wheat (KW) 
to match the final Federal non-spot month position limit level of CBOT 
Wheat (W) at 19,300 contracts.
    First, as noted earlier, the Federal non-spot month position limit 
level for CBOT KC HRW Wheat (KW) is already set higher, albeit 
slightly, than the limit level calculated under the updated open 
interest figure and 10/2.5% formula, which, as discussed previously, is 
a formula that the Commission believes is generally proper for 
determining Federal non-spot month position limit levels.\820\ Raising 
the Federal non-spot month position limit level for CBOT KC HRW Wheat 
(KW) to 19,300 contracts would be a drastic increase over the existing 
level that is not supported by the 10/2.5% formula or by the 
Commission's observations of how that market has functioned under the 
12,000 contract Federal non-spot month position limit level. As a 
result, the Commission is concerned that this could result in excessive 
speculation and increase the possibility of market manipulation or harm 
to the underlying price discovery function with respect to that 
contract.
---------------------------------------------------------------------------

    \820\ 85 FR at 11630.
---------------------------------------------------------------------------

    Second, the Commission believes that maintaining partial wheat 
parity between CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) is 
appropriate because the commodities underlying both of those wheat core 
referenced futures contracts are hard red wheats that, together, 
represent the majority of the wheat grown in both the United States and 
Canada, which results in those markets being closely intertwined.\821\ 
This is in contrast with CBOT Wheat (W), which typically sees 
deliveries of soft white wheat varieties (even though it allows for 
delivery of hard red wheat).\822\
---------------------------------------------------------------------------

    \821\ Id. at 11632.
    \822\ Id.
---------------------------------------------------------------------------

    Finally, the Commission reiterates that bona fide hedging positions 
will continue to be allowed to exceed the Federal position limit 
levels. Intermarket spreading is also permitted as well, which should 
address any concerns over the potential for loss of liquidity in the 
spread trades among the three wheat core referenced futures contracts 
during the non-spot months.\823\
---------------------------------------------------------------------------

    \823\ Id. at 11633.
---------------------------------------------------------------------------

5. Subsequent Spot and Non-Spot Month Limit Levels
i. Summary of the 2020 NPRM--Subsequent Spot and Non-Spot Month Limit 
Levels
    Unlike in previous iterations of the position limit rules, the 2020 
NPRM did not require the Commission to periodically review and revise 
EDS figures or adjust the Federal spot month position limit 
levels.\824\ Instead, under proposed Sec.  150.2(f), an exchange 
listing a core referenced futures contract would be required to provide 
EDS figures only if requested by the Commission. Proposed Sec.  
150.2(j) delegated the authority to make such requests to the Director 
of the Division of Market Oversight.\825\ The 2020 NPRM also allowed 
exchanges to voluntarily submit EDS figures to the Commission at any 
time, and encouraged them to do so.\826\ When submitting EDS figures, 
exchanges would be required to provide a description of the methodology 
used to derive the EDS figures, as well as all data and data sources 
used to calculate the estimate, so that the Commission could verify 
that the EDS figures are reasonable.\827\
---------------------------------------------------------------------------

    \824\ See e.g., 81 FR at 96769-96771.
    \825\ 85 FR at 11633.
    \826\ Id. at 11633-11634.
    \827\ Id. at 11634.
---------------------------------------------------------------------------

    Likewise, the 2020 NPRM also did not require the Commission to 
periodically review the open interest data and update the non-spot 
month position limit levels for the legacy agricultural core referenced 
futures contracts, unlike in previous iterations of the position limit 
rules.\828\
---------------------------------------------------------------------------

    \828\ See e.g., 81 FR at 96769, 96771-96773.
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Subsequent Spot and Non-
Spot Month Limit Levels
    The Commission is adopting Sec.  150.2(f) as proposed and will not 
include a formal mechanism to periodically renew or revise EDS figures 
or otherwise review and update the Federal spot month or non-spot month 
position limit levels. The Commission is also adopting the delegation 
provision in Sec.  150.2(j) as proposed.\829\
---------------------------------------------------------------------------

    \829\ The Commission did not receive any comments on proposed 
Sec.  150.2(j).
---------------------------------------------------------------------------

iii. Comments--Subsequent Spot and Non-Spot Month Limit Levels
    The Commission received several comments concerning updates to the 
Federal position limit levels, with commenters requesting that the 
Commission periodically review the levels and revise them if 
appropriate.\830\ One commenter was concerned that the Federal position 
limit levels could become too high over time,\831\ while the rest were 
concerned that the levels could become too low.\832\ In addition, CME 
Group also suggested that exchanges should update the EDS figures 
``every two years [and] . . . DCMs should be provided the opportunity 
to submit data voluntarily to the Commission on a more frequent 
basis.'' \833\
---------------------------------------------------------------------------

    \830\ MFA/AIMA at 5 (``the Commission should direct exchanges to 
periodically monitor the proposed new position limit levels''); 
PIMCO at 6 (``we urge the CFTC to include . . . a mandatory 
requirement to regularly (and at least annually) review and update 
limits as markets grow and change''); SIFMA AMG at 10 (the Final 
Rule should require ``that the Commission regularly consult with 
exchanges and review and adjust position limits when it is necessary 
to do so based on relevant market factors''); ISDA at 10 (``the 
Commission must regularly convene and consult with exchanges on 
deliverable supply and, if appropriate, propose notice and comment 
rulemaking to adjust limit levels''); and IATP at 16-17 (the 
Commission should engage in ``an annual review of position limit 
levels to give [commercial hedgers] legal certainty over that 
period'' and also retain ``the authority to revise position limits . 
. . if data monitoring and analysis show that those annual limit 
levels are failing to prevent excessive speculation and/or various 
forms of market manipulation'').
    \831\ IATP at 16-17.
    \832\ MFA/AIMA at 5-6; PIMCO at 6; SIFMA AMG at 10; and ISDA at 
10.
    \833\ CME Group at 5.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Subsequent Spot and Non-Spot Month Limit 
Levels
    The Commission declines to implement a periodic, predetermined 
schedule to review Federal position limits because the Commission 
believes that it is more appropriate to retain flexibility for both the 
exchanges and the Commission itself in updating the Federal position 
limit levels.
    Reviewing and adjusting the Federal spot month position limit 
levels requires the Commission to review, among other things, updated 
EDS figures for the core referenced futures contracts. Having worked 
closely with

[[Page 3341]]

exchanges to analyze and independently verify the methodology 
underlying the EDS figures and the EDS figures themselves, the 
Commission recognizes that estimating deliverable supply can be a time 
and resource consuming process for both the exchanges and the 
Commission.\834\ Furthermore, periodic, predetermined review intervals 
may not always align with market changes or other events resulting in 
material changes to deliverable supply that would warrant adjusting 
Federal spot month position limit levels. As a result, the Commission 
believes that it would be more efficient, timely, and effective to 
review the EDS figure and the Federal position limit level for a core 
referenced futures contract if warranted by market conditions, 
including changes in the underlying cash market, which the Commission 
and exchanges continually monitor.
---------------------------------------------------------------------------

    \834\ 85 FR at 11633.
---------------------------------------------------------------------------

    Reviewing and adjusting the Federal non-spot month position limit 
levels requires the Commission to review, among other things, open 
interest data for the relevant core referenced futures contracts. 
Unlike EDS figures, open interest is easily obtainable because it is 
regularly updated by the exchanges. As a result, the output of the 10/
2.5% formula can be quickly calculated. However, the Commission does 
not believe that it is appropriate to update the Federal non-spot month 
position limit levels separately from the Federal spot month position 
limit levels. The Commission has historically reviewed all of the 
Federal position limit levels--spot month and non-spot month--together 
for a particular contract because all months of a particular contract 
are part of the same market. As a result, updating both the spot and 
non-spot month position limits levels at the same time provides a 
holistic and integrated position limit regime for each commodity 
contract because the limits are based upon updated data covering the 
same or overlapping time period.
    Final Sec.  150.2(f) provides flexibility and authority for the 
Commission to be able to request an updated EDS figure, along with the 
methodology and underlying data, for a core referenced futures contract 
whenever market conditions suggest that a change in Federal position 
limit levels may be warranted. The exchanges are also encouraged to 
submit such information at any time as well under final Sec.  
150.2(f).\835\ Once the Commission receives the updated EDS figures, 
then the Commission can undertake the appropriate review and analysis 
of the EDS figures and any additional information, such as exchange 
recommendations, to adjust the Federal spot month position limit 
levels, if necessary, through rulemaking. At that time, the Commission 
would also review the open interest data for the core referenced 
futures contract and undertake the necessary analysis to ensure that 
the Federal non-spot month position limit levels are set at appropriate 
levels as well.
---------------------------------------------------------------------------

    \835\ In providing an updated EDS figure, exchanges should 
consult the guidance concerning estimating deliverable supply set 
forth in section (b)(1)(i) (``Estimating Deliverable Supplies'') of 
17 CFR part 38, Appendix C.
---------------------------------------------------------------------------

    Finally, the Commission notes that, under this position limits 
framework, the exchanges always have the freedom to set their exchange-
set position limit levels lower than the Federal position limit levels. 
Adjusting the Federal position limit levels necessarily requires the 
Commission to engage in rulemaking with notice-and-comment, which can 
take a significant amount of time.\836\ Thus, an exchange may adjust 
its exchange-set position limit levels lower in response to market 
conditions, while waiting for the Commission to adjust the Federal 
position limit levels.\837\
---------------------------------------------------------------------------

    \836\ Market participants may petition the Commission to adjust 
Federal position limit levels, subject to the Commission's notice-
and-comment rulemaking, under existing Sec.  13.1, which provides 
that any ``person may file a petition with . . . the Commission . . 
. for the issuance, amendment or repeal of a rule of general 
application.''
    \837\ However, an exchange cannot set its exchange-set position 
limit levels above the Federal position limit levels, even if market 
conditions may warrant raising the levels. Thus, in order to allow 
market participants to hold positions higher than the Federal 
position limit levels (absent an exemption), the Commission would 
need to raise the Federal position limit levels through rulemaking.
---------------------------------------------------------------------------

6. Relevant Contract Month
    Proposed Sec.  150.2(c) clarified that the spot month and single 
month for any given referenced contract is determined by the spot month 
and single month of the core referenced futures contract to which that 
referenced contract is linked.
    The Commission did not receive any comments and is adopting as 
proposed. Final Sec.  150.2(c) requires that referenced contracts be 
linked to the core referenced futures contract in order to be netted 
for position limit purposes.
    For example, for the NYMEX NY Harbor ULSD Heating Oil (HO) core 
referenced futures contract, the spot month period starts at the close 
of trading three business days prior to the last trading day of the 
contract. The spot month period for the NYMEX NY Harbor ULSD Financial 
(MPX) futures referenced contract would thus start at the same time--
the close of trading three business days prior to the last trading day 
of the core referenced futures contract.
7. Limits on ``Pre-Existing Positions''
i. Summary of the 2020 NPRM--Pre-Existing Positions
    Under proposed Sec.  150.2(g)(1) Federal spot month position limits 
applied to ``pre-existing positions, other than pre-enactment swaps and 
transition period swaps,'' each defined in proposed Sec.  150.1. 
Accordingly, Federal spot month position limits would not apply to any 
pre-existing positions in economically equivalent swaps. The 2020 NPRM 
defined ``pre-existing positions'' in proposed Sec.  150.1 as positions 
established in good faith prior to the effective date of a final 
Federal position limits rulemaking.
    In contrast, proposed Sec.  150.2(g)(2) provided that Federal non-
spot month limits would not apply to pre-existing positions, including 
pre-enactment swaps and transition period swaps, if acquired in good 
faith prior to the effective date of such limit. However, other than 
pre-enactment swaps and transition period swaps, any pre-existing 
positions held outside the spot month would be attributed to such 
person if the person's position is increased after the effective date 
of a final Federal position limits rulemaking.
    The 2020 NPRM's disparate treatment of pre-existing positions 
during and outside the spot month was predicated on the concern that 
failing to apply spot month limits to such pre-existing positions could 
result in a large, preexisting position either intentionally or 
unintentionally causing a disruption to the price discovery function of 
the core referenced futures contract as positions are rolled into the 
spot month. In contrast, outside the spot month, large, pre-existing 
positions may have a relatively less disruptive effect given that 
physical delivery occurs only during the spot month.
ii. Summary of the Commission Determination--Pre-Existing Positions
    The Commission is adopting Sec.  150.2(g)(1) as proposed, and is 
adopting Sec.  150.2(g)(2) with the following two changes:
    First, the Commission is amending proposed Sec.  150.2(g)(2) to 
provide that non-spot month limits shall apply to pre-existing 
positions, other than pre-enactment swaps and transition period swaps. 
As noted above, proposed Sec.  150.2(g)(2) in the 2020 NPRM exempted 
pre-existing positions from the Final Rule's Federal non-spot month 
position limits. However, as discussed below, the nine legacy 
agricultural

[[Page 3342]]

contracts currently are subject to the Commission's existing non-spot 
month position limits, and the Commission did not intend to exclude 
existing non-spot month positions in the nine legacy agricultural 
contracts that would otherwise qualify as ``pre-existing positions'' 
under the Final Rule. As discussed, the other 16 non-legacy core 
referenced futures contracts that are subject to Federal position 
limits for the first time under the Final Rule are not subject to 
Federal non-spot month position limits and therefore proposed Sec.  
150.2(g)(2) would not have applied to these contracts in any event.
    The Commission based the language in proposed Sec.  150.2(g) on 
similar language found in the 2016 Reproposal, which imposed Federal 
non-spot month position limits on all of the proposed core referenced 
futures contracts (as opposed to only on the nine legacy agricultural 
contracts under the Final Rule). In the context of the 2016 Reproposal, 
the Commission believed it made sense to exempt pre-existing positions 
in non-spot months in core referenced futures contracts that would have 
been subject to Federal position limits for the first time under the 
2016 Reproposal. However, as noted above, such core referenced futures 
contracts that are subject to Federal position limits for the first 
time under the Final Rule are not subject to Federal non-spot month 
position limits. Accordingly, the Commission is modifying Sec.  
150.2(g) so that pre-existing positions in the nine legacy agricultural 
contracts remain subject to Federal non-spot month position limits 
under the Final Rule, as the Commission had originally intended.
    Second, since the Commission is clarifying that pre-existing 
positions in the nine legacy agricultural contracts, other than pre-
enactment swaps and transition period swaps, are subject to Federal 
non-spot month position limits under the Final Rule, the language in 
proposed Sec.  150.2(g)(2) that would attribute to a person any 
increase in their non-spot month positions after the effective date of 
the Final Rule's non-spot month limits is no longer necessary. The 
Commission is therefore removing this language from final Sec.  
150.2(g)(2).
iii. Comments--Pre-Existing Positions
    Commenters generally supported proposed Sec.  150.2(g), although 
several commenters asked for additional clarity.\838\ MGEX and FIA both 
argued that the provision could be simplified by creating only two 
categories: ``pre-existing swaps'' (exempt from all spot/non-spot 
Federal position limits) and ``pre-existing futures'' (exempt from all 
non-spot Federal position limits, provided there is no increase in such 
non-spot positions), stating that relying upon the proposed relief as 
structured will be ``operationally challenging'' for market 
participants.\839\ MGEX and FIA also requested that the Commission 
clarify that a market participant is not required to rely upon the 
exemption so that its pre-existing positions could be netted, as 
applicable, with the market participant's other referenced 
contracts.\840\ ISDA encouraged the Commission to provide that the 
Final Rule's new Federal position limits do not apply to any pre-
existing positions, whether in futures contracts or swaps.\841\ 
Finally, CHS encouraged the Commission to adopt a ``safe harbor'' 
provision where participants could demonstrate a ``good-faith'' effort 
at compliance so ``inadvertent'' violations would not trigger possible 
enforcement action.\842\
---------------------------------------------------------------------------

    \838\ MGEX at 4; FIA at 9; ISDA at 8.
    \839\ FIA at 8-9; MGEX at 4.
    \840\ MGEX at 3-4; FIA at 8-9, 18-19.
    \841\ ISDA at 2, 8.
    \842\ CHS at 5.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Pre-Existing Positions
    As stated in the 2020 NPRM, the Commission believes that the 
absence of spot-month limits on pre-existing positions, other than pre-
existing swaps and transition period swaps, could render the Federal 
spot month position limits ineffective. Failure to apply spot month 
limits to such pre-existing positions, particularly for the 16 
commodities that are not currently subject to Federal position limits 
and where market participants may have pre-existing positions in excess 
of the spot-month position limits adopted herein, could result in a 
large, pre-existing position either intentionally or unintentionally 
causing a disruption to the price discovery function of the core 
referenced futures contract as positions are rolled into the spot 
month.\843\ The Commission is particularly concerned about protecting 
the spot month in physically delivered futures contracts from price 
distortions or manipulation that would disrupt the hedging and price 
discovery utility of the futures contract.\844\
---------------------------------------------------------------------------

    \843\ 85 FR at 11634.
    \844\ Id.
---------------------------------------------------------------------------

    With respect to non-spot month position limits, only the nine 
legacy agricultural contracts are currently subject to such limits 
under the existing Federal position limits framework and will continue 
to be subject to Federal non-spot month position limits under the Final 
Rule. The Commission did not intend in the 2020 NPRM to exclude such 
pre-existing positions in the nine legacy agricultural contracts from 
non-spot month limits. Accordingly, for the Final Rule the Commission 
is modifying final Sec.  150.2(g)(2) to make clear that Federal non-
spot month position limits do apply to these pre-existing positions. 
However, as noted above, the 16 non-legacy core referenced futures 
contracts that are subject to Federal position limits for the first 
time under this Final Rule are not subject to Federal non-spot month 
position limits and so are not affected by the Commission's change in 
final Sec.  150.2(g)(2).
    The Commission agrees with MGEX's and FIA's comments that pre-
existing positions can be netted. The Commission confirms that market 
participants may continue to net their pre-existing positions, as 
applicable, with market participants' post-effective date referenced 
contract positions. In the 2020 NPRM, the Commission made explicit in 
proposed Sec.  150.3(a)(5) that market participants would be permitted 
to net pre-existing swap positions with post-effective date referenced 
contract positions (to the extent such pre-existing swap positions 
qualify as ``economically equivalent swaps'' under the Final 
Rule).\845\ The Commission adopted this clarification in final Sec.  
150.3(a)(5) for the avoidance of doubt. The Commission believes this 
explicit clarification with respect to swaps is helpful to market 
participants since swaps are subject to Federal position limits for the 
first time under this Final Rule and since it may not otherwise be 
clear whether a market participant could net a pre-enactment swap or 
transition period swap given that such pre-enactment and transition 
period swaps are exempt from Federal position limits under final Sec.  
150.3(a)(5).
---------------------------------------------------------------------------

    \845\ Pre-existing swap positions (i.e., pre-enactment swaps and 
transition period swaps) would otherwise be exempt from Federal 
position limits.
---------------------------------------------------------------------------

    However, the Commission similarly intended that market participants 
also would be able to net pre-existing futures contracts and option on 
futures contracts against post-effective date positions. The Commission 
did not feel such a clarification was necessary since futures contracts 
and options thereon have been subject to the existing Federal position 
limits framework. Accordingly, for the avoidance of doubt, the 
Commission is affirming that market participants may continue to net 
pre-existing futures contracts and option on

[[Page 3343]]

futures contracts with post-effective date positions in referenced 
contracts.
    In response to ISDA's request for clarification, the Commission 
notes that Federal non-spot month position limits will apply to pre-
existing positions in the nine legacy agricultural contracts (but not 
to the 16 non-legacy core referenced futures contracts). However, for 
the reasons articulated above, Federal position limits will apply 
during the spot month for futures contracts and options on futures 
contracts for all 25 core referenced futures contracts, other than pre-
enactment swaps and transition period swaps.
    While the Commission is not adopting a ``safe harbor'' provision, 
it is providing a transition period, as requested by CHS,\846\ so that 
market participants will have until January 1, 2022 (or January 1, 2023 
for economically-equivalent swaps or positions relying on the risk-
management exemption) to comply with the Final Rule. The Commission 
believes this will provide sufficient time for market participants to 
implement and test new systems and processes that have been established 
to comply with the Final Rule.
---------------------------------------------------------------------------

    \846\ CHS at 5.
---------------------------------------------------------------------------

8. Positions on Foreign Boards of Trade
i. Background
    CEA section 4a(a)(6)(B) directs the Commission to establish limits 
on the aggregate number of positions in contracts based upon the same 
underlying commodity that may be held by any person across contracts 
traded on a foreign board of trade (``FBOT'') with respect to a 
contract that settles against any price of at least one contract listed 
for trading on a registered entity.\847\
---------------------------------------------------------------------------

    \847\ 7 U.S.C. 6a(a)(6)(B). The CEA's definition of ``registered 
entity'' includes DCMs and SEFs. 7 U.S.C. 1a(40).
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Foreign Boards of Trade
    Proposed Sec.  150.2(h) applied the proposed Federal position 
limits to a market participant's aggregate positions in referenced 
contracts executed on a DCM or SEF and on, or pursuant to the rules of, 
an FBOT, provided that (1) the referenced contracts settle against a 
price of a contract listed for trading on a DCM or SEF and (2) the FBOT 
makes such contract available in the United States through ``direct 
access.'' \848\ In other words, a market participant's positions in 
referenced contracts listed on a DCM or SEF and on an FBOT registered 
to provide direct access would collectively have to stay below the 
Federal position limit for the relevant core referenced futures 
contract.
---------------------------------------------------------------------------

    \848\ Commission regulation Sec.  48.2(c) defines ``direct 
access'' to mean an explicit grant of authority by an FBOT to an 
identified member or other participant located in the United States 
to enter trades directly into the trade matching system of the FBOT. 
17 CFR 48.2(c).
---------------------------------------------------------------------------

iii. Summary of the Commission Determination--Foreign Boards of Trade
    The Commission is adopting Sec.  150.2(h) as proposed.
iv. Comments--Foreign Boards of Trade
    The Commission received comments from CEWG, Chevron, and Suncor 
regarding proposed Sec.  150.2(h) and its possible effects with respect 
to certain contracts listed on ICE Futures Europe (``IFEU'') that are 
price-linked to the energy core referenced futures contracts.\849\ Each 
of the commenters expressed concern that the extension of the proposed 
Federal position limits regime to referenced contracts listed for 
trading on IFEU could have unintended consequences, such as: (1) 
Requiring U.S.-based market participants to comply with potentially 
conflicting requirements of multiple regulators and position limits 
regimes; and (2) incentivizing foreign regulators to extend their reach 
into the Commission's jurisdictional markets.\850\
---------------------------------------------------------------------------

    \849\ CEWG at 28-29; Chevron at 15-16; Suncor at 14-15.
    \850\ CEWG at 28; Chevron at 16; Suncor at 15.
---------------------------------------------------------------------------

    Chevron and Suncor requested that the Commission reconsider what 
they perceive to be the potential regulatory conflicts and burdens that 
could be imposed on market participants who transact referenced 
contracts listed on IFEU, and adopt a policy of substituted compliance 
to minimize such conflicts.\851\ CEWG recommended that the Commission 
adopt an approach based on substituted compliance with respect to 
referenced contracts listed on FBOTs similar to that adopted for swaps 
under CEA section 2(i).\852\
---------------------------------------------------------------------------

    \851\ Chevron at 16; Suncor at 15.
    \852\ CEWG at 29.
---------------------------------------------------------------------------

v. Discussion of Final Rule--Foreign Boards of Trade
    As stated above, the Commission is adopting Sec.  150.2(h) as 
proposed. As stated in the 2020 NPRM,\853\ CEA section 4a(a)(6)(B) 
requires the Commission to establish limits on the aggregate number or 
amount of positions in contracts based upon the same underlying 
commodity that may be held by any person across certain contracts 
traded on an FBOT with linkages to a contract traded on a registered 
entity. Final Sec.  150.2(h) simply codifies requirements set forth in 
CEA section 4a(a)(6)(B), and will lessen regulatory arbitrage by 
eliminating a potential loophole whereby a market participant could 
accumulate positions on certain FBOTs in excess of limits in referenced 
contracts.\854\
---------------------------------------------------------------------------

    \853\ 85 FR at 11634.
    \854\ In addition, CEA section 4(b)(1)(B) prohibits the 
Commission from permitting an FBOT to provide direct access to its 
trading system to its participants located in the United States 
unless the Commission determines, in regards to any FBOT contract 
that settles against any price of one or more contracts listed for 
trading on a registered entity, that the FBOT (or its foreign 
futures authority) adopts position limits that are comparable to the 
position limits adopted by the registered entity. 7 U.S.C. 
6(b)(1)(B).
---------------------------------------------------------------------------

    Accordingly, the Commission believes that Sec.  150.2(h) is 
consistent with the goal set forth in CEA section 4a(a)(2)(C) to ensure 
that liquidity does not move to foreign jurisdictions or place U.S. 
exchanges at a competitive disadvantage to foreign competitors. If the 
Commission did not attribute positions held in referenced contracts on 
FBOTs, the Commission inadvertently could incentivize market 
participants to shift trading and liquidity in referenced contracts to 
FBOTs in order to avoid Federal position limits.
9. Anti-Evasion
i. Summary of the 2020 NPRM--Anti-Evasion
    Pursuant to the Commission's rulemaking authority in section 8a(5) 
of the CEA,\855\ the Commission proposed Sec.  150.2(i), which was 
intended to deter and prevent a number of potential methods of evading 
Federal position limits. The proposed anti-evasion provision provided: 
(1) A commodity index contract and/or location basis contract, which 
would otherwise be excluded from the proposed referenced contract 
definition, would be considered a referenced contract subject to 
Federal position limits if used to willfully circumvent position 
limits; (2) a bona fide hedge recognition or spread exemption would no 
longer apply if used to willfully circumvent speculative position 
limits; and (3) a swap contract used to willfully circumvent 
speculative position limits would be deemed an economically equivalent 
swap, and thus a referenced contract, even if the swap does not meet 
the economically equivalent swap definition set forth in proposed Sec.  
150.1.
---------------------------------------------------------------------------

    \855\ 7 U.S.C. 12a(5).
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Anti-Evasion
    The Commission is adopting Sec.  150.2(i) as proposed with 
conforming changes that reflect revisions to the ``referenced 
contract'' definition adopted herein in

[[Page 3344]]

which the Final Rule additionally is excluding ``monthly average 
pricing contracts'' and ``outright price reporting agency index 
contracts'' from the ``referenced contract'' definition.\856\ A 
discussion of these conforming changes appears immediately below, 
followed by a summary of the comments, which addressed different 
aspects of the proposed anti-evasion provision.
---------------------------------------------------------------------------

    \856\ See supra Section II.A.16.iii.b. (explanation of proposed 
exclusions from the ``referenced contract'' definition).
---------------------------------------------------------------------------

a. Discussion of Conforming Changes--Anti-Evasion
    The Commission is revising proposed Sec.  150.2(i)(1), which 
addressed evasion of Federal position limits by using commodity index 
contracts and location basis contracts, to also cover monthly average 
pricing contracts and outright price reporting agency index contracts. 
This change is needed to conform the anti-evasion provision to the 
``referenced contract'' definition adopted herein. In particular, while 
the 2020 NPRM would exclude commodity index contracts and location 
basis contracts from the ``referenced contract'' definition, the Final 
Rule excludes those contracts as well as monthly average pricing 
contracts and outright price reporting agency index contracts from the 
``referenced contract definition.'' \857\
---------------------------------------------------------------------------

    \857\ See Section II.A.16.iii.b.
---------------------------------------------------------------------------

    Because contracts that are excluded from the final ``referenced 
contract'' definition are not subject to Federal position limits, the 
Commission intends that final Sec.  150.2(i)(1) will prevent a 
potential loophole whereby a market participant who has reached its 
limits could otherwise utilize these contract types to willfully 
circumvent or evade speculative position limits. For example, a market 
participant could purchase a commodity index contract in a manner that 
allowed the participant to exceed limits when taking into account the 
weighting in the component commodities of the index contract. The Final 
Rule also will avoid creating what could otherwise be similar potential 
loopholes with respect to monthly average pricing contracts, outright 
price reporting agency index contracts, and location basis contracts.
    Additionally, the Commission is adopting Sec.  150.2(i)(2) as 
proposed. This provision provides that a bona fide hedge recognition or 
spread exemption will no longer apply if used to willfully circumvent 
speculative position limits. This provision is intended to help ensure 
that bona fide hedge recognitions and spread exemptions are granted and 
utilized in a manner that comports with the CEA and Commission 
regulations, and that the ability to obtain bona fide hedge 
recognitions and spread exemptions does not become an avenue for market 
participants to inappropriately exceed speculative position limits.
    The Commission is also adopting Sec.  150.2(i)(3) as proposed. 
Under this provision, a swap contract used to willfully circumvent 
speculative position limits is deemed an economically equivalent swap, 
and thus a referenced contract, even if the swap does not meet the 
economically equivalent definition set forth in final Sec.  150.1. This 
provision is intended to deter and prevent the structuring of a swap in 
order to willfully evade speculative position limits.
iii. Comments--Anti-Evasion
    Several commenters stated that the anti-evasion provision is 
prudent, but would be difficult to apply in practice, in part due to 
the subjective ``willful circumvention'' standard.\858\ FIA recommended 
that, instead, the anti-evasion analysis should be based on the 
presence of ``deceit, deception, or other unlawful or illegitimate 
activity'' so market participants will be better equipped to evaluate 
the surrounding facts and circumstances in making an evasion 
determination.\859\ FIA further expressed that, because markets evolve, 
it is inadvisable to consider ``historical practices behind the market 
participant and transaction in question.'' \860\ FIA also asked the 
Commission to confirm that it is not evasion for a market participant 
to consider ``costs or regulatory burdens, including the avoidance 
thereof,'' if that participant has a legitimate business purpose for a 
transaction.\861\
---------------------------------------------------------------------------

    \858\ SIFMA AMG at 7, n.16 (noting that the anti-evasion 
provision makes the application of the proposed ``economically 
equivalent swap'' definition less clear because it incorporates a 
subjective measure of intent); see also FIA at 25 (questioning how a 
participant would distinguish a strategy that minimizes position 
size with an evasive strategy); Better Markets at 33 (describing the 
anti-evasion provision as a ``useful deterrent,'' but noting that 
the willful circumvention standard would be difficult to meet and 
partially turns on the Commission's consideration of the legitimate 
business purpose analysis).
    \859\ FIA at 25-26.
    \860\ Id.
    \861\ Id.
---------------------------------------------------------------------------

    Specific to swaps, ISDA encouraged the Commission to expressly 
acknowledge and confirm that an out-of-scope swap transaction would not 
be considered evasion under any set of circumstances.\862\ FIA 
recommended that, for structured swaps, the anti-evasion analysis 
should ask whether the swap serves the market participant's commercial 
needs or objectives.\863\ Finally, FIA suggested that the Final Rule 
should provide an automatic safe harbor from a retroactive evasion 
determination for all swaps entered into prior to the compliance 
date.\864\
---------------------------------------------------------------------------

    \862\ ISDA at 5, n.7
    \863\ FIA at 25.
    \864\ Id.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Anti-Evasion
    The Final Rule's anti-evasion provision is not intended to capture 
a trading strategy merely because the strategy may result in a smaller 
position size for purposes of position limits. Instead, the anti-
evasion provision is intended to deter and prevent cases of willful 
evasion of speculative position limits, the specifics of which the 
Commission may be unable to anticipate. The Federal position limit 
requirements adopted herein will apply during the spot month for all 
referenced contracts subject to Federal position limits, while non-spot 
month Federal position limit requirements will only apply for the nine 
legacy agricultural contracts. Under this framework, and because the 
threat of corners and squeezes is the greatest in the spot month, the 
Commission anticipates that it may focus its attention on anti-evasion 
activity during the spot month.
    The determination of whether particular conduct is intended to 
circumvent or evade requires a facts and circumstances analysis. In 
interpreting these anti-evasion rules, the Commission is guided by its 
interpretations of anti-evasion provisions appearing elsewhere in the 
Commission's regulations, including the interpretation of the anti-
evasion rules that the Commission adopted in its rulemakings to further 
define the term ``swap'' and to establish a clearing requirement under 
section 2(h)(1)(A) of the CEA.\865\
---------------------------------------------------------------------------

    \865\ See Further Definition of ``Swap, ``Security-Based Swap,'' 
and ''Security-Based Swap Agreement;'' Mixed Swaps; Security-Based 
Swap Agreement Recordkeeping, 77 FR 48208, 48297-48303 (Aug. 13, 
2012); Clearing Requirement Determination Under Section 2(h) of the 
CEA, 77 FR 74284, 74317-74319 (Dec. 13, 2012).
---------------------------------------------------------------------------

    Generally, consistent with those interpretations, in evaluating 
whether conduct constitutes evasion, the Commission will consider, 
among other things, the extent to which the person lacked a legitimate 
business purpose for structuring the transaction in that particular 
manner. For example, an analysis of how a swap was structured could 
reveal that a person or persons crafted derivatives transactions, 
structured entities, or conducted

[[Page 3345]]

themselves in a manner without a legitimate business purpose and with 
the intent to willfully evade position limits by structuring one or 
more swaps such that such swap(s) would not meet the ``economically 
equivalent swap'' definition in final Sec.  150.1.
    In response to FIA's comment that the Commission should confirm 
that it is not evasion for a market participant with a legitimate 
business purpose for a transaction to consider ``costs or regulatory 
burdens,\866\ the Commission acknowledges that it fully expects that a 
person acting for legitimate business purposes within its respective 
industry will naturally consider a multitude of costs and benefits 
associated with different types of financial transactions, entities or 
instruments, including the applicable regulatory obligations.\867\ As 
stated in a prior rulemaking, a person's specific consideration of, for 
example, costs or regulatory burdens, including the avoidance thereof, 
is not, in and of itself, dispositive that the person is acting without 
a legitimate business purpose in a particular case.\868\
---------------------------------------------------------------------------

    \866\ FIA at 25.
    \867\ See 77 FR at 48301.
    \868\ See 77 FR at 74319.
---------------------------------------------------------------------------

    In response to FIA's comment \869\ that an anti-evasion analysis of 
a structured swap should evaluate whether the transaction serves the 
market participant's commercial needs or objectives, as stated in the 
2020 NPRM, the Commission will view legitimate business purpose 
considerations on a case-by-case basis in conjunction with all other 
relevant facts and circumstances. Additionally, the Commission 
disagrees with FIA's comment \870\ that an historical practices inquiry 
is inadvisable. Because transactions and instruments are regularly 
structured, and entities regularly formed, in a particular way and for 
various, often times multiple, reasons, the Commission believes it is 
essential that all relevant facts and circumstances be considered, 
including historical practices.\871\ While historical practice is a 
factor the Commission will consider as part of its facts and 
circumstances analysis, it is not dispositive in determining whether 
particular conduct constitutes evasion.
---------------------------------------------------------------------------

    \869\ FIA at 25.
    \870\ Id. at 25-26.
    \871\ See 77 FR at 48302.
---------------------------------------------------------------------------

    As part of its facts and circumstances analysis, the Commission 
will look at factors such as the historical practices behind the market 
participant and transaction in question. For example, with respect to 
Sec.  150.2(i)(2) (i.e., bona fide hedges or spreads used to evade), 
the Commission is adopting guidance in Appendix B to part 150 with 
respect to gross versus net hedging. As discussed elsewhere in this 
release, the Commission believes that measuring risk on a gross basis 
to willfully circumvent or evade speculative position limits would 
potentially run afoul of Sec.  150.2(i)(2).\872\ Use of gross or net 
hedging that is inconsistent with an entity's historical practice, or a 
change from gross to net hedging (or vice versa), could be an 
indication that an entity is seeking to evade position limits 
regulations.\873\ With respect to Sec.  150.2(i)(3) (i.e., swaps used 
to evade), the Commission will consider whether a market participant 
has a history of structuring its swaps one way, but then starts 
structuring its swaps a different way around the time the participant 
risked exceeding a speculative position limit as a result of its swap 
position, such as by modifying the delivery date or other material 
terms and conditions such that the swap no longer meets the definition 
of an ``economically equivalent swap.''
---------------------------------------------------------------------------

    \872\ See Section II.A.1.ix.
    \873\ Id.
---------------------------------------------------------------------------

    Consistent with interpretive language in prior rulemakings 
addressing evasion,\874\ when determining whether a particular activity 
constitutes willful evasion, the Commission will consider the extent to 
which the activity involves deceit, deception, or other unlawful or 
illegitimate activity. Although it is likely that fraud, deceit, or 
unlawful activity will be present where willful evasion has occurred, 
the Commission disagrees with FIA's comment \875\ that these factors 
should be a prerequisite to an evasion finding. A position that does 
not involve fraud, deceit, or unlawful activity could still lack a 
legitimate business purpose or involve other indicia of evasive 
activity. The presence or absence of fraud, deceit, or unlawful 
activity is one fact the Commission will consider when evaluating a 
person's activity. That said, the final anti-evasion provision does 
require willfulness, i.e. ``scienter.'' In response to commenters \876\ 
who expressed concern regarding the practical application of this 
intent standard, the Commission will interpret ``willful'' consistently 
with how the Commission has done so in the past, i.e., that acting 
either intentionally or with reckless disregard constitutes acting 
``willfully.'' \877\
---------------------------------------------------------------------------

    \874\ See 77 FR at 48297-48303; 77 FR at 74317-74319.
    \875\ FIA at 25.
    \876\ SIFMA AMG at 7, n.16; see also FIA at 25; Better Markets 
at 33.
    \877\ See In re Squadrito, [1990-1992 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) ] 25,262 (CFTC Mar. 27, 1992) (adopting 
definition of ``willful'' in McLaughlin v. Richland Shoe Co., 486 
U.S. 128 (1987)).
---------------------------------------------------------------------------

    In determining whether a transaction has been entered into or 
structured willfully to evade position limits, the Commission will not 
consider the form, label, or written documentation as dispositive. The 
Commission also is not requiring a pattern of evasive transactions as a 
prerequisite to prove evasion, although such a pattern may be one 
factor in analyzing whether evasion has occurred. In instances where 
one party willfully structures a transaction to evade but the other 
counterparty does not, Sec.  150.2(i) will apply to the party who 
willfully structured the transaction to evade.
    Further, entering into transactions that qualify for the forward 
exclusion from the swap definition, standing alone, shall not be 
considered evasive. However, in circumstances where a transaction does 
not, in fact, qualify for the forward exclusion, the transaction may or 
may not be evasive depending on an analysis of all relevant facts and 
circumstances.
    The Commission declines to adopt ISDA's request \878\ to carve out-
of-scope swap transactions from the anti-evasion provision. This 
request was unsupported and did not address whether an out-of-scope 
swap could be used to evade position limits.
---------------------------------------------------------------------------

    \878\ ISDA at 5, n.7.
---------------------------------------------------------------------------

    Finally, the Commission declines to adopt FIA's request \879\ that 
all swaps entered into prior to the compliance date be granted an 
automatic safe harbor from a retroactive finding of evasion. This 
change is unnecessary given that under final Sec.  150.3, pre-enactment 
swaps and transition period swaps will not be subject to Federal 
position limits at all during or outside the spot month.\880\
---------------------------------------------------------------------------

    \879\ FIA at 25.
    \880\ See final Sec.  150.3(a)(5).
---------------------------------------------------------------------------

10. Application of Netting and Related Treatment of Cash-Settled 
Referenced Contracts
i. Background
    Under the existing Federal framework, Federal position limits apply 
only to the nine legacy agricultural contracts, which are all 
physically-settled. However, existing part 150 does not include the 
equivalent concept of a ``referenced contract,'' and therefore existing 
Federal position limits do not apply to any cash-settled look-alike 
contracts as they would under the Final Rule. Accordingly, the issue of 
netting across look-alike contracts that may be located across

[[Page 3346]]

different exchanges is not addressed under the existing framework.
ii. Summary of the 2020 NPRM--Netting and Related Treatment of Cash-
Settled Referenced Contracts
    Under the 2020 NPRM, the referenced contract definition in proposed 
Sec.  150.1 included, among other things, (i) cash-settled contracts 
that are linked, either directly or indirectly, to a core referenced 
futures contract, and (ii) ``economically equivalent swaps.'' \881\
---------------------------------------------------------------------------

    \881\ See Section II.A.16. (discussion of the proposed 
referenced contract definition).
---------------------------------------------------------------------------

    Proposed Sec.  150.2(a) provided that during the spot month, 
Federal position limits would apply ``separately'' to physically 
delivered referenced contracts and cash-settled referenced contracts. 
Under the 2020 NPRM, positions in a physically-settled core referenced 
futures contract would not be required to be added to, nor permitted to 
be netted down by, positions in corresponding cash-settled referenced 
contracts (and vice-versa).
    Proposed Sec.  150.2(b), in contrast, provided that during the non-
spot months, including the single month and all-months-combined, 
Federal position limits would apply in the aggregate to both 
physically-delivered referenced contracts and cash-settled referenced 
contracts. This meant that for the purposes of determining whether a 
market participant complies with the Federal non-spot month position 
limits, a person's physically-settled and cash-settled referenced 
contract positions would be added together and could net against each 
other.
    Under both proposed Sec. Sec.  150.2(a) and (b), positions in 
referenced contracts would be aggregated across exchanges for purposes 
of determining one's net position for Federal position limit purposes.
iii. Summary of the Commission Determination--Netting and Related 
Treatment of Cash-Settled Referenced Contracts
    The Commission is finalizing Sec.  150.2(a) and (b) of the 2020 
NPRM as proposed.\882\
---------------------------------------------------------------------------

    \882\ As discussed above, the Commission is making an exception 
for natural gas referenced contracts to the general netting rules 
discussed below. For further discussion on the Final Rule's 
treatment of natural gas referenced contracts, see Section 
II.B.3.vi.
---------------------------------------------------------------------------

iv. Comments--Netting and Related Treatment of Cash-Settled Referenced 
Contracts
    PIMCO, SIFMA AMG, and ISDA contended that cash-settled referenced 
contracts should not be subject to Federal position limits at all 
because cash-settled contracts do not introduce the same risk of market 
manipulation. They argued that subjecting cash-settled referenced 
contracts to Federal position limits would reduce market liquidity and 
depth in these instruments.\883\
---------------------------------------------------------------------------

    \883\ PIMCO at 3; SIFMA AMG at 4-7; ISDA at 3-5. These entities 
did not specifically argue that cash-settled contracts should be 
excluded from the ``referenced contract'' definition, but rather in 
general that such instruments should not be subject to Federal 
position limits. The Commission noted that this is technically a 
different argument since cash-settled instruments could be exempt 
from position limits while still technically qualifying as 
``referenced contracts,'' but the end result is the same as a 
practical matter.
---------------------------------------------------------------------------

    FIA and ICE argued that limits for cash-settled referenced 
contracts should be higher relative to Federal position limits for 
physically-settled referenced contracts. They similarly argued that 
cash-settled referenced contracts are ``not subject to corners and 
squeezes'' and will `` `ensure market liquidity for bona fide hedgers.' 
'' \884\ FIA and ICE further suggested that Federal position limits for 
cash-settled referenced contracts should apply per DCM (rather than in 
aggregate across DCMs).\885\ FIA additionally suggested setting a 
separate Federal spot-month position limit for economically equivalent 
swaps.\886\
---------------------------------------------------------------------------

    \884\ ICE at 3, 15 (also arguing that cash-settled limits should 
apply per exchange, rather than across exchanges); FIA at 7-8.
    \885\ FIA at 7-8; ICE at 13.
    \886\ FIA 7-8.
---------------------------------------------------------------------------

    In contrast, CME Group supported the Commission's approach for 
spot-month parity for physically-settled and cash-settled referenced 
contracts across all commodity markets. CME Group explained that absent 
such parity, one side of the market could be vulnerable to: Artificial 
distortions from manipulations on the other side of the market; 
regulatory arbitrage; and liquidity drain to the other side of the 
market.\887\ CME Group warned that, ultimately, a lack of parity could 
undermine the statutory goals of position limits.\888\ NEFI agreed, 
arguing similarly that ``this move is essential to guard against 
manipulation by a trader who holds positions in both physically-settled 
and cash-settled contracts for the same underlying commodity.'' \889\
---------------------------------------------------------------------------

    \887\ CME Group at 3-4.
    \888\ Id. at 6.
    \889\ NEFI at 3.
---------------------------------------------------------------------------

v. Discussion of Final Rule--Netting and Related Treatment of Cash-
Settled Referenced Contracts
    The Commission is finalizing Sec. Sec.  150.2(a) and (b) as 
proposed. Under final Sec.  150.2(a), Federal spot month limits apply 
to physical-delivery referenced contracts ``separately'' from Federal 
spot month limits applied to cash-settled referenced contracts, meaning 
that during the spot month, positions in physically-settled contracts 
may not be netted with positions in linked cash-settled contracts but 
also are not required to be added to linked cash-settled contracts for 
the purposes of determining compliance with Federal position limits. 
Specifically, all of a trader's positions (long or short) in a given 
physically-settled referenced contract (across all exchanges and OTC as 
applicable) \890\ are netted and subject to the spot month limit for 
the relevant commodity, and all of such trader's positions in any cash-
settled referenced contracts (across all exchanges and OTC as 
applicable) linked to such physically-settled core referenced futures 
contract are netted and independently (rather than collectively along 
with the physically-settled positions) subject to the Federal spot 
month limit for that commodity.\891\
---------------------------------------------------------------------------

    \890\ In practice, the only physically-settled referenced 
contracts subject to the Final Rule will be the 25 core referenced 
futures contracts, none of which are listed on multiple DCMs, 
although there could potentially be physically-settled OTC swaps 
that would satisfy the ``economically equivalent swap'' definition 
and therefore would also qualify as referenced contracts. For 
further discussion on economically equivalent swaps, see Section 
II.A.4.
    \891\ Consistent with CEA section 4a(a)(6), this would include 
positions across exchanges. However, for the reasons discussed in 
Section II.B.3.vi., the Commission is exercising its exemptive 
authority under CEA section 4a(a)(7) to provide an exception for 
natural gas to the general aggregation rule in CEA section 4a(a)(6). 
As discussed above, the Commission has concluded that the natural 
gas market is well-established with contracts that currently trade 
across several exchanges, and is relatively liquid with significant 
open interest. Accordingly, the Commission is exercising its 
judgment to establish Federal position limits on a per-exchange (and 
OTC as applicable) basis in order to maintain the status quo rather 
than risk disturbing the existing natural gas market.
---------------------------------------------------------------------------

    Additionally, a position in a commodity contract that is not a 
referenced contract, and therefore is not subject to Federal position 
limits, as a consequence, cannot be netted with positions in referenced 
contracts for purposes of Federal position limits.\892\ For example, a 
swap that is not a referenced contract because it does not meet the 
economically equivalent swap definition could not be netted with 
positions in a referenced contract.
---------------------------------------------------------------------------

    \892\ Proposed Appendix C to part 150 provides guidance 
regarding the referenced contract definition, including that the 
following types of contracts are not deemed referenced contracts, 
meaning such contracts are not subject to Federal position limits 
and cannot be netted with positions in referenced contracts for 
purposes of Federal position limits: Location basis contracts; 
commodity index contracts; swap guarantees; trade options that meet 
the requirements of 17 CFR 32.3; monthly average pricing contracts; 
and outright price reporting agency index contracts.

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

[[Page 3347]]

    Allowing the netting of linked physically-settled and cash-settled 
contracts during the spot month could lead to disruptions in the price 
discovery function of the core referenced futures contract or allow a 
market participant to manipulate the price of the core referenced 
futures contract. Absent separate spot month position limits for 
physically-settled and cash-settled contracts, the spot month position 
limit would be rendered ineffective, as a participant could maintain 
large positions in excess of limits in both the physically-settled 
contract and the linked cash-settled contract, enabling the participant 
to disrupt the price discovery function as the contracts go to 
expiration by taking large opposite positions in the physically-settled 
core referenced futures and cash-settled referenced contracts, or 
potentially allowing a participant to effect a corner or squeeze.\893\ 
Consistent with current and historical practice, the Federal position 
limits adopted herein apply to positions throughout each trading 
session (i.e., on an intra-day basis during each trading session), as 
well as at the close of each trading session.\894\
---------------------------------------------------------------------------

    \893\ For example, absent such a restriction in the spot month, 
a trader could stand for 100 percent of deliverable supply during 
the spot month by holding a large long position in the physical-
delivery contract along with an offsetting short position in a cash-
settled contract, which effectively would corner the market.
    \894\ See, e.g., Elimination of Daily Speculative Trading 
Limits, 44 FR 7124, 7125 (Feb. 6, 1979).
---------------------------------------------------------------------------

    In response to the comments from PIMCO, SIFMA AMG, and ISDA that 
cash-settled referenced contracts should not be subject to position 
limits at all because such contracts do not introduce the same risk of 
market manipulation, as discussed above under Section II.A.16.iii.a., 
the Commission has concluded that cash-settled referenced contracts 
should be subject to Federal position limits since they form one market 
with their corresponding physically-settled core referenced futures 
contracts.\895\
---------------------------------------------------------------------------

    \895\ For further discussion, see Section II.A.16.iii.a(2).
---------------------------------------------------------------------------

    In response to ISDA's recommendation that the Final Rule only 
include physically-settled referenced contracts and that the Commission 
apply Federal position limits on cash-settled referenced contracts at a 
later time, the Commission notes that as discussed under Section I.D., 
the Final Rule will be subject to a general compliance period until 
January 1, 2022. During this period, exchanges may choose to implement 
exchange-set position limits that provide for a different phased-in 
approach for cash-settled versus physically-settled referenced 
contracts as the exchanges may find appropriate for their respective 
markets. Additionally, the compliance period will be further extended 
until January 1, 2023 for economically equivalent swaps and positions 
held in reliance on a risk-management exemption, which in each case the 
Commission notes include mostly cash-settled positions. Accordingly, as 
a practical matter, many cash-settled contracts will be subject to a 
longer compliance period. However, as discussed further above under 
Section II.A.16.iii.a, the Commission has determined that it is 
appropriate to include cash-settled referenced contracts in Federal 
position limits under this Final Rule.\896\
---------------------------------------------------------------------------

    \896\ For further discussion of the Commission's rationale for 
including cash-settled referenced contracts under the Final Rule, 
see Section II.A.16.iii.a.
---------------------------------------------------------------------------

    FIA and ICE similarly argued that cash-settled referenced contracts 
should be subject to higher Federal position limits compared to the 
physically-settled core referenced futures contracts. Their arguments 
were predicated, in part, on their conclusions that market participants 
cannot use cash-settled contracts to effect a corner or squeeze.\897\
---------------------------------------------------------------------------

    \897\ FIA at 7; ICE at 12-13.
---------------------------------------------------------------------------

    The Commission declines to adopt higher Federal position limits for 
cash-settled referenced contracts for several reasons. First, as an 
initial matter, the Commission acknowledges that preventing corners and 
squeezes is a crucial focus of the Commission. However, in response to 
FIA's and ICE's arguments that cash-settled referenced contracts should 
be subject to higher Federal position limits compared to physically-
settled futures contracts because cash-settled contracts cannot be used 
to effect a corner or squeeze, the Commission notes that there are 
other forms of manipulation, such as ``banging'' or ``marking'' the 
close, that cash-settled referenced contracts can effect, and the 
Commission emphasizes that it endeavors to prevent all such market 
manipulation, consistent with CEA section 4a(a)(3)(B)(ii).\898\ While 
CEA section 4a(a)(3)(B)(ii) specifically references corners and 
squeezes, the CEA section also references ``manipulation'' generally, 
and neither FIA nor ICE recognized the existence of other types of 
market manipulation, such as ``banging'' the close, in their analysis.
---------------------------------------------------------------------------

    \898\ For further discussion, see Sections II.A.16., 
II.A.4.iii.d(2), and II.B.10.iv.
---------------------------------------------------------------------------

    Second, the Commission believes that FIA's and ICE's arguments for 
higher Federal position limits for cash-settled referenced contracts is 
intrinsically related to the comments from PIMCO, SIFMA AMG, and ISDA 
discussed above arguing that cash-settled referenced contracts should 
not be subject to Federal position limits at all. That is, the higher 
the Federal position limits for cash-settled referenced contracts that 
FIA or ICE recommend establishing, the closer, as a practical matter, 
it is to having no Federal position limits for cash-settled referenced 
contracts.\899\ As a result, the Commission believes that its general 
rationale for including cash-settled referenced contracts within the 
Federal position limits framework similarly supports parity between 
cash-settled and physically-settled referenced contracts.
---------------------------------------------------------------------------

    \899\ See Section II.A.16.iii.a.
---------------------------------------------------------------------------

    Third, the Commission generally agrees with the reasons articulated 
in the comments from CME Group and NEFI that it is appropriate to 
establish spot-month parity for physically-settled and cash-settled 
referenced contracts across all commodity markets. While FIA argued 
that higher position limits for cash-settled referenced contracts could 
ensure liquidity for bona fide hedgers,\900\ the Final Rule has 
established the Federal position limit levels in general for the 25 
core referenced futures contracts (including increases for many of the 
nine legacy agricultural contracts) and has expanded the enumerated 
bona fide hedges and streamlined the related application process under 
final Sec. Sec.  150.3 and 150.9 in order to ensure sufficient 
liquidity for bona fide hedgers.
---------------------------------------------------------------------------

    \900\ FIA at 7-8.
---------------------------------------------------------------------------

    FIA and ICE similarly argued that market participants should not be 
required to aggregate cash-settled positions across all exchanges but 
rather should be subject to a disaggregated Federal position limit that 
applies per-exchange. In other words, as the Commission understands 
FIA's and ICE's request, if the Federal position limit is 1,000 
contracts, FIA and ICE believe that a market participant should be able 
to hold 1,000 cash-settled referenced contracts per exchange rather 
than being required to aggregate positions across all exchanges. Under 
this approach, a long position of 1,000 contracts on Exchange A would 
not be aggregated with a long position of 1,000 contracts on Exchange 
B. However, under this approach, a long position on Exchange A also 
would not net with a short position on Exchange B.
    ICE specifically argued that a single, aggregate Federal position 
limit for all

[[Page 3348]]

referenced contracts across exchanges may make it difficult for an 
exchange to launch a new referenced contract since the hypothetical new 
referenced contract would be aggregated with an existing referenced 
contract for purposes of Federal position limits.\901\ According to 
ICE, establishing new exchanges and/or new contracts is made more 
difficult under the Commission's aggregated approach, since it is 
purportedly more difficult to attract sufficient liquidity to establish 
a sustainable exchange or contract.\902\ ICE also references the 
Commission's obligations under CEA section 15 to consider the public 
interest and antitrust laws.\903\ ICE recommends a more flexible 
approach to allow an exchange to develop its own liquidity and 
establish its own limits, even for similar or look-alike cash-settled 
referenced contracts, to help develop robust and liquid markets while 
protecting against excessive speculation.\904\
---------------------------------------------------------------------------

    \901\ ICE at 12-13.
    \902\ ICE at 12-13.
    \903\ Id.
    \904\ Id.
---------------------------------------------------------------------------

    In response to FIA and ICE, as discussed immediately below, the 
Commission believes that, as a general matter, establishing aggregate 
limits across exchanges promotes competition and innovation while also 
better addressing the statutory goals in CEA section 4a(a)(3) as 
compared to ICE's request to establish disaggregated, per-exchange 
position limits. However, before discussing the Commission's underlying 
policy rationale supporting aggregate Federal position limits, the 
Commission has determined that as an initial legal matter that CEA 
section 4a(a)(6)(B) requires the Commission to establish the 
``aggregate number or amount of positions . . . that maybe held by any 
person . . . for each month across . . . contracts listed by [DCMs] . . 
. .'' (emphasis added).\905\ While ICE cites CEA section 15 in its 
comment letter, ICE does not address CEA section 4a(a)(6)'s requirement 
that the Commission generally must establish aggregate position limits 
across exchanges. Accordingly, in addition to the policy rationale 
discussed immediately below, the Commission further has determined that 
the Final Rule's requirement to aggregate positions across exchanges 
does not on its face violate CEA section 15.\906\
---------------------------------------------------------------------------

    \905\ 7 U.S.C. 6a(a)(6); CEA 4a(a)(6).
    \906\ See Section IV.D. As discussed elsewhere in this release, 
the Commission is exercising its exemptive authority pursuant to CEA 
Section 4a(a)(7) to establish an exception to this rule in 
connection with, and based on the particular circumstances of the 
natural gas market. See Section II.B.3.iv (discussing natural gas).
---------------------------------------------------------------------------

    As noted above, the Commission also believes it is appropriate to 
aggregate positions across exchanges for Federal position limit 
purposes for the same general reasons that the Commission has 
determined both to include cash-settled referenced contracts within the 
Federal position limits framework and also to maintain parity for 
Federal position limit levels between physically-settled and cash-
settled referenced contracts. For example, applying a per-exchange 
Federal position limit, rather than aggregating across exchanges, 
effectively increases the applicable Federal position limit. 
Accordingly, the Commission likewise believes it generally is 
inappropriate to permit per-exchange Federal position limits for cash-
settled referenced contracts.
    In response to ICE's concern regarding liquidity formation and that 
aggregating cash-settled positions across exchanges would harm 
competitiveness and innovation by making it more difficult to attract 
enough liquidity to become sustainable on an ongoing basis,\907\ the 
Commission believes that to the extent Federal position limit levels 
under the Final Rule have been correctly calibrated, the Federal 
position limits framework should promote--or at least not 
disincentivize--liquidity formation.
---------------------------------------------------------------------------

    \907\ ICE at 12-13.
---------------------------------------------------------------------------

    However, ICE's proposal to allow Federal position limits to apply 
on a disaggregated, per-exchange basis risks dividing liquidity among 
several liquidity pools, which itself could harm liquidity for bona 
fide hedgers and reduce price discovery. The Commission also observes 
that, as a practical matter, ICE's request to disaggregate positions 
across exchanges would significantly increase the applicable position 
limit (possibly by a multiple of two or three--or more--depending on 
the number of exchanges that list referenced contracts). Consequently, 
if the Commission assumes, in arguendo, that Federal position limit 
levels are reasonably calibrated under the Final Rule, then applying a 
per-exchange limit by definition would increase the potential risks of 
excessive speculation and possible manipulation as market participants 
are permitted to hold larger directional positions in referenced 
contracts. Moreover, to the extent Federal position limits under this 
Final Rule are not reasonably calibrated to ensure necessary liquidity 
for bona fide hedgers, then the Commission, as a general matter, would 
prefer to address the lack of liquidity by adjusting the Federal 
position limit levels to appropriate levels rather than applying 
Federal position limits on a per-exchange basis for the reasons 
discussed in the paragraphs above and as discussed in the paragraph 
immediately below.
    Last, the Commission believes that ICE's approach could actually 
harm innovation since under ICE's rationale, Federal position limit 
levels would need to be set lower than the Federal levels adopted 
herein. For example, if the Commission were to allow disaggregated 
netting across exchanges as a general rule, then it would likely lead 
to increased excessive speculation and possible manipulation, as 
discussed above.
    Accordingly, in order to avoid the threat of excessive speculation 
and manipulation, the Commission would be obligated to set Federal 
position limits sufficiently low in order to compensate for a per-
exchange position limit disaggregated approach. However if the 
Commission were to establish Federal position limits sufficiently low 
to prevent these concerns from happening, then innovation could be 
adversely affected since it means that the concomitant lower Federal 
position limit levels likely would make it difficult for exchanges to 
develop sufficient liquidity for a new product--unless other competing 
exchanges offered linked contracts to add sufficient liquidity to the 
market. In such a case, the success of any new product offered by the 
initial exchange could be dependent upon competing exchanges offering 
competing look-alike contracts to allow for sufficient liquidity. In 
contrast, the Commission believes that the Final Rule's approach to 
make the full aggregated Federal position limit available to the 
contract is more responsive to the needs of the market compared to a 
disaggregated approach, and the Commission believes that the Final 
Rule's aggregated approach promotes innovation and competition in the 
marketplace. Accordingly, the Commission does not believe that applying 
netting on an aggregate basis harms competition and innovation. Rather, 
the Commission believes its approach supports healthy competition and 
innovation while ICE's approach could harm liquidity and innovation.
    While the Commission believes the above rationale generally 
applies, the Commission notes that for the reasons discussed in Section 
II.B.3.vi., the Commission is exercising its exemptive authority under 
CEA section 4a(a)(7) to provide an exception for natural gas to the 
general aggregation rule in CEA section 4a(a)(6). The Commission does

[[Page 3349]]

not believe that the rationale above necessarily applies to the natural 
gas market. As discussed above, the natural gas market has existing 
natural gas commodity derivatives contracts that are well-established 
with liquidity, trading, and open interest currently across several 
exchanges. Accordingly, the Commission is exercising its judgment to 
establish Federal position limits on a per-exchange basis in order to 
maintain the status quo rather than risk disturbing the structure of 
the existing natural gas market, which could harm liquidity for bona 
fide hedgers or price discovery.
    In response to FIA's suggestion that economically equivalent swaps 
should be subject to separate Federal spot-month position limits, as 
discussed under Section II.A.4.iii., the Commission does not believe 
doing so would be appropriate.\908\ As discussed above, the Commission 
believes that establishing separate class position limits for futures 
contracts and swaps could harm liquidity formation while establishing a 
single Federal position limit promotes integration between the futures 
and swaps markets.
---------------------------------------------------------------------------

    \908\ FIA 7-8.
---------------------------------------------------------------------------

11. ``Eligible Affiliates'' and Position Aggregation
i. Background
    In 2016, the Commission amended Sec.  150.4 to adopt new rules 
governing the aggregation of positions for purposes of compliance with 
Federal position limits.\909\ These aggregation rules currently apply 
only to the nine legacy agricultural contracts previously subject to 
Federal position limits, but now will also apply to the 16 new 
contracts subject to Federal position limits for the first time under 
this Final Rule. Under the existing aggregation rules, unless an 
exemption applies, all of the positions held and trading done by the 
person must be aggregated with positions for which the person controls 
trading or for which the person holds a 10% or greater ownership 
interest. DMO has issued time-limited no-action relief through August 
12, 2022 (``NAL 19-19'') from some of the aggregation requirements 
contained in that rulemaking.\910\
---------------------------------------------------------------------------

    \909\ See 81 FR at 91454.
    \910\ See CFTC Letter No. 19-19 (July 31, 2019), available at 
https://www.cftc.gov/csl/19-19/download. NAL 19-19 extends NAL 17-37 
and provides an additional three-year period of no-action relief 
from compliance with certain position aggregation requirements under 
Commission Regulation 150.4 by streamlining the compliance 
requirements that must be satisfied for a person or entity to rely 
on an exemption from aggregation.
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Eligible Affiliates and Position 
Aggregation
    Proposed Sec.  150.2(k) addressed entities that would qualify as an 
``eligible affiliate'' as defined in proposed Sec.  150.1. Under the 
proposed definition, an ``eligible affiliate'' would include certain 
entities that, among other things, are required to aggregate their 
positions under Sec.  150.4 and that do not claim an exemption from 
aggregation. There may be certain entities that would be eligible for 
an exemption from aggregation, but that prefer to aggregate rather than 
disaggregate their positions (such as when aggregation would result in 
advantageous netting of positions with affiliated entities). Proposed 
Sec.  150.2(k) intended to address such a circumstance by making clear 
that an ``eligible affiliate'' may opt to aggregate its positions even 
though it is eligible to disaggregate.
iii. Summary of the Commission Determination--Eligible Affiliates and 
Position Aggregation
    The Commission is adopting Sec.  150.2(k) as proposed.
iv. Comments--Eligible Affiliates and Position Aggregation
    Although the Commission did not receive any comments on this 
provision, it received a number of comments related to position 
aggregation in general. These commenters urged the Commission to amend 
the Federal position limits aggregation rules in existing Sec.  150.4 
by codifying existing NAL 19-19.\911\ Some commenters further requested 
that the Commission revisit certain aspects of NAL 19-19 and the 
aggregation rules, such as the threshold ownership percentage set forth 
in existing Sec.  150.4 that triggers the requirement to aggregate 
positions or rely upon an exemption.\912\ Conversely, IATP argued that 
before applying the existing aggregation rules, and accompanying 
exemptions, to additional commodities, the Commission should study 
whether the existing exemptions from aggregation have resulted in 
increased speculation.\913\
---------------------------------------------------------------------------

    \911\ FIA at 28; ISDA at 11; PIMCO at 6; CMC at 12-13; and SIFMA 
AMG at 2, 9.
    \912\ CMC at 12-13; FIA at 28.
    \913\ IATP at 18-19.
---------------------------------------------------------------------------

v. Discussion of Final Rule--Eligible Affiliates and Position 
Aggregation
    The Commission declines to codify NAL 19-19 \914\ in this 
rulemaking since NAL 19-19's relief from some of the aggregation 
requirements contained in 2016 Final Aggregation Rulemaking \915\ 
continues to apply until August 12, 2022. DMO extended this relief for 
three years to provide sufficient time to ``evaluate whether the relief 
granted is hindering Commission staff's ability to conduct 
surveillance; assess the impact of the relief; and consider long-term 
solutions that must, appropriately, be implemented by a notice and 
comment rulemaking.'' \916\ Accordingly, the Commission believes it is 
appropriate to first monitor the application of the existing position 
aggregation requirements before considering amendments to those 
aggregation requirements, and the Commission will address the 
aggregation rules, including whether to codify NAL 19-19, as needed, 
after this Final Rule goes into effect.
---------------------------------------------------------------------------

    \914\ See CFTC Letter No. 19-19 (July 31, 2019), available at 
https://www.cftc.gov/csl/19-19/download.
    \915\ 81 FR 91454 (December 16, 2016).
    \916\ See CFTC Letter No. 19-19 at 4.
---------------------------------------------------------------------------

C. Sec.  150.3--Exemptions From Federal Position Limits

1. Background--Existing Sec. Sec.  150.3, 1.47, and 1.48--Exemptions 
From Federal Position Limits
    Existing Sec.  150.3(a), which pre-dates the Dodd-Frank Act, lists 
positions that may, under certain circumstances, exceed Federal 
position limits, including: (1) Bona fide hedging transactions, as 
defined in the current bona fide hedging definition in Sec.  1.3; and 
(2) spread or arbitrage positions, subject to certain conditions.\917\ 
Existing Sec.  150.3(b) provides that the Commission or certain 
Commission staff may make a ``call'' to demand certain information from 
exemption holders so that the Commission can effectively oversee the 
use of such exemption. Section Sec.  150.3(b) also provides that any 
such call may request information relating to positions owned or 
controlled by that person, trading done pursuant to that exemption, the 
futures, options or cash-market positions that support the claimed 
exemption, and the relevant business relationships supporting a claim 
of exemption.\918\
---------------------------------------------------------------------------

    \917\ 17 CFR 150.3(a).
    \918\ 17 CFR 150.3(b).
---------------------------------------------------------------------------

    The current bona fide hedge definition in existing Sec.  1.3 
requires applicants who wish to receive bona fide hedging recognition 
and exceed Federal position limits to apply for non-enumerated bona 
fide hedges under Sec.  1.47 and to apply for anticipatory bona fide 
hedges under Sec.  1.48 of the Commission's existing regulations. Under 
Sec.  1.47, persons seeking recognition by the Commission of a non-

[[Page 3350]]

enumerated bona fide hedging transaction or position must file certain 
initial statements with the Commission at least 30 days in advance of 
the date that such transaction or position would be in excess of 
Federal position limits.\919\ Similarly, persons seeking recognition by 
the Commission of certain anticipatory bona fide hedges must submit 
their application 10 days in advance of the date that such transactions 
or positions would be in excess of Federal position limits.\920\
---------------------------------------------------------------------------

    \919\ 17 CFR 1.47.
    \920\ 17 CFR 1.48.
---------------------------------------------------------------------------

    With respect to spread exemptions, the Commission's authority and 
existing regulation for exempting certain spread positions can be found 
in CEA section 4a(a)(1) and existing Sec.  150.3(a)(3) of the 
Commission's regulations. In particular, CEA section 4a(a)(1) 
authorizes the Commission to exempt from Federal position limits 
transactions ``normally known to the trade as 'spreads' or 'straddles' 
or 'arbitrage.''' Similarly, in existing Sec.  150.3(a)(3), the 
Commission exempts ``spread or arbitrage positions,'' and allows such 
exemptions to be self-effectuating for the nine legacy agricultural 
contracts currently subject to Federal position limits. The Commission 
does not specify a formal process, in Sec.  150.3(a)(3), for granting 
spread exemptions.\921\
---------------------------------------------------------------------------

    \921\ Since 1938, the Commission (then known as the Commodity 
Exchange Commission) has recognized the use of spread positions to 
facilitate liquidity and hedging. See Notice of Proposed Order in 
the Matter of Limits on Position and Daily Trading in Grain for 
Future Delivery, 3 FR 1408 (June 14, 1938).
---------------------------------------------------------------------------

2. Overview of Proposed Sec.  150.3, Commenters' Views, and the 
Commission's Final Rule Determination

    This section provides a brief overview of proposed Sec.  150.3, 
commenters' general views, and the Commission's determination. The 
Commission will summarize and address each sub-section of Sec.  150.3 
in greater detail further below. The Commission proposed several 
changes to Sec.  150.3. First, the Commission proposed to update Sec.  
150.3 to conform to the proposed bona fide hedging definition in Sec.  
150.1 (described above) and the new streamlined process in proposed 
Sec.  150.9 for recognizing non-enumerated bona fide hedging positions 
(described further below). The Commission also proposed to amend Sec.  
150.3 to include new exemption types not explicitly listed in existing 
Sec.  150.3, including: (i) Exemptions for financial distress 
situations; (ii) conditional exemptions for certain spot month 
positions in cash-settled natural gas contracts; and (iii) exemptions 
for pre-enactment swaps and transition period swaps.\922\ Proposed 
Sec.  150.3(b)-(g) respectively addressed: Non-enumerated bona fide 
hedge and spread exemption requests submitted directly to the 
Commission; previously-granted risk management exemptions to Federal 
position limits; exemption-related recordkeeping and reporting 
requirements; the aggregation of accounts; and the delegation of 
certain authorities to the Director of the Division of Market 
Oversight.
---------------------------------------------------------------------------

    \922\ The Commission revised Sec.  150.3(a) in 2016, relocating 
the independent account controller aggregation exemption from Sec.  
150.3(a)(4) in order to consolidate it with the Commission's 
aggregation requirements in Sec.  150.4(b)(4). See Final Aggregation 
Rulemaking, 81 FR at 91489-91490.
---------------------------------------------------------------------------

    The most substantive comments on proposed Sec.  150.3 relate to the 
spread transaction exemption in proposed Sec.  150.3(a)(2) and to the 
natural gas conditional position limit exemption in proposed Sec.  
150.3(a)(4), as described in detail below and under the discussion of 
Sec.  150.2, above.\923\ In addition, one commenter expressed general 
support for the Commission's proposed approach to recognizing 
exemptions under Sec.  150.3.\924\
---------------------------------------------------------------------------

    \923\ See supra Section II.B.3.vi.a. (discussing the spot-month 
limit for natural gas).
    \924\ See CMC at 6.
---------------------------------------------------------------------------

    The Commission has determined to adopt Sec.  150.3 largely as 
proposed, with certain modifications and clarifications in response to 
commenters' views and other considerations, as described in detail 
below.

3. Section 150.3(a)(1)--Exemption for Bona Fide Hedging Transaction or 
Position

i. Summary of the 2020 NPRM--Exemption for Bona Fide Hedging 
Transaction or Position
    First, under proposed Sec.  150.3(a)(1)(i), a bona fide hedging 
transaction or position that falls within one of the proposed 
enumerated hedges set forth in proposed Appendix A to part 150, 
discussed above, would be self-effectuating for purposes of Federal 
position limits. A market participant thus would not be required to 
request Commission approval prior to exceeding Federal position limits 
for such transaction or position. However, this does not affect a 
market participant's obligations under proposed Sec.  150.5(a) and 
under the relevant exchange's rules and thus, the market participant 
would be required to request a bona fide hedge exemption from the 
relevant exchange for purposes of exchange-set limits established 
pursuant to proposed Sec.  150.5(a), and submit required cash-market 
information to the exchange as part of that request.\925\ The 
Commission also proposed to allow the existing enumerated anticipatory 
bona fide hedges (some of which are not currently self-effectuating, 
and must be approved by the Commission, under existing Sec.  1.48) to 
be self-effectuating for purposes of Federal position limits (and thus 
would not require prior Commission approval).
---------------------------------------------------------------------------

    \925\ See infra Section II.D.3. See also 85 FR at 11644 
(proposed Sec.  150.5(a)(2)(ii)(A)).
---------------------------------------------------------------------------

    Second, under proposed Sec.  150.3(a)(1)(ii), for positions in 
referenced contracts that do not satisfy one of the proposed enumerated 
hedges in Appendix A, (i.e., non-enumerated bona fide hedges), a market 
participant must request approval from the Commission either directly, 
or indirectly through an exchange, prior to exceeding Federal position 
limits. Such exemptions thus would not be self-effectuating and a 
market participant in such cases would have one of the following two 
options for requesting such a non-enumerated bona fide hedge 
recognition: (1) Apply directly to the Commission in accordance with 
Sec.  150.3(b) (described below), and, separately, also apply to an 
exchange pursuant to exchange rules established under proposed Sec.  
150.5(a); \926\ or (2) apply through an exchange pursuant to proposed 
Sec.  150.9 for a non-enumerated bona fide hedge recognition that could 
ultimately be valid both for purposes of Federal and exchange-set 
position limit requirements, unless the Commission (and not staff, 
which would not have delegated authority) denies the application within 
a limited period of time.\927\ As discussed in the 2020 NPRM, market 
participants relying on enumerated or non-enumerated bona fide hedge 
recognitions would no longer have to file the monthly Form 204/304 with 
supporting cash-market information.\928\
---------------------------------------------------------------------------

    \926\ See infra Section II.D.3. (discussion of proposed Sec.  
150.5).
    \927\ See infra Section II.G. (discussion of proposed Sec.  
150.9).
    \928\ See infra Section II.H.2. (discussion of the proposed 
elimination of Form 204).
---------------------------------------------------------------------------

ii. Comments and Discussion of Final Rule--Exemption for Bona Fide 
Hedging Transactions or Positions
    The Commission did not receive any comments on proposed Sec.  
150.3(a)(1). As such, the Commission is finalizing Sec.  150.3(a)(1) 
with a few grammatical and organizational changes to improve 
readability. The Commission is also finalizing the introductory text in 
Sec.  150.3(a) with a clarification that ``each'' of a person's 
transactions or positions must satisfy at least one of the

[[Page 3351]]

exemptions in Sec.  150.3(a) in order to exceed Federal limits. None of 
the technical revisions are intended to change the substance of 
proposed Sec.  150.3(a)(1).
4. Section 150.3(a)(2)--Spread Exemptions
i. Summary of the 2020 NPRM--Spread Exemptions
    Under proposed Sec.  150.3(a)(2)(i), a spread position would be 
self-effectuating for purposes of Federal position limits, provided 
that the position fits within at least one of the types of spread 
strategies listed in the ``spread transaction'' definition in proposed 
Sec.  150.1,\929\ and provided further that the market participant 
separately requests a spread exemption from the relevant exchange's 
limits established pursuant to proposed Sec.  150.5(a).
---------------------------------------------------------------------------

    \929\ See supra Section II.A.20. (proposed definition of 
``spread transaction'' in Sec.  150.1, which would cover: Intra-
market, inter-market, intra-commodity, or inter-commodity spreads, 
including calendar spreads, quality differential spreads, processing 
spreads (such as energy ``crack'' or soybean ``crush'' spreads), 
product or by-product differential spreads, and futures-options 
spreads.)
---------------------------------------------------------------------------

    Under proposed Sec.  150.3(a)(2)(ii), for a spread strategy that 
does not meet the ``spread transaction'' definition in proposed Sec.  
150.1, a market participant must apply for a spread exemption directly 
from the Commission in accordance with proposed Sec.  150.3(b). The 
market participant must also receive a notification of the approved 
spread exemption under proposed Sec.  150.3(b)(4) before exceeding the 
Federal speculative position limits for that spread position. The 
Commission thus did not propose a process akin to Sec.  150.9 for 
spreads that do not meet the proposed ``spread transaction'' 
definition.
ii. Comments--Spread Exemptions
    Several commenters advocated for the Commission to expand the 
proposed Sec.  150.9 process, which would allow exchanges to process 
applications for non-enumerated bona fide hedge exemptions for purposes 
of both Federal and exchange limits, to also allow exchanges to grant 
``non-enumerated'' spread exemptions for spread positions that do not 
meet the ``spread transaction'' definition.\930\ Commenters also 
requested that the Commission provide an explanation for why the 
Commission would not expand Sec.  150.9 to cover ``non-enumerated'' 
spread exemptions.\931\ Finally, commenters requested that market 
participants be able to apply for spread exemptions on a late or 
retroactive basis the same way they would be permitted to apply for 
bona fide hedge exemptions within five days of exceeding Federal 
position limits under proposed Sec. Sec.  150.3 and 150.9.\932\
---------------------------------------------------------------------------

    \930\ See MFA/AIMA at 10; FIA at 21; Citadel at 8-9; ISDA at 9; 
ICE at 7-8 (suggesting that if the list of spread positions in the 
spread transaction definition is determined to be an exhaustive 
list, then the Commission should permit additional flexibility for 
an exchange to grant additional spread exemptions--that are not 
covered in the spread transaction definition--using the proposed 
Sec.  150.9 process).
    \931\ See MFA/AIMA at 10.
    \932\ See ICE at 8.
---------------------------------------------------------------------------

iii. Discussion of Final Rule--Spread Exemptions
    The Commission has determined to adopt Sec.  150.3(a)(2) with non-
substantive revisions to address technical edits or improve 
readability. For the reasons discussed immediately below, the 
Commission has determined not to expand Sec.  150.3(a)(2) as requested 
by commenters to allow market participants to apply to exchanges for 
``non-enumerated'' spread exemptions that are not covered in the 
``spread transaction'' definition in Sec.  150.1.
    First, as discussed above,\933\ the Commission has determined to 
expand the ``spread transaction'' definition so that it covers most, if 
not all, of the most common spread exemptions used by market 
participants. With this expansion, the Commission expects that most 
spread exemption requests will fall within the scope of the ``spread 
transaction'' definition. Accordingly, the Commission expects that most 
spread exemptions will thus be self-effectuating for purposes of 
Federal position limits. Also, the Commission expects that any spread 
exemption requests falling outside of the ``spread transaction'' 
definition are likely to be novel exemption requests that the 
Commission--and not exchanges--should review, considering certain 
statutory considerations in CEA section 4a(a)(3)(B). As explained 
immediately below, the Commission cannot authorize exchanges to conduct 
this analysis because exchanges would lack clear standards for 
assessing whether a particular spread position satisfies the 
requirements of the CEA.
---------------------------------------------------------------------------

    \933\ See supra Section II.A.20. (discussing changes to expand 
the spread transaction definition).
---------------------------------------------------------------------------

    Second, bona fide hedge recognitions and spread exemptions are 
subject to different legal standards. That is, under CEA section 
4a(a)(c)(2), Congress provided clear criteria to the Commission for 
determining what constitutes a bona fide hedging transaction or 
position. In turn, the Commission has defined in detail the term bona 
fide hedging transaction or position in Sec.  150.1. As a result, under 
final Sec.  150.9, the Commission is permitting exchanges to evaluate 
applications for non-enumerated bona fide hedges for purposes of 
exchange-set limits in accordance with the same clear criteria used by 
the Commission.
    In contrast, the CEA does not include clear criteria for granting 
spread exemptions. Instead, CEA section 4a(a)(1) generally permits the 
Commission to exempt ``transactions normally known to the trade as 
``spreads'' or ``straddles'' or ``arbitrage'' from position limits 
\934\ and requires the Commission to administer Federal position limits 
in a manner that comports with certain policy considerations in CEA 
section 4a(a)(3)(B).\935\ Analyzing novel spread exemption requests in 
accordance with these general principles requires the Commission to use 
its judgment to conduct a highly fact-specific analysis. And, in the 
absence of any detailed statutory or regulatory criteria, the 
Commission is not comfortable, at this time, with leveraging an 
exchange's analysis and determination with respect to novel spread 
exemption requests. As such, the Commission has determined that the 
Commission should conduct a direct review of any spread exemptions that 
do not meet the ``spread transaction'' definition, and the Commission 
thus will not expand Sec.  150.9 to cover spreads because exchanges 
would lack clear standards for assessing whether a particular spread 
position satisfies the requirements of the CEA. In the future, the 
Commission may, however, consider developing regulatory criteria for 
spread exemptions such that novel spread exemptions could be considered 
through a more streamlined process, such as Sec.  150.9.
---------------------------------------------------------------------------

    \934\ 7 U.S.C. 6a(a)(1).
    \935\ 7 U.S.C. 6a(a)(3)(b).
---------------------------------------------------------------------------

    Finally, unlike for certain bona fide hedge recognitions as 
discussed below, the Commission has determined not to permit 
retroactive applications for spread exemptions or other exemptions 
permitted under this Sec.  150.3(a). The Commission believes that the 
Federal position limits framework adopted herein provides sufficient 
flexibility through expanded speculative limits, and a clear, 
comprehensive set of exemptions, most of which are self-effectuating 
and thus do not require prior Commission approval. As such, the 
Commission believes that market participants will be able to identify 
their exemption needs based on these clear regulatory requirements and 
apply for

[[Page 3352]]

all such exemptions ahead of time. In addition, the Commission believes 
that allowing retroactive spread exemptions and other types of 
retroactive exemptions (such as the financial distress or conditional 
natural gas spot month exemption) could potentially be harmful to the 
market as these types of strategies may involve non-risk-reducing or 
speculative activity that should be evaluated prior to a person 
exceeding Federal position limits.
5. Section 150.3(a)(3)--Financial Distress Exemptions
i. Summary of the 2020 NPRM--Financial Distress Exemptions
    Proposed Sec.  150.3(a)(3) would allow for a financial distress 
exemption in certain situations, including the potential default or 
bankruptcy of a customer or a potential acquisition target. For 
example, in periods of financial distress, such as a customer default 
at an FCM or a potential bankruptcy of a market participant, it may be 
beneficial for a financially-sound market participant to take on the 
positions and corresponding risk of a less stable market participant, 
and in doing so, exceed Federal speculative position limits. Pursuant 
to authority delegated under Sec. Sec.  140.97 and 140.99, Commission 
staff previously granted exemptions in these types of situations to 
avoid sudden liquidations required to comply with a position 
limit.\936\ Such sudden liquidations could otherwise potentially hinder 
statutory objectives, including by reducing liquidity, disrupting price 
discovery, and/or increasing systemic risk.\937\
---------------------------------------------------------------------------

    \936\ See, e.g., CFTC Press Release No. 5551-08, CFTC Update on 
Efforts Underway to Oversee Markets, (Sept. 19, 2008), available at 
https://www.cftc.gov/PressRoom/PressReleases/pr5551-08.
    \937\ See 7 U.S.C. 6a(a)(3).
---------------------------------------------------------------------------

    The proposed exemption would be available for the positions of ``a 
person, or related persons,'' meaning that a financial distress 
exemption request should be specific to the circumstances of a 
particular person, or to persons affiliated with that person, and not a 
more general request by a large group of unrelated people whose 
financial distress circumstances may differ from one another. The 
proposed exemption would be granted on a case-by-case basis in response 
to a request submitted to the Commission pursuant to Sec.  140.99, and 
would be evaluated based on the specific facts and circumstances of a 
particular person or a related person or persons. Any such financial 
distress position would not be a bona fide hedging transaction or 
position unless it otherwise met the substantive and procedural 
requirements set forth in proposed Sec. Sec.  150.1, 150.3, and 150.9, 
as applicable.
ii. Comments and Summary of the Commission Determination--Financial 
Distress Exemptions
    The Commission did not receive any substantive comments on proposed 
Sec.  150.3(a)(3), although one commenter expressed general support for 
the financial distress exemption.\938\ As such, the Commission has 
determined to finalize Sec.  150.3(a)(3) as proposed, for the reasons 
discussed above and in the 2020 NPRM.
---------------------------------------------------------------------------

    \938\ CCI at 2.
---------------------------------------------------------------------------

6. Section 150.3(a)(4)--Conditional Spot Month Exemption in Natural Gas
i. Summary of the 2020 NPRM--Conditional Spot Month Exemption in 
Natural Gas
    Certain natural gas contracts are currently subject to exchange-set 
position limits, but not Federal position limits.\939\ In the 2020 
NPRM, the Commission proposed applying Federal position limits to 
certain natural gas contracts for the first time by including the 
physically-settled NYMEX Henry Hub Natural Gas (``NYMEX NG'') contract 
as a core referenced futures contract listed in proposed Sec.  
150.2(d). The Commission also proposed, consistent with existing 
exchange practice, establishing a conditional spot month exemption for 
Federal position limit purposes that would permit larger positions 
during the spot month for cash-settled natural gas referenced contracts 
so long as the market participant held no physically-settled NYMEX NG.
---------------------------------------------------------------------------

    \939\ Some examples include natural gas contracts that use the 
NYMEX NG futures contract as a reference price, such as ICE's Henry 
Financial Penultimate Fixed Price Futures (PHH), options on Henry 
Penultimate Fixed Price (PHE), Henry Basis Futures (HEN) and Henry 
Swing Futures (HHD), NYMEX's E-mini Natural Gas Futures (QG), Henry 
Hub Natural Gas Last Day Financial Futures (HH), and Henry Hub 
Natural Gas Financial Calendar Spread (3 Month) Option (G3).
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Conditional Spot Month 
Exemption in Natural Gas
    For the Final Rule, the Commission is adopting the conditional spot 
month exemption in natural gas, as proposed. The Commission discusses 
this conditional spot month exemption, as well as other issues in 
connection with NYMEX NG, above under the discussion of Sec.  
150.2.\940\ The Commission is discussing all the issues related to the 
NYMEX NG core referenced futures contract, including this conditional 
spot month exemption, together in one place in this release for the 
reader's convenience.
---------------------------------------------------------------------------

    \940\ See supra Section II.B.3.vi.a. (discussing the Federal 
spot-month limit for natural gas).
---------------------------------------------------------------------------

7. Section 150.3(a)(5)--Exemption for Pre-Enactment Swaps and 
Transition Period Swaps
i. Background and Summary of the 2020 NPRM--Exemption for Pre-Enactment 
Swaps and Transition Period Swaps
    Currently, swaps are not subject to the existing Federal position 
limits framework, and the Commission is unaware of any exchange-set 
limits on swaps with respect to any of the 25 core referenced futures 
contracts.
    In order to promote a smooth transition to compliance for swaps, 
which were not previously subject to Federal speculative position 
limits, in the 2020 NPRM, the Commission proposed to exempt pre-
enactment swaps and transition period swaps from Federal position 
limits. Proposed Sec.  150.3(a)(5) provided that Federal position 
limits would not apply to positions acquired in good faith in any pre-
enactment swaps or in any transition period swaps, in either case as 
defined by Sec.  150.1.\941\ Under the 2020 NPRM, any pre-enactment 
swap or transition period swap would be exempt from Federal position 
limits--even if the swap would qualify as an economically equivalent 
swap under the 2020 NPRM. This proposed exemption would be self-
effectuating and would not require a market participant to request 
relief from the Commission.
---------------------------------------------------------------------------

    \941\ ``Pre-enactment swap'' would mean any swap entered into 
prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), 
the terms of which have not expired as of the date of enactment of 
that Act.
    ``Transition period swap'' would mean a swap entered into during 
the period commencing after the enactment of the Dodd-Frank Act of 
2010 (July 21, 2010), and ending 60 days after the publication in 
the Federal Register of final amendments to this part implementing 
section 737 of the Dodd-Frank Act of 2010, the terms of which have 
not expired as of 60 days after the publication date.
---------------------------------------------------------------------------

    For purposes of complying with the proposed Federal non-spot month 
limits, the 2020 NPRM would also allow both pre-enactment swaps and 
transition period swaps (to the extent such swaps qualify as 
``economically equivalent swaps'') to be netted with post-Effective 
Date commodity derivative contracts. The 2020 NPRM did not permit such 
positions to be netted during the spot month so as to avoid rendering 
spot month limits ineffective. Specifically, the Commission explained 
that it was particularly concerned about protecting the spot month in 
physically-delivered futures contracts from price distortions or 
manipulation to protect against

[[Page 3353]]

disrupting the hedging and price discovery utility of the futures 
contract.
ii. Comments and Summary of the Commission Determination--Exemption for 
Pre-Enactment Swaps and Transition Period Swaps
    The Commission did not receive any comments specifically addressing 
the exemption for pre-enactment swaps and transition period swaps 
addressed in proposed Sec.  150.3(a)(5). The Commission is adopting 
Sec.  150.3(a)(5) as proposed with certain limited grammatical and 
technical changes that are not intended to reflect a change in the 
substantive meaning. For comments generally related to the exemption 
for pre-enactment swaps and transition period swaps, please refer to 
the discussion of pre-existing positions in general and comments 
thereto, in Sec.  150.2(g) above,\942\ and Sec.  150.5(a)(3)(ii) 
below.\943\
---------------------------------------------------------------------------

    \942\ See supra Section II.B.7. (discussing Sec.  150.2 Federal 
position limits on pre-existing positions).
    \943\ See infra Section II.D.3. (discussing Sec.  150.5 
requirements for exchange limits on pre-existing positions in a non-
spot month).
---------------------------------------------------------------------------

8. Section 150.3(b)--Application for Relief and Removal of Existing 
Commission Application Processes
i. Summary of the 2020 NPRM--Application for Relief and Removal of 
Existing Commission Application Processes
    The Commission proposed two avenues for a market participant to 
request a non-enumerated bona fide hedge recognition: Sec.  150.3(b), 
described below, which would allow market participants to apply 
directly to the Commission; and Sec.  150.9, which, as described in 
detail further below, would allow market participants to apply to 
exchanges for a non-enumerated bona fide hedge exemption for purposes 
of both Federal and exchange limits.\944\ The Commission proposed to 
remove its existing processes for applying for such exemptions under 
Sec. Sec.  1.47 and 1.48. The Commission also proposed to remove 
existing Sec.  140.97, which delegates to the Director of the Division 
of Enforcement or his designee authority regarding requests for 
classification of positions as bona fide hedges under existing 
Sec. Sec.  1.47 and 1.48.\945\
---------------------------------------------------------------------------

    \944\ See infra Section II.G.
    \945\ 17 CFR 140.97.
---------------------------------------------------------------------------

    In the 2020 NPRM, the Commission explained that it did not intend 
the proposed replacement of Sec. Sec.  1.47 and 1.48 to have any 
bearing on bona fide hedges previously recognized under those 
provisions. With the exception of certain recognitions for risk 
management positions discussed below, positions that were previously 
recognized as bona fide hedges under Sec. Sec.  1.47 or 1.48 would 
continue to be recognized, provided such positions continue to meet the 
statutory bona fide hedging definition and all other existing and 
proposed requirements.
    With respect to a Sec.  150.3(b) application for a bona fide hedge 
recognition, the Commission proposed that such application must 
include: (i) A description of the position in the commodity derivative 
contract for which the application is submitted, including the name of 
the underlying commodity and the position size; (ii) information to 
demonstrate why the position satisfies CEA section 4a(c)(2) and the 
definition of bona fide hedging transaction or position in proposed 
Sec.  150.1, including ``factual and legal analysis;'' (iii) a 
statement concerning the maximum size of all gross positions in 
derivative contracts for which the application is submitted (in order 
to provide a view of the true footprint of the position in the market); 
(iv) information regarding the applicant's activity in the cash markets 
and the swaps markets for the commodity underlying the position for 
which the application is submitted; \946\ and (v) any other information 
that may help the Commission determine whether the position meets the 
requirements of CEA section 4a(c)(2) and the definition of bona fide 
hedging transaction or position in Sec.  150.1.\947\
---------------------------------------------------------------------------

    \946\ The Commission stated that it would expect applicants to 
provide cash-market data for at least the prior year.
    \947\ For example, the Commission may, in its discretion, 
request a description of any positions in other commodity derivative 
contracts in the same commodity underlying the commodity derivative 
contract for which the application is submitted. Other commodity 
derivative contracts could include other futures contracts, option 
on futures contracts, and swaps (including OTC swaps) positions held 
by the applicant.
---------------------------------------------------------------------------

    In addition, under the 2020 NPRM, a market participant would be 
required to apply to the Commission using the application process in 
Sec.  150.3(b) for exemptions for any spread positions that do not meet 
the proposed ``spread transaction'' definition. With respect to a Sec.  
150.3(b) application for a spread exemption, the Commission proposed 
that such application must include: (i) A description of the spread 
transaction for which the exemption application is submitted; \948\ 
(ii) a statement concerning the maximum size of all gross positions in 
derivative contracts for which the application is submitted; and (iii) 
any other information that may help the Commission determine whether 
the position is consistent with CEA section 4a(a)(3)(B).
---------------------------------------------------------------------------

    \948\ The nature of such description would depend on the facts 
and circumstances, and different details may be required depending 
on the particular spread.
---------------------------------------------------------------------------

    Under proposed Sec.  150.3(b)(2), the Commission (or Commission 
staff pursuant to delegated authority proposed in Sec.  150.3(g)) could 
request additional information from the applicant and would provide the 
applicant with ten business days to respond. Under proposed Sec.  
150.3(b)(3) and (4), the applicant, however, could not exceed Federal 
position limits unless it receives a notice of approval from the 
Commission or from Commission staff pursuant to delegated authority 
proposed in Sec.  150.3(g)--with one exception. That is, due to 
demonstrated sudden or unforeseen increases in a person's bona fide 
hedging needs, the person could request a recognition of a bona fide 
hedging transaction or position within five business days after the 
person established the position that exceeded the Federal speculative 
position limit.\949\
---------------------------------------------------------------------------

    \949\ Where a person requests a bona fide hedge recognition 
within five business days after exceeding Federal position limits, 
such person would be required to demonstrate that they encountered 
sudden or unforeseen circumstances that required them to exceed 
Federal position limits before submitting and receiving approval of 
their bona fide hedge application. These applications submitted 
after a person has exceeded Federal position limits should not be 
habitual and would be reviewed closely. If the Commission reviews 
such application and finds that the position does not qualify as a 
bona fide hedge, then the applicant would be required to bring its 
position into compliance within a commercially reasonable time, as 
determined by the Commission in consultation with the applicant and 
the applicable DCM or SEF. If the applicant brings the position into 
compliance within a commercially reasonable time, then the applicant 
would not be considered to have violated the position limits rules. 
Further, any intentional misstatements to the Commission, including 
statements to demonstrate why the bona fide hedging needs were 
sudden and unforeseen, would be a violation of sections 6(c)(2) and 
9(a)(2) of the Act. 7 U.S.C. 9(2) and 13(a)(2).
---------------------------------------------------------------------------

    Under this proposed process, market participants would be 
encouraged to submit their requests for bona fide hedge recognitions 
and spread exemptions as early as possible since proposed Sec.  
150.3(b) would not set a specific timeframe within which the Commission 
must make a determination for such requests. Further, under the 2020 
NPRM, all approved bona fide hedge recognitions and spread exemptions 
would need to be renewed if there are any changes to the information 
submitted as part of the request, or upon request by the Commission or 
Commission staff.\950\

[[Page 3354]]

Finally, under proposed Sec.  150.3(b)(6), the Commission (and not 
staff) could revoke or modify any bona fide hedge recognition or spread 
exemption at any time if the Commission determines that the bona fide 
hedge recognition or spread exemption, or portions thereof, are no 
longer consistent with the applicable statutory and regulatory 
requirements.\951\
---------------------------------------------------------------------------

    \950\ See proposed Sec.  150.3(b)(5). Currently, the Commission 
does not require automatic updates to bona fide hedge applications, 
and does not require applications or updates thereto for spread 
exemptions, which are self-effectuating. Consistent with current 
practices, under proposed Sec.  150.3(b)(5), the Commission would 
not require automatic annual updates to bona fide hedge and spread 
exemption applications; rather, updated applications would only be 
required if there are changes to information the requestor initially 
submitted or upon Commission request. This approach is different 
than the proposed streamlined process in Sec.  150.9, which would 
require automatic annual updates to such applications, which is more 
consistent with current exchange practices. See, e.g., CME Rule 559.
    \951\ This proposed authority to revoke or modify a bona fide 
hedge recognition or spread exemption would not be delegated to 
Commission staff.
---------------------------------------------------------------------------

    In the 2020 NPRM, the Commission noted that it anticipates that 
most market participants would utilize the streamlined process set 
forth in proposed Sec.  150.9 rather than the process proposed in Sec.  
150.3(b) because: Exchanges would generally be able to make an initial 
determination more efficiently than Commission staff; and market 
participants are likely already familiar with the proposed processes 
set forth in Sec.  150.9 (which are intended to leverage the processes 
currently used by exchanges to address requests for exemptions from 
exchange-set limits). Nevertheless, proposed Sec.  150.3(a)(1) and (2) 
clarify that market participants could request non-enumerated bona fide 
hedge recognitions and spread exemptions that do not meet the ``spread 
transaction'' definition directly from the Commission. After receiving 
any approval of a bona fide hedge recognition or spread exemption from 
the Commission under proposed Sec.  150.3(b), the market participant 
would still be required to request a bona fide hedge recognition or 
spread exemption from the relevant exchange for purposes of exchange-
set limits established pursuant to proposed Sec.  150.5(a).
ii. Comments--Application for Relief and Removal of Existing Commission 
Application Processes
    The Commission received one comment on proposed Sec.  150.3(b) 
requesting that the Commission remove the requirement proposed in Sec.  
150.3(b)(1)(i)(B) that an applicant provide a ``factual and legal 
analysis'' as part of an exemption application for a non-enumerated 
bona fide hedge.\952\
---------------------------------------------------------------------------

    \952\ CME Group at 10.
---------------------------------------------------------------------------

iii. Discussion of Final Rule--Application for Relief and Removal of 
Existing Commission Application Processes
    The Commission has determined to finalize its proposal to remove 
existing Sec. Sec.  1.47, 1.48, and 140.97.\953\ The Commission has 
also determined to finalize Sec.  150.3(b) largely as proposed but with 
the following modifications in response to commenters and other 
considerations.
---------------------------------------------------------------------------

    \953\ Although Sec. Sec.  1.47 and 1.48 are currently reflected 
in the Code of Federal Regulations (``CFR'') as ``[Reserved]'', 
Sec. Sec.  1.47 and 1.48 that existed prior to the 2011 Final 
Rulemaking are currently in effect. The 2011 Final Rulemaking 
removed and reserved Sec. Sec.  1.47 and 1.48. However, the U.S. 
District Court for the District of Columbia in ISDA subsequently 
vacated the 2011 Final Rulemaking on September 28, 2012. As a 
result, Sec. Sec.  1.47 and 1.48 that existed prior to the 2011 
Final Rulemaking went back into effect, though they were not 
recodified in the CFR. This Final Rule removes Sec. Sec.  1.47 and 
1.48 as they are currently in effect (i.e., as they existed prior to 
the 2011 Final Rulemaking) and leaves those two sections reserved in 
the CFR. As this action does not result in a change to the currently 
codified CFR, there is no corresponding amendment in the regulatory 
text of this document.
---------------------------------------------------------------------------

    Generally, the information required to be submitted as part of the 
Sec.  150.3(b) application is necessary to allow the Commission to 
evaluate whether the applicant's position satisfies the requirements in 
Sec.  150.3(b)(1), as applicable. The Commission has determined to 
modify the requirement, as it appears in both Sec.  150.3(b) and Sec.  
150.9(c), that an applicant provide a ``factual and legal analysis'' as 
part of its non-enumerated bona fide hedge exemption application. As 
explained further below, in proposing this requirement, the Commission 
did not intend to require that applicants engage legal counsel to 
complete their applications for non-enumerated bona fide hedge 
recognitions. Rather, the purpose of this proposed requirement was to 
ensure that applicants explain their hedging strategies and provide 
sufficient information to demonstrate why a particular position 
satisfies the bona fide hedge definition in proposed Sec.  150.1 and 
CEA section 4a(c)(2).\954\ Accordingly, the Commission has revised 
Sec.  150.3(b)(1)(i)(B) to replace the requirement to provide ``factual 
and legal'' analysis with the requirement that an applicant provide: 
(1) An explanation of the hedging strategy, including a statement that 
the applicant's position complies with the applicable requirements of 
the bona fide hedge definition, and (2) information that demonstrates 
why the position satisfies the applicable requirements.
---------------------------------------------------------------------------

    \954\ See supra Section II.G.5. (providing a more detailed 
discussion of this requirement as it appears in Sec.  150.9(c)).
---------------------------------------------------------------------------

    The Commission is also making several other clarifications to Sec.  
150.3(b). First, in Sec.  150.3(b)(3)(ii)(C), the Commission proposed 
that, for a retroactive application submitted to the Commission after a 
person has already exceeded Federal position limits, the Commission 
would not hold an applicant accountable for a position limits violation 
during the period of the Commission's review, nor once the Commission 
has issued its determination. The Commission is revising this provision 
to clarify that the Commission ``will not pursue an enforcement 
action'' in these circumstances. The Commission is also revising this 
provision to clarify that the provision applies so long as the 
applicant submitted its application in good faith and, if required, the 
applicant brings its position below the Federal position limits. This 
revision is simply intended to make explicit an implicit presumption 
that the applicant should have a reasonable and good faith basis for 
determining that its position meets the requirements of Sec.  150.3(b) 
and for submitting the retroactive application. This requirement is 
also intended to deter the filing of frivolous retroactive exemption 
applications. Finally, the Commission is making a few technical 
revisions to clarify that this section is referring to the retroactive 
application provisions in Sec.  150.3(b)(3)(ii), and to correct a 
cross-reference in this paragraph to correctly reference paragraph 
Sec.  150.3(b)(3)(ii)(B).
    In addition, the Commission is modifying proposed Sec.  150.3(b)(5) 
to clarify that an applicant who received its original approval of a 
recognition of a non-enumerated bona fide hedge or spread exemption 
through the Commission's Sec.  150.3(b) process is required to submit a 
renewal application if there are any ``material'' changes to the 
original application, but is not required to submit a renewal 
application as a result of circumstances involving any minor or non-
substantive changes to the information underlying the original 
application. If a market participant using the Sec.  150.3(b) process 
has any questions regarding what qualifies as a material change to the 
original application, the Commission encourages the market participant 
to contact DMO staff for guidance on a case-by-case basis.
    Next, the Commission is revising its revocation authority under 
Sec.  150.3(b)(6) to expressly require that the Commission provide a 
person with an opportunity to respond after the Commission notifies 
such person that

[[Page 3355]]

the Commission believes their transactions or positions no longer 
satisfy the bona fide hedge definition or spread exemption 
requirements, as applicable. The Commission is also revising Sec.  
150.3(b)(6) to clarify that the Commission will discuss with the 
applicant and consult with the relevant exchange when determining what 
is a commercially reasonable amount of time for the applicant to bring 
its position below the Federal position limits. The Commission also 
reorganized this section to improve readability.
    Finally, the Commission made several grammatical and technical 
changes to Sec.  150.3(b) that are not intended to change the substance 
of the remaining sections, unless discussed above.
9. Section 150.3(c)--Previously-Granted Risk Management Exemptions
i. Summary of the 2020 NPRM--Previously-Granted Risk Management 
Exemptions
    As discussed above, the Commission previously recognized, as bona 
fide hedges under Sec.  1.47, certain risk-management positions in 
physical commodity futures and/or option on futures contracts held 
outside of the spot month that were used to offset the risk of 
commodity index swaps and other related exposures, but that did not 
represent substitutes for transactions or positions to be taken in a 
physical marketing channel.\955\ However, the 2020 NPRM interpreted the 
Dodd-Frank Act amendments to the CEA as eliminating the Commission's 
authority to grant such relief unless the position satisfies the pass-
through provision in CEA section 4a(c)(2)(B).\956\ Accordingly, to 
ensure consistency with the Dodd-Frank Act, the Commission proposed 
that it would not recognize further risk management positions as bona 
fide hedges, unless the position otherwise satisfies the requirements 
of the pass-through provisions.\957\
---------------------------------------------------------------------------

    \955\ See supra Section II.A.1.iii. (discussing the temporary 
substitute test and risk management exemption under Sec.  150.1).
    \956\ Id.
    \957\ 85 FR at 11641.
---------------------------------------------------------------------------

    In addition, the Commission proposed in Sec.  150.3(c) that such 
previously-granted exemptions shall not apply after the effective date 
of a final Federal position limits rulemaking implementing the Dodd-
Frank Act. Proposed Sec.  150.3(c) used the phrase ``positions in 
financial instruments'' to refer to such commodity index swaps and 
related exposure, and would have the effect of revoking the ability to 
use previously-granted risk management exemptions once the limits 
proposed in Sec.  150.2 go into effect.
ii. Comments and Discussion of Final Rule--Previously-Granted Risk 
Management Exemptions
    The Commission has addressed any comments on risk management 
exemptions in the discussion of Sec.  150.1 above.\958\ As discussed 
above, to ensure consistency with the Dodd-Frank Act, the Commission 
will not recognize risk management positions as bona fide hedges under 
the Final Rule, unless the position otherwise satisfies the 
requirements of the Final Rule's pass-through swap provisions.\959\ 
Consequently, the Commission is adopting Sec.  150.3(c) largely as 
proposed, which provides that such previously-granted risk management 
exemptions issued pursuant to Sec.  1.47 shall no longer be 
recognized.\960\ However, the Final Rule is also providing for a 
compliance date of January 1, 2023 with respect to the elimination of 
the risk management exemption by which risk management exemption 
holders must reduce their risk management exemption positions to comply 
with Federal position limits under the Final Rule.\961\
---------------------------------------------------------------------------

    \958\ See supra Section II.A.1.iii (discussing risk management 
exemptions and comments received in greater detail).
    \959\ See supra Section II.A.1.x. (discussing the proposed pass-
through swap provisions).
    \960\ Under this Final Rule, however, exchanges may continue to 
grant risk management exemptions (that do not otherwise meet the 
bona fide hedge definition in Sec.  150.1) up to the applicable 
Federal position limit.
    \961\ See supra Section I.D. (discussing the effective and 
compliance dates).
---------------------------------------------------------------------------

    Section 150.3(c) uses the phrase ``positions in financial 
instruments'' to refer to such commodity index swaps and related 
exposure and would have the effect of revoking the ability to use 
previously-granted risk management exemptions once the Final Rule's 
Federal position limits in Sec.  150.2 become effective. However, the 
Final Rule will also include an extended compliance date until January 
1, 2023 with respect to positions entered into upon reliance of an 
existing risk management exemption.\962\
---------------------------------------------------------------------------

    \962\ Id.
---------------------------------------------------------------------------

    The Final Rule also deletes the sentence in proposed Sec.  
150.3(c), which stated that nothing in Sec.  150.3(c) shall preclude 
the Commission, a DCM, or SEF from recognizing a bona fide hedging 
transaction or position for the former holder of such a risk management 
exemption if the position complies with the definition of bona fide 
hedging transaction or position under this part, including appendices 
hereto. This sentence was intended to clarify what has been explained 
above--risk management exemptions that meet the pass-through swap 
provisions are permitted under the Final Rule.\963\ The Commission has 
determined that this sentence is unnecessary.
---------------------------------------------------------------------------

    \963\ See supra Section II.A.1.x. (discussing the proposed pass-
through language).
---------------------------------------------------------------------------

    The Commission is making several technical changes to proposed 
Sec.  150.3(c), including to clarify that the provision covers risk 
management exemptions previously granted by the Commission or by 
Commission staff. The Commission also reorganized Sec.  150.3(c) to 
improve readability.
10. Section 150.3(d)--Recordkeeping
i. Summary of the 2020 NPRM--Recordkeeping
    Proposed Sec.  150.3(d) would establish recordkeeping requirements 
for persons who claim any exemption under proposed Sec.  150.3. 
Proposed Sec.  150.3(d) is intended to help ensure that any person who 
claims any exemption permitted under proposed Sec.  150.3 could 
demonstrate compliance with the applicable requirements by providing 
all relevant records to support the claim of a particular exemption. 
That is, under proposed Sec.  150.3(d)(1), any persons claiming an 
exemption would be required to keep and maintain complete books and 
records concerning all details of their related cash, forward, futures, 
options on futures, and swap positions and transactions, including 
anticipated requirements, production and royalties, contracts for 
services, cash commodity products and by-products, cross-commodity 
hedges, and records of bona fide hedging swap counterparties.
    Proposed Sec.  150.3(d)(2) would address recordkeeping requirements 
related to the pass-through swap provision in the proposed definition 
of bona fide hedging transaction or position in proposed Sec.  
150.1.\964\ Under proposed Sec.  150.3(d)(2), a pass-through swap 
counterparty, as contemplated by proposed Sec.  150.1, that relies on a 
representation received from a bona fide hedging swap counterparty that 
a swap qualifies in good faith as a bona fide hedging position or 
transaction under proposed Sec.  150.1, would be required to: (i) 
Maintain any written representation for at least two years following 
the expiration of the swap; and (ii) furnish the representation to the 
Commission upon request.
---------------------------------------------------------------------------

    \964\ See supra Section II.A.1.x. (discussion of proposed pass-
through swap provision).
---------------------------------------------------------------------------

ii. Comments--Recordkeeping
    Several commenters requested clarification that the recordkeeping

[[Page 3356]]

requirements in proposed Sec.  150.3(d)(1) would not impose an 
additional recordkeeping obligation on commercial end-users beyond the 
records that are kept in the normal course of business and are typical 
for the relevant industry.\965\
---------------------------------------------------------------------------

    \965\ Cope at 5-6; EEI/EPSA at 7-8.
---------------------------------------------------------------------------

    In addition, commenters recommended that the Commission delete the 
pass-through swap recordkeeping requirements in proposed Sec.  
150.3(d)(2).\966\ Commenters were concerned that the pass-through swap 
provision in Sec.  150.1 places all compliance burdens on the pass-
through swap counterparty offering the swap, and not on the bona fide 
hedging counterparty using the swap.\967\ Commenters expressed that 
this recordkeeping provision would require the pass-through swap 
counterparty to maintain records of each representation made by the 
bona fide hedging counterparty on a trade-by-trade basis--a practice 
commenters view as onerous and unnecessary.\968\ Commenters suggested 
that the Commission will have access to records from anyone availing 
themselves of any exemption from speculative limits, and thus does not 
need the additional recordkeeping requirement in proposed Sec.  
150.3(d)(2).\969\ One commenter also requested that the Commission 
clarify that the pass-through swap counterparty can rely on the bona 
fide hedging counterparty's good faith representation that a record of 
an agreement or confirmation of the transaction containing the bona 
fide hedge pass-through representation would satisfy the record 
retention requirements set forth in proposed Sec.  150.3(d)(2).\970\
---------------------------------------------------------------------------

    \966\ Cargill at 6; Shell at 6.
    \967\ Id.
    \968\ Shell at 7; CMC at 5.
    \969\ COPE at 5-6.
    \970\ Shell at 6.
---------------------------------------------------------------------------

iii. Discussion of Final Rule--Recordkeeping
    The Commission has determined to finalize Sec.  150.3(d), for the 
reasons stated in the 2020 NPRM, with certain clarifications discussed 
below.
    First, the Commission clarifies that the recordkeeping requirements 
in Sec.  150.3(d)(1) are not intended to impose any additional 
recordkeeping obligations on market participants beyond the records 
they are required to keep in the normal course of business. The 
Commission notes, however, that, consistent with the general 
recordkeeping obligations in Commission regulation 1.31, and as 
explained in the 2020 NPRM, Sec.  150.3(d)(1) is intended to capture 
records market participants should be maintaining with respect to each 
of their exemptions from Federal position limits. The Commission is 
revising Sec.  150.3(d)(1) to clarify that market participants that 
avail themselves of exemptions under this section are required to keep 
the relevant ``books and records'' of ``each of their exemptions'' and 
any related position or transaction information for such applications, 
including any books and records market participants create for related 
``merchandising activity'' or other relevant aspects of a particular 
exemption (including the items listed in Sec.  150.3(d)(1)), as 
applicable.
    Next, regarding the pass-through swap recordkeeping requirements, 
in Sec.  150.2(d)(2), the Commission intended for this requirement to 
be an extension of market participants' existing obligations to 
maintain swap data records under Part 45 and regulatory records under 
Sec.  1.31.\971\ That is, under Sec.  150.1, the Commission has revised 
paragraph (2) of the bona fide hedging transaction or position 
definition to require that a pass-through swap counterparty receive a 
written representation from its bona fide hedging swap counterparty 
that the swap ``qualifies as a bona fide hedging transaction or 
position'' pursuant to paragraph (1) of the definition of a bona fide 
hedging transaction or position in Sec.  150.1 in order for the pass-
through swap to qualify as a bona fide hedge. The pass-through swap 
counterparty may rely in good faith on such written representation from 
the bona fide hedging swap counterparty, unless the pass-through swap 
counterparty has information that would cause a reasonable person to 
question the accuracy of the representation. Thus, the recordkeeping 
requirements in Sec.  150.3(d)(2) are intended to capture any 
``written'' record created for purposes of making such demonstration. 
The Commission provides additional explanation above on how a pass-
through swap counterparty can demonstrate good faith reliance.\972\ For 
the avoidance of doubt, the Commission is revising Sec.  150.3(d)(2) to 
clarify that a person relying on the pass-through swap provision is 
required to maintain any records created for purposes of demonstrating 
a good faith reliance on that provision in accordance with Sec.  150.1.
---------------------------------------------------------------------------

    \971\ 17 CFR 1.31(a)-(b).
    \972\ See supra Section II.A.1.x. (discussing the pass-through 
swap provision in greater detail).
---------------------------------------------------------------------------

    The Commission also clarifies that, pursuant to the swap 
recordkeeping requirements in Sec.  45.2(b) \973\ and the general 
recordkeeping requirements in Sec.  1.31,\974\ the bona fide hedging 
swap counterparty to the pass-through swap is required to maintain a 
record of such pass-through swap. The Commission considers any written 
representation the bona fide hedging swap counterparty provides to the 
pass-through swap counterparty as being part of the full, complete, and 
systematic records that the bona fide hedging swap counterparty is 
required to keep pursuant to Sec.  45.2(b), with respect to each pass-
through swap to which it is a counterparty. The bona fide hedging swap 
counterparty is required to keep such records according to the form and 
duration requirements of Sec.  1.31. Such records are also subject to 
the inspection and production requirements of both Sec.  1.31(d) \975\ 
and Sec.  45.2(h).\976\ As such, the Commission reminds bona fide 
hedging swap counterparties to a pass-through swap that they are 
responsible for maintaining an accurate and true record of any written 
representations they make to the pass-through swap counterparty 
regarding the bona fides of the pass-through swap. Further, any such 
records and written representations that a bona fide hedging swap 
counterparty makes may, upon request, be filed with the Commission as 
part of an inspection, pursuant to Sec. Sec.  1.31(d) and 45.2(h), and 
would be subject to the Commission's prohibition regarding false 
statements in section 6(c)(2) of the Act, as well as any other 
applicable provisions regarding false information.\977\
---------------------------------------------------------------------------

    \973\ 17 CFR 45.2(b) (requiring that all non-swap dealer/non-
major swap participant counterparties keep full, complete, and 
systematic records, together with all pertinent data and memoranda, 
with respect to each swap in which they are a counterparty).
    \974\ 17 CFR 1.31 (regulatory records, retention, and production 
requirements).
    \975\ 17 CFR 1.31(d) (requirement for a records entity, as 
defined in Sec.  1.31(a), to produce or make accessible for 
inspection all regulatory records).
    \976\ 17 CFR 45.2(h) (swap record inspection requirements).
    \977\ 7 U.S.C. 9(2) (prohibition on making a false or misleading 
statement of material fact to the Commission); see also 7 U.S.C. 
9(4) (general enforcement authority of the Commission).
---------------------------------------------------------------------------

11. Section 150.3(e)--Call for Information
i. Summary of the 2020 NPRM--Call for Information
    The Commission proposed to move existing Sec.  150.3(b), which 
currently allows the Commission or certain Commission staff to make 
calls to demand certain information regarding positions or trading, to 
proposed

[[Page 3357]]

Sec.  150.3(e), with some technical modifications.
    Together with the recordkeeping provision of proposed Sec.  
150.3(d), proposed Sec.  150.3(e) should enable the Commission to 
monitor the use of exemptions from speculative position limits and help 
to ensure that any person who claims any exemption permitted by 
proposed Sec.  150.3 can demonstrate compliance with the applicable 
requirements.
ii. Comments and Summary of Commission Determination--Call for 
Information
    The Commission did not receive comments on proposed Sec.  150.3(e). 
Accordingly, the Commission is adopting Sec.  150.3(e) with one 
grammatical edit that is not intended to reflect a substantive change 
to this section.
12. Section 150.3(f)--Aggregation of Accounts
i. Summary of the 2020 NPRM--Aggregation of Accounts
    Proposed Sec.  150.3(f) would clarify that entities required to 
aggregate under Sec.  150.4 would be considered the same person for 
purposes of determining whether they are eligible for a bona fide hedge 
recognition under Sec.  150.3(a)(1).\978\
---------------------------------------------------------------------------

    \978\ See 17 CFR 150.4 (providing the Commission's existing 
aggregation requirements for Federal position limits); See also 
supra Section II.B.11. (discussing eligible affiliates and position 
aggregation requirements).
---------------------------------------------------------------------------

ii. Comments and Summary of Commission Determination--Aggregation of 
Accounts
    The Commission did not receive comments on proposed Sec.  150.3(f). 
Accordingly, the Commission is adopting Sec.  150.3(f) as 
proposed.\979\
---------------------------------------------------------------------------

    \979\ The Commission did receive general comments on position 
aggregation discussing existing no-action relief in connection with 
the position aggregation requirement in existing Sec.  150.4. For a 
discussion on comments received in connection with existing staff 
no-action relief for position aggregation requirements, see supra 
Section II.B.11.
---------------------------------------------------------------------------

13. Section Sec.  150.3(g)--Delegation of Authority
i. Summary of the 2020 NPRM--Delegation of Authority
    Proposed Sec.  150.3(g) would delegate authority to the Director of 
the Division of Market Oversight to: Grant financial distress 
exemptions pursuant to proposed Sec.  150.3(a)(3); request additional 
information with respect to an exemption request pursuant to proposed 
Sec.  150.3(b)(2); determine, in consultation with the exchange and 
applicant, a commercially reasonable amount of time for a person to 
bring its positions within the Federal position limits pursuant to 
proposed Sec.  150.3(b)(3)(ii)(B); make a determination whether to 
recognize a position as a bona fide hedging transaction or to grant a 
spread exemption pursuant to proposed Sec.  150.3(b)(4); and to request 
that a person submit additional application information or updated 
materials or renew their request pursuant to proposed Sec.  150.3(b)(2) 
or (5). This proposed delegation would enable the Division of Market 
Oversight to act quickly in the event of financial distress and in the 
other circumstances described above.
ii. Comments and Summary of the Commission Determination--Delegation of 
Authority
    The Commission did not receive comments on proposed 150.3(g). 
Accordingly, the Commission is adopting Sec.  150.3(g) with one 
technical edit to correct a punctuation error, which is not intended to 
reflect a change in the substance of this section.
14. Request for a New Exemption in Sec.  150.3(a) for Certain Energy 
Utility Entities
i. Summary of the 2020 NPRM and Comments--New Exemption for Certain 
Energy Utility Entities
    Although the 2020 NPRM did not include a new exemption explicitly 
applicable to certain energy utility entities, it did include a request 
for comment regarding the possibility of such an exemption.\980\ In 
response, NRECA (which encompasses several not-for-profit energy 
associations) \981\ along with other commenters,\982\ requested that 
the Commission use its authority in CEA section 4a(a)(7) to exempt 
certain not-for-profit electric and natural gas utility entities (``NFP 
Energy Entities'') from position limits.
---------------------------------------------------------------------------

    \980\ See 85 FR at 11642.
    \981\ NRECA at 3-14.
    \982\ See IECA at 5; LIPA at 1; NFPEA at 6.
---------------------------------------------------------------------------

    These commenters (in particular, NRECA) argued that Congress did 
not intend for the Commission's position limits regime to apply to 
commercial market participants engaged in hedging and mitigating 
commercial risk, such as the NFP Energy Entities.\983\ The commenters 
also provided several reasons why the Commission's position limits 
regulatory regime is incongruous with the operations of NFP Energy 
Entities, including that NFP Energy Entities: (a) Operate on a not-for-
profit basis; (b) have unique public service obligations to provide 
reliable, affordable utility services to residential, commercial, and 
industrial customers; (c) have governance structures with oversight by 
elected or appointed government officials or cooperative members/
consumers; (d) do not engage in speculative trading in derivatives 
markets; and (e) enter into energy commodity swaps and trade options 
only to hedge or mitigate commercial risk arising from ongoing business 
operations.\984\ NRECA expressed concern that the effort required for 
NFP Energy Entities to analyze and identify every transaction as non-
speculative would be purely academic and would unnecessarily increase 
the cost of electricity, natural gas and other fuels for generation for 
American consumers and businesses served by the NFP Energy 
Entities.\985\
---------------------------------------------------------------------------

    \983\ NRECA at 19.
    \984\ Id.
    \985\ Id.
---------------------------------------------------------------------------

ii. Discussion of the Commission Determination--New Exemption for 
Certain Energy Utility Entities
    The Commission has considered these comments and believes that many 
of the concerns raised by NFP Energy Entities are addressed through the 
Final Rule's pass-through swap provision and the expanded list of 
enumerated bona fide hedge exemptions. That is, the Commission believes 
that most, if not all, of the hedging needs of NFP Energy Entities will 
be considered enumerated, self-effectuating bona fide hedges that will 
not be subject to Federal position limits. Further, NFP Energy Entity 
counterparties that are not bona fide hedgers would receive pass-
through bona fide hedging treatment for any swaps with NFP Energy 
Entities, or any offsetting positions as a result of such swaps with 
NFP Energy Entities. This expanded flexibility should significantly 
alleviate the compliance burdens and cost concerns voiced by NFP Energy 
Entities.
    The Commission recommends that NFP Energy Entities assess the 
impact of the Final Rule on their operations, and if needed, pursue the 
requested exemption separate from this Final Rule. The Commission also 
believes that the extended compliance date for the Final Rule of 
January 1, 2022 in connection with the Federal position limits for the 
16 non-legacy core referenced futures contracts, and the further 
extended compliance date of January 1, 2023 for swaps that are subject 
to Federal position limits under the Final Rule, should give commenters 
and the Commission sufficient time to

[[Page 3358]]

continue to discuss this request if necessary.

D. Sec.  150.5--Exchange-Set Position Limits and Exemptions Therefrom

    For the avoidance of confusion, this discussion of Sec.  150.5 
addresses exchange-set limits and exemptions therefrom, not Federal 
position limits. For a discussion of the proposed processes by which an 
exemption may be recognized for purposes of Federal position limits, 
please see the discussion of proposed Sec.  150.3 above and Sec.  150.9 
below.\986\
---------------------------------------------------------------------------

    \986\ See supra Section II.C. (discussing Sec.  150.3 exemptions 
from Federal position limits). See also infra Section II.G. 
(discussing the Sec.  150.9 streamlined process for recognizing non-
enumerated bona fide hedges for purposes of both exchange and 
Federal position limits).
---------------------------------------------------------------------------

1. Background--Existing Requirements for Exchange-Set Position Limits
i. Applicable DCM and SEF Core Principles
    Under DCM Core Principle 5, a DCM shall adopt for each contract, as 
is necessary and appropriate, position limitations or position 
accountability for speculators. In addition, for any contract that is 
listed on a DCM and subject to a Federal position limit, the DCM must 
establish exchange-set limits for such contract no higher than the 
Federal limit level.\987\ Finally, DCMs are required to monitor their 
markets and enforce compliance with their rules.\988\
---------------------------------------------------------------------------

    \987\ See 7 U.S.C. 7(d)(5).
    \988\ See 7 U.S.C. 7(d)(2).
---------------------------------------------------------------------------

    Similarly, under SEF Core Principle 6, a SEF that is a trading 
facility must adopt for each contract, as is necessary and appropriate, 
position limitations or position accountability for speculators.\989\ 
Such SEF must also, for any contract that is listed on the SEF and 
subject to a Federal position limit, establish exchange-set limits for 
such contract no higher than the Federal limit.\990\ Finally, such SEF 
must monitor positions established on or through the SEF for compliance 
with the limit set by the Commission and the limit, if any, set by the 
SEF.\991\ Beyond these and other statutory and certain specified 
Commission requirements, unless otherwise determined by the Commission, 
DCM Core Principle 1 and SEF Core Principle 1 afford DCMs and SEFs, 
respectively, ``reasonable discretion'' in establishing the manner in 
which they comply with the core principles.\992\
---------------------------------------------------------------------------

    \989\ See 7 U.S.C. 7b-3(f)(6).
    \990\ Id.
    \991\ Id.
    \992\ See 7 U.S.C. 7(d)(1) and 7 U.S.C. 7b-3(f)(1).
---------------------------------------------------------------------------

    The current regulatory provisions governing exchange-set position 
limits and exemptions therefrom appear in Sec.  150.5.\993\ To align 
Sec.  150.5 with statutory changes made by the Dodd-Frank Act,\994\ and 
with other changes in the 2020 NPRM,\995\ the Commission proposed a new 
version of Sec.  150.5. This new proposed Sec.  150.5 would generally 
afford exchanges the discretion to decide how best to set limit levels 
and grant exemptions from such limits in a manner that best reflects 
their specific markets.
---------------------------------------------------------------------------

    \993\ 17 CFR 150.5.
    \994\ While existing Sec.  150.5 on its face only applies to 
contracts that are not subject to Federal position limits, DCM Core 
Principle 5, as amended by the Dodd-Frank Act, and SEF Core 
Principle 6, establish requirements both for contracts that are, and 
are not, subject to Federal position limits. 7 U.S.C. 7(d)(5) and 7 
U.S.C. 7b-3(f)(6).
    \995\ Significant changes discussed herein include the process 
set forth in proposed Sec.  150.9 and revisions to the bona fide 
hedging definition proposed in Sec.  150.1.
---------------------------------------------------------------------------

ii. Existing Sec.  150.5
    As noted above, existing Sec.  150.5 pre-dates the Dodd-Frank Act 
and addresses the establishment of DCM-set position limits for all 
contracts not subject to Federal position limits under existing Sec.  
150.2 (aside from certain major foreign currencies).\996\ First, 
existing Sec.  150.5(a) authorizes DCMs to set different limits for 
different contracts and contract months, and permits DCMs to grant 
exemptions from DCM-set limits for spreads, straddles, or arbitrage 
trades. Existing Sec.  150.5(b) provides a limited set of methodologies 
for DCMs to use in establishing initial limit levels, including 
separate maximum spot-month limit levels for physical-delivery 
contracts and cash-settled contracts,\997\ as well as separate non-spot 
month limits for tangible commodities (other than energy),\998\ and for 
energy products and non-tangible commodities, including 
financials.\999\ Existing Sec.  150.5(c) provides guidelines for how 
DCMs may adjust their speculative initial levels.
---------------------------------------------------------------------------

    \996\ Existing Sec.  150.5(a) states that the requirement to set 
position limits shall not apply to futures or option contract 
markets on major foreign currencies, for which there is no legal 
impediment to delivery and for which there exists a highly liquid 
cash market. 17 CFR 150.5(a).
    \997\ See 17 CFR 150.5(b)(1) (providing that, for physical 
delivery contracts, the spot month limit level must be no greater 
than one-quarter of the estimated spot month deliverable supply, 
calculated separately for each month to be listed, and for cash 
settled contracts, the spot month limit level must be no greater 
than necessary to minimize the potential for manipulation or 
distortion of the contract's or the underlying commodity's price).
    \998\ See 17 CFR 150.5(b)(2) (providing that individual non-spot 
or all-months-combined levels must be no greater than 1,000 
contracts for tangible commodities other than energy products).
    \999\ See 17 CFR 150.5(b)(3) (providing that individual non-spot 
or all-months-combined levels must be no greater than 5,000 
contracts for energy products and nontangible commodities, including 
contracts on financial products).
---------------------------------------------------------------------------

    Next, existing Sec.  150.5(d) addresses bona fide hedging 
exemptions from DCM-set limits, including an exemption application 
process, providing that exchange-set speculative position limits shall 
not apply to bona fide hedging positions as defined by a DCM in 
accordance with the definition of bona fide hedging transactions and 
positions for excluded commodities in Sec.  1.3. Existing Sec.  
150.5(d) also addresses factors for DCMs to consider in recognizing 
bona fide hedging exemptions (or position accountability), including 
whether such positions ``are not in accord with sound commercial 
practices or exceed an amount which may be established and liquidated 
in an orderly fashion.'' \1000\
---------------------------------------------------------------------------

    \1000\ See 17 CFR 150.5(d)(1).
---------------------------------------------------------------------------

    As an alternative to exchange-set position limits set in accordance 
with the provisions described above, existing Sec.  150.5(e) permits a 
DCM, in certain circumstances, to submit for Commission approval a rule 
requiring traders ``to be accountable for large positions'' (or 
position accountability levels). That is, under certain circumstances, 
the DCM would require traders to, upon request, provide information 
about their position to the exchange, and/or consent to halt further 
increasing a position if so ordered by the exchange.\1001\ Among other 
things, this provision includes open interest and volume-based 
parameters for determining when DCMs may do so.\1002\
---------------------------------------------------------------------------

    \1001\ 17 CFR 150.5(e).
    \1002\ 17 CFR 150.5(e)(1)-(4).
---------------------------------------------------------------------------

    In addition, existing Sec.  150.5(f) provides that DCM speculative 
position limits adopted pursuant to Sec.  150.5 shall not apply to 
certain positions acquired in good faith prior to the effective date of 
such limits or to a person that is registered as an FCM or as a floor 
broker under the CEA except to the extent that transactions made by 
such person are made on behalf of, or for the account or benefit of, 
such person.\1003\ This provision also provides that in addition to the 
express exemptions specified in Sec.  150.5, a DCM may propose such 
other exemptions from the requirements of Sec.  150.5 as are consistent 
with the purposes of Sec.  150.5, and submit such rules for Commission 
review.\1004\ Finally, existing Sec.  150.5(g) addresses aggregation of 
positions for which a person directly or indirectly controls trading.
---------------------------------------------------------------------------

    \1003\ 17 CFR 150.5(f).
    \1004\ Id.

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

[[Page 3359]]

2. Overview of the 2020 NPRM, Commenters' Views, and Commission Final 
Rule Determination--Exchange-Set Position Limits and Exemptions 
Therefrom
    This section provides a brief overview of proposed Sec.  150.5, 
commenters' general views, and the Commission's determination. The 
Commission will summarize and address each sub-section of Sec.  150.5 
in greater detail further below.
    Pursuant to CEA sections 5(d)(1) and 5h(f)(1), the Commission 
proposed a new version of Sec.  150.5.\1005\ Proposed Sec.  150.5 is 
intended to allow DCMs and SEFs to set limit levels and grant 
exemptions in a manner that best accommodates activity particular to 
their markets, while promoting compliance with DCM Core Principle 5 and 
SEF Core Principle 6. Proposed Sec.  150.5 is also intended to ensure 
consistency with other changes proposed herein, including the process 
for exchanges to administer applications for non-enumerated bona fide 
hedge exemptions for purposes of Federal position limits proposed in 
Sec.  150.9.\1006\
---------------------------------------------------------------------------

    \1005\ While proposed Sec.  150.5 included references to swaps 
and SEFs, the proposed rule would initially only apply to DCMs, as 
requirements relating to exchange-set limits on swaps would be 
phased in at a later time.
    \1006\ To avoid confusion created by the parallel Federal and 
exchange-set position limit frameworks, the Commission clarifies 
that proposed Sec.  150.5 deals solely with exchange-set position 
limits and exemptions therefrom, whereas proposed Sec.  150.9 deals 
solely with a streamlined process for the Commission to recognize 
non-enumerated bona fide hedges for purposes of Federal position 
limits by leveraging exchanges.
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    Proposed Sec.  150.5 contains two main sub-sections, with each sub-
section addressing a different category of contract: (i) Sec.  150.5(a) 
proposed rules governing exchange-set limits for referenced contracts 
subject to Federal position limits; and (ii) Sec.  150.5(b) proposed 
rules governing exchange-set limits for physical commodity derivative 
contracts that are not subject to Federal position limits.
    Notably, with respect to exchange-set limits on swaps, the 
Commission proposed to delay compliance with DCM Core Principle 5 and 
SEF Core Principle 6, as compliance would otherwise be impracticable, 
and, in some cases, impossible, at this time. In the 2020 NPRM, the 
Commission explained that this delay was based largely on the fact that 
exchanges cannot view positions in OTC swaps across the various places 
they are trading, including on competitor exchanges.
    The Commission has determined to finalize Sec.  150.5 largely as 
proposed, with certain modifications and clarifications in response to 
commenters and other considerations, as discussed below.
    The Commission will oversee swaps in connection with compliance 
with Federal position limits under the Final Rule. The Commission has 
also determined to delay compliance for the requirement for exchanges 
to set position limits on swaps at this time. Specifically, with 
respect to exchange-set position limits on swaps, the Commission notes 
that in two years, the Commission will reevaluate the ability of 
exchanges to establish and implement appropriate surveillance 
mechanisms with respect to swaps and to implement DCM Core Principle 5 
and SEF Core Principle 6, as applicable.
    The Commission believes that delayed implementation of exchange-set 
position limits on swaps at this time is not inconsistent with the 
statutory objectives outlined in section 4a(a)(3) of the CEA for 
several reasons. First, as explained above, at this time, it would be 
impracticable and, in some cases, impossible for exchanges to comply 
with any requirement for establishing exchange-set limits on swaps. 
Next, the Commission is adopting in this Final Rule Federal position 
limits on economically equivalent swaps, which the Commission will 
monitor. These factors, coupled with the Commission's existing ability 
to surveil swap exposure across markets in a manner that at this time 
would be impracticable for the exchanges, will help ensure that the 
Commission meets its statutory obligations. Accordingly, while Sec.  
150.5 as finalized herein will apply to DCMs and SEFs, the Final Rule's 
requirements associated with exchange oversight of swaps, including 
with respect to exchange-set position limits, will be enforced at a 
later time. In other words, upon the compliance date, exchanges must 
comply with final Sec.  150.5 only with respect to futures and options 
on futures traded on DCMs.
3. Section 150.5(a)--Requirements for Exchange-Set Limits on Commodity 
Derivative Contracts Subject to Federal Position Limits Set Forth in 
Sec.  150.2
    The following section discusses the 2020 NPRM, comments received, 
and the Commission's final determination with respect to each sub-
section of Sec.  150.5(a), which addresses exchange-set position limits 
on contracts that are subject to Federal position limits.
i. Section Sec.  150.5(a)(1)--Requirements for Exchange-Set Limits on 
Contracts Subject to Federal Position Limits
a. Summary of the 2020 NPRM--Requirements for Exchange-Set Limits on 
Contracts Subject to Federal Position Limits
    Proposed Sec.  150.5(a) would apply to all contracts subject to the 
Federal position limits proposed in Sec.  150.2 and, among other 
things, is intended to help ensure that exchange-set limits do not 
undermine the Federal position limits framework. Under proposed Sec.  
150.5(a)(1), for any contract subject to a Federal limit, DCMs and, 
ultimately, SEFs, would be required to establish exchange-set limits 
for such contracts. Consistent with DCM Core Principle 5 and SEF Core 
Principle 6, the exchange-set limit levels on such contracts, whether 
cash-settled or physically-settled, and whether during or outside the 
spot month, would have to be no higher than the level specified for the 
applicable referenced contract in proposed Sec.  150.2. An exchange 
would be free to set position limits that are lower than the Federal 
limit. An exchange would also be permitted to adopt position 
accountability levels that are lower than the Federal position limits, 
in addition to any exchange-set position limits it adopts that are 
equal to or less than the Federal position limits.
b. Comments--Requirements for Exchange-Set Limits on Contracts Subject 
to Federal Position Limits
    With respect to requirements for exchange-set limits under proposed 
Sec.  150.5(a)(1), some commenters expressed concern that if an 
exchange determines to set a position limit for a particular contract 
significantly below the Federal position limit for that contract, then 
market participants could be restricted in their ability to provide 
liquidity, hedge activity, and otherwise pursue their trading 
objectives.\1007\ ISDA recommended that to the extent that an exchange 
determines to set position limits significantly below Federal position 
limits, CFTC staff, through its exchange examination process, should 
make transparent the exchange's reasoning and analysis underlying any 
lower position limits.\1008\ Likewise, SIFMA AMG encouraged the 
Commission to require exchanges to explain and justify any exchange-set 
limits that are below Federal position limits, and to work

[[Page 3360]]

with exchanges to ensure that exchange limits do not discourage 
liquidity.\1009\
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    \1007\ ISDA at 11; SIFMA AMG at 4.
    \1008\ ISDA at 11.
    \1009\ SIFMA AMG at 4.
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c. Discussion of Final Rule--Requirements for Exchange-Set Limits on 
Contracts Subject to Federal Position Limits
    The Commission is adopting Sec.  150.5(a)(1) as proposed. In 
response to comments on Sec.  150.5(a)(1) requesting that the 
Commission require transparency into exchanges' reasoning for when they 
set limits well below Federal position limits, the Commission believes 
market participants already have sufficient transparency under part 40 
of the Commission's regulations. When exchanges seek to implement rules 
to establish new or amended exchange-set limits, exchanges are required 
to submit those rules through the Commission's part 40 process, and the 
rules are made publicly available on the CFTC's website.\1010\ 
Exchanges are also required to post such submissions on their own 
websites.\1011\
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    \1010\ See CFTC Industry Filings available at https://www.cftc.gov/IndustryOversight/IndustryFilings/index.htm.
    \1011\ See 17 CFR 40.2(a)(3)(vi), 40.3(a)(9), 40.5(a)(6), 
40.6(a)(2).
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    Further, regarding the request that the Commission work with 
exchanges on exchange-set limits that are below Federal position 
limits, exchanges are permitted to establish exchange-set limits in a 
manner that is most appropriate for their own marketplaces and in a 
manner that allows them to comply with the applicable DCM and SEF core 
principles. The Commission views this process as a business and 
compliance decision that is best left in the discretion of each 
exchange. However, pursuant to DCM Core Principle 5 and SEF Core 
Principle 6, exchanges must implement exchange-set position limits in a 
manner that reduces market manipulation and congestion.
ii. Section 150.5(a)(2)--Exemptions to Exchange-Set Limits for 
Contracts Subject to Federal Position Limits
a. Summary of the 2020 NPRM--Exemptions to Exchange-Set Limits for 
Contracts Subject to Federal Position Limits
    Under the 2020 NPRM, Sec.  150.5(a)(2)(ii) would permit exchanges 
to grant exemptions from exchange-set limits according to the 
guidelines outlined below.
    First, if such exemptions from exchange-set limits conform to the 
types of exemptions that may be granted for purposes of Federal 
position limits under proposed sections: (1) 150.3(a)(1)(i) (enumerated 
bona fide hedge recognitions), (2) 150.3(a)(2)(i) (spread exemptions 
that meet the ``spread transaction'' definition in Sec.  150.1), (3) 
150.3(a)(4) (exempt conditional spot month positions in natural gas), 
or (4) 150.3(a)(5) (pre-enactment and transition period swaps), then 
the level of the exemption may exceed the applicable Federal position 
limit under proposed Sec.  150.2. Because the proposed exemptions 
listed in the four provisions above are self-effectuating for purposes 
of Federal position limits, exchanges may grant such exemptions 
pursuant to proposed Sec.  150.5(a)(2)(i) without prior Commission 
approval.
    Second, if such exemptions from exchange-set limits conform to the 
exemptions from Federal position limits that may be granted under 
proposed Sec. Sec.  150.3(a)(1)(ii) (non-enumerated bona fide hedges) 
and 150.3(a)(2)(ii) (spread positions that do not meet the ``spread 
transaction'' definition in proposed Sec.  150.1), then the level of 
the exemption may exceed the applicable Federal position limit under 
proposed Sec.  150.2, provided that the exemption for purposes of 
Federal position limits is first approved in accordance with proposed 
Sec.  150.3(b) or, in the case of non-enumerated bona fide hedges, 
Sec.  150.9, as applicable.
    Third, if such exemptions conform to the exemptions from Federal 
position limits that may be granted under proposed Sec.  150.3(a)(3) 
(financial distress positions), then the level of the exemption may 
exceed the applicable Federal position limit under proposed Sec.  
150.2, provided that the Commission has first issued a letter or other 
notice approving such exemption pursuant to a request submitted under 
Sec.  140.99.\1012\
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    \1012\ Under the 2020 NPRM, requests for exemptions for 
financial distress positions would be submitted directly to the 
Commission (or delegated staff) for consideration, and any approval 
of such exemption would be issued in the form of an exemption letter 
from the Commission (or delegated staff) pursuant to Sec.  140.99.
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    Finally, for purposes of exchange-set limits only, under the 2020 
NPRM, exchanges may grant exemption types that are not listed in Sec.  
150.3(a). However, in such cases, the exemption level would have to be 
capped at the level of the applicable Federal position limit, so as not 
to undermine the Federal position limits framework, unless the 
Commission has first approved such exemption for purposes of Federal 
position limits pursuant to Sec.  140.99 or proposed Sec.  150.3(b).
    The 2020 NPRM also explained that exchanges that wish to offer 
exemptions from their own limits other than the types listed in 
proposed Sec.  150.3(a) could also submit rules for the Commission's 
review, pursuant to part 40, allowing for such exemptions. The 
Commission would carefully review any such exemption types for 
compliance with applicable standards, including any statutory 
requirements \1013\ and Commission regulations.\1014\
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    \1013\ For example, an exchange would not be permitted to adopt 
rules allowing for risk management exemptions for positions in 
physical commodities that exceed Federal limits because the 
Commission interprets the Dodd-Frank Act amendments to CEA section 
4a(c)(2) as prohibiting risk management exemptions in such 
commodities (unless such position is considered a pass-through swap 
under paragraph (2) of the bona fide hedging definition in Sec.  
150.1). See supra Section II.A.1. (discussing of the temporary 
substitute test, risk-management exemptions, and the pass-through 
swap provision).
    \1014\ For example, as discussed below, proposed Sec.  
150.5(a)(2)(ii)(C) would require that exchanges consider whether the 
requested exemption would result in positions that are not in accord 
with sound commercial practices in the relevant commodity derivative 
market and/or would not exceed an amount that may be established and 
liquidated in an orderly fashion in that market.
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    Under proposed Sec.  150.5(a)(2)(ii)(A)(1), exchanges that wish to 
grant exemptions from their own limits would have to require traders to 
file an application. The 2020 NPRM explained that, generally, exchanges 
would have flexibility to establish the application process as they see 
fit, but subject to the requirements discussed below, including the 
requirement that the exchange collect cash-market and swaps market 
information from the applicant.
    For all exemption types, exchanges would have to generally require 
that such applications be filed in advance of the date such position 
would be in excess of the limits. However, under proposed Sec.  
150.5(a)(2)(ii)(B) and (C), exchanges would be given the discretion to 
adopt rules allowing traders to file retroactive applications for bona 
fide hedges within five business days after a trader established such 
position so long as the applicant demonstrates a sudden and unforeseen 
increase in its hedging needs. Further, under proposed Sec.  
150.5(a)(2)(ii)(D), if the exchange denies a retroactive application, 
it would require that the applicant bring its position into compliance 
with exchange-set limits within a commercially reasonable amount of 
time (as determined by the exchange). Finally, pursuant to proposed 
Sec.  150.5(a)(2)(ii)(A)(5), neither the Commission nor the exchange 
would enforce a position limits violation for such retroactive 
applications.
    Proposed Sec.  150.5(a)(2)(ii)(B) provided that an exchange would 
require that a trader reapply for the exemption granted

[[Page 3361]]

under proposed Sec.  150.5(a)(2) at least annually so that the exchange 
and the Commission can closely monitor exemptions for contracts subject 
to Federal position limits, and to help ensure that the exchange and 
the Commission remain aware of the trader's activities.
    Proposed Sec.  150.5(a)(2)(ii)(C) would authorize an exchange to 
deny, limit, condition, or revoke any exemption request in accordance 
with exchange rules,\1015\ and would set forth a principles-based 
standard for doing so. Specifically, under proposed Sec.  
150.5(a)(2)(ii)(C), exchanges would be required to take into account: 
(i) Whether granting the exemption request would result in a position 
that is ``not in accord with sound commercial practices'' in the market 
in which the DCM is granting the exemption; and (ii) whether granting 
the exemption request would result in a position that would ``exceed an 
amount that may be established or liquidated in an orderly fashion in 
that market.'' The 2020 NPRM explained that exchanges' evaluation of 
exemption requests against these standards would be a facts and 
circumstances determination.
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    \1015\ Currently, DCMs review and set exemption levels annually 
based on the facts and circumstances of a particular exemption and 
the market conditions at that time. As such, a DCM may decide to 
deny, limit, condition, or revoke a particular exemption, typically, 
if the DCM determines that certain conditions have changed and 
warrant such action. This may happen if, for example, there are 
droughts, floods, embargoes, trade disputes, or other events that 
cause shocks to the supply or demand of a particular commodity and 
thus impact the DCM's disposition of a particular exemption.
---------------------------------------------------------------------------

    The 2020 NPRM further explained that activity may reflect ``sound 
commercial practice'' for a particular market or market participant but 
not for another market or market participant. Similarly, activity may 
reflect ``sound commercial practice'' outside the spot month, but not 
in the spot month. Further, activity with manipulative intent or 
effect, or that has the potential or effect of causing price distortion 
or disruption, would be inconsistent with ``sound commercial 
practice,'' even if it is common practice among market participants. 
While an exemption granted to an individual market participant may 
reflect ``sound commercial practice'' and may not ``exceed an amount 
that may be established or liquidated in an orderly fashion in that 
market,'' the 2020 NPRM clarified that the Commission expects exchanges 
to also evaluate whether the granting of a particular exemption type to 
multiple participants could have a collective impact on the market in a 
manner inconsistent with ``sound commercial practice'' or in a manner 
that could result in a position that would ``exceed an amount that may 
be established or liquidated in an orderly fashion in that market.''
    In the 2020 NPRM, the Commission explained that it understands that 
the above-described parameters for exemptions from exchange-set limits 
are generally consistent with current practice among DCMs. Bearing in 
mind that proposed Sec.  150.5(a) would apply to contracts subject to 
Federal position limits, the Commission proposed codifying such 
parameters, as they would establish important, minimum standards needed 
for exchanges to administer, and the Commission to oversee, a robust 
program for granting exemptions from exchange-set limits in a manner 
that does not undermine the Federal position limits framework. Proposed 
Sec.  150.5(a) also would afford exchanges the ability to generally 
oversee their programs for granting exemptions from exchange-set limits 
as they see fit, including to establish different application processes 
and requirements to accommodate the unique characteristics of different 
contracts.
    Finally, proposed Sec.  150.5(a)(2)(ii)(D) would permit an 
exchange, in its discretion, to require a person relying on an 
exchange-granted exemption (for contracts subject to Federal position 
limits) to exit or limit the size of any position in excess of 
exchange-set limits during the lesser of the last five days of trading 
or the time period for the spot month in a physical-delivery contract. 
The Commission has traditionally referred to such requirements as a 
``Five-Day Rule.''
b. Comments--Exemptions to Exchange-Set Limits for Contracts Subject to 
Federal Position Limits
    With respect to permitted exemptions from exchange-set limits under 
proposed Sec.  150.5(a)(2), CMC requested that the Commission clarify 
that each exchange has discretion to determine what information is 
required of applicants when applying for a spread exemption from 
exchange-set limits, and that an exchange is not responsible for 
monitoring the use of spread positions for purposes of Federal position 
limits.\1016\
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    \1016\ CMC at 7.
---------------------------------------------------------------------------

    In addition, regarding the retroactive application provision in 
proposed Sec.  150.5(a)(2)(ii)(A)(5), CME Group recommended that the 
Commission should implement a standard that permits exchanges to impose 
position limits violations in cases where a person has exceeded Federal 
position limits and filed a late or retroactive application that the 
exchange then denies.\1017\
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    \1017\ See CME Group at 10 (explaining that today at the 
exchange level, CME Group considers firms to be in violation of a 
position limit if the firms exceed a limit and the exemption 
application is denied. CME Group believes the Commission should 
implement this standard, rather than permitting the proposed grace 
period for denial of an exemption application. CME Group explains 
that, otherwise, market participants with excessively large 
speculative positions could exploit the grace period accompanying an 
application for an exemption and intentionally go over the 
applicable limit without consequences--all the while disrupting 
orderly market operations. In CME Group's experience, the prospect 
of having an application denied and being found in violation of 
position limits has worked to deter market participants from 
attempting to exploit the retroactive exemption process).
---------------------------------------------------------------------------

    The Commission also received several comments regarding the 
provision that allows exchanges to impose a Five-Day Rule in proposed 
Sec.  150.5(a)(2)(ii)(D). In particular, commenters requested that the 
Commission expressly clarify that the Five-Day Rule does not apply to 
markets for energy commodity derivatives.\1018\ Commenters also 
requested clarification about whether, in cases where an exchange opts 
not to apply the Five-Day Rule, the Commission expects the exchange to 
follow the waiver guidance in proposed Appendix B, or whether the 
exchange can simply take no further action.\1019\
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    \1018\ Chevron at 13; Suncor at 12.
    \1019\ CCI at 9-10; CEWG at 25-26. See also supra Section 
II.A.1.viii. (explaining Appendix B, which provides guidance the 
Commission believes exchanges should consider when determining 
whether to apply the Five-Day Rule restriction).
---------------------------------------------------------------------------

c. Discussion of Final Rule--Exemptions to Exchange-Set Limits for 
Contracts Subject to Federal Position Limits
    The Commission has determined to finalize Sec.  150.5(a)(2) largely 
as proposed and with the clarifications and modifications, described 
below, in response to commenters and other considerations.
    Regarding comments on application information exchanges are 
required to collect under Sec.  150.5(a)(2), as explained in the 2020 
NPRM, the Commission is providing exchanges great flexibility to create 
an application process for exemptions from exchange-set limits as they 
see fit. This means an exchange has discretion to determine what 
information is required of applicants applying for a spread exemption, 
or any other exemption from exchange-set limits, except for instances 
where the exchange is processing a non-enumerated bona fide hedge 
application

[[Page 3362]]

in accordance with the application requirements of Sec.  150.9. The 
Commission is making one modification to clarify the Commission's 
posture when reviewing exchange-granted exemptions. In proposed Sec.  
150.5(a)(2)(ii)(A), the Commission proposed to require exchanges to 
collect sufficient information for the exchange to determine and the 
Commission to ``verify'' that the facts and circumstances demonstrate 
that the exchange may grant the exemption. In final Sec.  
150.5(a)(2)(ii)(A), the Commission is revising this provision to make 
clear that the Commission will conduct an independent evaluation of any 
application it reviews to ``determine'' (not verify) whether the facts 
and circumstances demonstrate that the exchange may grant the 
exemption.
    Further, regarding monitoring spread exemptions, exchanges are 
required to administer and monitor their position limits and any 
exemptions therefrom in accordance with DCM Core Principle 5 and SEF 
Core Principle 6, as applicable. To the extent, however, that an 
exchange grants an inter-market spread exemption where part of the 
spread position is executed on another exchange or OTC, although an 
exchange is not responsible for monitoring a trader's position on other 
exchanges or OTC, an exchange should request information from the 
spread exemption applicant about the entire composition of the spread 
position so that the exchange is best informed about whether to grant 
the exemption. Ultimately, the person relying on the spread exemption 
is responsible for monitoring for compliance with the applicable 
Federal position limits. The Commission reminds market participants 
that an approved exemption does not preclude the Commission from 
finding that a person has otherwise disrupted or manipulated the 
market.
    Next, regarding comments on the retroactive application provision 
in proposed Sec.  150.5(a)(2)(ii)(A)(5), the Commission believes that 
exchanges are in the best position to determine whether to pursue 
enforcement actions for violations of exchange-set limits. Accordingly, 
the Commission has determined to revise this provision so that 
exchanges have discretion to determine whether to impose a position 
limits violation for any retroactive exemption request for exchange-set 
limits that the exchange ultimately denies. The Commission, however, 
retains its position that the Commission will not pursue a position 
limits violation in those circumstances, provided that the application 
was submitted in good faith and the applicant brings its position 
within the DCM or SEF's speculative position limits within a 
commercially reasonable time, as determined by the DCM or SEF.\1020\ 
This revision is simply intended to make explicit an implicit 
presumption that the applicant should have a reasonable and good faith 
basis for determining that its position meets the requirements of Sec.  
150.5(a)(2)(ii)(A) and for submitting the retroactive application.
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    \1020\ The Commission notes that, under Section 4a(e) of the 
Act, the Commission could pursue violations of exchange position 
limit rules; however, the Commission, as a matter of policy, will 
not pursue such violations so long as the conditions of Sec.  
150.5(a)(2)(ii)(E) are met.
---------------------------------------------------------------------------

    Next, regarding various comments on the provision that allows 
exchanges to impose the Five-Day Rule, or a similar requirement, in 
proposed Sec.  150.5(a)(2)(ii)(D), for the avoidance of doubt, the 
Commission reiterates that exchanges are not required to impose the 
Five-Day Rule. Further, the Commission is adopting Appendix B and 
Appendix G to provide guidance for exchanges to consider when 
determining whether to impose the Five-Day Rule or similar requirements 
in the spot period with respect to bona fide hedge exemptions or spread 
exemptions, respectively.\1021\ The Final Rule permits exchanges to 
determine whether any such restriction on trading in the spot period is 
necessary given the facts and circumstances of a particular exemption 
request. Further, when an exchange determines not to impose the Five-
Day Rule or similar requirement for an approved exemption, it is not 
obligated to take any additional steps. The Commission has revised 
Sec.  150.5(a)(2)(ii)(H) to make these points clear.
---------------------------------------------------------------------------

    \1021\ See supra Sections II.A.1.viii. (discussing Appendix B) 
and II.A.20 (discussing Appendix G). See also infra Appendices B and 
G.
---------------------------------------------------------------------------

    Finally, the Commission is making various non-substantive technical 
and grammatical changes to Sec.  150.5(a)(2) to improve readability. 
The Commission has also updated the outline numbering of Sec.  
150.5(a)(2)(ii). These changes are not intended to change the substance 
of this section.
iii. Section 150.5(a)(3)--Exchange-Set Limits on Pre-Existing Positions 
for Contracts Subject to Federal Position Limits
a. Summary of the 2020 NPRM--Exchange-Set Limits on Pre-Existing 
Positions for Contracts Subject to Federal Position Limits
    In the 2020 NPRM, the Commission recognized that the proposed 
Federal position limits framework may result in certain ``pre-existing 
positions'' being subject to speculative position limits, even though 
the positions predated the adoption of such limits. So as not to 
undermine the Federal position limits framework during the spot month, 
and to minimize disruption outside the spot month, proposed Sec.  
150.5(a)(3) would require that during the spot month, for contracts 
subject to Federal position limits, exchanges impose limits no larger 
than Federal levels on ``pre-existing positions,'' other than for pre-
enactment swaps and transition period swaps. However, outside the spot 
month, an exchange would not be required to impose limits on any such 
position, provided the position is acquired in good faith consistent 
with the ``pre-existing position'' definition of proposed Sec.  150.1, 
and provided further that if the person's position is increased after 
the effective date of the limit, such pre-existing position (other than 
pre-enactment swaps and transition period swaps) along with the 
position increased after the effective date, would be attributed to the 
person. This provision is consistent with the proposed treatment of 
pre-existing positions for purposes of Federal position limits set 
forth in proposed Sec.  150.2(g), and was intended to prevent spot-
month limits from being rendered ineffective.
    That is, not subjecting pre-existing positions to spot-month 
position limits could result in a large, pre-existing position either 
intentionally or unintentionally causing a disruption as it is rolled 
into the spot month, and the Commission was particularly concerned 
about protecting the spot month in physical-delivery futures from 
corners and squeezes. Outside of the spot month, however, concerns over 
corners and squeezes may be less acute.
b. Comments--Exchange-Set Limits on Pre-Existing Positions for 
Contracts Subject to Federal Position Limits
    The Commission addressed comments on pre-existing positions under 
its discussion of Sec.  150.2(g)(2) above.\1022\
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    \1022\ See supra Section II.B.7. (further discussing limits on 
pre-existing positions).

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[[Page 3363]]

c. Discussion of Final Rule--Exchange-Set Limits on Pre-Existing 
Positions for Contracts Subject to Federal Position Limits
    The Commission is adopting Sec.  150.5(a)(3) with two modifications 
to conform to the changes made to Sec.  150.2(g)(2), described below.
    First, the Commission is amending Sec.  150.5(a)(3)(ii) to clarify 
that non-spot month limits shall apply to pre-existing positions, other 
than pre-enactment swaps and transition period swaps. As discussed 
above in Section II.B.7., the Commission did not intend in the 2020 
NPRM to exclude existing non-spot month positions in the nine legacy 
agricultural contracts that would otherwise qualify as ``pre-existing 
positions.'' As discussed, the other 16 non-legacy core referenced 
futures contracts that are subject to Federal position limits for the 
first time under the Final Rule are not subject to Federal non-spot 
month position limits and therefore proposed Sec.  150.5(a)(3)(ii) 
would not have applied to these contracts in any event.\1023\
---------------------------------------------------------------------------

    \1023\ See supra Section II.B.7. (discussing Sec.  150.2 Federal 
position limits on pre-existing positions).
---------------------------------------------------------------------------

    Second, the Commission is eliminating the language in proposed 
Sec.  150.5(a)(3)(ii) that would attribute to a person any increase in 
their position after the effective date of the non-spot month limit. 
This language is no longer necessary since final Sec.  150.5(a)(3)(ii) 
clarifies that pre-existing positions, other than pre-enactment swaps 
and transition period swaps, are subject to non-spot month limits.
    For further discussion on pre-existing positions in general and 
comments thereto, please refer to Sec. Sec.  150.2(g).\1024\
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    \1024\ Id.
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iv. Section 150.5(a)(4)--Monthly Report Detailing Exemption 
Applications for Contracts Subject to Federal Limits
a. Summary of the 2020 NPRM--Monthly Report Detailing Exemption 
Applications for Contracts Subject to Federal Limits
    In the 2020 NPRM, the Commission explained that it seeks a balance 
between having sufficient information to oversee the exchange-granted 
exemptions, and not burdening exchanges with excessive periodic 
reporting requirements. The Commission thus proposed under Sec.  
150.5(a)(4) to require one monthly report by each exchange providing 
certain information about exchange-granted exemptions for contracts 
that are subject to Federal position limits. Certain exchanges already 
voluntarily file these types of monthly reports with the Commission, 
and proposed Sec.  150.5(a)(4) would standardize such reports for all 
exchanges that process applications for bona fide hedges, spread 
exemptions, and other exemptions from exchange-set limits for contracts 
that are subject to Federal position limits. The proposed report would 
provide information regarding the disposition of any application to 
recognize a position as a bona fide hedge (both enumerated and non-
enumerated) or to grant a spread or other exemption, including any 
renewal, revocation of, or modification to the terms and conditions of, 
a prior recognition or exemption.\1025\
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    \1025\ Under the 2020 NPRM, in the monthly report, exchanges may 
elect to list new recognitions or exemptions, and modifications to 
or revocations of prior recognitions and exemptions each month. 
Alternatively, exchanges may submit cumulative monthly reports 
listing all active recognitions and exemptions (i.e., including 
exemptions that are not new or have not changed).
---------------------------------------------------------------------------

    As specified under proposed Sec.  150.5(a)(4), the report would 
provide certain details regarding any application to recognize a bona 
fide hedging position, or grant a spread exemption or other exemption, 
including: The effective date and expiration date of any recognition or 
exemption; any unique identifier assigned to track the application or 
position; identifying information about the applicant; the derivative 
contract or positions to which the application pertains; the maximum 
size of the commodity derivative position that is recognized or 
exempted by the exchange (including any ``walk-down'' requirements); 
\1026\ any size limitations the exchange sets for the position; and a 
brief narrative summarizing the applicant's relevant cash-market 
activity.
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    \1026\ An exchange could determine to recognize as a bona fide 
hedge or spread exemption all, or a portion, of the commodity 
derivative position for which an application has been submitted, 
provided that such determination is made in accordance with the 
requirements of proposed Sec.  150.5 and is consistent with the Act 
and the Commission's regulations. In addition, an exchange could 
require that a bona fide hedging position or spread position be 
subject to ``walk-down'' provisions that require the trader to scale 
down its positions in the spot month in order to reduce market 
congestion as needed based on the facts and circumstances.
---------------------------------------------------------------------------

    With respect to any unique identifiers to be included in the 
proposed monthly report, the exchange's assignment of a unique 
identifier would assist the Commission's tracking process. Accordingly, 
the Commission suggested that, as a ``best practice,'' the exchange's 
procedures for processing bona fide hedging position and spread 
exemption applications contemplate the assignment of such unique 
identifiers.\1027\ The proposed report would also be required to 
specify the maximum size and/or size limitations by contract month and/
or type of limit (e.g., spot month, single month, or all-months-
combined), as applicable. The proposed monthly report would be a 
critical element of the Commission's surveillance program by 
facilitating the Commission's ability to track bona fide hedging 
positions and spread exemptions approved by exchanges. The proposed 
monthly report would also keep the Commission informed as to the manner 
in which an exchange is administering its application procedures, the 
exchange's rationale for permitting large positions, and relevant cash-
market activity. The Commission expected that exchanges would be able 
to leverage their current exemption processes and recordkeeping 
procedures to generate such reports.
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    \1027\ The unique identifier could apply to each of the bona 
fide hedge or spread exemption applications that the exchange 
receives, and, separately, each type of commodity derivative 
position that the exchange wishes to recognize as a bona fide hedge 
or spread exemption.
---------------------------------------------------------------------------

    In certain instances, information included in the proposed monthly 
report may prompt the Commission to request records required to be 
maintained by an exchange. For example, the Commission proposed that, 
for each derivative position that an exchange wishes to recognize as a 
bona fide hedge, or any revocation or modification of such recognition, 
the report would include a concise summary of the applicant's activity 
in the cash markets and swaps markets for the commodity underlying the 
position. The Commission explained that it expects that this summary 
would focus on the facts and circumstances upon which an exchange based 
its determination to recognize a bona fide hedge, to grant a spread 
exemption, or to revoke or modify such recognition or exemption. In 
light of the information provided in the summary, or any other 
information included in the proposed monthly report regarding the 
position, the Commission may request the exchange's complete record of 
the application. The Commission also explained that it expects that it 
would only need to request such complete records in the event that it 
noticed an issue that could cause market disruptions.
    Proposed Sec.  150.5(a)(4) would require an exchange, unless 
instructed otherwise by the Commission, to submit such monthly reports 
according to the form and manner requirements the Commission specifies. 
In order to facilitate the processing of such reports,

[[Page 3364]]

and the analysis of the information contained therein, the Commission 
would establish reporting and transmission standards. The 2020 NPRM 
would also require that such reports be submitted to the Commission 
using an electronic data format, coding structure, and electronic data 
transmission procedures specified on the Commission's Forms and 
Submissions page of its website.
b. Comments--Monthly Report Detailing Exemption Applications for 
Contracts Subject to Federal Limits
    With respect to the monthly reporting requirement in proposed Sec.  
150.5(a)(4), ICE requested that the Commission clarify that the monthly 
report is only required to capture positions that are subject to 
Federal position limits and does not apply to other exchange-set non-
enumerated exemptions.\1028\ ICE also requested that the Commission 
codify when the monthly reports are required to be submitted, and that 
any regular reports can be made at the discretion of the 
exchange.\1029\ Other commenters expressed that they prefer that the 
Commission not specify a particular day each month as a deadline for 
exchanges to submit their monthly reports pursuant to Sec.  
150.5(a)(4).\1030\ Finally, ICE requested that the Commission clarify 
how factual and legal justifications for exemptions should be provided 
in the monthly report, and the level of granularity required.\1031\
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    \1028\ ICE at 14.
    \1029\ Id.
    \1030\ CME Group at 14; IFUS at 13.
    \1031\ ICE at 14.
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c. Discussion of Final Rule--Monthly Report Detailing Exemption 
Applications for Contracts Subject to Federal Limits
    The Commission is finalizing Sec.  150.5(a)(4) as proposed, with 
minor technical revisions. The Commission clarifies, as stated in the 
proposed and final regulation text, that the monthly reporting 
requirement only applies to exemptions an exchange grants for contracts 
that are subject to Federal position limits. Further, in consideration 
of comments and the Commission's past with collecting voluntary monthly 
reports from exchanges, the Commission has determined not to prescribe 
a particular day of the month or monthly deadline for exchanges to 
submit the monthly reports. Rather, the Commission defers to exchanges 
on the best timing for submitting their reports so long as the reports 
are submitted on a monthly basis in accordance with Sec.  150.5(a)(4). 
Finally, the Commission clarifies that Sec.  150.5(a)(4) does not 
require exchanges to provide factual and legal analysis in the monthly 
report. The monthly report is intended to give the Commission a 
snapshot of all exemptions the exchange has granted from exchange-set 
limits for contracts that are subject to Federal position limits. The 
Commission's expectation is that in circumstances when it needs 
additional information on the exchange's analysis for a particular 
exemption application, it will work with the exchange to obtain such 
additional information.
4. Section 150.5(b)--Requirements and Acceptable Practices for 
Exchange-Set Limits on Commodity Derivative Contracts in a Physical 
Commodity That Are Not Subject to the Limits Set Forth in Sec.  150.2
i. Summary of the 2020 NPRM--Exchange-Set Limits on Commodity 
Derivative Contracts in a Physical Commodity Not Subject to the Limits 
Set Forth in Sec.  150.2
    Under proposed Sec.  150.5(b), for physical commodity derivative 
contracts that are not subject to Federal position limits, whether 
cash-settled or physically-settled, exchanges would be subject to 
flexible standards for setting exchange limits during the contract's 
spot month and non-spot month.
    During the spot month, under proposed Sec.  150.5(b)(1)(i), 
exchanges would be required to establish position limits, and such 
limits would have to be set at a level that is no greater than 25 
percent of deliverable supply. As described in detail in connection 
with the proposed Federal spot-month limits described above, it would 
be difficult, in the absence of other factors, for a participant to 
corner or squeeze a market if the participant holds less than or equal 
to 25 percent of deliverable supply, and the Commission has long used 
deliverable supply as the basis for spot month position limits due to 
concerns regarding corners, squeezes, and other settlement-period 
manipulative activity.\1032\
---------------------------------------------------------------------------

    \1032\ See supra Section II.B. (discussing proposed Sec.  
150.2).
---------------------------------------------------------------------------

    In the 2020 NPRM, the Commission recognized, however, that there 
may be circumstances where an exchange may not wish to use the 25% 
formula, including, for example, if the contract is cash-settled, does 
not have a measurable deliverable supply, or if the exchange can 
demonstrate that a different parameter is better suited for a 
particular contract or market.\1033\ Accordingly, proposed Sec.  
150.5(b)(1) would afford exchanges the ability to submit to the 
Commission alternative potential methodologies for calculating spot 
month limit levels, provided that the limits are set at a level that is 
``necessary and appropriate to reduce the potential threat of market 
manipulation or price distortion of the contract's or the underlying 
commodity's price or index.'' This standard has appeared in existing 
Sec.  150.5 since its adoption in connection with spot-month limits on 
cash-settled contracts.
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    \1033\ Guidance for calculating deliverable supply can be found 
in Appendix C to part 38. 17 CFR part 38, Appendix C.
---------------------------------------------------------------------------

    As noted above, existing Sec.  150.5 includes separate parameters 
for spot-month limits in physical-delivery contracts and for cash-
settled contracts, but does not include flexibility for exchanges to 
consider alternative parameters. In an effort to both simplify the 
regulation and provide the ability for exchanges to consider multiple 
parameters that may be better suited for certain products, the 
Commission proposed the above standard as a principles-based 
requirement for both cash-settled and physically-settled contracts 
subject to proposed Sec.  150.5(b).
    Outside of the spot month, where, historically, attempts at certain 
types of market manipulation is generally less of a concern, proposed 
Sec.  150.5(b)(2)(i) would allow exchanges to choose between position 
limits or position accountability for physical commodity contracts that 
are not subject to Federal position limits. While exchanges would be 
permitted to decide whether to use limit levels or accountability 
levels for any such contract, under either approach, the exchange would 
have to set a level that is ``necessary and appropriate to reduce the 
potential threat of market manipulation or price distortion of the 
contract's or the underlying commodity's price or index.''
    To help exchanges efficiently demonstrate compliance with this 
standard for physical commodity contracts outside of the spot month, 
the Commission proposed separate acceptable practices for exchanges 
that wish to adopt non-spot month position limits and exchanges that 
wish to adopt non-spot month accountability.\1034\ For

[[Page 3365]]

exchanges that choose to adopt non-spot month position limits, rather 
than position accountability, proposed paragraph (a)(1) to Appendix F 
of part 150 would set forth non-exclusive acceptable practices. Under 
that provision, an exchange would be deemed in compliance with proposed 
Sec.  150.5(b)(2)(i) if the exchange sets non-spot limit levels for 
each contract subject to Sec.  150.5(b) at a level no greater than: (1) 
The average of historical position sizes held by speculative traders in 
the contract as a percentage of the contract's open interest; \1035\ 
(2) the spot month limit level for the contract; (3) 5,000 contracts 
(scaled up proportionally to the ratio of the notional quantity per 
contract to the typical cash-market transaction if the notional 
quantity per contract is smaller than the typical cash-market 
transaction, or scaled down proportionally if the notional quantity per 
contract is larger than the typical cash-market transaction); \1036\ or 
(4) 10% of open interest in that contract for the most recent calendar 
year up to 50,000 contracts, with a marginal increase of 2.5% of open 
interest thereafter.\1037\ When evaluating average position sizes held 
by speculative traders, the Commission expected exchanges: (i) To be 
cognizant of speculative positions that are extraordinarily large 
relative to other speculative positions, and (ii) to not consider any 
such outliers in their calculations.
---------------------------------------------------------------------------

    \1034\ The acceptable practices in Appendix F to part 150 of the 
2020 NPRM reflected non-exclusive methods of compliance. 
Accordingly, the language of these proposed acceptable practices, 
used the word ``shall'' not to indicate that the acceptable practice 
is a required method of compliance, but rather to indicate that in 
order to satisfy the acceptable practice, a market participant must 
(i.e., shall) establish compliance with that particular acceptable 
practice.
    \1035\ For example, if speculative traders in a particular 
contract typically make up 12 percent of open interest in that 
contract, the exchange could set limit levels no greater than 12 
percent of open interest.
    \1036\ Under the 2020 NPRM, for exchanges that choose to adopt a 
non-spot month limit level of 5,000 contracts, this level assumes 
that the notional quantity per contract is set at a level that 
reflects the size of a typical cash-market transaction in the 
underlying commodity. However, if the notional quantity of the 
contract is larger/smaller than the typical cash-market transaction 
in the underlying commodity, then the DCM must reduce/increase the 
5,000 contract non-spot month limit until it is proportional to the 
notional quantity of the contract relative to the typical cash-
market transaction. These required adjustments to the 5,000-contract 
metric are intended to avoid a circumstance where an exchange could 
allow excessive speculation by setting excessively large notional 
quantities relative to typical cash-market transaction sizes. For 
example, if the notional quantity per contract is set at 30,000 
units, and the typical observed cash-market transaction is 2,500 
units, the notional quantity per contract would be 12 times larger 
than the typical cash-market transaction. In that case, the non-spot 
month limit would need to be 12 times smaller than 5,000 (i.e., at 
417 contracts.). Similarly, if the notional quantity per contract is 
1,000 contracts, and the typical observed cash-market transaction is 
2,500 units, the notional quantity per contract would be 2.5 times 
smaller than the typical cash-market transaction. In that case, the 
non-spot month limit would need to be 2.5 times larger than 5,000, 
and would need to be set at 12,500 contracts.
    \1037\ In connection with the proposed Appendix F to part 150 
acceptable practices, open interest should be calculated by 
averaging the month-end open positions in a futures contract and its 
related option contract, on a delta-adjusted basis, for all months 
listed during the most recent calendar year.
---------------------------------------------------------------------------

    These proposed parameters have largely appeared in existing Sec.  
150.5 for many years in connection with either initial or subsequent 
levels.\1038\ The Commission was of the view that these parameters 
would be useful, flexible standards to carry forward as acceptable 
practices. For example, the Commission expected that the 5,000-contract 
acceptable practice would be a useful benchmark for exchanges because 
it would allow them to establish limits and demonstrate compliance with 
Commission regulations in a relatively efficient manner, particularly 
for new contracts that have yet to establish open interest. Similarly, 
for purposes of exchange-set limits on physical commodity contracts 
that are not subject to Federal position limits, the Commission 
proposed to maintain the baseline 10/2.5 percent formula as an 
acceptable practice. Because these parameters are simply acceptable 
practices, exchanges may, after evaluation, propose higher limits or 
accountability levels.
---------------------------------------------------------------------------

    \1038\ 17 CFR 150.5(b) and (c). Proposed Sec.  150.5(b) would 
address physical commodity contracts that are not subject to Federal 
position limits.
---------------------------------------------------------------------------

    Along those lines, the Commission recognized that other parameters 
may be preferable and/or just as effective, and was open to considering 
alternative parameters submitted pursuant to part 40 of the 
Commission's regulations, provided, at a minimum, that the parameter 
complies with Sec.  150.5(b)(2)(i). The Commission encouraged exchanges 
to submit potential new parameters to Commission staff in draft form 
prior to submitting them under part 40.
    For exchanges that choose to adopt position accountability, rather 
than limits, outside of the spot month, proposed paragraph (a)(2) of 
Appendix F to part 150 would set forth a non-exclusive acceptable 
practice that would permit such exchanges to comply with proposed Sec.  
150.5(b)(2)(i) by adopting rules establishing ``position 
accountability'' as defined in proposed Sec.  150.1. ``Position 
accountability'' would mean rules that the exchange submits to the 
Commission pursuant to part 40 that require a trader, upon request by 
the exchange, to consent to: (i) Provide information to the exchange 
about their position, including, but not limited to, information about 
the nature of the positions, trading strategies, and hedging 
information; and (ii) halt further increases to their position or to 
reduce their position in an orderly manner.\1039\
---------------------------------------------------------------------------

    \1039\ While existing Sec.  150.5(e) includes open-interest and 
volume-based limitations on the use of position accountability, the 
Commission opted not to include such limitations in the 2020 NPRM. 
Under the 2020 NPRM, if an exchange submitted a part 40 filing 
seeking to adopt position accountability, the Commission would 
determine on a case-by-case basis whether such rules are consistent 
with the Act and the Commission's regulations. The Commission did 
not want to use one-size-fits-all volume-based limitations for 
making such determinations.
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(3) addressed a circumstance where multiple 
exchanges list contracts that are substantially the same, including 
physically-settled contracts that have the same underlying physical 
commodity and delivery location, or cash-settled contracts that are 
directly or indirectly linked to a physically-settled contract. Under 
proposed Sec.  150.5(b)(3), exchanges listing contracts that are 
substantially the same in this manner must either adopt ``comparable'' 
limits for such contracts, or demonstrate to the Commission how the 
non-comparable levels comply with the standards set forth in proposed 
Sec.  150.5(b)(1) and (2). Such a determination also must address how 
the levels are necessary and appropriate to reduce the potential threat 
of market manipulation or price distortion of the contract's or the 
underlying commodity's price or index. Proposed Sec.  150.5(b)(3) would 
apply equally to cash-settled and physically-settled contracts, and to 
limits during and outside of the spot month, as applicable.\1040\ 
Proposed Sec.  150.5(b)(3) was intended to help ensure that position 
limits established on one exchange would not jeopardize market 
integrity or otherwise harm other markets. Further, proposed Sec.  
150.5(b)(3) would be consistent with the Commission's proposed approach 
to generally apply equivalent Federal position limits to linked 
contracts, including linked contracts listed on multiple 
exchanges.\1041\
---------------------------------------------------------------------------

    \1040\ For reasons discussed elsewhere in the 2020 NPRM, this 
provision would not apply to natural gas contracts. See supra 
Section II.C.6. (discussion of proposed conditional spot month 
exemption in natural gas).
    \1041\ See supra Section II.A.16. (discussion of the proposed 
referenced contract definition and linked contracts).
---------------------------------------------------------------------------

    Finally, under proposed Sec.  150.5(b)(4), exchanges would be 
permitted to grant exemptions from any limits established under 
proposed Sec.  150.5(b). As noted, proposed Sec.  150.5(b) would apply 
to physical commodity contracts not subject to Federal position limits; 
thus, exchanges would be given flexibility to

[[Page 3366]]

grant exemptions in such contracts, including exemptions for both 
intra-market and inter-market spread positions,\1042\ as well as other 
exemption types (including risk management exemptions) not explicitly 
listed in proposed Sec.  150.3.\1043\ However, such exchanges must 
require that traders apply for the exemption. In considering any such 
application, the exchanges would be required to consider whether the 
exemption would result in a position that would not be in accord with 
``sound commercial practices'' in the market for which the exchange is 
considering the application, and/or would ``exceed an amount that may 
be established and liquidated in an orderly fashion in that market.''
---------------------------------------------------------------------------

    \1042\ See Appendix G (providing additional guidance on spread 
exemptions).
    \1043\ As noted above, proposed Sec.  150.3 would allow for 
several exemption types, including: Bona fide hedging positions; 
certain spreads; financial distress positions; and conditional spot 
month limit exemption positions in natural gas.
---------------------------------------------------------------------------

    While exchanges would be subject to the requirements of Sec.  
150.5(a) and (b) described above, such proposed requirements are not 
intended to limit the discretion of exchanges to utilize other tools to 
protect their markets. Among other things, an exchange would have the 
discretion to: Impose additional restrictions on a person with a long 
position in the spot month of a physical-delivery contract who stands 
for delivery, takes that delivery, and then re-establishes a long 
position; establish limits on the amount of delivery instruments that a 
person may hold in a physical-delivery contract; and impose such other 
restrictions as it deems necessary to reduce the potential threat of 
market manipulation or congestion, to maintain orderly execution of 
transactions, or for such other purposes consistent with its 
responsibilities.
ii. Comments--Exchange-Set Limits on Commodity Derivative Contracts in 
a Physical Commodity Not Subject to the Limits Set Forth in Sec.  150.2
    Better Markets recommended revisions for proposed Sec.  150.5(b)(2) 
if the Commission decides to finalize the proposed approach to only 
implement spot month limits on contracts that are not subject to 
Federal position limits.\1044\ Proposed Sec.  150.5(b)(2) requires 
exchanges to have either non-spot month position limits or 
accountability levels, as necessary and appropriate, to reduce 
manipulation and price distortions for contracts that are not subject 
to limits in Sec.  150.2. Better Markets' recommendation goes a step 
further and would require exchanges to set position limits and position 
accountability levels outside of the spot month to reduce the potential 
threat of market manipulation or price distortion and the potential for 
sudden or unreasonable fluctuations or unwarranted changes.\1045\
---------------------------------------------------------------------------

    \1044\ Better Markets at 47-48.
    \1045\ Id.
---------------------------------------------------------------------------

iii. Discussion of Final Rule--Exchange-Set Limits on Commodity 
Derivative Contracts in a Physical Commodity Not Subject to the Limits 
Set Forth in Sec.  150.2
    The Commission is adopting Sec.  150.5(b), as proposed, with a few 
technical or grammatical revisions to improve readability and the 
following explanation. Of note, the Commission is revising the 
beginning of Sec.  150.5(b)(1) to clarify that this section applies to 
exchange-set limits on cash-settled and physically-settled commodity 
derivative contracts in a physical commodity that are not subject to 
the Federal position limits set forth in Sec.  150.2. Although this 
point is made clear in the preamble and the introductory title of Sec.  
150.5(b), the Commission has added the additional clarification for the 
avoidance of any confusion.
    In response to comments from Better Markets, and as explained in 
detail earlier in this release, the Commission believes that outside 
the spot month, either exchange-set position limits or exchange-set 
accountability levels will be sufficient for exchanges to reduce the 
potential threat of market manipulation and price distortions and 
manage fluctuations and changes in their markets.\1046\ Accordingly, 
the Commission has determined to finalize the position limits and 
accountability requirements as proposed.
---------------------------------------------------------------------------

    \1046\ See supra Section II.B.2.iv. (providing a detailed 
discussion of the Commission's extensive experience monitoring 
position accountability levels, which have been effective at 
exchanges).
---------------------------------------------------------------------------

5. Section 150.5(c)--Requirements for Security Futures Products
i. Background and Summary of the 2020 NPRM--Requirements for Security 
Futures Products
    As the Commission has previously noted, security futures products 
and security options may serve economically equivalent or similar 
functions to one another.\1047\ Therefore, when the Commission 
originally adopted position limits regulations for security futures 
products in part 41, it set levels that were generally comparable to, 
although not identical with, the limits that applied to options on 
individual securities.\1048\ The Commission has pointed out that 
security futures products may be at a competitive disadvantage if 
position limits for security futures products vary too much from those 
of security options.\1049\ As a result, the Commission in 2019 adopted 
amendments to the position limitations and accountability requirements 
for security futures products, noting that one goal was to provide a 
level regulatory playing field with security options.\1050\ The 
Commission proposed Sec.  150.5(c), therefore, to include a cross-
reference clarifying that for security futures products, position 
limitations and accountability requirements for exchanges are specified 
in Sec.  41.25.\1051\ This would allow the Commission to take into 
account the position limits regime that applies to security options 
when considering position limits regulations for security futures 
products.
---------------------------------------------------------------------------

    \1047\ See Position Limits and Position Accountability for 
Security Futures Products, 83 FR at 36799, 36802 (July 31, 2018).
    \1048\ Id. See also Listing Standards and Conditions for Trading 
Security Futures Products, 66 FR at 55078, 55082 (Nov. 1, 2001) 
(explaining the Commission's adoption of position limits for 
security futures products).
    \1049\ See 83 FR at 36802.
    \1050\ See Position Limits and Position Accountability for 
Security Futures Products, 84 FR at 51005, 51009 (Sept. 27, 2019).
    \1051\ See 17 CFR 41.25. Rule Sec.  41.25 establishes conditions 
for the trading of security futures products.
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Requirements 
for Security Futures Products
    The Commission did not receive comments on Sec.  150.5(c) and is 
adopting this section as proposed.
6. Section 150.5(d)--Rules on Aggregation
i. Summary of the 2020 NPRM--Rules on Aggregation
    As noted earlier in this release, the Commission adopted in 2016 
final aggregation rules under Sec.  150.4 that apply to all contracts 
subject to Federal position limits. The Commission recognized that with 
respect to contracts not subject to Federal position limits, market 
participants may find it burdensome if different exchanges adopt 
different aggregation standards. Accordingly, under proposed Sec.  
150.5(d), all DCMs, and, ultimately, SEFs, that list any physical 
commodity derivatives, regardless of whether the contract is subject to 
Federal position limits, would be required to adopt position 
aggregation rules for such contracts that

[[Page 3367]]

conform to Sec.  150.4.\1052\ Exchanges that list excluded commodities 
would be encouraged to also adopt position aggregation rules that 
conform to Sec.  150.4. Aggregation policies that otherwise vary from 
exchange to exchange would increase the administrative burden on a 
trader active on multiple exchanges, as well as increase the 
administrative burden on the Commission in monitoring and enforcing 
exchange-set position limits.
---------------------------------------------------------------------------

    \1052\ Under Sec.  150.4, unless an exemption applies, a 
person's positions must be aggregated with positions for which the 
person controls trading or for which the person holds a 10% or 
greater ownership interest. Commission Regulation Sec.  150.4(b) 
sets forth several exemptions from aggregation. See Final 
Aggregation Rulemaking, 81 FR at 91454. The Division of Market 
Oversight has issued time-limited no-action relief from some of the 
aggregation requirements contained in that rulemaking. See CFTC 
Letter No. 19-19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/download.
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Rules on 
Aggregation
    The Commission did not receive comments on Sec.  150.5(d) and is 
adopting this section as proposed.
7. Section 150.5(e)--Requirements for Submissions to the Commission
i. Summary of the 2020 NPRM--Requirements for Submissions to the 
Commission
    Proposed Sec.  150.5(e) reflects that, consistent with the 
definition of ``rule'' in existing Sec.  40.1, any exchange action 
establishing or modifying exchange-set position limits or exemptions 
therefrom, or position accountability, in any case pursuant to proposed 
Sec.  150.5(a), (b), (c), or Appendix F to part 150, would qualify as a 
``rule'' and must be submitted to the Commission as such pursuant to 
part 40 of the Commission's regulations. Such rules would also include, 
among other things, parameters used for determining position limit 
levels, and policies and related processes setting forth parameters 
addressing, among other things, which types of exemptions are 
permitted, the parameters for the granting of such exemptions, and any 
exemption application requirements.
    Proposed Sec.  150.5(e) further provides that exchanges would be 
required to review regularly\1053\ any position limit levels 
established under proposed Sec.  150.5 to ensure the level continues to 
comply with the requirements of those sections. For example, in the 
case of Sec.  150.5(b), exchanges would be expected to ensure the 
limits comply with the requirement that limits be set ``at a level that 
is necessary and appropriate to reduce the potential threat of market 
manipulation or price distortion of the contract's or the underlying 
commodity's price or index.'' Exchanges would also be required to 
update such levels as needed, including if the levels no longer comply 
with the proposed rules.
---------------------------------------------------------------------------

    \1053\ Under the 2020 NPRM, an acceptable, regular review regime 
would consist of both a periodic review and an event-specific review 
(e.g., in the event of supply and demand shocks such as 
unanticipated shocks to supply and demand of the underlying 
commodity, geo-political shocks, and other events that may result in 
congestion and/or other disruptions).
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Requirements 
for Submissions to the Commission
    The Commission did not receive comments on Sec.  150.5(e) and is 
adopting this section with a few non-substantive revisions to address 
grammatical issues and improve the readability and organization of the 
section. These revisions are not intended to change the substance of 
this section.
8. Section 150.5(f)--Delegation of Authority to the Director of the 
Division of Market Oversight
i. Summary of the 2020 NPRM--Delegation of Authority to the Director of 
the Division of Market Oversight
    The Commission proposed to delegate its authority, pursuant to 
proposed Sec.  150.5(a)(4)(ii), to the Director of the Commission's 
Division of Market Oversight, or such other employee(s) that the 
Director may designate from time to time, to provide instructions 
regarding the submission of information required to be reported by 
exchanges to the Commission on a monthly basis, and to determine the 
manner, format, coding structure, and electronic data transmission 
procedures for submitting such information.
ii. Comments and Summary of the Commission Determination--Delegation of 
Authority to the Director of the Division of Market Oversight
    The Commission did not receive comments on Sec.  150.5(f) and is 
adopting this section as proposed.
9. Commission Enforcement of Exchange-Set Limits
    As discussed throughout this Final Rule, the framework for 
exchange-set limits operates in conjunction with the Federal position 
limits framework. The Futures Trading Act of 1982 gave the Commission, 
under CEA section 4a(5) (since re-designated as section 4a(e)), the 
authority to directly enforce violations of exchange-set, Commission-
approved speculative position limits in addition to position limits 
established directly by the Commission.\1054\ Since 2008, it has also 
been a violation of the Act for any person to violate an exchange 
position limit rule certified to the Commission by such exchange 
pursuant to CEA section 5c(c)(1).\1055\ Thus, under CEA section 4a(e), 
it is a violation of the Act for any person to violate an exchange 
position limit rule certified to or approved by the Commission, 
including to violate any subsequent amendments thereto, and the 
Commission has the authority to enforce those violations.
---------------------------------------------------------------------------

    \1054\ See Futures Trading Act of 1982, Public Law 97-444, 96 
Stat. 2299-30 (1983).
    \1055\ See CFTC Reauthorization Act of 2008, Food, Conservation 
and Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 
2008) (also known as the ``Farm Bill'') (amending CEA section 4a(e), 
among other things, to assure that a violation of exchange-set 
position limits, regardless of whether such position limits have 
been approved by or certified to the Commission, would constitute a 
violation of the Act that the Commission could independently 
enforce). See also Federal Speculative Position Limits for 
Referenced Energy Contracts and Associated Regulations, 75 FR at 
4144, 4145 (Jan. 26, 2010) (summarizing the history of the 
Commission's authority to directly enforce violations of exchange-
set speculative position limits).
---------------------------------------------------------------------------

    The Commission did not receive comments on its authority to enforce 
exchange-set position limits.

E. Sec.  150.6--Scope

    Existing Sec.  150.6 provides that nothing in this part shall be 
construed to affect any provisions of the CEA relating to manipulation 
or corners nor to relieve any contract market or its governing board 
from responsibility under the CEA to prevent manipulation and 
corners.\1056\
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    \1056\ 17 CFR 150.6. The Commission notes that while existing 
Sec.  150.6 references ``section 5(4) of the [CEA]'' no such CEA 
section currently exists. The Final Rule instead references section 
5(d)(4) of the CEA.
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1. Summary of the 2020 NPRM--Scope
    Proposed Sec.  150.6 was intended to make clear that fulfillment of 
specific part 150 requirements alone does not necessarily satisfy other 
obligations of an exchange. Proposed Sec.  150.6 provided that part 150 
of the Commission's regulations would only be construed as having an 
effect on position limits set by the Commission or an exchange 
including any associated recordkeeping and reporting requirements. 
Proposed Sec.  150.6 provided further that nothing in part 150 would 
affect any other provisions of the CEA or Commission regulations 
including those relating to actual or attempted manipulation, corners, 
squeezes, fraudulent or deceptive conduct, or to prohibited

[[Page 3368]]

transactions. For example, proposed Sec.  150.5 would require DCMs, 
and, ultimately, SEFs, to impose and enforce exchange-set speculative 
position limits. The fulfillment of the requirements of Sec.  150.5 
alone would not satisfy any other legal obligations under the CEA or 
Commission regulations applicable to exchanges to prevent manipulation 
and corners. Likewise, a market participant's compliance with position 
limits or an exemption thereto would not confer any type of safe harbor 
or good faith defense to a claim that the participant had engaged in an 
attempted or perfected manipulation.
    Further, the proposed amendments were intended to help clarify that 
Sec.  150.6 would apply to: Regulations related to position limits 
found outside of part 150 of the Commission's regulations (e.g., 
relevant sections of part 1 and part 19); and recordkeeping and 
reporting regulations associated with speculative position limits.
2. Comments and Discussion of Final Rule--Scope
    The Commission received no comments on proposed Sec.  150.6 and is 
adopting as proposed.
    As the Commission explained in the 2020 NPRM, position limits are 
meant to diminish, eliminate, and prevent excessive speculation and to 
deter and prevent market manipulation, squeezes, and corners. The 
Commission stresses that nothing in the Final Rule's revisions to part 
150 would impact the anti-disruptive, anti-cornering, and anti-
manipulation provisions of the CEA and Commission regulations, 
including but not limited to CEA sections 6(c) or 9(a)(2) regarding 
manipulation, CEA section 4c(a)(5) regarding disruptive practices 
including spoofing, or sections 180.1 and 180.2 of the Commission's 
regulations regarding manipulative and deceptive practices. It may be 
possible for a trader to manipulate or attempt to manipulate the prices 
of futures contracts or the underlying commodity with a position that 
is within the Federal position limits. It may also be possible for a 
trader holding a bona fide hedge, as recognized by the Commission or an 
exchange, to manipulate or attempt to manipulate the markets. The 
Commission would not consider it a defense to a charge under the anti-
manipulation provisions of the CEA or the regulations that a trader's 
position was within position limits.

F. Sec.  150.8--Severability

    Final Sec.  150.8 provides that should any provision(s) of part 150 
be declared invalid, including the application thereof to any person or 
circumstance, all remaining provisions of part 150 shall not be 
affected to the extent that such remaining provisions, or the 
application thereof, can be given effect without the invalid 
provisions.
    The Commission did not receive comments on proposed Sec.  150.8, 
and is adopting it as proposed.

G. Sec.  150.9--Process for Recognizing Non-Enumerated Bona Fide 
Hedging Transactions or Positions With Respect to Federal Speculative 
Position Limits

1. Background--Non-Enumerated Bona Fide Hedging Transactions or 
Positions
    The Commission's authority and existing processes for recognizing 
bona fide hedges can be found in CEA section 4a(c), and Sec. Sec.  1.3, 
1.47, and 1.48 of the Commission's regulations.\1057\ In particular, 
CEA section 4a(c)(1) provides that no CFTC rule issued under CEA 
section 4a(a) applies to ``transactions or positions which are shown to 
be bona fide hedging transactions or positions.'' \1058\ Under the 
existing definition of ``bona fide hedging transactions and positions'' 
in Sec.  1.3,\1059\ paragraph (1) provides the Commission's general 
definition of bona fide hedging transactions or positions; paragraph 
(2) provides a list of enumerated bona fide hedging positions that, 
generally, are self-effectuating, and must be reported (along with 
supporting cash-market information) to the Commission monthly on Form 
204 after the positions are taken; \1060\ and paragraph (3) provides a 
procedure for market participants to seek recognition from the 
Commission for non-enumerated bona fide hedging positions. Under 
paragraph (3), any person that seeks a Commission recognition of a 
position as a non-enumerated bona fide hedge must apply to the 
Commission in advance of taking on the position, and pursuant to the 
processes outlined in Sec.  1.47 (30 days in advance for non-enumerated 
bona fide hedges) or Sec.  1.48 (10 days in advance for enumerated 
anticipatory hedges), as applicable.
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    \1057\ 7 U.S.C. 6a(c); 17 CFR 1.3, 1.47, and 1.48.
    \1058\ 7 U.S.C. 6a(c)(1).
    \1059\ As described above, the Commission is moving an amended 
version of the bona fide hedging definition from Sec.  1.3 to Sec.  
150.1. See supra Section II.A.1. (discussion of Sec.  150.1).
    \1060\ As described below, the Commission is eliminating Form 
204 and relying instead on the cash-market information submitted to 
exchanges pursuant to Sec. Sec.  150.5 and 150.9. See infra Section 
II.H. (discussion of amendments to part 19).
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    For the nine legacy agricultural contracts currently subject to 
Federal position limits, the Commission's current process for 
recognizing non-enumerated bona fide hedge positions exists in parallel 
with exchange processes for granting exemptions from exchange-set 
limits, as described below. The exchange processes for granting 
exemptions vary by exchange, and generally do not mirror the 
Commission's processes.\1061\ Thus, when requesting a non-enumerated 
bona fide hedging position recognition, currently market participants 
must submit two applications--one application submitted to the 
Commission in accordance with Sec.  1.47 for purposes of compliance 
with Federal position limits, and another application submitted to the 
relevant exchange in accordance with the exchange's rules for purposes 
of exchange-set position limits.
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    \1061\ As discussed in the 2020 NPRM, exchanges typically use 
one application process to grant all exemption types, whereas the 
Commission has different processes for different bona fide hedge 
exemption types. That is, the Commission currently has different 
processes for permitting enumerated bona fide hedges and for 
recognizing positions as non-enumerated bona fide hedges or 
anticipatory bona fide hedges. Generally, for bona fide hedges 
enumerated in paragraph (2) of the bona fide hedge definition in 
Sec.  1.3, no formal process is required by the Commission. Instead, 
such enumerated bona fide hedge recognitions are self-effectuating 
and Commission staff reviews monthly reporting of cash-market 
positions on existing Form 204 and part 17 position data to monitor 
such positions. Requests for recognitions of non-enumerated bona 
fide hedging positions and for certain enumerated anticipatory bona 
fide hedge positions, as explained above, must be submitted to the 
Commission pursuant to the processes in existing Sec. Sec.  1.47 and 
1.48 of the regulations, as applicable. Further, exchanges generally 
do not require the submission of monthly cash-market information; 
instead, they generally require exemption applications to include 
cash-market information supporting positions that exceed the limits, 
to be filed prior to exceeding a position limit, and to be updated 
on an annual basis. On the other hand, the Commission has various 
monthly reporting requirements under Form 204 and part 17 of the 
Commission's regulations as described above.
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2. Overview of the 2020 NPRM, Comments, and the Commission's 
Determination
    Generally, the Commission is adopting Sec.  150.9 largely as 
proposed, but with certain clarifications and modifications to address 
commenters' views and other considerations. This section provides an 
overview of, and addresses general comments regarding, proposed Sec.  
150.9. Further below, the Commission summarizes each sub-section of 
Sec.  150.9 and comments relevant to that sub-section, and provides a 
more detailed discussion of the Commission's determination and any 
changes to each sub-section of Sec.  150.9.
i. General Overview of the 2020 NPRM
    The Commission proposed Sec.  150.9 to establish a new framework 
whereby a

[[Page 3369]]

market participant seeking a non-enumerated bona fide hedge recognition 
could file one application with an exchange to receive a non-enumerated 
bona fide hedge recognition for purposes of both exchange-set limits 
and Federal position limits.\1062\ The proposed framework was intended 
to be independent of, and serve as an alternative to, the Commission's 
process for reviewing exemption requests under proposed Sec.  150.3. 
The proposed framework was also intended to help: (1) Streamline the 
process by which non-enumerated bona fide hedge applications are 
addressed; (2) minimize disruptions by leveraging existing exchange-
level processes with which many market participants are already 
familiar; \1063\ and (3) reduce inefficiencies created when market 
participants are required to comply with different Federal and 
exchange-level processes.
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    \1062\ Alternatively, under the proposed framework, a trader 
could submit a request directly to the Commission pursuant to 
proposed Sec.  150.3(b). A trader that submitted such a request 
directly to the Commission for purposes of Federal position limits 
would have to separately request an exemption from the applicable 
exchange for purposes of exchange-set limits. As discussed earlier 
in this release, the Commission proposed to separately allow for 
enumerated hedges and spreads that meet the ``spread transaction'' 
definition to be self-effectuating. See supra Section II.C. 
(discussing proposed Sec.  150.3).
    \1063\ In particular, the Commission recognizes that, in the 
energy and metals spaces, market participants are familiar with 
exchange application processes and are not familiar with the 
Commission's processes since, currently, there are no Federal 
position limits for those commodities.
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    In the 2020 NPRM, the Commission emphasized that proposed Sec.  
150.9 would serve as a separate, self-contained process that is related 
to, but independent of, the proposed regulations governing: (1) The 
process in proposed Sec.  150.3 for traders to apply directly to the 
Commission for a bona fide hedge recognition; and (2) exchange 
processes for establishing exchange-set limits and granting exemptions 
therefrom in proposed Sec.  150.5. The Commission also emphasized that 
proposed Sec.  150.9 would serve as a voluntary process that exchanges 
could implement to provide additional flexibility for their market 
participants to file one non-enumerated bona fide hedge application 
with an exchange to receive a recognition for purposes of both 
exchange-set limits and Federal speculative position limits. Finally, 
the 2020 NPRM made clear that an exchange's determination to recognize 
a non-enumerated bona fide hedge in accordance with proposed Sec.  
150.9 with respect to exchange-set limits would serve to inform the 
Commission's own decision as to whether to recognize the exchange's 
determination for purposes of Federal speculative position limits set 
forth in proposed Sec.  150.2, and would not be a substitute for the 
Commission's determination.
    Under the proposed procedural framework, an exchange's 
determination to recognize a non-enumerated bona fide hedge in 
accordance with proposed Sec.  150.9 with respect to exchange-set 
limits would serve to inform the Commission's own decision as to 
whether to recognize the exchange's determination for purposes of 
Federal position limits set forth in proposed Sec.  150.2. Among other 
conditions, the exchange would be required to base its determination on 
standards that conform to the Commission's own standards for 
recognizing bona fide hedges for purposes of Federal position limits.
    Further, the exchange's determination with respect to its own 
position limits and application process would be subject to Commission 
review and oversight. These requirements were proposed to facilitate 
the Commission's independent review and determination by ensuring that 
any bona fide hedge recognized by an exchange for purposes of exchange-
set limits in accordance with proposed Sec.  150.9 conforms to the 
Commission's standards. For a given referenced contract, proposed Sec.  
150.9 would allow a person to exceed Federal position limits if the 
exchange listing the contract recognized the position as a bona fide 
hedge with respect to exchange-set limits, unless the Commission denies 
or stays the application within ten business days (or two business days 
for applications, including retroactive applications, filed due to 
sudden or unforeseen circumstances) (the ``10/2-day review''). Under 
the 2020 NPRM, if the Commission does not intervene during that 10/2-
day review period, then the exemption would be deemed approved for 
purposes of Federal position limits. The Commission provides a more 
detailed discussion of each sub-section of proposed Sec.  150.9 further 
below.
ii. General Comments--Non-Enumerated Bona Fide Hedging Transactions or 
Positions, Generally
    Generally, the majority of commenters supported the Commission's 
proposed approach in Sec.  150.9.\1064\ In particular, one commenter 
expressed that Sec.  150.9 represents a ``fair and balanced'' 
approach,\1065\ and another commenter expressed that Sec.  150.9 offers 
an ``efficient and timely process for hedgers to obtain permission to 
mitigate their risk.'' \1066\ On the other hand, certain commenters 
opposed the streamlined process in Sec.  150.9 and requested that the 
Commission reduce or eliminate the role of exchanges in processing non-
enumerated bona fide hedge exemptions.\1067\
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    \1064\ ICE at 8; CCI at 2; IECA at 1-2; NGFA at 9; MGEX at 4; 
AGA at 11; CME Group at 7; FIA at 2; CMC at 10-11; EPSA at 6-7; 
Suncor at 2; COPE at 4; Shell at 3-4; and CEWG at 3; See also ASR at 
3 (noting that proposed Sec.  150.9 effectively leverages existing 
exchange frameworks).
    \1065\ Suncor at 2.
    \1066\ COPE at 4.
    \1067\ Rutkowski at 1; AFR at 2; IECA at 2-3; Public Citizen at 
2-3; NEFI at 4; Better Markets at 3, 62; IATP at 13-14; NEFI at 4; 
and PMAA at 4 (noting a concern that non-enumerated bona fide hedges 
would be granted outside of the notice and comment rulemaking 
process).
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    In particular, certain commenters expressed concerns regarding the 
proposed role of exchanges in Sec.  150.9. That is, certain commenters 
were concerned that the streamlined approach in proposed Sec.  150.9 
would create conflicts of interest for exchanges (which commenters note 
are for-profit entities) where exchanges could benefit from granting 
non-compliant non-enumerated bona fide hedge exemptions to boost 
trading volume and profits.\1068\ Other commenters expressed concern 
that Sec.  150.9 delegates too much discretion to exchanges to 
determine what qualifies as a non-enumerated bona fide hedge without 
well-defined criteria, and that such discretion could lead to an 
unlimited universe of new non-enumerated bona fide hedge exemptions 
that could adversely impact

[[Page 3370]]

markets.\1069\ Finally, several commenters shared the view that Sec.  
150.9 would erode the Commission's authority over exchange-granted 
exemptions, and that the Commission should retain all authority to 
grant non-enumerated bona fide hedge exemptions.\1070\
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    \1068\ Rutkowski at 1; see also AFR at 2 (stating concerns that 
proposed Sec.  150.9 would be ineffective at controlling speculation 
due, in part, to the substantially increased flexibility of 
exchanges and market participants to determine whether positions 
qualify for bona fide hedge exemptions or to propose and institute 
new non-enumerated hedge exemptions, despite clear conflicts posed 
by exchanges' incentive to directly profit from trading volume); 
IECA at 2-3 and NEFI at 4 (stating that proposed Sec.  150.9 would 
perpetuate a concern, raised by Congress in the Dodd-Frank Act, that 
exchanges may be motivated by profit to allow broad hedge exemptions 
that may include non-commercial market participants); Public Citizen 
at 2-3 (stating that proposed Sec.  150.9 puts for-profit exchanges 
in the driver's seat of making decisions on granting exemptions, and 
that customer incentive programs offered by exchanges to increase 
trading volumes would undermine the exchanges' efforts to determine 
hedge exemptions; arguing that certain exchanges have experienced 
difficulty in ``cooperating'' with current laws and regulations, 
thus casting doubt on their ability to enforce the proposed rule; 
and arguing that no additional authority should be granted to CME 
pending resolution of CFTC v. Byrnes, Case. No. 13-cv-01174 (SDNY) 
(alleging a violation of internal firewalls and sales of 
confidential trading information to an outside broker). Regarding 
Public Citizen's comment on CFTC v. Byrnes, the Commission notes 
that this case has been resolved and is not a condition precedent to 
this Final Rule.
    \1069\ PMAA at 4; see also Better Markets at 63 (arguing that 
the standards for exchanges to grant non-enumerated bona fide hedge 
recognitions are too flexible and lack meaningful constraints).
    \1070\ PMAA at 4 (noting a concern that non-enumerated bona fide 
hedges would be granted outside of the notice and comment rulemaking 
process); IATP at 13-14; NEFI at 4.
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iii. Discussion of Final Rule--Non-Enumerated Bona Fide Hedging 
Transactions or Positions, Generally--General Concerns and Comments on 
Sec.  150.9
    First, the Commission reiterates, as stated in the 2020 NPRM, that 
an exchange's determination to recognize a non-enumerated bona fide 
hedge in accordance with proposed Sec.  150.9 with respect to exchange-
set limits would serve to inform the Commission's decision whether to 
recognize such position as a non-enumerated bona fide hedge for 
purposes of Federal position limits set forth in proposed Sec.  150.2. 
The Commission is not delegating or ceding its authority to exchanges 
to make the determination for purposes of Federal position limits to 
recognize a position as a non-enumerated bona fide hedge for 
applications submitted under Sec.  150.9. In that regard, the 
exchange's determination to recognize a bona fide hedge with respect to 
exchange-set limits established under Sec.  150.5 is not a substitute 
for the Commission's independent review of, and determination with 
respect to, non-enumerated bona fide hedge applications submitted 
pursuant to Sec.  150.9.
    As described in detail below, under Sec.  150.9 as adopted herein, 
exchanges that elect to review non-enumerated bona fide hedge 
applications under Sec.  150.9 are required to establish and maintain 
standards and processes for such review, approved by the Commission 
pursuant to Sec.  40.5. Section 150.9 requires, among other things, 
that the exchanges base their determinations on standards that conform 
to the Commission's own standards for recognizing bona fide hedges for 
purposes of Federal position limits. The Final Rule also requires an 
exchange to directly notify the Commission of any determinations to 
recognize a non-enumerated bona fide hedge for purposes of exchange-set 
limits, and, upon such notification, the Commission will make its 
determination as to such applications for purposes of Federal position 
limits. The Commission also reserves authority to, at a later date and 
after providing an opportunity to respond, revoke a non-enumerated bona 
fide hedge recognition that is approved through the Sec.  150.9 process 
and require a participant to lower its position below the Federal 
position limit level within a commercially reasonable time if the 
Commission finds that the position no longer meets the bona fide hedge 
definition in Sec.  150.1.
    In response to general concerns that Sec.  150.9 would create 
conflicts of interest for exchanges, the Commission does not believe 
that Sec.  150.9 creates incentives for exchanges to grant non-
enumerated bona fide hedge exemptions in order to boost trading volume 
and profits.\1071\ On the contrary, the Commission believes there are 
several requirements and obligations that incentivize and require 
exchanges to implement Sec.  150.9 in a manner that protects their 
markets.
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    \1071\ See generally supra Sections II.B.2.iv.b. and II.G.2. 
(discussing studies that indicate that exchanges are incentivized to 
maintain market integrity).
---------------------------------------------------------------------------

    First, under Sec.  150.9, exchanges may only grant non-enumerated 
bona fide hedges that meet the Commission's bona fide hedging 
definition, and each non-enumerated bona fide hedge approved by an 
exchange for purposes of its own limits is separately and independently 
reviewed by the Commission for purposes of Federal position limits.
    Next, under Sec.  150.5(a)(2)(ii)(G) finalized herein, exchanges 
are required to consider whether approving a particular exemption 
request would result in positions that would not be in accord with 
sound commercial practices in the relevant commodity derivatives market 
and/or whether the position resulting from an approved exemption would 
exceed an amount that may be established and liquidated in an orderly 
fashion in that market.\1072\
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    \1072\ See infra Final Rule Sec.  150.5(a)(2)(ii)(G).
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    Finally, under DCM Core Principle 5 and SEF Core Principle 6, 
exchanges are accountable for administering position limits in a manner 
that reduces the potential threat of market manipulation or 
congestion.\1073\ The Commission believes that these requirements, 
working in concert, provide sufficient guardrails to mitigate any 
potential conflicts of interest for exchanges.
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    \1073\ See 17 CFR 37.600 and 38.300.
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    Further, the Commission does not agree that Sec.  150.9 improperly 
delegates discretion to exchanges or erodes the Commission's authority 
over exchanges and the non-enumerated bona fide hedge recognition 
process because, as discussed above, the Commission is not delegating 
its decision-making authority with respect to the granting of bona fide 
hedge recognitions for purposes of Federal position limits. Rather, the 
Commission is allowing exchanges to offer traders the opportunity to 
submit their applications for a bona fide hedge recognition pursuant to 
a consolidated review process under which the Commission will conduct 
its own review and make an independent determination for purposes of 
Federal speculative position limits.
    The Commission has thus determined to adopt Sec.  150.9 largely as 
proposed, but with certain modifications and clarifications, as 
described further below, to address commenters' views and other 
considerations. The following discussions summarize each sub-section of 
proposed Sec.  150.9, as well as comments received and the Commission's 
final determination with respect to each sub-section of Sec.  150.9.
3. Section 150.9(a)--Approval of Exchange Rules Related to the 
Application Submission Process for Non-Enumerated Bona Fide Hedging 
Transactions or Positions
i. Summary of 2020 NPRM--Approval of Rules
    Proposed Sec.  150.9(a) would require an exchange to have rules, 
adopted pursuant to the existing rule-approval process in Sec.  40.5 of 
the Commission's regulations, that establish standards and processes in 
accordance with proposed Sec.  150.9 as described below. The Commission 
would review such rules to ensure that the exchange's standards and 
processes for recognizing bona fide hedges for its own exchange-set 
limits conform to the Commission's standards and processes for 
recognizing bona fide hedges for Federal position limits.
ii. Comments--Approval of Exchange Rules Related to the Application 
Submission Process for Non-Enumerated Bona Fide Hedging Transactions or 
Positions
    Although the Commission did not receive comments directly about the 
requirements under proposed Sec.  150.9(a), the Commission did receive 
comments related to when an exchange could start implementing Sec.  
150.9, which is contingent on the exchange having approved rules in 
place. That is, several commenters recommended a phased implementation 
for starting the Sec.  150.9 process to avoid a concentration of non-
enumerated bona fide hedge applications at one time.\1074\

[[Page 3371]]

Commenters suggested starting the process either six months prior to 
the effective date or permitting phased compliance for six months after 
the effective date of the Final Rule.
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    \1074\ See ICE at 9; IFUS at 7; CMC at 12; Shell at 4; FIA at 
18; Chevron at 16; and CEWG at 27. See also CME Group at 8 
(supporting a 12-month compliance date, but suggesting that the 
Commission work with exchanges to implement a rolling process where 
market participants are ``grandfathered into current exchange 
approved exemptions they hold today, permitting them to file for 
those exemptions on the same annual schedule'').
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iii. Discussion of Final Rule--Approval of Exchange Rules Related to 
the Application Submission Process for Non-Enumerated Bona Fide Hedging 
Transactions or Positions
    The Commission is finalizing Sec.  150.9(a) with the clarifications 
and rewording changes described below. As explained in the Proposal, 
the Commission's pre-approval of an exchange's standards and process 
for review of non-enumerated bona fide hedge applications ensures that 
the exchange's determination is based on the Commission's applicable 
standards and process, allowing the Commission to leverage off exchange 
determinations in conducting the Commission's own, independent review.
    While the Commission has determined, as described above, to extend 
the compliance period with respect to certain obligations under this 
Final Rule,\1075\ exchanges may start, but are not required, to 
implement and begin processing non-enumerated bona fide hedge 
applications under Sec.  150.9 as early as the Effective Date of the 
Final Rule.\1076\ The Commission reminds exchanges that, to implement 
Sec.  150.9, they will first need to submit new or amended rules to the 
Commission, pursuant to the existing rule-approval process in Sec.  
40.5 (which could take up to 45-90 days or longer, as agreed to by the 
exchange) before they exchanges can begin processing applications under 
Sec.  150.9.
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    \1075\ See supra Section I.D. (discussing the effective and 
compliance dates for the Final Rule).
    \1076\ Id.
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    Finally, the Commission clarifies that market participants with 
existing Commission-granted non-enumerated or anticipatory bona fide 
hedge recognitions (other than risk management exemptions) are not 
required to reapply to the Commission for a new recognition under the 
Final Rule. That is, if the Commission previously issued a non-
enumerated or anticipatory bona fide hedge recognition for one of the 
nine legacy agricultural contracts pursuant to existing Sec.  1.47 or 
Sec.  1.48, as applicable, a market participant is not required, under 
the Final Rule, to reapply to the Commission for such recognition 
pursuant to final Sec.  150.3 or Sec.  150.9.
    In addition, the Commission is making a technical change by 
rewording Sec.  150.9(a) to clarify that exchanges must seek approval, 
using the Commission's rule approval process in existing Sec.  40.5, to 
implement their rules establishing application processes under Sec.  
150.9.
4. Section 150.9(b)--Prerequisites for an Exchange To Recognize Non-
Enumerated Bona Fide Hedges in Accordance With This Section
i. Summary of 2020 NPRM--Prerequisites for an Exchange To Recognize 
Non-Enumerated Bona Fide Hedges
    Proposed Sec.  150.9(b) set forth conditions that would require an 
exchange-recognized bona fide hedge to conform to the corresponding 
definitions and standards the Commission uses in proposed Sec. Sec.  
150.1 and 150.3 for purposes of the Federal position limits regime. 
Proposed Sec.  150.9(b) would require the exchange to meet the 
following conditions: (i) The exchange lists the applicable referenced 
contract for trading; (ii) the position is consistent with both the 
definition of bona fide hedging transaction or position in proposed 
Sec.  150.1 and existing CEA section 4a(c)(2); and (iii) the exchange 
does not recognize as bona fide hedges any positions that include 
commodity index contracts and one or more referenced contracts, 
including exemptions known as risk management exemptions.\1077\
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    \1077\ The Commission finds that financial products are not 
substitutes for positions taken or to be taken in a physical 
marketing channel. Thus, the offset of financial risks arising from 
financial products would be inconsistent with the definition of bona 
fide hedging transactions or positions for physical commodities in 
proposed Sec.  150.1. See supra Section II.A.1. (discussion of the 
temporary substitute test and risk-management exemptions).
---------------------------------------------------------------------------

ii. Comments and Summary of Commission Determination--Prerequisites for 
an Exchange To Recognize Non-Enumerated Bona Fide Hedges
    The Commission did not receive any comments on proposed Sec.  
150.9(b) and is finalizing this section as proposed, for reasons stated 
above with respect to Sec.  150.9(b), and with only minor grammatical 
edits to change certain words to a singular tense.
5. Section 150.9(c)--Application Process
    Proposed Sec.  150.9(c) set forth the information and 
representations that the exchange, at a minimum, would be required to 
obtain from applicants as part of the Sec.  150.9 application process. 
Proposed Sec.  150.9(c) would permit exchanges to rely upon their 
existing application forms and processes in making such determinations, 
provided that they collect the information outlined below. The 
following sections summarize each sub-section of proposed Sec.  
150.9(c) as well as comments received and the Commission's 
determination on each sub-section.
i. Section 150.9(c)(1)--Required Information for Non-Enumerated Bona 
Fide Hedging Positions
a. Summary of 2020 NPRM--Required Information for Non-Enumerated Bona 
Fide Hedging Positions
    With respect to bona fide hedging positions in referenced 
contracts, proposed Sec.  150.9(c)(1) would require that any 
application include: (i) A description of the position in the commodity 
derivative contract for which the application is submitted (which would 
include the name of the underlying commodity and the position size); 
(ii) information to demonstrate why the position satisfies CEA section 
4a(c)(2) and the definition of bona fide hedging transaction or 
position in proposed Sec.  150.1, including ``factual and legal 
analysis;'' (iii) a statement concerning the maximum size of all gross 
positions in derivative contracts for which the application is 
submitted (in order to provide a view of the true footprint of the 
position in the market); (iv) information regarding the applicant's 
activity in the cash markets for the commodity underlying the position 
for which the application is submitted; \1078\ and (v) any other 
information the exchange requires, in its discretion, to enable the 
exchange and the Commission to determine whether such position should 
be recognized as a bona fide hedge.\1079\
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    \1078\ The Commission expects that exchanges would require 
applicants to provide cash-market data for at least the prior year.
    \1079\ Under proposed Sec.  150.9(c)(1)(iv) and (v), exchanges, 
in their discretion, could request additional information as 
necessary, including information for cash-market data similar to 
what is required in the Commission's existing Form 204. See infra 
Section II.H.2. (discussion of Form 204 and amendments to part 19). 
Exchanges could also request a description of any positions in other 
commodity derivative contracts in the same commodity underlying the 
commodity derivative contract for which the application is 
submitted. Other commodity derivatives contracts could include other 
futures contracts, option on futures contracts, and swaps (including 
OTC swaps) positions held by the applicant.
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    In the 2020 NPRM, the Commission noted that exchanges would not 
need to require the identification of a hedging need against a 
particular identified

[[Page 3372]]

category, but that the requesting party must satisfy all applicable 
requirements in proposed Sec.  150.9, including demonstrating with a 
factual and legal analysis that a position would fit within the bona 
fide hedge definition. The 2020 NPRM was not intended to require the 
hedging party's books and records to identify the particular type of 
hedge being applied.
b. Comments--Required Information for Non-Enumerated Bona Fide Hedging 
Positions
    The Commission received few comments related to the application 
requirements exchanges must implement under proposed Sec.  150.9(c)(1). 
Some commenters requested that the Commission remove the requirement 
that the exchange applications implemented under proposed Sec.  
150.9(c)(1)(ii) require a ``factual and legal analysis'' from 
applicants.\1080\ Another commenter requested that the Commission 
clarify any additional factors exchanges should consider when granting 
non-enumerated bona fide hedge applications pursuant to proposed Sec.  
150.9.\1081\
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    \1080\ CME Group at 10 (noting its concern that this requirement 
could be interpreted as requiring applicants to engage legal counsel 
to complete their applications. CME Group stated that by way of 
background, CME Group exchanges have never required detailed legal 
or economic analysis to demonstrate compliance with regulatory 
requirements. Instead, CME Group requires the applicant to explain 
its strategy, and CME Group considers and analyzes this explanation 
using the exchange's expertise. CME Group recommends that the CFTC 
instead require an applicant to ``explain its strategy and state 
that it complies with the regulatory requirements for a bona fide 
hedge exemption without having to provide a legal analysis.'' The 
exchange can solicit additional information from the applicant as 
needed.) and CMC at 11 (providing that, in the alternative, the 
Commission could clarify that exchanges or the Commission might 
request legal analyses at their discretion, which may be in the form 
of analysis provided by in-house counsel).
    \1081\ See ISDA at 9 (requesting that the final rule include 
factors exchanges should consider, such as ``sound commercial 
practices'' or ``necessary and appropriate to reduce potential 
threat of market manipulation'').
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c. Discussion of Final Rule--Required Information for Non-Enumerated 
Bona Fide Hedging Positions
    The Commission is adopting Sec.  150.9(c)(1), with certain 
revisions and clarifications, explained below. The information required 
to be submitted as part of the application is necessary to allow the 
exchange and the Commission to evaluate whether the applicant's hedging 
position satisfies the bona fide hedge definition in proposed Sec.  
150.1 and CEA section 4a(c)(2).
    The Commission is making one modification to clarify the 
Commission's posture when reviewing non-enumerated bona fide hedge 
applications under the Sec.  150.9 process. In proposed Sec.  
150.9(c)(1) the Commission proposed to require exchanges to collect 
sufficient information for the exchange to determine and the Commission 
to ``verify'' that the facts and circumstances demonstrate that the 
exchange may recognize a position as a bona fide hedge. In final Sec.  
150.9(c)(1), the Commission is revising this provision to make clear 
that the Commission will conduct an independent evaluation of any 
application it reviews to ``determine'' (not verify) whether the facts 
and circumstances demonstrate that the exchange may recognize the 
position as a bona fide hedge. Likewise, the Commission is also 
revising final Sec.  150.9(c)(1)(v), to require that exchanges collect 
any other information they deem necessary to ``determine'' (not 
``verify'' as proposed) whether a particular position meets the bona 
fide hedge definition. The term ``determine'' more accurately describes 
the exchange's responsibility to conduct an independent evaluation of 
each application, as opposed to a verification, as proposed.
    In final Sec.  150.9(c)(1)(ii), the Commission is modifying the 
requirement from proposed Sec.  150.9(c)(1)(ii) that exchanges request 
a ``factual and legal'' analysis from applicants for non-enumerated 
bona fide hedge recognitions. In proposing this requirement, the 
Commission did not intend for exchanges to require that applicants 
engage legal counsel to complete their applications for non-enumerated 
bona fide hedge recognitions. Rather, the purpose of this proposed 
provision was to ensure that applicants provide an explanation and 
information that sufficiently demonstrates why a particular position 
qualifies as bona fide hedge, as defined in Sec.  150.1 and CEA section 
4a(c)(2). Instead of requiring a ``factual and legal analysis,'' the 
Commission has revised Sec.  150.9(c)(1)(ii) in the Final Rule 
accordingly so that an applicant must provide an explanation of the 
hedging strategy, including a statement that the applicant's position 
complies with the applicable requirements of the bona fide hedge 
definition, and information to demonstrate why the position satisfies 
the applicable requirements. This revision is intended to clarify that 
the applicant is not required to provide a detailed legal analysis or 
engage legal counsel to complete their application. Rather, the 
applicant must provide: (1) A simple explanation or description of the 
hedging strategy (and include a statement that the strategy complies 
with the bona fide hedge definition requirements); and (2) the relevant 
information that shows why or how the strategy meets the bona fide 
hedge definition requirements. The exchange can then consider this 
explanation and information in light of its expertise with the relevant 
market in performing its own analysis.
    Also, under Sec.  150.9(c)(1), regarding the request that the 
Commission provide additional factors that exchanges should consider 
when granting non-enumerated bona fide hedge recognitions, the 
Commission believes that the requirements under final Sec.  150.9(c) 
provide sufficient criteria for exchanges to consider when evaluating 
applications. As stated in the 2020 NPRM, the Commission believes the 
information an exchange is required to collect under Sec.  150.9(c) is 
sufficient for the exchange and the Commission to determine whether a 
particular transaction or position satisfies the definition of bona 
fide hedging transaction for purposes of Federal position limits. The 
Commission further highlights that, under final Sec.  150.9(c)(1)(v), 
an exchange has the authority to collect any additional information 
that, in its discretion, would help it assess whether to approve a 
request for a non-enumerated bona fide hedge recognition. Further, in 
response to ISDA's request, an exchange is required by Sec.  
150.5(a)(2)(ii)(G) to consider some of the factors ISDA recommended 
when determining whether to grant an exemption, including whether the 
approval of an exemption would result in positions that are in accord 
with sound commercial practices, among other considerations.\1082\ In 
summary, the Commission believes that the final regulations strike the 
proper balance by providing sufficient guidance to the exchanges for 
their review and determination in the context of exchange-set limits, 
while preserving the exchanges' discretionary authority to determine 
what types of additional information, if any, to collect.
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    \1082\ See supra Section II.D.3. (addressing other factors 
exchanges must consider, under Sec.  150.5(a)(2)(ii)(G), when 
granting exemptions for contracts that are subject to Federal 
position limits).
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    In addition to the revisions and explanations above, the Commission 
is adding the word ``needed'' to Sec.  150.9(c)(1) to clarify that 
exchanges may collect all information needed to conduct their analysis 
of a particular application.

[[Page 3373]]

ii. Section 150.9(c)(2)--Timing of Non-Enumerated Bona Fide Hedge 
Application
a. Summary of 2020 NPRM--Timing of Non-Enumerated Bona Fide Hedge 
Application
    The Commission did not propose to prescribe timelines (e.g., a 
specified number of days) for exchanges to review applications because 
the Commission believed that exchanges are in the best position to 
determine how to best accommodate the needs of their market 
participants. Rather, under proposed Sec.  150.9(c)(2), an applicant 
must submit its application in advance of exceeding the applicable 
Federal position limits for any given referenced contract.
    However, the 2020 NPRM would permit a person to submit a bona fide 
hedge application within five days after the person has exceeded 
Federal speculative limits (commonly referred to as retroactive 
applications) if such person exceeds the limits due to ``demonstrated 
sudden or unforeseen increases in its bona fide hedging needs.'' Where 
an applicant claims a sudden or unforeseen increase in its bona fide 
hedging needs, the 2020 NPRM would require exchanges to require that 
the person provide materials demonstrating that the person exceeded the 
Federal speculative limit due to sudden or unforeseen circumstances. 
Further, in the 2020 NPRM, the Commission cautioned exchanges that 
applications submitted after a person has exceeded Federal position 
limits should not be habitual and would be reviewed closely. Finally, 
if the Commission found that the position did not qualify as a bona 
fide hedge, then the applicant would be required to bring its position 
into compliance, and could face a position limits violation if it did 
not reduce the position within a commercially reasonable time.
b. Comments--Timing of Non-Enumerated Bona Fide Hedge Application
    The Commission received several comments regarding the retroactive 
application provision in proposed Sec.  150.9(c)(2)(ii). CME preferred 
allowing retroactive application exemptions that are not limited to 
circumstances involving sudden/unforeseen increases in bona fide 
hedging needs.\1083\ Instead, CME Group recommended that the Commission 
(i) allow retroactive applications regardless of the circumstances, and 
(ii) impose a position limits violation upon an applicant if the 
exchange denies the retroactive application.\1084\ ICE recommended that 
the Commission permit retroactive exemptions for other types of 
exemptions (including spread exemptions and pass-through-swap 
exemptions) as well as for position limit overages that occur as a 
result of operational or incidental issues where the applicant did not 
intend to evade position limits.\1085\ Finally, IFUS supported the 
retroactive application provision as it was proposed.\1086\ IFUS noted 
that it follows a similar approach under its existing rules.\1087\
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    \1083\ CME Group at 9-10 (explaining that in its experience, 
position limit violations ``often occur unintentionally due to 
operational or administrative oversight, not because the market 
participant needed to enter into a hedge quickly in response to 
changing market conditions'' and that over the past three years, CME 
Group has received at least 49 retroactive exemption applications to 
address some type of administrative oversight issue); See also CMC 
at 11 (agreeing with CME Group), and FIA at 18 (recommending the 
Commission allow retroactive exemptions within five business days 
for any reason).
    \1084\ CME Group at 9-10 (explaining that without the threat of 
a potential position limits violation, market participants could 
exploit the retroactive provision and intentionally exceed position 
limits without consequences--``all while disrupting orderly market 
operations.'' According to CME Group, the prospect of having an 
application denied and being found in violation of position limits 
has worked to deter market participants from attempting to exploit 
the retroactive exemption process).
    \1085\ ICE at 10.
    \1086\ IFUS at 13-14.
    \1087\ Id.
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c. Discussion of Final Rule--Timing of Non-Enumerated Bona Fide Hedge 
Application
    The Commission is adopting Sec.  150.9(c) largely as proposed, with 
certain modifications and clarifications to reflect commenters' views 
and other considerations. First, the Commission is revising Final Rule 
Sec.  150.9(c)(2)(i) so that it is consistent with changes the 
Commission is making to Sec.  150.9(e)(3), discussed further 
below.\1088\ As explained below, under Final Rule Sec.  
150.9(e)(3),\1089\ applicants may elect (at their own risk) \1090\ to 
exceed Federal position limits after an exchange notifies the 
Commission of the exchange's approval of the application for purposes 
of exchange-set limits,\1091\ and during the Commission's 10-day review 
period. This is a change from the 2020 NPRM under which a person would 
be required to wait until the Commission's 10-day review period expired 
before exceeding Federal position limits. Proposed Sec.  150.9(c)(2)(i) 
was drafted in a manner that reflects this proposed requirement. 
Accordingly, the Commission is revising Sec.  150.9(c)(2)(i) to clarify 
that an applicant may exceed Federal position limits after receiving a 
notice of approval from the relevant designated contract market or swap 
execution facility.
---------------------------------------------------------------------------

    \1088\ See infra Section II.G.7. (discussing when a person may 
exceed Federal position limits).
    \1089\ Id.
    \1090\ See infra Section II.G.7.ii. (explaining that an 
applicant bears the risk that the Commission could deny the 
application and require the person to bring their position into 
compliance with Federal position limits).
    \1091\ The Commission clarifies, for the avoidance of doubt, 
that an exchange approval of a non-enumerated bona fide hedge (for 
purposes of exchange limits) issued under Sec.  150.9 is not a 
Commission approval of the non-enumerated bona fide hedge.
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    Next, the Commission has determined not to expand the retroactive 
application provision in Sec.  150.9(c)(2)(ii) to be available in any 
circumstances (i.e., not just for sudden or unforeseen hedging needs) 
or for other exemption types. The Final Rule provides broad flexibility 
to market participants in the form of various exemptions from Federal 
position limits. In particular, this Final Rule significantly expands 
the list of self-effectuating enumerated bona fide hedges available to 
market participants,\1092\ provides an expansive spread transaction 
exemption provision,\1093\ and provides new exemptions for relief for 
financial distress positions and conditional spot month limits for 
certain natural gas positions.\1094\ This Final Rule also grants 
additional flexibility for market participants to exceed Federal 
position limits during the pendency of the Commission's review of the 
application. Given these additional enhancements to the Federal 
position limits framework for bona fide hedges and other exemptions, 
the Commission expects that there will be a limited number of non-
enumerated bona fide hedge requests submitted through the Sec.  150.9 
process and that it is reasonable to expect that market participants 
will be able to file any such non-enumerated bona fide hedge requests 
ahead of needing to exceed limits.
---------------------------------------------------------------------------

    \1092\ See supra Section II.A.1. (discussing the expanded list 
of enumerated bona fide hedges in Appendix A).
    \1093\ See supra Section II.A.20. (discussing the expanded 
spread transaction definition in Sec.  150.1).
    \1094\ See supra Section II.C.5-6. (discussing the financial 
distress exemption and the conditional spot month limit exemption in 
natural gas).
---------------------------------------------------------------------------

    The Commission is willing to permit the limited exception for 
retroactive applications that occur due to sudden or unforeseen bona 
fide hedging needs, as described above. Otherwise, market participants 
would be penalized and prevented from assuming appropriate hedges even 
though their hedging need arises from circumstances beyond their

[[Page 3374]]

control. Beyond that exception, the Commission believes that market 
participants are able, and should be required, to file timely 
applications. The Commission believes this is particularly true for 
trading strategies that are not enumerated bona fide hedges and thus 
may involve some element of non-risk reducing activity. Expanding the 
exception beyond bona fide hedging needs that arise due to sudden or 
unforeseen circumstances may dis-incentivize market participants from 
properly monitoring their hedging activities and filing exemption 
applications in a timely manner.
iii. Section 150.9(c)(3)--Renewal of Applications for Non-Enumerated 
Bona Fide Hedges
a. Summary of 2020 NPRM--Renewal of Applications for Non-Enumerated 
Bona Fide Hedges
    Proposed Sec.  150.9(c)(3) would require that the exchange require 
persons with approved non-enumerated bona fide hedges that were 
previously granted pursuant to proposed Sec.  150.9 to reapply to the 
exchange at least on an annual basis by updating their original 
applications. Proposed Sec.  150.9(c)(3) would also require that the 
exchange require applicants to receive a notice of approval of the 
renewal from the exchange prior to exceeding the applicable position 
limit.
b. Comments--Renewal of Applications for Non-Enumerated Bona Fide 
Hedges
    Several commenters requested a clarification that an applicant (i) 
would only be subject to the Commission's 10/2-day review process in 
Sec.  150.9(e) (described below) for initial applications for non-
enumerated bona fide hedge recognitions, and (ii) would not be subject 
to such review for annual renewal applications, unless the facts and 
circumstances materially change from those presented in the initial 
application.\1095\
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    \1095\ CEWG at 27; MGEX at 3; CME Group at 8; FIA at 17; ICE at 
9; and IFUS at 7 (further requesting that if a non-enumerated bona 
fide hedge is granted, a participant should be able to treat similar 
positions as bona fide hedges so long as they re-apply to the 
exchange through the annual renewal process).
---------------------------------------------------------------------------

c. Discussion of Final Rule--Renewal of Applications for Non-Enumerated 
Bona Fide Hedges
    The Commission is adopting Sec.  150.9(c)(3) with modifications to 
clarify that the Commission's review and determination conducted under 
final Sec.  150.9(e) is required only for initial applications for non-
enumerated bona fide hedge recognitions. The Commission is also 
clarifying that, except as provided below, renewals of previously-
approved non-enumerated bona fide hedge applications are not required 
to be submitted to the Commission under Sec.  150.9, and need only be 
submitted to and approved by the relevant exchange at least on an 
annual basis for the applicant to continue relying on such recognition 
for purposes of Federal position limits. Such renewal application 
serves the purpose of confirming that the facts and circumstances 
underlying the original application approved by the Commission remain 
operative. However, if the facts and circumstances underlying a renewal 
application are materially different than the initial application, then 
such application should be treated as a new request that should be 
submitted through the Sec.  150.9 process and subject to the 
Commission's 10/2-day review process in Sec.  150.9(e).
iv. Section 150.9(c)(4)--Exchange Revocation Authority
a. Summary of the 2020 NPRM--Exchange Revocation Authority
    Proposed Sec.  150.9(c)(4) would require that an exchange retain 
its authority to limit, condition, or revoke, at any time, any 
recognition previously issued pursuant to proposed Sec.  150.9, for any 
reason, including if the exchange determines that the recognition is no 
longer consistent with the bona fide hedge definition in proposed Sec.  
150.1 or section 4a(c)(2) of the Act.
b. Comments and Summary of the Commission Determination--Exchange 
Revocation Authority
    The Commission did not receive comments on proposed Sec.  
150.9(c)(4) and is finalizing this section as proposed.
6. Section 150.9(d)--Recordkeeping
i. Summary of the 2020 NPRM--Recordkeeping
    Proposed Sec.  150.9(d) would require exchanges to maintain 
complete books and records of all activities relating to the processing 
and disposition of applications in a manner consistent with the 
Commission's existing general regulations regarding 
recordkeeping.\1096\ Such records would need to include: All 
information and documents submitted by an applicant in connection with 
its application; records of oral and written communications between the 
exchange and the applicant in connection with the application; and 
information and documents in connection with the exchange's analysis 
of, and action on, such application. Exchanges would also be required 
to maintain any documentation submitted by an applicant after the 
disposition of an application, including, for example, any reports or 
updates the applicant files with the exchange.
---------------------------------------------------------------------------

    \1096\ Requirements regarding the keeping and inspection of all 
books and records required to be kept by the Act or the Commission's 
regulations are found at Sec.  1.31. 17 CFR 1.31. DCMs are already 
required to maintain records of their business activities in 
accordance with the requirements of Sec.  1.31 and Sec.  38.951. 17 
CFR 38.951.
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ii. Comments--Recordkeeping
    The Commission received one comment regarding exchange 
recordkeeping requirements under proposed Sec.  150.9. NGSA requested 
that any exchange recordkeeping/reporting requirements that apply to 
the proposed Sec.  150.9 process do not require matching applicants' 
hedge positions to their underlying cash positions on a one-to-basis, 
but should instead allow for recordkeeping/reporting of positions on an 
aggregate basis.\1097\
---------------------------------------------------------------------------

    \1097\ See NGSA at 9 (noting that allowing matching on an 
aggregate basis would accommodate the practical needs of many market 
participants to hedge their risks on a portfolio basis).
---------------------------------------------------------------------------

iii. Discussion of Final Rule--Recordkeeping
    The Commission is adopting Sec.  150.9(d) as proposed, and with 
only one minor grammatical edit to change the term ``designated 
contract market'' to the correct possessive tense. The Commission also 
clarifies here, in response to comments, that the Sec.  150.9(d) 
recordkeeping requirements do not prescribe the manner in which 
exchanges record how they match applicants' bona fide hedge positions 
to applicants' underlying cash positions. Rather, final Sec.  
150.9(c)(1)(iv) requires that an exchange collect the necessary 
information regarding an applicant's cash-market activity and 
offsetting cash positions, and final Sec.  150.9(d) simply requires the 
exchange to keep a record of such application materials and information 
collected. However, an exchange's records should be sufficient to 
demonstrate that any approved non-enumerated bona fide hedges meet the 
requirements of Sec.  150.9(b). The Commission also reiterates, as 
explained in the 2020 NPRM, that exchanges are required to store and 
produce records pursuant to existing Sec.  1.31,\1098\ and will

[[Page 3375]]

be subject to requests for information pursuant to other applicable 
Commission regulations, including, for example, existing Sec.  
38.5.\1099\
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    \1098\ Consistent with existing Sec.  1.31, the Commission 
expects that these records would be readily available during the 
first two years of the required five-year recordkeeping period for 
paper records, and readily accessible for the entire five-year 
recordkeeping period for electronic records. In addition, the 
Commission expects that records required to be maintained by an 
exchange pursuant to this section would be readily accessible during 
the pendency of any application, and for two years following any 
disposition that did not recognize a derivative position as a bona 
fide hedge.
    \1099\ See 17 CFR 38.5 (requiring, in general, that upon request 
by the Commission, a DCM must file responsive information with the 
Commission, such as information related to its business, or a 
written demonstration of the DCM's compliance with one or more core 
principles).
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7. Section 150.9(e)--Process for a Person To Exceed Federal Position 
Limits
    The following discussion summarizes proposed Sec.  150.9(e), 
comments received, and the Commission's determination according to each 
sub-section, or a combination of certain subsections, of Sec.  
150.9(e).
i. Section 150.9(e)(1)-(2)--Notification to the Commission and 
Notification Requirements
a. Summary of the 2020 NPRM--Notification to the Commission and 
Notification Requirements
    Under proposed Sec.  150.9(e)(1), once an exchange recognizes a 
non-enumerated bona fide hedge with respect to its own exchange-set 
position limits established pursuant to Sec.  150.5(a), the exchange 
would be required to notify the Commission concurrently with the 
approval notice it provides to the applicant. Under proposed Sec.  
150.9(e)(2), such notification to the Commission would need to include 
a copy of the application and any supporting materials, as well as 
certain basic information, outlined in Sec.  150.9(e)(2)(i)-(vi), about 
the exemption. The exchange would only be required to provide this 
notice to the Commission with respect to its initial (and not renewal) 
determination for a particular application.
b. Comments--Notification to the Commission and Notification 
Requirements
    While proposed Sec.  150.9(e)(1) would require an exchange to 
notify the Commission upon making an initial determination to recognize 
a non-enumerated bona fide hedge, that rule would not require the 
exchange to notify the public of any such determination. Commenters 
submitted several general requests related to the publication of non-
enumerated bona fide hedges and the future expansion of the list of 
enumerated bona fide hedges in Appendix A to the proposed regulatory 
text in the 2020 NPRM. Specifically, certain commenters requested that 
exchanges be required to publicize approved non-enumerated bona fide 
hedge recognitions so that market participants are aware of the types 
of recognitions they can receive.\1100\
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    \1100\ See COPE at 5 (noting that such notice should provide 
market participants the facts upon which the recognition is based, 
and would save the Commission from repeatedly processing requests 
for the same hedging strategy); FIA at 15, 19 (requesting that 
exchanges be required to publish anonymized descriptions of non-
enumerated hedging recognitions granted by the exchange); EPSA at 5-
7.
---------------------------------------------------------------------------

c. Discussion of Final Rule--Notification to the Commission and 
Notification Requirements
    The Commission has determined to finalize Sec.  150.9(e)(1)-(2) as 
proposed. While the Final Rule does not require exchanges to publicize 
approved non-enumerated bona fide hedge recognitions, an exchange may 
elect, in its discretion, to provide such a list. The Commission 
understands, however, that in the past, exchanges and market 
participants have raised concerns that publicizing information about 
approved non-enumerated bona fide hedges could divulge confidential 
information (such as trade secrets, intellectual property, the market 
participant's identity or position).\1101\
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    \1101\ See 81 FR at 96824.
---------------------------------------------------------------------------

    To the extent that an exchange elects to publicize descriptions of 
approved non-enumerated bona fide hedges, the Commission cautions that 
any such data published should not disclose the identity of, or 
confidential information about, the applicant. Rather, any published 
summaries are expected to be general (generic facts and circumstances). 
While the decision whether to publicize descriptions of approved non-
enumerated bona fide hedges is at the discretion of the exchange, the 
exchange remains subject to all applicable laws and regulations 
(including exchange bylaws) governing the protection of confidential 
trade and trader information. The Commission also cautions exchanges to 
make clear that any descriptions or lists of approved non-enumerated 
bona fide hedges they elect to publish are for informational purposes 
only and do not bestow any rights upon applicants to a claim that a 
particular strategy is a non-enumerated bona fide hedge simply because 
it aligns with a published example or description provided by the 
exchange.
ii. Section 150.9(e)(3)-(4)--Exceeding Federal Speculative Position 
Limits and the Commission's 10/2-Day Review Process
a. Summary of the 2020 NPRM--Exceeding Federal Speculative Position 
Limits and the Commission's 10/2-Day Review Process
    Under proposed Sec.  150.9(e)(3), a person could exceed Federal 
position limits ten business days after the exchange notifies the 
Commission in accordance with proposed Sec.  150.9(e)(2) that the 
exchange has approved the non-enumerated bona fide hedge application 
for purposes of exchange limits, provided that the Commission does not 
notify the exchange or applicant that the Commission has determined to 
stay or deny the application during its ten-day review.
    Under proposed Sec.  150.9(e)(4), if a person exceeds Federal 
position limits due to sudden or unforeseen bona fide hedging needs and 
then files a retroactive application pursuant to proposed Sec.  
150.9(c)(2)(ii), then such application would be deemed approved by the 
Commission two business days after the exchange issues the required 
notification, provided that the Commission does not notify the exchange 
or applicant that the Commission has determined to stay or deny the 
application during its two-day review.
    Under the 2020 NPRM, once those ten (or two) business days have 
passed, the person could rely on the bona fide hedge recognition both 
for purposes of exchange-set and Federal position limits, with the 
certainty that the Commission (and not Commission staff) would only 
revoke that determination in the limited circumstances set forth in 
proposed Sec.  150.9(f)(1) and (2) described further below.
b. Comments--Exceeding Federal Speculative Position Limits and the 
Commission's 10/2-Day Review Process
    The bulk of the comments the Commission received on proposed Sec.  
150.9 relate to the Commission's proposed ten-day or two-day period for 
reviewing a non-enumerated bona fide hedge application after an 
exchange has already approved the application for purposes of the 
exchange-set limits (as noted above,\1102\ the 10/2-day review). In 
particular, the Commission received several comments on the sufficiency 
of the proposed review periods, including that the Commission's 
proposed 10/2-

[[Page 3376]]

day review period is: (1) Too long; \1103\ (2) too short; \1104\ and 
(3) just right.\1105\
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    \1102\ See supra Section II.G.
    \1103\ ADM at 6 (suggesting a five/one business day review 
period); ICE at 9 (explaining that the 10-day review period would 
impose unnecessary burdens and delay and create uncertainty for 
market participants); IFUS at 14 (explaining that the 10-day review 
period potentially conflicts with the exchange's spot-month 
exemption review process, as contracts could expire before the 
review period ends, and noting that a two day review, although not 
ideal, is preferred); NGFA at 9 (suggesting a two-business-day 
review period).
    \1104\ IATP at 13-14 (contending that the 10/2-day review period 
would burden an under-resourced Commission); Better Markets at 3, 63 
(asserting that, under proposed Sec.  150.9, it is impossible for 
Commission staff to, within the prescribed amount of time: review 
and collect additional information on non-enumerated bona fide hedge 
applications; draft orders; receive the Chairman's approval for a 
seriatim process; and secure the necessary Commissioner votes).
    \1105\ CME Group at 7 (also agreeing that a timeline for 
exchanges' review of applications should not be prescribed).
---------------------------------------------------------------------------

    In addition, several commenters suggested that the Commission 
permit applicants to exceed Federal position limits during the 
Commission's ten-day review period (which occurs after an exchange 
issues its approval with respect to exchange-set limits).\1106\ 
Commenters also suggested that rather than the CFTC reviewing each non-
enumerated bona fide hedge exemption application after each exchange 
determination, the CFTC should monitor exchanges at a higher level 
(such as through the rule enforcement review process).\1107\
---------------------------------------------------------------------------

    \1106\ ADM at 6; ICE at 9; IFUS at 7; CME Group at 7-8 
(explaining that exchanges have ``strong incentives to grant 
exemptions only after careful review'' because they have statutory 
obligations to prevent manipulation); CMC at 12 (noting that it is 
currently unclear whether an applicant can enter into a position 
during the Commission's 10/2-day review).
    \1107\ ICE at 9; IFUS at 7 (questioning whether it is necessary 
for the Commission to routinely review each non-enumerated bona fide 
hedge application); CEWG at 26-27 (suggesting an annual exchange 
rule enforcement review process instead of the 10/2-day review).
---------------------------------------------------------------------------

c. Discussion of Final Rule--Exceeding Federal Speculative Position 
Limits and the Commission's 10/2-Day Review Process
    The Commission is adopting Sec.  150.9(e)(3)-(4) with certain 
revisions and clarifications as discussed below.
    First, regarding general comments on the length of the Commission's 
10/2-day review periods, the Commission acknowledges commenters' 
concerns regarding whether the Commission will have enough time to 
review and act on non-enumerated bona fide hedge applications. However, 
the Commission will continue to develop internal processes and systems 
to respond to Sec.  150.9 applications as needed and within those 
timeframes. In addition, the Sec.  150.9 process enables the Commission 
to leverage the exchange's review and analysis, which would serve to 
inform the Commission's own review. The Commission believes that this 
streamlined approach will reduce the amount of time required for the 
Commission's review each application.
    In addition, regarding comments suggesting that the 10/2-day review 
periods are too long and will impose unnecessary delays on market 
participants, and the request that market participants be able to 
exceed Federal position limits during the Commission's 10-day review, 
the Commission is revising proposed Sec.  150.9(e)(3) to provided 
additional flexibility. Under Sec.  150.9(e)(3), applicants may elect 
to exceed Federal position limits once they receive a notice of 
approval from the relevant exchange and during the Commission's 10-day 
review period, but will do so at their own risk.
    That is, if an applicant exceeds Federal position limits before the 
Commission's 10-day review period ends, the applicant bears market risk 
for that position, in that the Commission could, in accordance with 
Sec.  150.9(e)(6) described below, deny the application for purposes of 
Federal position limits and require the applicant to bring its position 
back into compliance with the Federal position limits within a 
commercially reasonable amount of time, as determined by the Commission 
in consultation with the relevant exchange and applicant. As discussed 
below in connection with Sec.  150.9(e)(6), in these circumstances 
where an applicant is required to lower its position, as a matter of 
policy, the Commission will not pursue an enforcement action against 
the applicant so long as the application was filed in good faith 
(meaning the applicant and exchange have a reasonable and good faith 
basis for determining that the position meets the requirements of Sec.  
150.9(b)) and the applicant brings its position into compliance within 
a commercially reasonable amount of time.
    Further, regarding general comments that the length of the 10/2-day 
review period is too long, the Commission believes allowing applicants 
to exceed Federal position limits during the Commission's ten-day 
review period addresses many commenter concerns. As described above, 
the Final Rule also affords applicants the ability to file retroactive 
applications in certain limited circumstances, and to hold positions 
above Federal position limits during the Commission's two-day review of 
such retroactive application. The Commission believes that these 
avenues adequately accommodate market participants' needs to hedge in a 
timely manner, and are well-balanced with the Commission's need to 
maintain adequate oversight of non-enumerated bona fide hedge 
applications through its limited 10/2-day review periods.
    Furthermore, the Commission would consider it to be a reasonable 
and helpful practice if exchanges elect to provide information to the 
Commission on non-enumerated bona fide hedge applications as the 
exchange is considering such applications. That is, the Commission 
would find it helpful to receive an advance courtesy copy of any Sec.  
150.9 applications the exchange receives. The exchange is not, however, 
required to provide such advance copies, and would not be required to 
obtain an opinion on such applications from the Commission before 
making its determination. Rather, providing such application 
information as the exchange receives it could facilitate a more rapid 
Commission evaluation of Sec.  150.9 applications. This would help 
facilitate additional regulatory certainty for market participants and 
would aid the Commission in its review of applications processed under 
Sec.  150.9.
    Also, while commenters requested that the Commission should not 
review each non-enumerated bona fide hedge application, the Commission 
is of the view that it must review each application in order to conform 
to the legal limits on what an agency may delegate to persons outside 
the agency.\1108\ Under the new model finalized herein, the Commission 
will be informed by the exchanges' determinations to make the 
Commission's own determination for purposes of Federal position limits 
before the 10/2-day review period expires. Accordingly, the Commission 
will retain its decision-making authority with respect to the Federal 
position limits and provide legal certainty to market participants of 
their determinations.
---------------------------------------------------------------------------

    \1108\ In U.S. Telecom Ass'n v. FCC, the D.C. Circuit held 
``that, while Federal agency officials may sub-delegate their 
decision-making authority to subordinates absent evidence of 
contrary congressional intent, they may not sub-delegate to outside 
entities--private or sovereign--absent affirmative evidence of 
authority to do so.'' U.S. Telecom Ass'n v. FCC, 359 F.3d 554, 565-
68 (D.C. Cir. 2004) (citations omitted). Nevertheless, there are 
three circumstances that the agency may ``delegate'' its authority 
to an outside party because they do not involve sub-delegation of 
decision-making authority: (1) Establishing a reasonable condition 
for granting Federal approval; (2) fact gathering; and (3) advice 
giving. Id. at 568.
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    Finally, in Sec.  150.9(e)(3) and (4), the Commission is making one 
technical correction to clarify that a person may exceed Federal 
position limits or rely on

[[Page 3377]]

an approved retroactive application after the 10/2-day review period, 
as applicable, unless the Commission notifies the person and relevant 
exchange that it has determined to stay or deny the application, 
pursuant to Sec.  150.9(e)(5) or (e)(6). In the 2020 NPRM, the 
Commission only referred to its stay authority in Sec.  150.9(e)(5), 
discussed in detail below. However, as clarified in the Final Rule, the 
Commission could also notify the applicant and exchange of its 
determination to deny the application for purposes of Federal position 
limits under Sec.  150.9(e)(6), also discussed below. This change is a 
technical correction and does not change the substance of Sec.  
150.9(e)(3) or (4).
iii. Section 150.9(e)(5)--Commission Stay of Pending Applications and 
Requests for Additional Information
a. Summary of the 2020 NPRM--Commission Stay of Pending Applications 
and Requests for Additional Information
    Under proposed Sec.  150.9(e)(5), the Commission could stay a non-
enumerated bona fide hedge application that an exchange has approved, 
pursuant to Sec.  150.9(e)(2), for purposes of exchange-set limits. 
Under the 2020 NPRM, if, during the ten (or two) business day timeframe 
in Sec.  150.9(e)(3) or (4), the Commission notifies the exchange and 
applicant that the Commission (and not staff) has determined to stay 
the application, the applicant would not be able to rely on the 
exchange's approval of the application for purposes of exceeding 
Federal position limits, unless the Commission approves the application 
after further review. The proposed stay provision did not include a 
time limitation on the duration of a Commission stay.
    Separately, under proposed Sec.  150.9(e)(5), the Commission (or 
Commission staff) could request additional information from the 
exchange or applicant in order to evaluate the application, and the 
exchange and applicant would have an opportunity to provide the 
Commission with any supplemental information requested to continue the 
application process. Any such request for additional information by the 
Commission (or staff), however, would not stay or toll the ten (or two) 
business day application review period.
b. Comments--Commission Stay of Pending Applications and Requests for 
Additional Information
    With respect to instances where the Commission has stayed an 
exchange-granted non-enumerated bona fide hedge application or elects 
to review a previously approved-application, several commenters 
requested that the Commission limit the duration of its review period, 
which was unlimited in the 2020 NPRM.\1109\
---------------------------------------------------------------------------

    \1109\ ICE at 9; FIA at 18; CME Group at 7 (suggesting that the 
Commission's stay or review of an application should not exceed 30 
calendar days); IFUS at 15 (noting that any Commission stay will 
almost certainly conflict with IFUS procedures for reviewing 
exemptions in the spot month, where certain exemptions may be in 
effect for less than 10 days).
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c. Discussion of Final Rule--Commission Stay of Pending Applications 
and Requests for Additional Information
    The Commission has determined to finalize Sec.  150.9(e)(5) with 
certain modifications and clarifications in response to commenters and 
other considerations.
    In response to commenters' requests, the Commission is modifying 
its stay authority under proposed Sec.  150.9(e)(5). Under the Final 
Rule, any Commission stay issued pursuant to Sec.  150.9(e)(5) will be 
limited to 45 days. The Commission has a long history of conducting 
other extensive regulatory reviews within a 45-day period.\1110\ The 
Commission has found that this timeframe provides sufficient time for 
the Commission to conduct an adequate review while also providing 
certainty to market participants that the review will not be 
indefinite.
---------------------------------------------------------------------------

    \1110\ See 17 CFR 40.3 and 40.5 (providing the Commission's 45-
day review period for new product and rule approval applications).
---------------------------------------------------------------------------

    The Commission is also clarifying in final Sec.  150.9(e)(5) that 
if the Commission stays a pending application where the applicant has 
not yet exceeded Federal position limits, then the applicant may not 
exceed Federal position limits until the Commission issues a final 
determination. Further, if the Commission stays a pending application 
and the applicant has already exceeded Federal position limits (either 
during the Commission's 10-day review period or as part of a 
retroactive application), then the applicant may continue to maintain 
its position unless the Commission notifies the designated contract 
market or swap execution facility and the applicant otherwise, pursuant 
to Sec.  150.9(e)(6).
    In addition to the changes above, the Commission is making several 
technical edits to improve readability, none of which impact the 
substance of the section.
iv. Section 150.9(e)(6)--Commission Determination for Applications 
During the 10/2-Day Review
    The following discussion addresses Sec.  150.9(e)(6), which deals 
with any Commission determinations that are issued for pending 
applications and during the Commission's 10/2-day review.
a. Summary of the 2020 NPRM--Commission Determination for Applications 
During the 10/2-Day Review
    Under proposed Sec.  150.9(e)(6), if the Commission determined that 
an application does not meet the conditions set forth in proposed Sec.  
150.9(b), the Commission would notify the exchange and the applicant 
and provide an opportunity for the applicant to respond. After doing 
so, the Commission could, in its discretion, deny the application for 
purposes of Federal position limits, and require the person to reduce 
the position within a commercially reasonable amount of time, as 
determined by the Commission in consultation with the applicant and the 
exchange.
    In such a case, the applicant would not be subject to any finding 
of a position limits violation during the Commission's review of a 
pending application or after the Commission makes its determination. A 
person would also not be subject to a violation if they already 
exceeded Federal position limits and filed a retroactive application, 
and the Commission then determined that the bona fide hedge is not 
approved for purposes of Federal position limits. In either case, the 
2020 NPRM provided that the Commission would not find that the person 
had committed a position limits violation so long as the person brings 
the position into compliance within a commercially reasonable time.
b. Comments--Commission Determination for Applications During the 10/2-
Day Review
    Commenters requested that the Commission allow traders sufficient 
time to exit a position if the Commission denies an exchange-approved 
non-enumerated bona fide hedge application before the end of the 10/2-
day review period.\1111\
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    \1111\ CMC at 12 (requesting a commercially reasonably amount of 
time to exit positions); ADM at 6 (requesting, in addition, that the 
Commission consult exchanges on what is a commercially reasonable 
amount of time for an applicant to exit a position); CME Group at 7-
8.

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[[Page 3378]]

c. Discussion of Final Rule--Commission Determination for Applications 
During the 10/2-Day Review
    The Commission has determined to finalize Sec.  150.9(e)(6) with 
certain modifications and clarifications in response to commenters and 
other considerations.
    First, for the avoidance of doubt and in response to comments, the 
Commission clarifies and reiterates how it will handle any 
determination to deny an application under final Sec.  150.9(e)(6). 
Generally, if the Commission denies an application under Sec.  
150.9(e)(6), and the applicant consequently is required to reduce its 
position below the applicable Federal position limit, the Commission 
will allow the applicant a commercially reasonable amount of time to do 
so. The Commission will determine the commercially reasonable amount of 
time in consultation with the relevant exchange and the applicant. The 
Commission intends for the applicant and the relevant exchange to have 
input regarding what amount of time is sufficient.
    Further, the Commission is clarifying for final Sec.  150.9(e)(6) 
that it expects all applicants to submit their applications in good 
faith. As part of that good faith submission, the Commission expects 
each applicant will have a reasonable basis for determining that the 
purported non-enumerated bona fide hedge meets the requirements of 
Sec.  150.9(b). Accordingly, the Commission is revising Sec.  
150.9(e)(6) to clarify that the Commission will not pursue an 
enforcement action for a position limits violation for the applicant 
holding the position if the applicant exceeds Federal position limits 
during the 10/2-day review and the Commission subsequently determines 
to deny the application, so long as: (1) The application was submitted 
to the exchange pursuant to Sec.  150.9 in good faith, and (2) if 
required, the applicant reduces its positions within a commercially 
reasonable amount of time.
    In addition, the Commission is making several non-substantive 
clarifications to final Sec.  150.9(e)(6). The Commission is clarifying 
that this section deals with any Commission determination issued for 
pending applications during the 10/2-day review period (as opposed to 
Commission determinations issued under Sec.  150.9(f) after the 10/2-
day review period). The Commission is also adding language to clarify 
that the Commission must notify the applicant and relevant exchange of 
any determination within the 10/2-day review period. In addition, the 
Commission is adding language to clarify that Sec.  150.9(e)(6) is not 
limited to Commission denials of applications; rather, the Commission 
could also determine to issue an approval with certain conditions or 
limitations that may be different from the approval issued by the 
exchange for purposes of exchange-set limits. Finally, the Commission 
is making various non-substantive technical and organizational changes 
to make the section more readable.
v. Section 150.9(e)--Recognition of Additional Enumerated Bona Fide 
Hedges
a. Summary of the 2020 NPRM--Recognition of Additional Enumerated Bona 
Fide Hedges
    Proposed Appendix A to the Final Rule identified each of the 
enumerated bona fide hedges, and under the 2020 NPRM, the Commission's 
recognition of a non-enumerated bona fide hedge, pursuant to Sec.  
150.3 or Sec.  150.9, would not add new bona fide hedges to the list of 
enumerated bona fide hedges in Appendix A.
b. Comments--Recognition of Additional Enumerated Bona Fide Hedges
    Commenters requested that the Commission codify a path to move 
commonly granted non-enumerated bona fide hedge recognitions to the 
list of enumerated bona fide hedge recognitions in Appendix A.\1112\
---------------------------------------------------------------------------

    \1112\ See MGEX at 4; EPSA at 5-7; COPE at 5; FIA at 19 (noting 
that the process should be subject to the notice and comment 
rulemaking process); ICE at 10; and IFUS at 7 (requesting that such 
process also require Commission staff to provide an annual report to 
the Commission recommending non-enumerated bona fide hedges that 
should be enumerated).
---------------------------------------------------------------------------

c. Discussion of Final Rule--Recognition of Additional Enumerated Bona 
Fide Hedges
    The Commission has determined to finalize the approach as proposed. 
Regarding a path forward for the Commission to expand the list of 
enumerated bona fide hedges to include certain non-enumerated bona fide 
hedges that are commonly granted, the Commission notes that it has an 
existing rulemaking process (which requires public notice and comment) 
to accomplish this. The Commission also clarifies, for the avoidance of 
doubt, that it remains open to expanding the list of enumerated hedges, 
as appropriate, but that the Commission would be required to do so 
under its existing rulemaking process subject to public notice and 
comment. Market participants are welcome to request that the Commission 
take up future rulemakings to amend the list of enumerated bona fide 
hedges.\1113\
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    \1113\ Market participants may petition the Commission to expand 
the list of enumerated bona fide hedges under existing Sec.  13.1, 
which provides that any ``person may file a petition with . . . the 
Commission . . . for the issuance, amendment or repeal of a rule of 
general application.''
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8. Section 150.9(f)--Commission Revocation of an Approved Application
i. Summary of 2020 NPRM--Commission Revocation of an Approved 
Application
    Proposed Sec.  150.9(f) set forth the limited circumstances under 
which the Commission would revoke a previously-approved non-enumerated 
bona fide hedge recognition granted pursuant to proposed Sec.  150.9. 
First, under proposed Sec.  150.9(f)(1), if an exchange limits, 
conditions, or revokes its recognition of a non-enumerated bona fide 
hedge that was previously approved under Sec.  150.9, then such bona 
fide hedge would also be deemed limited, conditioned, or revoked for 
purposes of Federal position limits.
    Next, under proposed Sec.  150.9(f)(2), if the Commission 
determines that an application that has been approved or deemed 
approved by the Commission is no longer consistent with the applicable 
sections of the Act and the Commission's regulations, the Commission 
could revoke the non-enumerated bona fide hedge recognition and/or 
require the person to reduce its position within a commercially 
reasonable time, or otherwise come into compliance.
    Under proposed Sec.  150.9(f)(2), if the Commission makes such 
determination, it would need to first notify the person holding the 
position and provide them with an opportunity to respond. The 
Commission would also provide a notification briefly explaining the 
nature of the issues raised and the regulatory provision with which the 
position is inconsistent. If the Commission requires the person to 
reduce the position, the Commission would allow the person a 
commercially reasonable amount of time to do so, as determined by the 
Commission in consultation with the applicable exchange and applicant. 
Finally, under the 2020 NPRM, the Commission would not find that the 
person has committed a position limit violation so long as the person 
comes into compliance within the commercially reasonable time.

[[Page 3379]]

ii. Comments--Commission Revocation of an Approved Application
    Commenters' views on proposed Sec.  150.9(f) tended to overlap with 
their views on the Commission's determination authority under Sec.  
150.9(e)(6) (discussed above). In particular, commenters requested that 
the Commission allow traders sufficient time to exit a position if the 
Commission revokes a previously approved non-enumerated bona fide hedge 
recognition.\1114\ Commenters also requested that the Commission 
further clarify that an applicant will not be penalized for relying on 
an approved non-enumerated bona fide hedge recognition if the 
Commission later revokes such approval after the 10/2-day review 
period.\1115\
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    \1114\ CMC at 12 (requesting a commercially reasonable amount of 
time to exit positions); ADM at 6 (requesting, in addition, that the 
Commission consult exchanges on what is a commercially reasonably 
amount of time for an applicant to exit a position).
    \1115\ CMC at 12; ADM at 6.
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iii. Discussion of Final Rule--Commission Revocation of an Approved 
Application
    The Commission has determined to finalize Sec.  150.9(f) with 
certain modifications and clarifications in response to commenters and 
other considerations.
    First, under the Final Rule, if the Commission limits, conditions, 
or revokes a previously approved non-enumerated bona fide hedge 
recognition under Sec.  150.9(f)(2), and the applicant consequently is 
required to reduce its position below the applicable Federal position 
limit, the Commission will allow the applicant a commercially 
reasonable amount of time to do so. The Commission will determine the 
commercially reasonable amount of time in consultation with the 
relevant exchange and the applicant. The Commission intends for the 
applicant and the relevant exchange to have input regarding what amount 
of time is sufficient.
    Further, if the Commission limits, conditions, or revokes a 
previously approved non-enumerated bona fide hedge recognition under 
Sec.  150.9(f)(2), the Commission will not pursue an enforcement action 
for a position limits violation for the person holding the position in 
excess of Federal position limits so long as the person: (1) Submitted 
its application pursuant to Sec.  150.9 in good faith,\1116\ and (2) if 
required, reduces the position within a commercially reasonable amount 
of time as determined by the Commission in consultation with the person 
and the relevant exchange.
---------------------------------------------------------------------------

    \1116\ See supra Section II.G.7. (providing additional 
discussion of the premise that a person submit their Sec.  150.9 
application in good faith).
---------------------------------------------------------------------------

    The Commission is revising the title of final Sec.  150.9(f) to 
clarify that this section is limited to revocations of non-enumerated 
bona fide hedges previously approved by the Commission. The Commission 
is also adding language to final Sec.  150.9(f)(2)(i) (consistent with 
language in Sec.  150.9(f)(1)) to clarify that, in addition to revoking 
a previously-granted non-enumerated bona fide hedge recognition, the 
Commission could alternatively determine to limit or condition a 
previously-granted recognition. The Commission believes that there 
could be circumstances where it would not need to completely revoke a 
previously-granted recognition, but instead may determine a less 
drastic measure is more appropriate to enable a market participant to 
achieve compliance with the applicable requirements. Finally, the 
Commission is revising Sec.  150.9(f)(2)(iii) to include the same 
language that it added to Sec.  150.9(e)(6) to explicitly make clear an 
underlying premise that the Commission will not pursue Federal position 
limits violations so long as any applications are filed in good faith. 
Finally, the Commission is making a number of technical and grammatical 
corrections in Sec.  150.9(f) that are not substantive revisions.
    In addition to the clarifications and modifications above, the 
Commission would like to reiterate the following explanations and 
guidance from the 2020 NPRM. The Commission expects for persons to be 
able to rely on non-enumerated bona fide hedge recognitions granted 
pursuant to Sec.  150.9 with the certainty that the final determination 
would only be limited, conditioned, or revoked in very limited 
circumstances. The Commission expects that it (and not Commission 
staff) would only exercise such authority under rare circumstances 
where the disposition of an application has resulted, or is likely to 
result, in price anomalies, threatened manipulation, actual 
manipulation, market disruptions, or disorderly markets. The Commission 
also expects that any action compelling a market participant to reduce 
its position pursuant to Sec.  150.9(f)(2) would be a rare Commission 
action, and such action is not delegated to Commission staff. In 
determining requirements for a person to reduce a position, the 
Commission may consult the person and relevant exchange, and may also 
consider factors such as current market conditions and the protection 
of price discovery in the market. Finally, for the avoidance of doubt, 
the Commission expects that its exercise of its authorities under Sec.  
150.9(f)(2) would not be subject to the requirements of CEA section 
8a(9), that is, the Commission would not be compelled to find that a 
CEA section 8a(9) emergency condition exists prior to requiring that a 
market participant reduce certain positions.
9. Section 150.9(g)--Delegation of Authority to the Director of the 
Division of Market Oversight
i. Summary of the 2020 NPRM--Delegation of Authority to the Director of 
the Division of Market Oversight
    The Commission proposed to delegate certain of its authorities 
under proposed Sec.  150.9 to the Director of the Commission's Division 
of Market Oversight, or such other employee(s) that the Director may 
designate from time to time. Proposed Sec.  150.9(g)(1) would delegate 
the Commission's authority, in Sec.  150.9(e)(5), to request additional 
information from the exchange and applicant.
    The Commission did not propose, however, to delegate its authority, 
in proposed Sec.  150.9(e)(5) and (6) to stay or deny a non-enumerated 
bona fide hedge application. The Commission also did not delegate its 
authority in proposed Sec.  150.9(f)(2) to revoke a non-enumerated bona 
fide hedge recognition granted pursuant to Sec.  150.9, or to require 
an applicant to reduce its positions or otherwise come into compliance. 
The Commission stated that if an exchange's disposition of an 
application raises concerns regarding consistency with the CEA, 
presents novel or complex issues, or requires remediation, then the 
Commission (and not Commission staff) would make the final 
determination, after taking into consideration any supplemental 
information provided by the exchange or the applicant.
    As with all authorities delegated by the Commission to staff, under 
the 2020 NPRM, the Commission would maintain the authority to consider 
any matter which has been delegated. The Commission stated in the 2020 
NPRM that it intended to closely monitor staff administration of the 
proposed processes for granting non-enumerated bona fide hedge 
recognitions.
ii. Comments and Summary of the Commission Determination--Delegation of 
Authority to the Director of the Division of Market Oversight
    The Commission did not receive comments on proposed Sec.  150.9(g). 
The Commission is finalizing Sec.  150.9(g) with one revision to 
reorganize certain text to improve readability. This update is not

[[Page 3380]]

intended to change the substance of this section.

H. Part 19 and Related Provisions--Reporting of Cash-Market Positions

1. Background
    Key reports currently used for purposes of monitoring compliance 
with Federal position limits include Form 204 \1117\ and Parts I and II 
of Form 304,\1118\ known collectively as the ``series `04'' reports. 
Under existing Sec.  19.01, market participants that hold bona fide 
hedging positions in excess of limits for the nine legacy agricultural 
contracts currently subject to Federal position limits must justify 
such overages by filing the applicable report each month: Form 304 for 
cotton, and Form 204 for the other commodities.\1119\ These reports 
are: Generally filed after exceeding the Federal position limit; show a 
snapshot of such trader's cash positions on one given day each month; 
and are used by the Commission to determine whether a trader has 
sufficient cash positions to justify futures and options on futures 
positions above the speculative limits.
---------------------------------------------------------------------------

    \1117\ CFTC Form 204: Statement of Cash Positions in Grains, 
Soybeans, Soybean Oil, and Soybean Meal, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@forms/documents/file/cftcform204.pdf (existing Form 204).
    \1118\ CFTC Form 304: Statement of Cash Positions in Cotton, 
available at https://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform304.pdf (existing Form 304). Parts I and II of Form 304 
address fixed-price cash positions used to justify cotton positions 
in excess of Federal position limits. As described below, Part III 
of Form 304 addresses unfixed-price cotton ``on-call'' information, 
which is not used to justify cotton positions in excess of limits, 
but rather to allow the Commission to prepare its weekly cotton on-
call report.
    \1119\ 17 CFR 19.01.
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    The existing series `04 reports are both duplicative of, and 
inconsistent with, the processes market participants use to report 
cash-market information to the exchanges. When granting exemptions from 
their own limits, exchanges do not use a monthly cash-market reporting 
framework akin to the `04 reports. Instead, exchanges generally require 
market participants who wish to exceed exchange-set limits, including 
for bona fide hedging positions, to submit an annual exemption 
application form in advance of exceeding the limits.\1120\ Such 
applications are typically updated annually and generally include a 
month-by-month breakdown of cash-market positions for the previous year 
supporting any position-limits overages during that period.\1121\
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    \1120\ See, e.g., ICE Rule 6.29 and CME Rule 559.
    \1121\ For certain physically-delivered agricultural contracts, 
some exchanges may require that spot month exemption applications be 
renewed several times a year for each spot month, rather than 
annually.
---------------------------------------------------------------------------

2. Elimination of Form 204 and Cash-Reporting Elements of Form 304
i. Summary of the 2020 NPRM--Elimination of Form 204 and Cash-Reporting 
Elements of Form 304
    The Commission proposed to eliminate existing Form 204. The 
Commission also proposed to eliminate Parts I and II of existing Form 
304, which request information on cash-market positions for cotton akin 
to the information requested in Form 204.\1122\ As discussed in the 
2020 NPRM, the Commission believed that eliminating these forms would 
reduce duplicative reporting requirements for market participants 
without hindering the Commission's ability to access cash-market 
information, which the exchanges would be required to collect and 
provide to the Commission under proposed Sec. Sec.  150.3, 150.5, and 
150.9.\1123\
---------------------------------------------------------------------------

    \1122\ Part III of Form 304, which addresses cotton-on-call, is 
discussed below.
    \1123\ 78 FR at 11694, 11655-11656.
---------------------------------------------------------------------------

    For a market participant accustomed to filing series `04 reports 
the 2020 NPRM would result in a slight change in practice. Under the 
2020 NPRM, such participant's bona fide hedge recognitions could still 
be self-effectuating for purposes of Federal position limits, provided 
that the market participant also separately applies for a bona fide 
hedge exemption from exchange-set limits established pursuant to 
proposed Sec.  150.5(a), discussed above, and provided further that the 
participant submits the requisite cash-market information to the 
exchange as required by proposed Sec.  150.5(a)(2)(ii)(A).
ii. Summary of the Commission Determination--Elimination of Form 204 
and Cash-Reporting Elements of Form 304
    The Commission has carefully considered the comments received and 
is eliminating existing Form 204 and Parts I and II of existing Form 
304 as proposed.
iii. Comments--Elimination of Form 204 and Cash-Reporting Elements of 
Form 304
    Numerous commenters supported the elimination of the Form 204 and 
Parts I and II of the Form 304.\1124\ In particular, several commenters 
supported the proposed streamlined process that eliminates duplicative 
reporting requirements to both the Commission and the exchanges.\1125\ 
ISDA additionally recommended that the Commission rely on its special 
call authority and relevant exchange authority to request additional 
information on an as-need basis.\1126\
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    \1124\ See, e.g., ACSA at 3; AMCOT at 2-3; ACA at 3; Canale 
Cotton at 3; Cargill at 9-10; CCI at 2; CEWG at 4; Chevron at 3; CHS 
at 2, 6; CMC at 12; COPE at 3-4; DECA at 2; East Cotton at 3; Ecom 
at 1; EEI at 7; EPSA at 7; FIA at 3; IMC at 3; ISDA at 9-10; Jess 
Smith at 3; LDC at 2; Mallory Alexander at 2; McMeekin at 2-3; 
Memtex at 2-3; Moody Compress at 2; Namoi at 1; NCFC at 2; Olam at 
3; Omnicotton at 2-3; Parkdale at 2; SEMI at 3; Shell at 4; SCA at 
3; SW Ag at 2-3; Texas Cotton at 2-3; Toyo at 2-3; Walcot at 3; WCSA 
at 3; White Gold at 2-3.
    \1125\ See, e.g., Cargill at 9-10; CCI at 2; CEWG at 4; COPE at 
3-4; ISDA at 10.
    \1126\ ISDA at 10.
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    Three commenters opposed the elimination of the series `04 reports. 
In particular, AFR and Rutkowski expressed concern that eliminating 
Form 204 will delegate position limit oversight and enforcement 
responsibilities to the exchanges.\1127\ These commenters contended 
that the exchanges are financially disincentivized from imposing limits 
on speculation because the exchanges profit from trading volume.\1128\ 
Similarly, Better Markets also opposed the elimination of the series 
`04 reports, contending that Federal law provides more substantial 
deterrents for misreporting information on a form provided to Federal 
agencies such as the Commission.\1129\
---------------------------------------------------------------------------

    \1127\ AFR at 2-3; Rutkowski at 2.
    \1128\ Id.
    \1129\ Better Markets at 59-60.
---------------------------------------------------------------------------

    Better Markets also commented that the reporting changes would 
increase the industry's overall reporting burdens because market 
participants would have to report information to multiple 
exchanges.\1130\ Better Markets suggested that the Commission should 
instead ``ensure that all cash positions reporting is automated'' and 
``amenable to aggregation'' in order to provide such information to the 
exchanges.\1131\
---------------------------------------------------------------------------

    \1130\ Id. at 59.
    \1131\ Id. at 60.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Elimination of Form 204 and Cash-
Reporting Elements of Form 304
    The Commission is eliminating Form 204 and Sections I and II of 
existing Form 304, as proposed. For the reasons described below and as 
discussed in the 2020 NPRM, the Commission believes that the 
elimination of these forms will reduce duplication and inefficiency 
resulting from market participants submitting cash-market information 
to both the Commission and the exchanges under the existing 
framework.\1132\ As described below, under the approach

[[Page 3381]]

adopted herein, the Commission will receive any necessary information 
related to market participants' recognized bona fide hedges by 
leveraging existing expertise and processes at the exchanges, as well 
as information that market participants will be required to submit to 
exchanges under the Final Rule.
---------------------------------------------------------------------------

    \1132\ 85 FR at 11694.
---------------------------------------------------------------------------

    The Commission finds comments that the elimination of the series 
`04 reports would require the Commission to delegate authority to the 
exchanges to be misplaced for several reasons. First, by eliminating 
the series `04 reports, the Commission is not delegating any oversight 
or enforcement responsibilities to the exchanges. The CEA establishes 
the statutory framework under which the Commission operates.\1133\ Even 
without the series `04 reports, the Commission will continue to 
administer the CEA to monitor and protect the derivatives markets, 
market users, and the public from fraud, manipulation, and other 
abusive practices that are prohibited by the CEA and Commission 
regulations. The Commission will continue to do so through its market 
surveillance program,\1134\ rule enforcement reviews,\1135\ and other 
regulatory tools. The Commission will also continue to investigate and 
prosecute persons who violate the CEA and Commission regulations in 
connection with derivatives trading on exchanges and related conduct in 
cash-market commodities.\1136\
---------------------------------------------------------------------------

    \1133\ See 7 U.S.C. 2(a)(1).
    \1134\ CFTC Market Surveillance Program, U.S. Commodity Futures 
Trading Commission website, available at https://www.cftc.gov/IndustryOversight/MarketSurveillance/CFTCMarketSurveillanceProgram/index.htm#P5_912. The Commission's Market Surveillance Program is 
responsible for collecting market data and position information from 
registrants and large traders, and for monitoring the daily 
activities of large traders, key price relationships, and relevant 
supply and demand factors in a continuous review for potential 
market problems. Id.
    \1135\ The Commission conducts regular rule enforcement reviews 
of each exchange's audit trail, trade practice surveillance, 
disciplinary, and dispute resolution programs for ongoing compliance 
with the Core Principles. See Rule Enforcement Reviews of Designated 
Contract Markets, U.S. Commodity Futures Trading Commission website, 
available at https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf.html.
    \1136\ Enforcement, U.S. Commodity Futures Trading Commission 
website, available at https://www.cftc.gov/LawRegulation/Enforcement/OfficeofDirectorEnforcement.html.
---------------------------------------------------------------------------

    Second, the elimination of Form 204 and the cash-market reporting 
portions of Form 304 will not hinder the Commission's access to the 
cash-market information needed for the Commission to effectuate its 
oversight and enforcement responsibilities. Instead, the Commission is 
ensuring that it will continue to have access to sufficient cash-market 
information by adopting several reporting and recordkeeping 
requirements in final Sec. Sec.  150.3, 150.5, and 150.9.\1137\ In 
particular, under Sec.  150.5, an exchange will be required to collect 
applications, which must be updated at least on an annual basis, for 
purposes of granting bona fide hedge recognitions from exchange-set 
limits for contracts subject to Federal position limits,\1138\ and for 
recognizing bona fide hedging positions for purposes of Federal 
position limits.\1139\ Among other things, each application will be 
required to include: (1) Information regarding the applicant's activity 
in the cash markets for the underlying commodity; and (2) any other 
information to enable the exchange and the Commission to determine 
whether the exchange may recognize such position as a bona fide 
hedge.\1140\ Additionally, consistent with existing industry practice 
for certain exchanges, exchanges will be required to file monthly 
reports to the Commission showing, among other things, for all bona 
fide hedges (whether enumerated or non-enumerated), a concise summary 
of the applicant's activity in the cash markets.\1141\
---------------------------------------------------------------------------

    \1137\ As discussed earlier in this Final Rule, Final Sec.  
150.9 also includes reporting and recordkeeping requirements 
pertaining to spread exemptions. Those requirements will not be 
discussed again in this Section of the Final Rule, which addresses 
cash-market reporting in connection with bona fide hedges.
    \1138\ See Final Sec.  150.5(a)(2)(ii)(A).
    \1139\ As discussed above in connection with Final Sec.  150.9, 
market participants who wish to request a bona fide hedge 
recognition under Sec.  150.9 will not be required to file such 
applications with both the exchange and the Commission. They will 
only file the applications with the exchange, which will then be 
subject to recordkeeping requirements in Final Sec.  150.9(d), as 
well as Final Sec. Sec.  150.5 and 150.9 requirements to provide 
certain information to the Commission on a monthly basis and upon 
demand.
    \1140\ See Final Sec.  150.5(a)(2)(ii)(G).
    \1141\ See Final Sec.  150.5(a)(4).
---------------------------------------------------------------------------

    Collectively, final Sec. Sec.  150.5 and 150.9 will provide the 
Commission with the same substantive information from monthly reports 
about all recognitions granted for purposes of contracts subject to 
Federal position limits, including cash-market information supporting 
the applications, and annual information regarding all month-by-month 
cash-market positions used to support a bona fide hedging recognition. 
These reports will help the Commission determine whether any person who 
claims a bona fide hedging position can demonstrate satisfaction of the 
relevant requirements. This information will also help the Commission 
perform market surveillance in order to detect and deter manipulation 
and abusive trading practices in physical commodity markets.
    While the Commission will no longer receive the monthly snapshot 
data currently included on the series `04 reports, the Commission will 
have broad access, at any time, to the cash-market information 
described above, as well as any other data or information exchanges 
collect as part of their application processes.\1142\ This will include 
any updated application forms and periodic reports that exchanges may 
require applicants to file regarding their positions. To the extent 
that the Commission observes market activity or positions that warrant 
further investigation, Sec.  150.9 will also provide the Commission 
with access to any supporting or related records the exchanges will be 
required to maintain.\1143\
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    \1142\ See, e.g., Final Sec.  150.9(d) (requiring that all such 
records, including cash-market information submitted to the 
exchange, be kept in accordance with the requirements of Sec.  
1.31), and Final Sec.  19.00(b) (requiring, among other things, all 
persons exceeding speculative position limits who have received a 
special call to file any pertinent information as specified in the 
call).
    \1143\ See Final Sec.  150.9(d).
---------------------------------------------------------------------------

    Furthermore, the Final Rule will not impact the Commission's 
existing provisions for gathering information through special calls 
relating to positions exceeding limits and/or to reportable positions. 
As discussed further below, under the Final Rule, all persons exceeding 
the Federal position limits set forth in final Sec.  150.2, as well as 
all persons holding or controlling reportable positions pursuant to 
Sec.  15.00(p)(1), must file any pertinent information as instructed in 
a special call.\1144\
---------------------------------------------------------------------------

    \1144\ See Final Sec.  19.00(b).
---------------------------------------------------------------------------

    In response to commenter concerns that elimination of the series 
`04 reports may increase reliance on exchanges which may lack 
incentives to impose position limits, the Commission does not view the 
question of whether exchanges impose speculative position limits in 
this context as a matter of incentives. Even with the elimination of 
the series `04 reports, exchanges will be under statutory and 
regulatory obligations, as they are today, to establish speculative 
position limits for all contracts subject to Federal position 
limits.\1145\ Additionally, as discussed above, the Commission does not 
believe that exchanges generally lack proper incentives to maintain the 
integrity of their markets; to the contrary, they are subject to 
various statutory core principles and regulatory obligations

[[Page 3382]]

that require them to maintain integrity in their markets.\1146\ 
Further, exchanges will remain subject to regulatory oversight and 
enforcement responsibilities required for DCMs by CEA section 5(d) and 
part 38 of the Commission's regulations and for SEFs by CEA section 5h 
and part 37 of the Commission's regulations.\1147\ Specifically, 
several existing Commission regulations in parts 38 and 37 require 
exchanges to monitor for violations of exchange-set position 
limits,\1148\ and detect and prevent manipulation, price distortions 
and, where possible, disruptions of the physical-delivery or cash-
settlement process.\1149\
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    \1145\ See 7 U.S.C. 7(d)(5) and Sec.  150.5(a).
    \1146\ For further discussion, see Section II.B.3.iii.b(3)(iii) 
(addressing comments from Better Markets related to conflicts-of-
interest).
    \1147\ See 7 U.S.C. 7(d); 17 CFR 38; 7 U.S.C. 7b-3(f); 17 CFR 
37.
    \1148\ See 17 CFR 38.251(d); 17 CFR 37.205(b).
    \1149\ See 17 CFR 38.251(a); 17 CFR 37.205(a).
---------------------------------------------------------------------------

    In response to Better Markets' concern that eliminating the '04 
reports will reduce deterrents for misreporting, the Commission 
believes that the false reporting provision in Section 9(a)(4) of the 
CEA, which makes it a felony to make any false statements to an 
exchange, is sufficient to deter market participants from misreporting 
cash-market information to exchanges.\1150\
---------------------------------------------------------------------------

    \1150\ 7 U.S.C. 13(a)(4). The Commission has not hesitated to 
impose severe penalties on market participants that mislead 
exchanges about cash positions. See, e.g., In the Matter of EMF 
Financial Products LLC, CFTC Docket No. 10-02, U.S. Commodity 
Futures Trading Commission website, available at https://www.cftc.gov/PressRoom/PressReleases/5751-09 (imposing a $4,000,000 
civil monetary penalty on a firm that misled an exchange about the 
firm's cash positions in treasury futures). See also supra Section 
II.D.9. (discussing Commission enforcement of exchange-set position 
limits).
---------------------------------------------------------------------------

    Further, the Commission disagrees with Better Markets' concerns 
about increased burdens. Given that market participants are currently 
required both to file the series `04 reports with the Commission, and 
to submit cash-market information to the exchanges, eliminating the 
series `04 reports will reduce burdens on market participants.\1151\ In 
fact, the Commission did not receive any comments opposing the 
elimination of the series `04 reports from traders who currently have 
an obligation to file such forms. While the Commission supports 
streamlined and automated reporting requirements whenever possible, 
Better Markets has not identified any practicable method or program 
that would permit the automated reporting of the kinds of disparate 
cash-market information currently reflected in Forms 204 and 304.
---------------------------------------------------------------------------

    \1151\ See infra Section IV.A.5.iii. (discussing the benefits of 
elimination of Form 204 and amendment of Form 304).
---------------------------------------------------------------------------

    In addition to the justifications for eliminating the series `04 
reports described above, the Commission has also determined that Form 
204, including the timing and procedures for its filing, is inadequate 
for the reporting of cash-market positions relating to certain energy 
contracts, which will be subject to Federal position limits for the 
first time under the Final Rule. For example, when compared to 
agricultural contracts, energy contracts generally expire more 
frequently, have a shorter delivery cycle, and have significantly more 
product grades. The information required by Form 204, as well as the 
timing and procedures for its filing, reflects the way agricultural 
contracts trade, but is inadequate for purposes of reporting cash-
market information involving energy contracts.
    Finally, the Commission understands that the exchanges maintain 
regular dialogue with their participants regarding cash-market 
positions, and that it is common for exchange surveillance staff to 
make informal inquiries of market participants, including if the 
exchange has questions about market events or a participant's use of an 
exemption or recognition. The Commission encourages exchanges to 
continue this practice. Similarly, the Commission anticipates that its 
own staff will engage in dialogue with market participants, either 
through the use of informal conversations or, in limited circumstances, 
via special call authority.
3. Changes to Parts 15 and 19 To Implement the Elimination of Form 204 
and Portions of Form 304
i. Background--Changes to Parts 15 and 19 To Implement the Elimination 
of Form 204 and Portions of Form 304
    The market and large-trader reporting rules are contained in parts 
15 through 21 of the Commission's regulations. Collectively, these 
reporting rules effectuate the Commission's market and financial 
surveillance programs by enabling the Commission to gather information 
concerning the size and composition of the commodity derivative markets 
and to monitor and enforce any established speculative position limits, 
among other regulatory goals.
ii. Summary of the 2020 NPRM--Changes to Parts 15 and 19 To Implement 
the Elimination of Form 204 and Portions of Form 304
    To effectuate the proposed elimination of Form 204 and the cash-
market reporting components of Form 304, the Commission proposed to 
eliminate: (a) Existing Sec.  19.00(a)(1), which requires persons 
holding reportable positions which constitute bona fide hedging 
positions to file a Form 204; and (b) existing Sec.  19.01, which, 
among other things, sets forth the cash-market information required on 
Forms 204 and 304.\1152\ Based on the proposed elimination of existing 
Sec. Sec.  19.00(a)(1) and 19.01 and Form 204, the Commission proposed 
conforming technical changes to remove related reporting provisions 
from: (i) The ``reportable position'' definition in Sec.  15.00(p); 
(ii) the list of ``persons required to report'' in Sec.  15.01; and 
(iii) the list of reporting forms in Sec.  15.02.
---------------------------------------------------------------------------

    \1152\ 17 CFR 19.01.
---------------------------------------------------------------------------

iii. Comments and Summary of the Commission Determination--Changes to 
Parts 15 and 19 To Implement the Elimination of Form 204 and Portions 
of Form 304
    The Commission did not receive any comments on the conforming 
changes to parts 15 and 19 that implement the elimination of Form 204 
and Sections I and II of Form 304, and is adopting the changes as 
proposed.
4. Special Calls
i. Summary of the 2020 NPRM--Special Calls
    Notwithstanding the proposed elimination of the series `04 reports, 
the Commission did not propose to make any significant substantive 
changes to information requirements relating to positions exceeding 
limits and/or to reportable positions. Accordingly, in proposed Sec.  
19.00(b), the Commission proposed that all persons exceeding the 
proposed limits set forth in Sec.  150.2, as well as all persons 
holding or controlling reportable positions pursuant to Sec.  
15.00(p)(1), must file any pertinent information as instructed in a 
special call. This proposed provision is similar to existing Sec.  
19.00(a)(3), but would require any such person to file the information 
as instructed in the special call, rather than to file the information 
on a series `04 report.\1153\
---------------------------------------------------------------------------

    \1153\ 17 CFR 19.00(a)(3).
---------------------------------------------------------------------------

    The Commission also proposed to add language to existing Sec.  
15.01(d) to clarify that persons who have received a special call are 
deemed ``persons required to report'' as defined in Sec.  15.01.\1154\ 
The Commission proposed this change to clarify an existing requirement 
found in Sec.  19.00(a)(3), which requires persons holding or 
controlling positions that are reportable

[[Page 3383]]

pursuant to Sec.  15.00(p)(1) who have received a special call to 
respond.\1155\ The proposed changes to part 19 operate in tandem with 
the proposed additional language for Sec.  15.01(d) to reiterate the 
Commission's existing special call authority without creating any new 
substantive reporting obligations. Finally, proposed Sec.  19.03 
delegated authority to issue such special calls to the Director of the 
Division of Enforcement, and proposed Sec.  19.03(b) delegated to the 
Director of the Division of Enforcement the authority in proposed Sec.  
19.00(b) to provide instructions or to determine the format, coding 
structure, and electronic data transmission procedures for submitting 
data records and any other information required under part 19.
---------------------------------------------------------------------------

    \1154\ 17 CFR 15.01.
    \1155\ 17 CFR 19.00(a)(3).
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Special Calls
    The Commission did not receive any comments on these changes and is 
adopting the changes to Sec. Sec.  15.01(d), Sec.  19.00(b), and 
19.03(b) as proposed.
5. Form 304 Cotton On-Call Reporting
i. Summary of the 2020 NPRM--Form 304 Cotton On-Call Reporting
    With the proposed elimination of the cash-market reporting portions 
of Form 304 as described above, Form 304 would be used exclusively to 
collect the information needed to publish the Commission's weekly 
cotton on-call report, which shows the quantity of unfixed-price cash 
cotton purchases and sales that are outstanding against each cotton 
futures month.\1156\ While the Commission did not propose to eliminate 
the cotton on-call portions of Form 304, or to stop publishing the 
cotton on-call report, the Commission did request comment about the 
implications of doing so.\1157\
---------------------------------------------------------------------------

    \1156\ Cotton On-Call, U.S. Commodity Futures Trading Commission 
website, available at https://www.cftc.gov/MarketReports/CottonOnCall/index.htm (weekly report).
    \1157\ Specifically, the Commission requested comments on the 
following issues: To what extent, and for what purpose, do market 
participants and others rely on the information contained in the 
Commission's weekly cotton on-call report; Whether publication of 
the cotton on-call report creates any informational advantages or 
disadvantages, and/or otherwise impact competition in any way; 
Whether the Commission should stop publishing the cotton on-call 
report, but continue to collect, for internal use only, the 
information required in Part III of Form 304 (Unfixed-Price Cotton 
``On-Call''); Or alternatively, whether the Commission should stop 
publishing the cotton on-call report and also eliminate the Form 304 
altogether, including Part III. See 85 FR at 11657.
---------------------------------------------------------------------------

    In addition to requesting comment regarding continued collection of 
the Form 304 and publication of the cotton-on-call report, the 
Commission proposed a number of technical changes to the Form 304. 
Under the 2020 NPRM, the requirements pertaining to that report would 
remain in proposed Sec. Sec.  19.00(a) and 19.02, with minor 
modifications to existing provisions. In particular, the Commission 
proposed to update cross references (including to renumber Sec.  
19.00(a)(2) as Sec.  19.00(a)) and to clarify and update the procedures 
and timing for the submission of Form 304. Specifically, proposed Sec.  
19.02(b) would require that each Form 304 report be made weekly, dated 
as of the close of business on Friday, and filed not later than 9 a.m. 
Eastern Time on the third business day following that Friday using the 
format, coding structure, and electronic data transmission procedures 
approved in writing by the Commission. The Commission also proposed 
some modifications to the Form 304 itself, including conforming and 
technical changes to the organization, instructions, and required 
identifying information.\1158\
---------------------------------------------------------------------------

    \1158\ Among other things, the proposed changes to the 
instructions would clarify that traders must identify themselves on 
Form 304 using their Public Trader Identification Number, in lieu of 
the CFTC Code Number required on previous versions of Form 304. This 
change will help Commission staff to connect the various reports 
filed by the same market participants. This release includes a 
representation of the final Form 304, which is to be submitted in an 
electronic format published pursuant to this Final Rule, either via 
the Commission's web portal or via XML-based, secure FTP 
transmission.
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Form 304 Cotton On-Call 
Reporting
    The Commission has determined to maintain the status quo as 
proposed by not eliminating the cotton on-call portions (currently Part 
III) of the Form 304, and by continuing to publish the cotton on-call 
report. The Commission is also adopting the proposed technical changes 
described above.
iii. Comments--Form 304 Cotton On-Call Reporting
    Commenters were divided on the questions posed by the Commission on 
whether to retain Part III of the Form 304 and to continue publishing 
the weekly cotton on-call report.
    CMC, along with numerous commenters from the cotton industry, 
believed the Commission should eliminate Form 304 in its entirety and 
stop publishing the cotton on-call report.\1159\ For example, Namoi and 
ACSA both argued that the cotton on-call report allows market 
participants to see proprietary cash-market information for every other 
participant in the cotton market, which among other things, creates an 
opportunity for speculators to profit by trading against this publicly 
disclosed unfixed-price positions.\1160\ Additionally, Namoi and ACSA 
each highlighted that the Commission does not collect or publish 
similar information for any other commodities.\1161\ ACSA also argued 
that the cotton on-call report causes competitive harm to the U.S. 
cotton industry because, according to ACSA, foreign mills believe that 
the report imposes risks and costs and are therefore more likely to 
purchase cotton from outside of the United States in order to avoid 
completing Part III of Form 304.\1162\ The NCTO suggested that textile 
mills are particularly harmed when speculators trade against the cash-
market positions disclosed in the cotton on-call report because textile 
mills purchase the majority of their cotton on call.\1163\
---------------------------------------------------------------------------

    \1159\ ACA at 3; ACSA at 3, 9-11; Cargill at 10; CMC at 12; East 
Cotton at 3; McMeekin at 2-3; Namoi at 1-2; Omnicotton at 2-3; Texas 
Cotton at 2-3; Toyo at 2-3; Walcot at 3; and White Gold at 2.
    \1160\ Namoi at 1-2; ACSA at 9-11.
    \1161\ Namoi at 1-2.
    \1162\ ACSA at 9-11.
    \1163\ NCTO at 1-2.
---------------------------------------------------------------------------

    Conversely, several commenters, including other cotton industry 
members, stated that the Commission should continue to collect the 
information required by Form 304 and to publish the cotton on-call 
report.\1164\ For example, Glencore argued that discontinuing the 
report would reduce transparency, open the market to more manipulation, 
and harm smaller participants due to asymmetrical information.\1165\ 
Similarly, AMCOT argued that without the report, large participants, 
who account for a significant amount of the cotton bought or sold on 
call, would have an informational advantage over small producers who 
have less visibility into a large portion of the cotton market.\1166\
---------------------------------------------------------------------------

    \1164\ VLM Comment Text; Eric Matsen Comment Text; AMCOT at 2-3; 
Gerald Marshall at 3; Lawson/O'Neill at 1; Glencore at 2; and 
Dunavant at 1.
    \1165\ Glencore at 2; Dunavant at 1.
    \1166\ AMCOT at 2.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Form 304 Cotton On-Call Reporting
    After reviewing the comments discussed above, the Commission has 
decided to retain the cotton on-call portions (currently Section III) 
of existing Form 304 and to continue publishing its weekly cotton on-
call report. Because the comments from cotton industry firms were 
divided, and

[[Page 3384]]

because the cotton on-call report has been a part of the cotton market 
for more than 80 years, the Commission believes that it would be 
imprudent to eliminate the report based solely on the information 
provided in the comment letters, which do not include any concrete 
data, studies, or quantifiable financial harms. The Commission further 
notes that continued publication of the cotton on-call report will not 
change the existing dynamics of the cotton market.
    In the future, the Commission may solicit comments to determine 
whether the cotton on-call report continues to benefit the market and 
whether the report hinders the competitiveness of U.S. firms in the 
global cotton market. The Commission may seek input from cotton market 
participants in the form of additional comments, data, studies, or 
information about specific financial harms that would warrant 
discontinuing the report. The Commission emphasizes that it remains 
open to continuing to discuss this important issue with market 
participants and to receive additional data and information that may 
more concretely demonstrate the competitive harms discussed by 
commenters above.
6. Proposed Technical Changes to Part 17
i. Summary of the 2020 NPRM--Proposed Technical Changes to Part 17
    Part 17 of the Commission's regulations addresses reports by 
reporting markets, FCMs, clearing members, and foreign brokers.\1167\ 
The Commission proposed to amend existing Sec.  17.00(b), which 
addresses information to be furnished by FCMs, clearing members, and 
foreign brokers, to delete certain provisions related to position 
aggregation, because those provisions have become duplicative of 
aggregation provisions that were adopted in Sec.  150.4 in the 2016 
Final Aggregation Rulemaking.\1168\ The Commission also proposed to add 
a new provision, Sec.  17.03(i), which delegates certain authority 
under Sec.  17.00(b) to the Director of the Office of Data and 
Technology.\1169\
---------------------------------------------------------------------------

    \1167\ 17 CFR part 17.
    \1168\ See Final Aggregation Rulemaking, 81 FR at 91455. 
Specifically, the Commission proposes to delete paragraphs (1), (2), 
and (3) from Sec.  17.00(b). 17 CFR 17.00(b).
    \1169\ Under Sec.  150.4(e)(2), which was adopted in the 2016 
Final Aggregation Rulemaking, the Director of the Division of Market 
Oversight is delegated authority to, among other things, provide 
instructions relating to the format, coding structure, and 
electronic data transmission procedures for submitting certain data 
records. 17 CFR 150.4(e)(2). A subsequent rulemaking changed this 
delegation of authority from the Director of the Division of Market 
Oversight to the Director of the Office of Data and Technology, with 
the concurrence of the Director of the Division of Enforcement. See 
82 FR at 28763 (June 26, 2017). The proposed addition of Sec.  
17.03(i) would conform Sec.  17.03 to that change in delegation.
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Proposed 
Technical Changes to Part 17
    The Commission did not receive any comments addressing these 
changes and is adopting these technical changes as proposed.

I. Removal of Part 151

1. Summary of the 2020 NPRM--Removal of Part 151
    Finally, the Commission proposed to remove and reserve part 151 in 
response to its vacatur by the U.S. District Court for the District of 
Columbia,\1170\ as well as in light of the proposed revisions to part 
150 that conform part 150 to the amendments made to CEA section 4a by 
the Dodd-Frank Act.
---------------------------------------------------------------------------

    \1170\ See supra notes 10-11 and accompanying discussion.
---------------------------------------------------------------------------

2. Comments and Summary of the Commission Determination--Removal of 
Part 151
    The Commission did not receive any comments regarding these changes 
and is adopting these conforming changes as proposed.

III. Legal Matters

    This section of the release sets forth certain legal determinations 
by the Commission that underlie the determinations regarding the 
specifics of the Final Rule set forth previously in this preamble, as 
well as the reasons for those legal determinations and consideration of 
relevant comments. Specifically, Part A sets forth the Commission's 
determination that, in a rulemaking pursuant to CEA section 4a(a)(2), 
the Commission must find position limits to be ``necessary'' within the 
meaning of paragraph 4a(a)(1). Part B sets forth the Commission's 
interpretation of the criteria for finding position limits to be 
necessary within the meaning of the statute. Part C sets forth the 
Commission's necessity findings for the 25 core referenced futures 
contracts. Part D sets forth the Commission's necessity finding for 
futures contracts and options on futures contracts linked to a core 
referenced futures contract. Finally, Part E sets forth the 
Commission's necessity finding for spot and non-spot months.

A. Interpretation of Statute Regarding Whether Necessity Finding Is 
Required for Position Limits Established Pursuant to CEA Section 
4a(a)(2)

1. The Commission's Preliminary Interpretation in the 2020 NPRM
    In the 2020 NPRM the Commission considered whether CEA section 4a, 
as amended, requires the Commission to issue Federal position limits 
for all physical commodities other than excluded commodities without 
making its own antecedent finding that such position limits are 
necessary. This was in response to ISDA, in which the U.S. District 
Court for the District of Columbia held that the CEA was ambiguous in 
that respect. Specifically, the court held that where CEA section 
4a(a)(2) (``paragraph 4a(a)(2)'') states that the Commission shall 
issue such position limits ``[i]n accordance with the standards set 
forth in paragraph (1),'' \1171\ it is unclear whether the 
``standards'' include the requirement in paragraph (1) of CEA section 
4a(a) (``paragraph 4a(a)(1)'') that the Commission establish such 
limits as it ``finds are necessary to diminish, eliminate, or prevent'' 
specified burdens on interstate commerce.\1172\ In the 2020 NPRM, the 
Commission preliminarily determined that paragraph 4a(a)(2) should be 
interpreted as incorporating the necessity requirement of paragraph 
4a(a)(1).\1173\ For the Final Rule, the Commission herein adopts that 
determination as final, along with the reasoning set forth in the 2020 
NPRM.
---------------------------------------------------------------------------

    \1171\ Paragraph 4a(a)(1) of the CEA states, in relevant part:
    ``Excessive speculation in any commodity under contracts of sale 
of such commodity for future delivery made on or subject to the 
rules of contract markets or derivatives transaction execution 
facilities, or swaps that perform or affect a significant price 
discovery function with respect to registered entities causing 
sudden or unreasonable fluctuations or unwarranted changes in the 
price of such commodity, is an undue and unnecessary burden on 
interstate commerce in such commodity. For the purpose of 
diminishing, eliminating, or preventing such burden, the Commission 
shall, from time to time, after due notice and opportunity for 
hearing, by rule, regulation, or order, proclaim and fix such limits 
on the amounts of trading which may be done or positions which may 
be held by any person, including any group or class of traders, 
under contracts of sale of such commodity for future delivery on or 
subject to the rules of any contract market or derivatives 
transaction execution facility, or swaps traded on or subject to the 
rules of a designated contract market or a swap execution facility, 
or swaps not traded on or subject to the rules of a designated 
contract market or a swap execution facility that performs a 
significant price discovery function with respect to a registered 
entity as the Commission finds are necessary to diminish, eliminate, 
or prevent such burden.''
    \1172\ Paragraphs 4a(a)(1) and 4a(a)(2)(A); ISDA, 887 F. Supp. 
2d at 280-81.
    \1173\ 85 FR at 11659.

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

[[Page 3385]]

    The Commission's preliminary determination was based on a number of 
considerations, set forth in detail in the 2020 NPRM.\1174\ Consistent 
with the district court's instructions,\1175\ the Commission based its 
determination both on analysis of the CEA's statutory language and on 
application of the Commission's experience and expertise to relevant 
facts and policy concerns.\1176\ Among the most important factual and 
policy concerns relied upon by the Commission in the 2020 NPRM were:
---------------------------------------------------------------------------

    \1174\ Id. at 11659-11661.
    \1175\ The court directed the Commission, on remand, to resolve 
the ambiguity not by ``rest[ing] simply on its parsing of the 
statutory language'' but by ``bring[ing] its experience and 
expertise to bear in light of the competing interests at stake.'' 85 
FR at 11659, quoting ISDA, 887 F. Supp. 2d at 281.
    \1176\ 85 FR at 11659-11661.
---------------------------------------------------------------------------

    a. Absent the necessity-finding requirement, the language of 
paragraph 4a(a)(2) would evidently require the imposition of some level 
of position limits for a physical commodity even if limits at any level 
would be likely to do more harm than good, including with respect to 
public interests specifically identified in paragraph 4a(a)(1) and 
elsewhere in section 4a or the CEA generally.\1177\ In addition to 
being inconsistent with the thrust of section 4a taken as a whole, this 
approach makes little sense as a matter of policy.\1178\
---------------------------------------------------------------------------

    \1177\ Id. at 11659, citing as examples CEA sections 5, 
4a(a)(2)(C), and 4a(a)(3)(B).
    \1178\ Id. at 11660.
---------------------------------------------------------------------------

    b. Subparagraph 4a(a)(2)(A) requires that position limits be set 
``as appropriate.'' At a minimum, this language requires the Commission 
to use its best judgment in determining the levels at which position 
limits are set. In addition, there is authority from case law that the 
word ``appropriate'' in a regulatory statute requires agencies to take 
into account the costs of regulation, if only in a rough or approximate 
way, and that consideration may preclude the considered action if the 
costs are highly disproportionate.\1179\ The statute thus allows for 
the possibility that, in establishing position limit levels for some 
commodities or contracts, the Commission, in its judgment, may 
determine that the optimal level is no limit at all. This possibility 
does not harmonize with a requirement to impose limits for all physical 
commodities, but is consistent with a requirement to impose limits 
where they are necessary.
---------------------------------------------------------------------------

    \1179\ See Michigan v. EPA, 132 S.Ct. 2699, 2707-08, 2711 (2015) 
(agency could not disregard major costs under statute requiring that 
regulation be ``appropriate,'' but use of this word did not require 
formal cost-benefit analysis).
---------------------------------------------------------------------------

    c. Requiring position limits without a necessity finding would be a 
``sea change'' in derivatives regulation since it would involve a shift 
from Federal limits on a small number of agricultural commodities to 
limits on all physical commodities.\1180\ The Commission was skeptical 
that Congress would have made such a change through ambiguous 
language.\1181\ The Commission noted that there are currently over 
1,200 listed futures contracts on physical commodities and that there 
is no indication that Congress had concerns about, or even considered, 
all of them.\1182\ To the contrary, the legislative history suggests 
that enactment of paragraph 4a(a)(2) was driven, in part, by studies of 
potential excessive speculation in a small number of particularly 
important commodities.\1183\ This history is consistent with an 
interpretation of the statute as requiring position limits for 
commodities where controlling excessive speculation is most important, 
absent statutory language that unambiguously requires limits for all 
commodities.
---------------------------------------------------------------------------

    \1180\ 85 FR at 11660.
    \1181\ Id.
    \1182\ Id.
    \1183\ 85 FR at 1160 (discussing Congressional staff studies of 
potential excessive speculation in oil, natural gas, and wheat).
---------------------------------------------------------------------------

    d. A necessity finding allows the Commission to apply its 
experience and expertise to impose position limits where they are 
likely to do the most good, taking into consideration the fact that 
even well-crafted position limits create compliance costs and 
potentially may have a negative effect on liquidity and forms of 
speculation that benefit the market.\1184\
---------------------------------------------------------------------------

    \1184\ 85 FR at 11660.
---------------------------------------------------------------------------

    In the 2020 NPRM, the Commission recognized that it was proposing 
to change its interpretation regarding whether paragraph 4a(a)(2) 
incorporates a requirement to find position limits necessary.\1185\ The 
Commission noted that, in the preamble to the 2011 Final Rulemaking as 
well as the Commission's subsequent position limits proposals,\1186\ 
the Commission had interpreted paragraph 4a(a)(2) to mandate the 
imposition of position limits without the need for a necessity 
finding.\1187\ As part of its preliminary determinations in the 2020 
NPRM that the CEA does require a necessity finding, the Commission 
explained in detail why the reasons it had previously given for the 
``mandate'' approach do not compel that interpretation of the statute. 
Taken as a whole, such reasons are insufficiently persuasive to 
outweigh the factors that favor a necessity finding.\1188\
---------------------------------------------------------------------------

    \1185\ Id. at 11658.
    \1186\ See supra Section I.A.
    \1187\ 85 FR at 11658.
    \1188\ 85 FR at 11661-64. CEA Section 4a(a)(2), which was 
enacted as part of the Dodd-Frank Act, directs the Commission to 
``establish'' limits on positions. The Commission does not interpret 
this directive to apply to the nine legacy agricultural contracts 
included in the list of core referenced futures contracts because 
they are already subject to Federal position limits that have 
existed for decades based on prior necessity findings pursuant to 
CEA Section 4a(a)(1). Nevertheless, as discussed infra at Section 
III.C, the Commission has determined that such limits are necessary.
---------------------------------------------------------------------------

2. Comments on the Commission's Preliminary Interpretation in the 2020 
NPRM and Commission Responses
    In response to the Commission's preliminary interpretation provided 
in the 2020 NPRM, a number of commenters stated that the Commission 
must make a necessity finding before establishing position limits under 
paragraph 4a(a)(2).\1189\ These commenters generally asserted that this 
result was required by the language of the statute, although they did 
not provide a detailed analysis of that language beyond that set forth 
in the 2020 NPRM.\1190\ Some commenters also asserted that a necessity 
finding is important to avoid imposing unwarranted costs on market 
participants, a position consistent with the policy concerns that 
entered into the Commission's preliminary determination that paragraph 
4a(a)(2) requires a necessity finding.\1191\
---------------------------------------------------------------------------

    \1189\ E.g., Citadel at 2; EEI at 2-3; ISDA at 3; MFA/AIMA at 1, 
14; SIFMA AMG at 1-2.
    \1190\ Id.
    \1191\ E.g., EEI at 3.
---------------------------------------------------------------------------

    A number of other commenters stated that the statute does not 
require a necessity finding for the establishment of position limits 
pursuant to paragraph 4a(a)(2).\1192\ These commenters made the 
following points:
---------------------------------------------------------------------------

    \1192\ E.g., AFR at 1; Better Markets at 3-4, 64; IATP at 4; 
NEFI at 2-3.
---------------------------------------------------------------------------

    a. Some commenters asserted that the language of paragraph 4a(a)(2) 
requires the Commission to establish position limits for all physical 
commodities without first determining that limits are necessary.\1193\ 
Commenters making this point emphasized the language of subparagraph 
4a(a)(2)(A) stating that the Commission ``shall'' impose position 
limits on physical commodities and the

[[Page 3386]]

language of subparagraph 4a(a)(2)(B) referring to position limits 
``required'' by subparagraph 4a(a)(2)(A).\1194\ However, while these 
words are suggestive of a mandatory requirement of some kind, they do 
not dictate the conclusion that paragraph 4a(a)(2) requires position 
limits across-the-board without a necessity finding, and to conclude 
otherwise would contradict the holding in ISDA that the statutory text 
is ambiguous.\1195\ The requirements of paragraph 4a(a)(2) are subject 
to the condition that position limits be imposed ``[i]n accordance with 
the standards set forth in paragraph [4a(a)(1)].'' The meaning of that 
text, and specifically the meaning of ``the standards,'' is the primary 
issue for the Commission to resolve here. For reasons explained above 
and in the 2020 NPRM, these standards are best interpreted as including 
the paragraph 4a(a)(1) necessity requirement.\1196\
---------------------------------------------------------------------------

    \1193\ E.g., Better Markets at 64 (incorporating by reference 
amicus brief by Senators Levin et al. in the ISDA litigation). The 
statute applies to all physical commodities ``other than excluded 
commodities.'' 7 U.S.C. 6a(a)(2). The Commission here refers to 
``all physical commodities'' for purposes of brevity only, and does 
not mean to imply that the statute covers excluded commodities.
    \1194\ E.g., Better Markets at 64; NEFI at 1. Better Markets 
stated that the Commission should adopt the legal views set forth in 
the amicus brief filed by certain U.S. Senators in the ISDA case. 
Better Markets at 64. However, in ISDA, the district court stated 
that ``[g]iven the fundamental ambiguities in the statute,'' it was 
``not persuaded by their arguments.'' ISDA, 887 F. Supp. 2d at 283.
    \1195\ ISDA, 887 F. Supp. 2d at 274.
    \1196\ Other arguments against a necessity requirement made by 
commenters based on the statutory wording have previously been 
addressed in the 2020 NPRM. Compare Better Markets at 64 
(incorporating by reference amicus brief by Senators Levin et al. in 
the ISDA litigation) with 85 FR at 11661-64.
---------------------------------------------------------------------------

    b. Some commenters asserted that the legislative history of 
paragraph 4a(a)(2) supports imposing limits on all physical commodities 
without requiring a necessity finding.\1197\ Among the points 
emphasized by commenters were that (1) certain bill language that 
ultimately became paragraph 4a(a)(2) evolved from using the permissive 
word ``may'' to the mandatory word ``shall''; and (2) the House 
Committee on Agriculture voted out a predecessor bill containing 
language similar to that of paragraph 4a(a)(2), and there are 
indications that members of the committee viewed this language as 
requiring limits for all physical commodities.\1198\ In the view of the 
Commission, neither of these points is sufficient to resolve the 
ambiguity in the language of paragraph 4a(a)(2) or dictate the 
conclusion that the statute mandates position limits without a 
necessity finding.
---------------------------------------------------------------------------

    \1197\ E.g., Better Markets at 64 (incorporating by reference 
amicus brief by Senators Levin et al. in the ISDA litigation).
    \1198\ Id.
---------------------------------------------------------------------------

    With regard to the first point, there is no question that the final 
version of paragraph 4a(a)(2) states that the Commission ``shall'' 
impose position limits. But, as explained above, this mandatory 
language is explicitly subject to a requirement that limits be imposed 
in accordance with the standards of paragraph 4a(a)(1), and that 
condition is ambiguous. The commenters' second point was addressed in 
detail in the 2020 NPRM.\1199\ Briefly, the House Committee on 
Agriculture bill described by commenters was never approved by the full 
House of Representatives.\1200\ Its language on position limits was 
included in the Dodd-Frank Act, but discussion of this language in the 
floor debate and conference committee report did not characterize it as 
requiring limits for all physical commodities.\1201\ And nothing in the 
legislative history specifies that the word ``standards'' in paragraph 
4a(a)(2) excludes the paragraph 4a(a)(1) necessity requirement. As a 
result, the legislative history, taken as a whole, does not resolve the 
ambiguity in the statute.
---------------------------------------------------------------------------

    \1199\ 85 FR at 11663.
    \1200\ Id.
    \1201\ Id.
---------------------------------------------------------------------------

    c. Some commenters asserted that to require a necessity finding 
construes the Dodd-Frank Act's amendment to section 4a as narrowing the 
Commission's power to impose position limits, which is implausible as 
an interpretation given the overall thrust of the Dodd-Frank Act and 
the legislative history of paragraph 4a(a)(2).\1202\ However, the CEA 
already required the Commission to find position limits necessary 
before the Dodd-Frank Act, so continuing to require such a finding is 
not a new constraint on the Commission.\1203\ And, even with a 
necessity requirement, paragraph 4a(a)(2) imposes an important new duty 
on the Commission: to affirmatively proceed to establish position 
limits for physical commodities where limits are necessary, within a 
specified period of time, including as to economically equivalent 
swaps, and to report to Congress on the effects of those limits, if 
any.\1204\ So the Commission's preliminary interpretation of the 
statute is consistent with legislative history indicating that Congress 
wanted the Commission to take action on the subject of position limits.
---------------------------------------------------------------------------

    \1202\ E.g. AFR at 1.
    \1203\ See paragraph 4a(a)(1). The House Committee on 
Agriculture summarized this provision as giving the government ``the 
power, after due notice and opportunity for hearing and a finding of 
a burden on interstate commerce caused by such speculation, to fix 
and proclaim limits on futures trading . . .'' H.R. Rep. No. 421, 
74th Cong., 1st Sess. 5 (1935), stated more specifically in the 
statutory text as authority to diminish, eliminate, or prevent 
burdens that are ``undue and unnecessary.'' Public Law 74-675 
section 5.
    \1204\ See paragraphs 4a(a)(2) and 4a(a)(5), 7 U.S.C. 6a(a)(2), 
6a(a)(5); Public Law 111-203 Sec.  719(a).
---------------------------------------------------------------------------

    d. Some commenters asserted that a necessity finding creates 
unnecessary administrative obstacles to establishing position 
limits.\1205\ In the view of the Commission, any extra needed 
administrative activity is a reasonable tradeoff for the flexibility 
and public policy benefits of imposing position limits only where they 
are economically justified as an efficient means of addressing the 
concerns Congress expressed in section 4a(a)(1). One commenter went 
further and suggested that a requirement to find necessity could make 
implementation and enforcement of position limits ``nigh to 
impossible.'' \1206\ However, that commenter premised this assertion on 
a different necessity standard, that the Commission is not adopting in 
this rulemaking.\1207\ In the view of the Commission, the necessity 
standard it is adopting herein is both consistent with the statute and 
workable in practice, as demonstrated by the necessity findings below. 
The workability of the Commission's standard is supported by a 
commenter who was opposed to a requirement to find necessity but 
nevertheless acknowledged that the necessity standard preliminarily 
adopted in the 2020 NPRM is ``unlikely to limit the CFTC's practical 
ability to impose Federal position limits.'' \1208\
---------------------------------------------------------------------------

    \1205\ E.g., Better Markets at 4.
    \1206\ IATP at 5.
    \1207\ Id. IATP assumed the use of a necessity standard, which 
it attributed to an industry group, requiring the Commission to, 
among other things, ``determine the likelihood that a specific limit 
would curtail excessive speculation in a specific market.'' Id. The 
Commission has determined that the statute does not require that. 85 
FR at 11664-66 and infra.
    \1208\ Better Markets at 4.
---------------------------------------------------------------------------

    Commenters who opposed a necessity-finding requirement also set 
forth a number of justifications for broad use of Federal position 
limits without asserting specifically that these concerns require 
limits for all physical commodities or justify imposing limits without 
finding them to be necessary. For example, commenters pointed out that 
unjustified volatility in derivatives markets can have negative 
consequences for price discovery and hedging in related non-financial 
markets.\1209\ The Commission agrees with this point and agrees that 
preventing these consequences is the major reason why the CEA provides 
for position limits.\1210\ However, this observation does not justify 
limits for all physical commodities since (a) the importance of the 
link between derivatives markets and associated cash markets can vary 
for

[[Page 3387]]

different commodities; and (b) good policy requires consideration of 
the costs and burdens associated with position limits as well as their 
potential preventative effects.\1211\ These points are discussed 
further in sections of this release dealing with the Commission's legal 
standard for necessity, necessity findings, and consideration of costs 
and benefits pursuant to CEA section 15(a).
---------------------------------------------------------------------------

    \1209\ Id. at 25-29.
    \1210\ See Congressional finding in first sentence of paragraph 
4a(a)(1), 7 U.S.C. 6a(a)(1).
    \1211\ In reaching this conclusion, the Commission draws upon 
its experience and expertise in considering costs and benefits 
before promulgating a rule, pursuant to 7 U.S.C. 19(a). The 
Commission believes that such consideration (which need not be 
mathematical) leads to better outcomes.
---------------------------------------------------------------------------

    Commenters opposed to a necessity-finding requirement also asserted 
that exchanges cannot always be relied upon to establish optimal 
position limits since they may benefit from revenue generated from high 
levels of speculation, including, in some instances, high levels of 
speculation by individual market participants.\1212\ To the extent that 
this is so, it is a reason for Congress to authorize, and the 
Commission to implement, position limits where needed. But it is not a 
reason to apply them to physical commodities across the board for the 
reasons just stated: The importance of unjustified volatility in 
derivatives markets for the non-financial economy can vary, and 
position limits have associated costs and burdens. Moreover, as 
discussed earlier in the preamble, exchanges are subject to statutory 
and regulatory obligations to establish position limits or position 
accountability and must do so in accordance with standards established 
by the Commission. Further, any incentives for exchanges to impose 
suboptimal position limits are reduced because an exchange that leaves 
itself open to an enhanced risk of excessive speculation, manipulation, 
or other forms of unjustified pricing is likely to lose business from 
traders seeking a stable market that reflects fundamental 
conditions.\1213\
---------------------------------------------------------------------------

    \1212\ Better Markets at 22-24.
    \1213\ See supra Section II.B.2.iv.b., for additional discussion 
of exchange incentives and related statutory and regulatory 
obligations to maintain market integrity.
---------------------------------------------------------------------------

3. Commission Determination
    Having reviewed the comments and further considered the issue, the 
Commission has determined that the interpretation of paragraph 4a(a)(2) 
as incorporating the requirement of paragraph 4a(a)(1) to find position 
limits necessary before imposing them is the best interpretation of the 
statute, and the Commission adopts this interpretation as its 
interpretation under the Final Rule. This determination is based on the 
reasons set forth above and in the relevant portion of the 2020 
NPRM.\1214\ The Commission further recognizes that this determination 
is a change from the Commission's earlier interpretation of paragraph 
4a(a)(2) as not requiring a necessity finding. The Commission has 
determined that the reasons previously given for such an interpretation 
of paragraph 4a(a)(2) are not compelling for the reasons stated above 
and in the relevant portion of the 2020 NPRM.\1215\ The specifics of 
what the term ``necessary'' means in this context are discussed in the 
next section, followed by the Commission's final necessity finding.
---------------------------------------------------------------------------

    \1214\ 85 FR at 11658-61.
    \1215\ Id. at 11661-64.
---------------------------------------------------------------------------

B. Legal Standard for Necessity Finding

    For the reasons discussed above, paragraph 4a(a)(2) requires the 
Commission to establish position limits to the extent they are 
``necessary'' to ``diminish, eliminate, or prevent'' the burden on 
interstate commerce in a commodity from ``sudden or unreasonable 
fluctuations or unwarranted changes in the price'' of the commodity 
caused by excessive speculation in futures contracts (and options 
thereon) or swaps.\1216\ In the 2020 NPRM the Commission preliminarily 
interpreted this requirement and preliminarily reached several 
conclusions about what sort of necessity finding the statute requires. 
This section of the preamble (1) reviews the preliminary conclusions 
set forth in the 2020 NPRM with some additional clarification and 
elaboration; \1217\ (2) reviews and evaluates important points made in 
comments regarding the CEA's statutory standard for finding necessity; 
and (3) sets forth the Commission's conclusions for this Final Rule on 
the legal standard for finding position limits to be necessary within 
the meaning of CEA section 4a.
---------------------------------------------------------------------------

    \1216\ The first sentence of paragraph 4a(a)(1) is a 
Congressional finding that ``excessive speculation in any 
commodity'' under futures contracts or certain swaps ``causing 
sudden or unreasonable fluctuations or unwarranted changes in the 
price of such commodity'' is ``an undue and unnecessary burden on 
interstate commerce in such commodity.'' 7 U.S.C. 6a(a)(1). The 
second sentence of paragraph 4a(a)(1), referring back to the burden 
on interstate commerce found in the first sentence, states that the 
Commission shall establish such position limits ``as the Commission 
finds are necessary to diminish, eliminate, or prevent such 
burden.'' Id.
    \1217\ Certain points relevant to the legal standard for 
necessity that were made in a number of different sections of the 
NPRM are integrated into the discussion of the legal standard here.
---------------------------------------------------------------------------

1. Preliminary Legal Standard for Necessity in 2020 NPRM
    In the 2020 NPRM, the Commission reached a number of conclusions: 
First, the CEA does not require the Commission to determine whether 
excessive speculation in general may create a risk of sudden or 
unreasonable fluctuations or unwarranted changes in the price of a 
commodity or whether position limits are an effective tool for 
controlling or preventing these potential effects.\1218\ Section 
4a(a)(1) of the CEA contains a Congressional finding that ``[e]xcessive 
speculation . . . causing sudden or unreasonable fluctuations or 
unwarranted changes in . . . price . . . is an undue and unnecessary 
burden on interstate commerce in such commodity'' and prescribes 
position limits for the purpose of ``diminishing, eliminating, or 
preventing'' that burden.\1219\ The analysis in the 2020 NPRM accepted 
those premises as established by Congress.
---------------------------------------------------------------------------

    \1218\ 85 FR at 11664.
    \1219\ See Commodity Futures Trading Com'n v. Hunt, 592 F.2d 
1211, 1215 (7th Cir. 1979) (``Congress concluded that excessive 
speculation in commodity contracts for future delivery can cause 
adverse fluctuations in the price of a commodity, and authorized the 
Commission to restrict the positions held or trading done by any 
individual person or by certain groups of people acting in 
concert.'').
---------------------------------------------------------------------------

    Second, the word ``necessary'' has a spectrum of legal meanings 
from absolute physical necessity to merely useful or convenient.\1220\ 
The 2020 NPRM explained that it is unlikely Congress intended either 
extreme.\1221\ The Commission preliminarily determined in the 2020 NPRM 
that the necessity requirement is best interpreted as a directive to 
establish position limits where they are economically justified as an 
efficient mechanism to advance the Congressional goal of preventing 
undue burdens on commerce in an underlying commodity caused by 
excessive speculation in the associated futures or swaps markets.\1222\
---------------------------------------------------------------------------

    \1220\ 85 FR at 11664.
    \1221\ Id.
    \1222\ Id. at 11665.
---------------------------------------------------------------------------

    Under this approach, the Commission explained, position limits are 
necessary where diminishing, eliminating, or preventing burdens on 
commerce in a commodity caused by excessive speculation in the 
associated derivatives market is likely to offer the greatest benefits 
to the cash market for the commodity and the economy, and not where the 
benefit of controlling or preventing such burdens is likely to be less 
significant or to be accompanied by disproportionate costs or negative 
consequences, including negative

[[Page 3388]]

consequences with respect to Congress's stated purpose, to prevent the 
burdens of sudden or unreasonable fluctuations or unwarranted changes 
in price that burden interstate commerce.\1223\ For example, it may be 
that for a given commodity, high levels of sudden or unreasonable 
fluctuation or unwarranted changes in the price of a commodity would 
have little overall impact on commerce in the cash commodity market or 
the national economy. If the burdens or negative economic consequences 
associated with position limits for that commodity, as discussed in the 
Commission's consideration of costs and benefits, are out of proportion 
to the likely economic benefits of position limits, it would be 
unwarranted to impose them.\1224\ However, there are markets in which 
sudden or unreasonable fluctuations or unwarranted changes in the price 
of a commodity caused by excessive speculation would have significantly 
negative effects on the cash commodity market or the broader economy. 
Even if such disruptions would be unlikely due to the particular 
characteristics of the relevant derivatives market, the Commission may 
nevertheless determine that position limits are necessary as a 
prophylactic measure given the potential magnitude or impact of the 
unlikely event.\1225\
---------------------------------------------------------------------------

    \1223\ 85 FR at 11665.
    \1224\ Id.
    \1225\ Id.
---------------------------------------------------------------------------

    The Commission's proposed test in the 2020 NPRM thus focused on the 
Congressional purpose implicit in the finding in the first sentence of 
paragraph 4a(a)(1): Protecting the cash commodity markets from such 
sudden or unreasonable fluctuations or unwarranted changes in the 
price. The Commission specified that this standard cannot be determined 
by a mathematical formula, but requires judgment by the Commission, 
taking into account available facts but also based on the Commission's 
experience and expertise.\1226\ The Commission further specified that 
this standard includes consideration of costs and benefits under CEA 
section 15(a), insofar as the Commission is required by that section to 
consider the costs and benefits of its discretionary choices.\1227\
---------------------------------------------------------------------------

    \1226\ 85 FR at 11665.
    \1227\ Id. For further discussion of the cost-benefit 
implications of the Commission's necessity finding with respect to 
the 25 core referenced futures contracts, see infra Section IV.A.2. 
For further discussion of the cost-benefit implications of Federal 
position limits in light of existing exchange-set limits, see infra 
Section IV.A.6.
---------------------------------------------------------------------------

    In applying this necessity standard in the 2020 NPRM, the 
Commission identified two primary factors to be used in identifying 
commodities where using position limits in derivatives markets to 
control or prevent injury to the underlying commodity market would be 
most valuable:
    The first primary factor is the importance of the derivatives 
market for a commodity to the operation of the market for the cash 
commodity itself.\1228\ Examples of links between derivatives markets 
and cash markets that exemplify this factor include:
---------------------------------------------------------------------------

    \1228\ 85 FR at 11665, 11666.
---------------------------------------------------------------------------

    a. The extent to which volatility in the derivatives market is 
likely to result in sudden or unreasonable fluctuations or unwarranted 
changes in the price in the cash commodity market including, in 
particular, the extent to which participants in the cash market rely on 
the derivatives market as a price discovery mechanism. This includes 
the use of futures prices for pricing cash-market transactions and the 
use of futures prices for planning purposes, such as when farmers 
decide what crops to plant or manufacturers estimate the cost of inputs 
to their production processes.\1229\
---------------------------------------------------------------------------

    \1229\ 85 FR at 11665, 11666.
---------------------------------------------------------------------------

    b. The extent to which participants in the cash market use the 
derivatives market for hedging.\1230\ The second primary factor 
specified in the 2020 NPRM is the importance of the underlying 
commodity to the economy as a whole.\1231\ In the view of the 
Commission, evidence demonstrating either one of these primary factors 
is sufficient to establish that position limits are necessary. This is 
so because each primary factor identifies circumstances that present an 
undue risk that disruptions to derivatives markets for a commodity will 
have consequences for industries that produce and use the relevant 
commodity and, ultimately, the general public that invests in and is 
employed by those industries and purchases their end-products.\1232\ 
Thus, each of the primary factors relates to the statutory objective of 
diminishing, eliminating, or preventing undue and unnecessary burdens 
on interstate commerce in a commodity arising from excessive 
speculation in associated derivatives contracts. Of course, to the 
extent that both factors are present, a necessity finding will be 
strengthened.
---------------------------------------------------------------------------

    \1230\ Id. at 11666.
    \1231\ Id. at 11665, 11666.
    \1232\ See Id. at 11664, fn. 471, 11666-11670 (giving examples 
as part of necessity finding).
---------------------------------------------------------------------------

    In the 2020 NPRM, the Commission emphasized that a necessity 
determination cannot be reduced to a mathematical formula, though data 
may of course be highly relevant. To the extent that the primary 
factors identified by the Commission cannot be directly measured, the 
Commission, in the exercise of its judgment, may look to market data or 
qualitative information that correlates with these factors for guidance 
in applying them.\1233\
---------------------------------------------------------------------------

    \1233\ See discussion in findings section below.
---------------------------------------------------------------------------

    With respect to futures contracts and options contracts linked to 
core referenced futures contracts, the Commission determined that 
position limits are necessary for linked contracts because such 
position limits are likely to make position limits for core referenced 
futures contracts more effective in preventing manipulation and other 
sources of sudden or unreasonable fluctuations or unwarranted changes 
in the price in the underlying commodity.\1234\
---------------------------------------------------------------------------

    \1234\ 85 FR at 11619-11620. See also supra at Section 
II.A.16.iii.
---------------------------------------------------------------------------

    The Commission's preliminary necessity finding in the 2020 NPRM 
also took into consideration economic differences between derivatives 
positions held during spot months and those held during other months 
that affect the extent to which position limits are an efficient 
mechanism for controlling or preventing sudden or unreasonable 
fluctuations or unwarranted changes in the price in underlying 
commodities. Specifically, the Commission stated that corners and 
squeezes can occur only during the spot month.\1235\ Thus, certain 
important sources of sudden or unreasonable fluctuations or unwarranted 
changes in the price are present only during the spot month. While the 
fact that certain types of disruptions in a given market may be 
unlikely is not dispositive of the necessity question,\1236\ the 
Commission judged that the impossibility of corners and squeezes in 
non-spot months diminished the likelihood of excessive speculation 
causing sudden or unreasonable fluctuations or unwarranted changes in 
the price in underlying commodities to such an extent as to reduce the 
benefit of position limits for those months below the point where, in 
the Commission's judgment, position limits would be justified under the 
necessity standard.\1237\ Nevertheless, the Commission did not rescind 
existing non-spot month limits for legacy

[[Page 3389]]

agricultural contracts, because it did not observe problems that would 
give a reason to eliminate them at this time.\1238\
---------------------------------------------------------------------------

    \1235\ 85 FR at 11629.
    \1236\ Id. at 11665.
    \1237\ 85 FR at 11628. The Commission also believes that the 
relevant benefits and burdens indicate that no level of new non-
spot-month limits is ``appropriate'' as that term is used in Section 
4a(a)(2)(A). See discussion at Section IV.A.6.iii.b.
    \1238\ 85 FR at 11628. Specifics of the Commission's findings 
with regard to the need for limits during spot and non-spot months 
are in the 2020 NPRM at 85 FR 11596, 11628, and supra at Sections 
II.B.3. and II.B.4.
---------------------------------------------------------------------------

2. Comments and Commission Responses
    Relatively few commenters addressed the substance of the 
Commission's legal interpretation of what CEA section 4a requires in 
order for the Commission to determine that position limits are 
necessary for a particular commodity or contract. Major points made by 
commenters, and the Commission's evaluation of these points include:
    a. Several commenters stated that the necessity finding must be 
``robust and data-driven.'' \1239\ The Commission agrees that the 
agency is required to consider available data, to the extent that it is 
relevant, in determining whether to establish position limits. At the 
same time, the Commission interprets the statute as requiring it to 
exercise judgment regarding the need for position limits where data is 
not available. The statute does not specify the use of any particular 
methodology, quantitative or otherwise, in determining whether position 
limits are necessary.
---------------------------------------------------------------------------

    \1239\ E.g. ISDA at 3; SIFMA AMG at 2. See also MFA/AIMA at 4 
(advocating for individualized necessity findings based on detailed 
analyses for each contract).
---------------------------------------------------------------------------

    In addition, the Commission must implement CEA section 4a in a 
fashion consistent with the finding regarding excessive speculation and 
its effects on commerce in the first sentence of paragraph 4a(a)(1) and 
the directive in paragraph 4a(a)(2) that the Commission ``shall'' 
promptly establish position limits for physical commodities, albeit 
subject to the necessity-finding requirement. These provisions imply 
that the Commission must act on position limits, even if available data 
is imperfect, so long as it has a reasonable basis for determining 
limits to be necessary. Other language of CEA section 4a further 
supports the conclusion that Congress intended the Commission to 
consider available data but also to exercise judgment in establishing 
position limits. For example, paragraph 4a(a)(2) requires that limits 
be established ``as appropriate,'' which implies consideration of a 
broad range of relevant factors, but subject to the reasonable exercise 
of subjective judgment.\1240\ Similarly, paragraph 4a(a)(3)(B) lists 
policy objectives for position limits that the Commission must achieve 
``to the maximum extent possible'' but specifies that the Commission 
must do this ``in its discretion.'' The Commission also believes it is 
better policy to interpret ``as necessary'' to permit flexibility in 
response to imperfect available data, so long as there is a reasonable 
basis for its decisions.\1241\ Such flexibility may facilitate 
achieving the objectives of the statute, whether by determining that 
position limits either are necessary or not necessary in particular 
circumstances.
---------------------------------------------------------------------------

    \1240\ See Michigan v. EPA, 576 U.S.C. 743, 752 (2015).
    \1241\ 7 U.S.C. 6a(a)(3)(B).
---------------------------------------------------------------------------

    b. One commenter, MGEX, supported the Commission's general approach 
of focusing on the relationship between the derivatives market and the 
underlying commodity in making necessity determinations.\1242\ This 
commenter stated, ``As the Commission appropriately points out, it is 
important to focus on derivatives that are vital to price discovery and 
distribution of the underlying commodity so that any excessive 
speculation may have a small impact.'' \1243\ The Commission agrees 
with that statement.
---------------------------------------------------------------------------

    \1242\ MGEX at 1.
    \1243\ Id.
---------------------------------------------------------------------------

    c. One commenter, Citadel, asserted that the statute required a 
different test for a finding of necessity than that used by the 
Commission.\1244\ According to this commenter, for each commodity 
subject to position limits, the Commission must establish ``when and 
how holding a large position in a given commodity could allow a market 
participant to exert undue market power or influence.'' \1245\ The 
commenter criticized the Commission for relying on the role core 
referenced futures contracts play in price discovery and the fact that 
they require physical delivery.\1246\ According to the commenter, the 
Commission proposed position limits on certain commodities ``based 
merely on their size or importance'' and ``did not explain why size or 
importance, without more'' justifies position limits.\1247\ The 
commenter expressed concern that the Commission's standard could set a 
precedent for the establishment of position limits for additional 
commodities in the future without adequate justification and therefore 
could reduce investor participation in commodity markets in a fashion 
that would impair the use of those markets for risk management and 
commercial decision making.\1248\
---------------------------------------------------------------------------

    \1244\ Citadel at 2-4. Somewhat similar views have been 
expressed by other commenters in earlier phases of the Commission's 
efforts to promulgate a position limits rule under paragraph 
4a(a)(2). See, e.g., IATP at 5 (describing views of ISDA/SIFMA AMG 
in connection with ISDA litigation).
    \1245\ Citadel at 2.
    \1246\ Id.
    \1247\ Id.
    \1248\ Id.
---------------------------------------------------------------------------

    The Commission disagrees with Citadel's interpretation of the CEA 
section 4a necessity requirement and criticism of the Commission's 
interpretation for several reasons, most of which have been stated 
previously.
    i. The statutory language does not state a requirement to make the 
particular findings Citadel claims are necessary. To the contrary, it 
includes a Congressional finding that excessive speculation can cause 
sudden or unreasonable fluctuations or unwarranted changes in the price 
that are a burden on interstate commerce in commodities. The Commission 
is required to establish position limits in light of that finding, and 
neither Congress nor the Commission have ever required the sort of 
showing Citadel suggests here with respect to individual 
commodities.\1249\ It is not reasonable to surmise that Congress 
intended Citadel's test to apply without saying so, particularly under 
the Dodd-Frank Act's amendments, which reflect a Congressional intent, 
or at least expectation, that the position limits regime be expanded. 
The Commission also notes that Citadel set forth its proposed standard 
for necessity in just a few sentences and did not spell out what sort 
of data would be needed to comply with it in practice and how such data 
would be used.\1250\ If there were any evidence that Congress intended 
Citadel's approach, or if a case could be made that the Commission 
should prefer it, such specifics would have been readily available.
---------------------------------------------------------------------------

    \1249\ The Commission has made similar determinations in 
connection with requirements for DCMs to impose position limits or 
position accountability levels by DCM rule. E.g., Establishment of 
Speculative Position Limits, 46 FR 50938, 50940 (Oct. 16, 1981) 
(``it appears that the capacity of any contract market to absorb the 
establishment and liquidation of large speculative positions in an 
orderly manner is related to the relative size of such positions, 
i.e., the capacity of the market is not unlimited''). See also 2020 
NPRM, 85 FR at 11665-11666 (Commission has repeatedly found that all 
markets in physical commodities are ``susceptible to the burdens of 
excessive speculation'' because they ``have a finite ability to 
absorb the establishment and liquidation of large speculative 
positions in an orderly manner,'' but this characteristic of these 
markets is not sufficient to establish that limits are necessary 
within the meaning of paragraph 4a(a)(1) for all physical 
commodities).
    \1250\ Citadel at 2-3.

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

[[Page 3390]]

    ii. The Congressional finding at the beginning of paragraph 
4a(a)(1) makes clear that Congress's primary concern was the effect of 
excessive speculation in derivatives markets on the related cash 
markets for the associated commodities. The Commission's focus on the 
role the core referenced futures contracts play in price discovery and 
hedging and the importance of certain commodities to the economy as a 
whole therefore is directly responsive to the statutory purpose of 
position limits. The Commission's focus on hedging and price discovery 
is further supported by CEA section 3, which sets forth the purpose of 
the CEA. Subsection 3(a) contains a Congressional finding that the 
transactions subject to the CEA serve a ``national public interest'' by 
providing a means for ``managing and assuming price risks'' (i.e., 
hedging and supporting hedging) ``discovering prices'' and 
``disseminating pricing information.'' Subsection 3(b) states that the 
purpose of the CEA, among other things, is to ``serve the public 
interests'' described in subsection 3(a).\1251\ The Commission's focus 
is thus consistent with the Congressional intent.
---------------------------------------------------------------------------

    \1251\ 7 U.S.C. 5(a), (b).
---------------------------------------------------------------------------

    The Commission's consideration of the size of the futures market 
for the core referenced futures contracts also is consistent with the 
statutory purpose. As explained below,\1252\ contracts with a large 
volume of trading, generally speaking, are contracts that are likely to 
be heavily used for price discovery and hedging by participants in the 
cash market. It is rational to conclude that position limits are 
unnecessary for contracts that play little role in price discovery or 
for commodities that have a lesser economic footprint. In addition, 
imposing position limits based on the size or importance of futures 
markets is a rational way to avoid imposing compliance costs related to 
position limits on futures contracts and related options contracts that 
are relatively inactive or otherwise a minor part of the market.
---------------------------------------------------------------------------

    \1252\ See infra Section III. (discussing necessity finding).
---------------------------------------------------------------------------

    iii. As for Citadel's claim that the Commission's standard for 
necessity will set a precedent for imposing position limits on 
additional commodities in the future without adequate justification, if 
the Commission were to establish additional position limits in the 
future, it would need to justify that decision through reasoned 
decision making in a new rulemaking, which would be subject to public 
comment and judicial review to the same extent as other rules.
    iv. Citadel's concern with adequate investor participation in the 
derivatives markets applies to varying degrees with respect to all 
position limits. The Commission has considered such effects, including 
on liquidity and bona fide hedging, throughout this rulemaking, 
including in its consideration of costs and benefits and in connection 
with the determination of position limit levels.\1253\
---------------------------------------------------------------------------

    \1253\ See 7 U.S.C. 6a(a)(3)(B)(iii) (position limits should be 
set at level that ensures sufficient market liquidity for bona fide 
hedgers to the maximum extent practicable in the discretion of the 
Commission).
---------------------------------------------------------------------------

    c. One commenter, IATP, endorsed a dissenting Commissioner's 
criticism of the necessity standard set forth in the 2020 NPRM.\1254\ 
The criticism was to the effect that the standard ``boils down'' to the 
assertion that the core referenced futures contracts are large and 
critically important to the underlying cash markets.\1255\ However, for 
reasons set forth above and in the 2020 NPRM, this is an incomplete 
characterization of the Commission's standard. Moreover, as also 
explained above and in the 2020 NPRM, importance to the cash market is 
a criterion for necessity that flows directly from the statutory 
purpose and, for reasons explained in the necessity findings section, 
the amount of trading in a contract, generally speaking, is likely to 
correlate with factors relevant to the statutory purpose, including use 
of the contract for price discovery and hedging.
---------------------------------------------------------------------------

    \1254\ IATP at 4 (quoting dissenting statement of Commissioner 
Berkovitz).
    \1255\ Id.
---------------------------------------------------------------------------

    While critical of the Commission's standard, IATP was even more 
critical of a standard like that proposed by Citadel that would require 
the Commission to ``determine the likelihood that a specific limit 
would curtail excessive speculation in a specific market.'' \1256\ 
According to IATP, such a standard, in combination with a requirement 
to avoid undue costs, would make implementation of position limits 
``nigh to impossible.'' \1257\ However, whether or not such a standard 
is possible to apply, the Commission has determined that the statute 
does not require it, and that the Commission's approach to the 
necessity finding is the one most consistent with the statutory 
language and purpose.
---------------------------------------------------------------------------

    \1256\ IATP at 5. IATP did not refer specifically to Citadel's 
comment but to similar concepts in connection with the ISDA 
litigation.
    \1257\ IATP at 5.
---------------------------------------------------------------------------

    d. Many commenters asserted that necessity findings needed to be 
made for each contract or commodity subject to position limits.\1258\ 
The Commission agrees with this interpretation of the statute, subject 
to a number of clarifications and provisos.
---------------------------------------------------------------------------

    \1258\ E.g., ISDA at 3 (necessity determination must be made 
``in connection with any specific position limits that are 
adopted''); PIMCO at 3 (necessity determination should be made on a 
``commodity-by-commodity and product-by-product basis''); MFA/AIMA 
at 4 (advocating ``for individualized necessity findings based on 
detailed analyses for each contract . . . including a more specific 
necessity finding for each contract'').
---------------------------------------------------------------------------

    i. While the Commission must find position limits necessary for 
each contract, it may do so based on different criteria for different 
types of contracts so long as the criteria are reasonable and 
consistent with the Commission's overall interpretation of the 
necessity provision. For example, as described above, the Commission 
has determined that, where limits are necessary for a core referenced 
futures contract, position limits for contracts linked to the core 
referenced futures contract are also necessary to enable position 
limits on the associated core referenced futures contract to function 
as intended.\1259\
---------------------------------------------------------------------------

    \1259\ For further discussion on contracts linked to core 
referenced futures contracts, see Sections II.A.16. and III.D.
---------------------------------------------------------------------------

    ii. The statute does not require a necessity finding for 
economically equivalent swaps for which position limits are required 
pursuant to paragraph 4a(a)(5) of the CEA.\1260\ While a necessity 
finding is required for position limits established under paragraph 
4a(a)(2) because the Commission must apply ``the standards set forth in 
paragraph [4a(a)(1)],'' no similar language appears in paragraph 
4a(a)(5). To the contrary, paragraph 4a(a)(5)(A) states that position 
limits for economically equivalent swaps must be established 
``[n]otwithstanding any other provision of this section.'' Moreover, 
the statute requires the Commission to develop position limits for 
economically equivalent swaps ``concurrently'' with position limits 
established under paragraph 4a(a)(2), and establish those limits 
``simultaneously'' with those established under paragraph 
4a(a)(2).\1261\ The necessity finding provision of paragraph 4a(a)(1) 
therefore does not apply to economically equivalent swaps. Rather, when 
position limits are necessary under paragraph 4a(a)(2), the requirement 
to establish them for economically equivalent swaps is automatically 
triggered under CEA section 4a(a)(5).
---------------------------------------------------------------------------

    \1260\ 7 U.S.C. 6a(a)(5).
    \1261\ 7 U.S.C. 6a(a)(5)(B).
---------------------------------------------------------------------------

    In addition to being compelled by the statutory language, this is a 
reasonable

[[Page 3391]]

interpretation of the statute in policy terms because Congress could 
reasonably have determined that the necessity finding for position 
limits for futures contracts (and options thereon) carries over to 
economically equivalent swaps by virtue of the fact that they are 
economically equivalent.\1262\ The Commission notes that, while 
paragraph 4a(a)(5) does not require the Commission to make a necessity 
finding for economically equivalent swaps, it requires the Commission 
to make policy judgments with respect to such swaps in connection with 
the definition of what swaps are economically equivalent and the 
requirement that limit levels be established ``as appropriate.'' \1263\ 
The relevant discussion with respect to the determination of what swaps 
that are deemed to be ``economically equivalent swaps'' is set forth 
elsewhere in this preamble.\1264\
---------------------------------------------------------------------------

    \1262\ Some commenters stated that the statute requires a 
necessity finding for swaps. E.g., ISDA at 4. The Commission 
generally agrees with this position for swaps, but not for 
economically equivalent swaps for the reasons stated herein.
    \1263\ 7 U.S.C. 6a(a)(5)(A), (B).
    \1264\ See Section II.A.4.
---------------------------------------------------------------------------

    e. Some commenters asked the Commission to clarify that it finds 
position limits not to be necessary for futures contracts other than 
the referenced contracts specified in the rule.\1265\ The Commission 
agrees that, for commodities falling within the scope of this 
rulemaking, i.e., ``physical commodities other than excluded 
commodities'' for which position limits are required by paragraph 
4a(a)(2), the Commission has determined that position limits are 
necessary only for the 25 core referenced futures contracts and any 
associated referenced contracts on futures contracts or options on 
futures contracts, but not for other futures contracts or options on 
futures contracts.\1266\ As with any rulemaking, the necessity 
determinations made in connection with this rule may change in the 
future based on market developments, new information or analysis, or 
changes in Commission policy.
---------------------------------------------------------------------------

    \1265\ E.g. SIFMA AMG at 5 (``spot month limits should apply 
only to physically settled futures contracts (i.e., the core 
referenced futures contracts), and the Commission should not make 
any determinations on, or adopt final rules applicable to, 
financially settled futures at this time.''); ISDA at 4 (stating 
that the Commission should start with final rules only for 
physically-settled contracts during the spot month.)
    \1266\ As discussed above, while economically equivalent swaps 
are encompassed within the ``referenced contract'' definition, such 
swaps are subject to Federal position limits pursuant to 7 U.S.C. 
6a(a)(5) and therefore are not subject to a necessity determination.
---------------------------------------------------------------------------

3. Commission Determination Regarding Necessity Standard
    For these reasons and those set forth in the 2020 NPRM, the 
Commission adopts the interpretation of ``necessity'' set forth in the 
2020 NPRM and clarified and elaborated upon here.

C. Necessity Finding as to the 25 Core Referenced Futures Contracts

1. Introduction
    This Final Rule imposes Federal position limits on 25 core 
referenced futures contracts, any futures contracts or options on 
futures contracts directly or indirectly linked to the core referenced 
futures contracts, and any economically equivalent swaps. As discussed 
above, the Commission bases its necessity analysis on the following 
propositions reflected in the text of CEA section 4a(a)(1). First, that 
excessive speculation in derivatives markets can cause sudden or 
unreasonable fluctuations or unwarranted changes in the price of an 
underlying commodity. Second, that such price fluctuations and changes 
are an undue and unnecessary burden on interstate commerce in that 
commodity. Third, that position limits can diminish, eliminate, or 
prevent that burden. With these propositions established by Congress, 
the Commission makes a further determination of whether it is necessary 
to use position limits, Congress's prescribed tool to address those 
burdens on interstate commerce, in light of the facts and 
circumstances.
    The Commission finds that position limits on the 25 core referenced 
futures contracts identified in the 2020 NPRM are necessary to prevent 
the economic burdens on interstate commerce associated with excessive 
speculation causing sudden or unreasonable fluctuations or unwarranted 
changes in the price of the commodities underlying these 
contracts.\1267\ As in the 2020 NPRM, this necessity determination is 
based on two interrelated factors: The importance of the 25 core 
referenced futures contracts to their respective underlying cash 
markets, including that they require physical delivery of the 
underlying commodity; and the particular importance to the national 
economy of the commodities underlying the 25 core referenced futures 
contracts. The Commission analyzes both factors in turn below.
---------------------------------------------------------------------------

    \1267\ See supra Section III.B.
---------------------------------------------------------------------------

2. Importance of the 25 Core Referenced Futures Contracts to Their 
Respective Underlying Cash Markets
a. Link Between the Derivatives Market and Its Underlying Cash-Market
    As explained in the 2020 NPRM, the Commission has determined that 
position limits are necessary for physical commodities only where there 
exists a physically-settled futures contract for two reasons. First, 
physical settlement establishes a direct link between the futures 
market and the cash market since futures contracts, while normally 
closed out by offset, may be settled by delivery of the commodity 
itself. This link helps to force convergence between futures contract 
settlement prices and cash-market prices by ensuring that futures 
prices in the delivery period reflect supply and demand in the cash-
market, whereas cash-settled futures contracts do not provide a direct 
link because physical-delivery is not an option.\1268\ As a result, in 
many circumstances, commercial participants use physically-settled 
futures contracts for price discovery. Illustrative of this point, at 
the May 2020 public meeting of the Commission's Energy and 
Environmental Markets Advisory Committee, an industry representative 
discussing application of position limits to power markets observed, 
``In futures markets, where physically-settled contracts are 
established, such as natural gas or crude oil, these physical contracts 
effectively serve as the most important price discovery tool for the 
spot market at baseload supply and demand for the delivery month is 
managed with the physical futures or physical deals linked to it.'' 
\1269\
---------------------------------------------------------------------------

    \1268\ See 85 FR at 11667. Many participants rely on the 
possibility of settlement by physical delivery to foster convergence 
at expiration of the futures contract. Id. Because of imperfect 
contract design or other factors, the convergence mechanism does not 
always work as hoped in practice. Id. at 11676, fn. 575. Such 
malfunctions are considered to be a public policy concern because 
bona fide hedgers and other participants seek to hedge cash-market 
prices with futures contract prices. Id. at 11667.
    \1269\ See Transcript of Committee Meeting at 46:19-47:06, 
Comment by Nodal Exchange, Inc., U.S. Commodity Futures Trading 
Commission Energy and Environmental Markets Advisory Committee 
(2020), https://www.cftc.gov/sites/default/files/2020/06/1591218221/eemactranscript050720.pdf.
---------------------------------------------------------------------------

    Second, physically-settled contracts may be at risk of corners and 
squeezes, because the settlement mechanism of the contract requires 
participants with short positions to deliver the underlying commodity 
at expiration.\1270\ Physical

[[Page 3392]]

settlement therefore may increase the sources of the risk of sudden or 
unreasonable fluctuations or unwarranted changes in the price of the 
underlying commodity arising from excessive speculation.\1271\ Applying 
position limits to commodities where there is a physically-settled core 
referenced futures contract therefore is consistent with the 
Commission's interpretation of the paragraph 4a(a)(1) necessity 
requirement as directing the Commission to impose limits where they are 
most likely to be an efficient mechanism for achieving the statutory 
objectives.\1272\
---------------------------------------------------------------------------

    \1270\ 85 FR at 11672. For example, based on its general 
experience, the Commission recognizes that if the underlying 
commodity is ``cornered'' and the participant with the short 
position does not already have the commodity to deliver, then the 
short participant must exit its position through an offsetting long 
position. As a consequence, the participant will likely have to bid 
up the price of the futures contract to exit the market, thus 
``squeezing'' the short to pay a higher price for the offsetting 
long position. Conversely, for a cash-settled contract, a market 
participant who has cornered the cash market for an underlying 
commodity cannot squeeze someone who is short the cash-settled 
futures contract because the short does not have to acquire the 
underlying commodity to make delivery to the long in a cash-settled 
contract.
    \1271\ See 7 U.S.C. 6a(a)(3)(B)(ii) (identifying deterrence and 
prevention of corners and squeezes as one of the objectives of 
position limits required by 7 U.S.C. 6a(a)(2)).
    \1272\ See ISDA at 3-4 (suggesting that the Commission 
``finalize the proposed Federal position limits rules only for 
physically delivered spot month futures contracts, in the first 
phase . . . as the Commission finds are necessary to . . . prevent 
[e]xcessive speculation . . . .'')
---------------------------------------------------------------------------

b. The 25 Core Referenced Futures Contracts Are Used for Hedging and 
Price Discovery
    In the 2020 NPRM, the Commission presented information supporting 
its determination that the proposed 25 core referenced futures 
contracts are used extensively for hedging and price discovery, thus 
establishing a close link between the markets for these futures 
contracts and commerce in the relevant commodities.\1273\ The 
Commission's conclusions on this point are further supported by 
comments discussing the use of particular core referenced futures 
contracts for hedging and price discovery, or discussing more generally 
the use of futures contracts for hedging and price discovery in the 
context of the Commission's proposed rule.\1274\
---------------------------------------------------------------------------

    \1273\ 85 FR at 11666-71.
    \1274\ See, e.g., ASR at 1 (stating that ICE Sugar No. 11 and 
ICE Sugar No. 16 are commonly used by commercial participants for 
hedging.); NGSA at 12 (``Physical market participants currently 
hedge Henry Hub price risk through both physically settled and 
financially-settled futures contracts.''); Cargill at 2 
(``Commercial end-users . . . rely on the futures and derivatives 
markets to perform vital functions including price discovery and 
risk management related to significant physical commodity 
origination, production and processing, transportation, purchasing 
and sales, among other things.''); EEI/EPSA at 2 (``The Joint 
Associations members are not financial entities. Rather, they are 
physical commodity market participants that rely on futures and 
swaps to hedge and mitigate their commercial risk.''); ADM at 2 
(``Many . . . [futures] transactions are critical elements of risk 
management, price discovery and hedging while also playing a role in 
the acquisition of physical commodities.''); CMC at 1 (noting that 
commercial participants ``use futures markets to hedge risk 
exposures related to commercial activities in physical 
commodities.''); DECA at 2 (``The [Cotton] CT contract plays an 
indispensable role in the global cotton ecosystem and it is needed 
to provide price discovery for all market participants.''); AFIA at 
2 (``As commercial end-users, AFIA's members prioritize the need for 
[futures] markets to work well for their primary function of price 
discovery and risk management.); NGFA at 2 (``The NGFA's member 
firms are bona fide hedgers who hedge physical commodity risk and 
depend on futures markets for price discovery and risk 
management.''); ACSA at 5 (``. . . the futures delivery process is 
essential to maintaining functioning agricultural markets, price 
discovery, and convergence.''); PMAA at 1 (``For decades, petroleum 
marketers have been utilizing oil and refined product futures 
markets for their hedging needs to protect customers from volatility 
and price spikes. Well-functioning markets are critical to commodity 
price discovery.''); CCI at 3 (``In addition to covering timing 
differentials in commodity prices, intra-commodity spreads perform 
an important function in energy markets by, among other things, 
promoting price discovery and convergence as well as providing 
liquidity for priced-linked, physically-settled and cash-settled 
Referenced Contracts in the same underlying commodity during the 
spot month as market participants manage their risks across 
markets.''). See also NFP Electric Associations, Comment Letter on 
Proposed Rule on Position Limits for Derivatives and Aggregation of 
Positions (July 3, 2014), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59934&SearchText= (noting that the ``[energy] 
markets . . . provide commercial risk management opportunities and 
achieve price convergence between futures and cash-market prices for 
the benefit of commercial hedgers and their counterparties.'').
---------------------------------------------------------------------------

    The 25 core referenced futures contracts also serve as key 
benchmarks for use in pricing cash-market and other transactions.\1275\ 
For example, NYMEX NY Harbor RBOB Gasoline (RB) is the main benchmark 
used for pricing gasoline in the U.S. petroleum products market, a huge 
physical market with total U.S. refinery capacity of approximately 9.5 
million barrels per day of gasoline.\1276\ Similarly, the NYMEX NY 
Harbor ULSD Heating Oil (HO) contract is the main benchmark used for 
pricing the distillate products market, which includes diesel fuel, 
heating oil, and jet fuel.\1277\ The utility of the price discovery 
function for these futures contracts is thus impactful for commercial 
participants regardless of whether they are actively trading in the 
futures market.
---------------------------------------------------------------------------

    \1275\ See, e.g., USDA Economic Research Service, Contracts, 
Markets, and Prices: Organizing the Production and Use of 
Agricultural Commodities, Agricultural Economic Report No. 837, at 6 
(Nov. 2004), https://www.ers.usda.gov/webdocs/publications/41702/14700_aer837_1_.pdf?v.=41061 (one-third of all U.S. agricultural 
production is produced under contracts using pricing formulas 
determined by reference to futures prices); see also Paul Peterson, 
Fixing Prices and Fixing Markets, farmdoc daily (4): 118, Department 
of Agricultural and Consumer Economics, University of Illinois at 
Urbana-Champaign (June 25, 2014), https://farmdocdaily.illinois.edu/2014/06/fixing-prices-and-fixing-markets.html (explaining that 
futures markets provide price discovery for cash grain spot markets 
and how price discovery through negotiated prices has diminished 
over time).
    \1276\ See 85 FR at 11669.
    \1277\ Id.
---------------------------------------------------------------------------

    There is also evidence that the 25 core referenced futures 
contracts are the physically-settled contracts in physical commodities 
traded on U.S. exchanges that, by and large, are most used for hedging 
and price discovery by cash-market participants. Unfortunately, the 
Commission does not have information that permits a direct comparative 
measurement of the extent to which each of the actively traded futures 
contracts is used for hedging and price discovery. However, available 
statistics from exchanges show that the 25 core referenced futures 
contracts, with the partial exception of CBOT Oats (O), a legacy 
contract, are the most actively traded physically-settled contracts in 
physical commodities, as measured by open interest and trading volume. 
As discussed in detail further below, the most actively traded futures 
contracts will usually be the contracts that are most used for hedging 
and price discovery.

[[Page 3393]]

    To follow up on the discussion of trading activity in the 2020 
NPRM,\1278\ the Commission analyzed average total open interest \1279\ 
and average notional open interest \1280\ for all physically-settled 
futures contracts for the period between January 2019 and December 
2019.\1281\ From that data, the Commission assessed the 30 largest 
physically-settled contracts in terms of average total open interest 
and average notional open interest for comparison.\1282\ These 30 
contracts comprised the 25 core referenced futures contracts, and the 
five physically-settled physical commodity contracts with the next-
highest amounts of average total open interest and average notional 
open interest. As shown in the tables below, there is a significant 
drop in open interest between CBOT Oats (O), which has the lowest open 
interest of the core referenced futures contracts, and CME Random 
Length Lumber (LBS), which is the 27th largest physically-settled 
futures contract and has the second highest open interest of the five 
contracts not selected from the group of 30 contracts.\1283\ 
Specifically, average total open interest in CBOT Oats (O) (5,630 OI) 
is almost twice the size of average total open interest in CME Random 
Length Lumber (LBS) (3,025 OI).\1284\
---------------------------------------------------------------------------

    \1278\ See id. at 11666, 11668-70.
    \1279\ Open interest refers to the total number of outstanding 
futures contracts that have not been offset at the end of the 
trading day.
    \1280\ Notional value means the value of average open interest 
without adjusting for delta in options.
    \1281\ The 25 core referenced futures contract are all long-
standing, established contracts. Generally speaking, for purposes of 
this Final Rule, the Commission focused on mature contract markets 
with at least five years of reported open interest and volume. For 
example, the Commission notes that the ICE Canola Futures (RS) and 
NYMEX WTI Houston Crude Oil Futures (HCL) contracts appear to have 
characteristics similar to those which the Commission has found 
support a necessity finding, but these contracts are both much 
newer, and the Commission finds that this militates against finding 
a position limit necessary until their respective markets mature 
further. The Commission may consider a position limit necessary for 
one or both in the future, as it revisits these issues from time to 
time as required by statute.
    \1282\ As discussed in the 2020 NPRM, the Commission also 
analyzed FIA end of month open interest data for December 2019 and 
FIA 12-month total trading volume data (January 2019 through 
December 2019) and reached the same conclusion as discussed herein. 
See 85 FR at 11670.
    \1283\ Many commenters suggested that the Commission's final 
rule should demonstrate that position limits are necessary on a 
``commodity-by-commodity basis'' as supported by empirical evidence 
or data. See, e.g. PIMCO at 3; ISDA at 3; SIFMA AMG at 2; MFA/AIMA 
at 4. As discussed in Section III.B.2.a., supra, the Commission 
agrees that the agency is required to consider relevant data, where 
available, in determining whether to establish position limits. The 
Commission however notes that the CEA does not specify the use of 
any particular methodology, quantitative or otherwise, in 
determining whether position limits are necessary.
    \1284\ During the period January 1, 2019 through December 31, 
2019, the NYMEX Loop Crude Oil Storage (LPS) futures contract had 
higher open interest than four of the 25 core referenced futures 
contracts and the remaining largest contracts that were not 
selected, as shown in the chart below. The Commission, however, 
notes that the contract is a capacity allocation contract, which 
gives the buyer of the contract the legal right to store crude oil 
at a storage facility in Louisiana for a specified calendar month. 
The Commission further notes that the contract is a newer one, has 
fewer reportable traders, and significantly lower average daily 
trading volume (NYMEX Loop Crude Oil Storage (LPS) 131 Vol.) and 
average notional value than any of the 25 core referenced futures 
contracts during this same period. In addition, open interest in the 
contract has dropped precipitously between January 1, 2020 and 
September 30, 2020. The Commission finds that all of these reasons 
militate against finding a position limit necessary for this 
contract until its market matures further. The Commission may 
consider a position limit necessary for this contract in the future, 
as it revisits these issues from time to time as required by 
statute.
---------------------------------------------------------------------------

    With the exception of CBOT Oats (O),\1285\ as shown in the tables 
below, the average notional open interest values for the 25 core 
referenced futures contracts are all substantially larger and more 
valuable than the five contracts that were not selected. Specifically, 
outstanding futures average notional values range from approximately $ 
33 billion for CBOT Corn (C) to approximately $ 80 million for CBOT 
Oats (O), with the other core referenced futures contracts on 
agricultural commodities all falling somewhere in between.\1286\ 
Outstanding futures average notional values of the core referenced 
futures contracts on metal commodities range from approximately $ 80 
billion in the case of COMEX Gold (GC), to approximately $ 3.6 billion 
in the case of NYMEX Platinum (PL), with the other metals core 
referenced futures contracts all falling somewhere in between.\1287\ 
With regard to energy commodities, futures average notional values 
range from $ 116.7 billion in the case of NYMEX Light Sweet Crude Oil 
(CL) to $ 28.3 billion in the case of NYMEX NY Harbor RBOB Gasoline 
(RB).\1288\
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    \1285\ See supra Section II.B.1. (discussing CBOT Oats (O) 
legacy contract status).
    \1286\ Calculations are based on data submitted to the 
Commission pursuant to part 16 of the Commission's regulations.
    \1287\ Id.
    \1288\ Id.

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[[Page 3394]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.013

    In addition to open interest and notional value, the Commission 
analyzed average daily trading volume \1290\ for the period January 1, 
2019 through December 31, 2019 and notes that trading volume on the 25 
core referenced futures contracts is also generally larger than trading 
volume on the five contracts that were not selected. For example, the 
CBOT Corn (C) and CBOT Soybean (S) contracts trade over 409,000 and 
211,000 contracts respectively per day.\1291\ The COMEX Gold (GC) 
contract trades approximately 343,288 contracts daily.\1292\ The NYMEX 
Light Sweet Crude Oil (CL) contract, which is the world's most liquid 
and actively traded crude oil contract, trades nearly 1.2 million 
contracts a day, and the NYMEX Henry Hub Natural Gas (NG) contract 
trades on average approximately 409,480 contracts daily.\1293\ In 
contrast, the CME Random Length Lumber (LBS), CBOT Ethanol (EH), COMEX 
Aluminum (ALI), and NYMEX Mont Belvieu Spot Ethylene In-Well (MBE) 
contracts, which were not selected, trade approximately 645, 315, 123, 
and 15.7 contracts respectively per day.\1294\
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    \1289\ Id.
    \1290\ Daily trading volume represents the total quantity of 
futures contracts traded within a day.
    \1291\ Calculations are based on data submitted to the 
Commission pursuant to part 16 of the Commission's regulations.
    \1292\ Id.
    \1293\ Id.
    \1294\ Id. The average daily trading volume for CBOT Oats (O) 
(645.04 Vol) is approximately the same as the average daily trading 
volume for CME Random Length Lumber (LBS) (645.56 Vol), which is the 
largest contract in terms of volume of the five contracts that were 
not selected. While the average daily trading volume for ICE Sugar 
No. 16 (SF) (307.32 Vol), which is the smallest of the 25 core 
contracts in terms of volume, is less than the average daily trading 
volume for both CME Random Length Lumber (LBS) (645.56 Vol) and CBOT 
Ethanol (EH) (315.7 Vol), the Commission notes that many commercial 
participants frequently use both ICE Sugar No. 16 (SF) and ICE Sugar 
No. 11 (SB) together for hedging and price discovery because the 
underlying commodity is the same for both contracts. See infra 
Section III.C.5. (discussing the ICE Sugar No. 16 (SF) and ICE Sugar 
No. 11 (SB) contracts).

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[[Page 3395]]

    There are a number of reasons to expect that, generally speaking, 
the most actively traded futures contracts will usually be the 
contracts that are most used for hedging and price discovery. First, it 
is generally accepted that successful futures contracts usually require 
active market participation by hedgers as well as speculators.\1295\ It 
is therefore reasonable to expect that some significant proportion of 
the activity in the most active futures contracts will normally consist 
of hedging and not solely consist of purely speculative trading. In 
addition, the most active futures contracts are likely to be the most 
liquid, at least most of the time. Such contracts are likely to be 
heavily relied upon as sources of price information because their 
prices reflect the collective opinion of more traders and are therefore 
likely to be a more accurate representation of the underlying cash-
market price conditions.\1296\ While the correlation between the 
magnitude of trading activity and use of a contract for hedging and 
price discovery is likely imperfect, it provides reason to expect that 
the 25 core referenced futures contracts are, on the whole, the 
physically-settled contracts in physical commodities traded on U.S. 
exchanges that are most used for hedging and price discovery. This is 
particularly true given the very large gap in activity levels between 
most of the 25 core referenced futures contracts and physically-settled 
contracts not included as core referenced futures contracts.
---------------------------------------------------------------------------

    \1295\ See, e.g., Holbrook Working, Futures Trading and Hedging, 
43 a.m. Econ. Rev. 314, 319-320 (June 1953), https://www.jstor.org/stable/1811346?seq=1&cid=pdf-reference#references_tab_contents. See 
also William L. Silber, Innovation, Competition, and New Contract 
Design in Futures Markets, 1 J. of Futures Markets 129, 131 (Summer 
1981), https://onlinelibrary.wiley.com/doi/abs/10.1002/fut.3990010205.
    \1296\ See, e.g., 85 FR at 11669, fn. 522-523. See generally 
William L. Silber, The Economic Role of Financial Futures, in 
Futures Markets: Their Economic Role 83, 89-90 (A. Peck ed., Am. 
Enter. Inst. for Pub. Pol'y Rsch. 1985), https://legacy.farmdoc.illinois.edu/irwin/archive/books/Futures-Economic/Futures-Economic_chapter2.pdf (discussing the price discovery and 
hedging functions of futures markets).
---------------------------------------------------------------------------

c. Conclusion Regarding Importance of the 25 Core Referenced Futures 
Contracts to Their Respective Underlying Cash Markets
    Based on the information set forth in the NPRM and supplemented 
here, the Commission concludes that the importance of the 25 core 
referenced futures contracts to their respective underlying cash 
markets supports the conclusion that position limits are necessary for 
these contracts.
3. Importance of the Commodities Underlying the 25 Core Referenced 
Futures Contracts to the National Economy
    With respect to the second factor, importance of the cash commodity 
to the U.S. economy as a whole, the 2020 NPRM set forth information 
demonstrating that each of the 25 core referenced futures contracts is 
important to the U.S. economy in various ways.\1297\ Many of the 25 
core referenced futures contracts involve commodities that are among 
the most important physical commodities for the U.S. economy, among 
those commodities for which physically-settled contracts are traded on 
U.S. exchanges.\1298\
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    \1297\ See 85 FR at 11666-11671.
    \1298\ See, e.g., 85 FR at 11668 (discussing agricultural 
commodities and their downstream uses), id. at 11669-70 (discussing 
energy contracts).
---------------------------------------------------------------------------

    For example, in the agricultural sector, three of the top five 
commodities in the United States, as measured by cash receipts, 
underlie core referenced futures contracts, including cattle, corn, and 
soybeans.\1299\ An additional commodity that underlies several core 
referenced contracts, wheat, is in the top ten.\1300\ Primary energy 
commodities that underlie core referenced futures contracts, 
specifically crude oil and natural gas, account for over half of U.S. 
energy production.\1301\ Two additional core referenced futures 
contracts in the energy space, NYMEX New York Harbor ULSD Heating Oil 
(HO) and NYMEX New York Harbor RBOB Gasoline (RB), relate, in turn, to 
commodities that are among the most widely used byproducts of crude 
oil.\1302\
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    \1299\ USDA Economic Research Service, Cash receipts by State, 
commodity ranking and share of U.S. total, 2019 Nominal (current 
dollars), https://data.ers.usda.gov/reports.aspx?ID=17843.
    \1300\ Id.
    \1301\ U.S. Energy Information Administration, Annual Energy 
Review, Primary Energy Production by Source, Table 1.2 (last updated 
Sept. 2020), https://www.eia.gov/totalenergy/data/monthly/pdf/sec1_5.pdf.
    \1302\ See, e.g., U.S. Energy Information Administration, U.S. 
petroleum flow, 2018, https://www.eia.gov/totalenergy/data/monthly/pdf/flow/petroleum.pdf.
---------------------------------------------------------------------------

    Thus, based on the information set forth in the NPRM and 
supplemented here, the importance of the underlying commodity to the 
national economy supports the conclusion that position limits are 
necessary for the 25 core referenced futures contracts.
4. Commodity Indices
    As an independent check on its selection of core referenced futures 
contracts, the Commission has compared its list with the lists of 
commodities included in several widely-tracked third-party commodity 
indices: The Bloomberg Commodity Index, the S&P GSCI index, and the 
Rogers International Commodity Index. Based on the criteria used to 
create these indices, inclusion of a commodity in the index is an 
indication that the commodity is important to the world or U.S. 
economy, and that futures prices for the commodity are considered to be 
an important source of price information. In particular, Bloomberg 
states that it selects commodities for its Bloomberg Commodity Index 
that in its view are ``sufficiently significant to the world economy to 
merit consideration,'' that are ``tradeable through a qualifying 
related futures contract'' and that generally are the ``subject of at 
least one futures contract that trades on a U.S. exchange.'' \1303\ 
Similarly, S&P's GSCI index is, among other things, ``designed to 
reflect the relative significance of each of the constituent 
commodities to the world economy.'' \1304\ Likewise, the Rogers 
International Commodity Index ``represents the value of a basket of 
commodities consumed in the global economy'' that are ``tracked via 
futures contracts on 38 different exchange-traded physical 
commodities'' and that ``aims to be an effective measure of the price 
action of raw materials not just in the United States but also around 
the world.'' \1305\
---------------------------------------------------------------------------

    \1303\ The Bloomberg Commodity Index Methodology, Bloomberg, at 
16-17 (Jan. 2020), https://data.bloomberglp.com/professional/sites/10/BCOM-Methodology.pdf.
    \1304\ S&P GSCI Methodology, S&P Dow Jones Indices, at 8 (May 
2020), https://www.spglobal.com/spdji/en/indices/commodities/sp-gsci/#overview.
    \1305\ The RICI Handbook, The Guide to the Rogers International 
Commodity Index, at 4-5 (Aug. 2020), https://www.rogersrawmaterials.com/documents/RICIHndbk_01.31.19.pdf.
---------------------------------------------------------------------------

    Applying these criteria, Bloomberg, S&P, and Rogers have all deemed 
eligible for inclusion in their indices lists of commodities that 
overlap significantly with the Commission's 25 core referenced futures 
contracts. In particular, Bloomberg, S&P, and Rogers include 17, 15, 
and 22 contracts respectively per index of the 25 contracts selected by 
the Commission.\1306\ Independent index

[[Page 3396]]

providers thus appear to have arrived at similar conclusions to the 
Commission's necessity finding regarding the relative importance of 
certain commodity markets for the economy and price discovery. The 
indices, taken individually or as a whole, support the Commission's 
conclusion that position limits are necessary for the 25 core 
referenced futures contracts.
---------------------------------------------------------------------------

    \1306\ The 17 Bloomberg contracts are ICE Coffee C (KC), COMEX 
Copper (HG), CBOT Corn (and Mini-Corn) (C), ICE Cotton No. 2 (CT), 
COMEX Gold (GC), NYMEX New York Harbor ULSD Heating Oil (HO), CME 
Live Cattle (LC), NYMEX Henry Hub Natural Gas (NG), NYMEX New York 
Harbor RBOB Gasoline (RB), COMEX Silver (SI), CBOT Soybeans (and 
Mini-Soybeans) (S), CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), 
ICE Sugar No. 11 (SB), CBOT Wheat (and Mini-Wheat) (W), CBOT KC HRW 
Wheat (KW), and NYMEX Light Sweet Crude Oil (CL). See https://data.bloomberglp.com/professional/sites/10/BCOM-Methodology.pdf.
    The 15 S&P GSCI contracts are ICE Cocoa (CC), ICE Coffee C (KC), 
CBOT Corn (and Mini-Corn) (C), ICE Cotton No. 2 (CT), COMEX Gold 
(GC), NYMEX New York Harbor ULSD Heating Oil (HO), CME Live Cattle 
(LC), NYMEX Henry Hub Natural Gas (NG), NYMEX New York Harbor RBOB 
Gasoline (RB), COMEX Silver (SI), CBOT Soybeans (and Mini-Soybeans) 
(S), ICE Sugar No. 11 (SB), CBOT Wheat (and Mini-Wheat) (W), CBOT KC 
HRW Wheat (KW), and NYMEX Light Sweet Crude Oil (CL). See S&P GSCI 
Methodology, S&P Dow Jones Indices, at 26 (May 2020), https://www.spglobal.com/spdji/en/indices/commodities/sp-gsci/#overview. The 
22 Rogers contracts are ICE Cocoa (CC), ICE Coffee C (KC), COMEX 
Copper (HG), CBOT Corn (and Mini-Corn) (C), ICE Cotton No. 2 (CT), 
COMEX Gold (GC), NYMEX New York Harbor ULSD Heating Oil (HO), CME 
Live Cattle (LC), NYMEX Henry Hub Natural Gas (NG), CBOT Oats (O), 
ICE FCOJ-A (OJ), NYMEX Palladium (PA), NYMEX Platinum (PL), NYMEX 
New York Harbor RBOB Gasoline (RB), CBOT Rough Rice (RR), COMEX 
Silver (SI), CBOT Soybeans (and Mini-Soybeans) (S), ICE Sugar No. 11 
(SB), CBOT Wheat (and Mini-Wheat) (W), CBOT KC HRW Wheat (KW), MGEX 
Hard Red Spring Wheat (MWE), and NYMEX Light Sweet Crude Oil (CL). 
See https://www.rogersrawmaterials.com/weight.asp.
---------------------------------------------------------------------------

5. Comments on Proposed Necessity Finding for Core Referenced Futures 
Contracts
    While some commenters asserted that position limits are mandatory 
for all physical commodities, no commenter argued that the necessity 
finding should apply to any particular contract other than the 25 core 
referenced futures contracts.\1307\
---------------------------------------------------------------------------

    \1307\ E.g., NEFI at 2 (supporting Federal position limits for 
all 25 core referenced futures contracts, but stating that the list 
is too limited because it included only four energy contracts and 
that Congress imposed a clear mandate to establish limits on all 
commercially-traded energy derivatives); Better Markets at 64.
---------------------------------------------------------------------------

    Only one commenter advocated that the Commission remove commodities 
from the proposed list of 25 core referenced futures contracts. That 
commenter, IFUS, objected to imposing Federal position limits on its 
Sugar No. 11 (SB) contract.\1308\ IFUS argued that the Sugar No. 11 
(SB) contract does not have ``a major significance to U.S. interstate 
commerce'' because the contract prices the physical delivery of raw 
cane sugar for more than 30 delivery points around the world and only a 
de minimis amount of the raw sugar represented by the contract can be 
imported into the U.S. under U.S. sugar tariff-rate quotas.\1309\ In 
addition, IFUS stated that the Commission's necessity finding does not 
establish that ICE Sugar No. 11 (SB) is used for price discovery for 
sugar produced and consumed in the United States.\1310\
---------------------------------------------------------------------------

    \1308\ IFUS at 3. The ICE Sugar No. 11 (SB) ``contract prices 
the physical delivery of raw cane sugar free-on-board the receiver's 
vessel to a port within the country of origin of the sugar.'' See 
Sugar No. 11 Futures Product Specs, Intercontinental Exchange 
website, available at https://www.theice.com/products/23/Sugar-No-11-Futures. The United States is one of the delivery points for the 
ICE Sugar No. 11 (SB) contract because U.S. origin raw cane sugar is 
one of the 29 deliverable origins under the contract. Id.
    \1309\ IFUS at 3-4.
    \1310\ IFUS at Exhibit 1, No. 52.
---------------------------------------------------------------------------

    The Commission has considered the comments and is adopting the list 
of the 25 core referenced futures contracts as proposed, including 
incorporating the ICE Sugar No. 11 (SB) contract as a core referenced 
futures contract. In response to IFUS' comment, the Commission 
recognizes that ``Sugar No. 11 (SB) is primarily an international 
benchmark.'' \1311\ The Commission, however, disagrees with IFUS' 
comment that the Sugar No. 11 (SB) contract does not have a major 
significance to U.S. interstate commerce or play a role in price 
discovery for sugar produced and consumed in the United States.\1312\
---------------------------------------------------------------------------

    \1311\ 85 FR at 11668, fn. 507.
    \1312\ The Commission notes that IFUS did not object to the 
inclusion of ICE Sugar No. 16 (SF) as a core referenced futures 
contract in the 2020 NPRM. The ICE Sugar No. 16 (SF) ``contract 
prices physical delivery of US-grown (or foreign origin with duty 
paid by deliverer) raw cane sugar at one of five U.S. refinery ports 
as selected by the receiver.'' See Sugar No. 16 Futures Product 
Specs, Intercontinental Exchange website, available at https://www.theice.com/products/914/Sugar-No-16-Futures. The same commodity, 
raw centrifugal cane sugar based on 96 degrees average polarization, 
underlies both ICE Sugar No. 16 (SF) and ICE Sugar No. 11 (SB) 
contracts. Id. See also Sugar No. 11 Futures Product Specs, 
Intercontinental Exchange website, available at https://www.theice.com/products/23/Sugar-No-11-Futures. Both contracts also 
trade on IFUS in units of 112,000 pounds per contract. Id.
---------------------------------------------------------------------------

    For several reasons, the Commission finds that the ICE Sugar No. 11 
(SB) contract has sufficient connection to the domestic sugar market to 
warrant Federal position limits. First, USDA data reflects that roughly 
one-quarter of the annual U.S. raw sugar supply is imported.\1313\ 
While U.S. imports may be a small percentage of the total sugar 
represented by open interest in the ICE Sugar No. 11 (SB) contract, 
U.S. imports still account for a significant percentage of the total 
U.S. raw sugar supply. As described below, Commission data suggests 
that the ICE Sugar No. 11 (SB) contract is used for price discovery and 
hedging within the United States. Thus, when the contract is being used 
by commercial participants for price discovery or hedging in the 
domestic raw sugar market, it is therefore reasonable to expect that 
any sudden or unreasonable fluctuations or unwarranted changes in the 
global price of raw sugar could impose significant disruptions or harms 
to the domestic raw sugar markets. Because the ICE Sugar No. 11 (SB) 
contract represents a material portion of the U.S. sugar market, the 
Commission determines that it is necessary to include it as a core 
referenced futures contract to protect against any sudden or 
unreasonable fluctuations or unwarranted changes, which could result in 
undue burdens on the U.S. economy. Additionally, as further discussed 
below, since the ICE Sugar No. 11 (SB) contract represents a material 
portion of the U.S. raw sugar supply, the Commission concludes that 
disruptions to this contract potentially could harm both the price 
discovery process for the domestic sugar markets as well as the 
physical delivery of the underlying commodity.
---------------------------------------------------------------------------

    \1313\ USDA Economic Research Service, Sugar and Sweeteners 
Yearbook Tables, World Production, Supply, and Distribution, at 
Table 1 (July 19, 2018), https://www.ers.usda.gov/data-products/sugar-and-sweeteners-yearbook-tables. For example, between 2009 and 
2019, the United States has imported between 22.7% and 28.6% of its 
raw sugar from other countries. Id. In 2019, the United States 
imported approximately 3 million metric tons of sugar from other 
countries whose sugar is deliverable under the ICE Sugar No. 11 (SB) 
contract. See USDA, U.S. Sugar Monthly Import and Re-Exports, Final 
Report, Fiscal Year 2019 (Oct. 2019), https://www.fas.usda.gov/sites/default/files/2020-01/fy_2019_final_sugar_report.pdf.
---------------------------------------------------------------------------

    Second, the ICE Sugar No. 11 (SB) contract is listed on IFUS, a DCM 
registered with the Commission that lists derivatives contracts for 
trading by U.S. participants in the United States, among others. Data 
reported to the Commission through Form 102s reflects that domestic 
firms account for approximately 20% of commercial market participants 
and 65%-70% of the non-commercial market participants trading in the 
ICE Sugar No. 11 (SB) contract.\1314\ This data supports the 
Commission's finding that the ICE Sugar No. 11 (SB) contract is ``used 
for price discovery and hedging within the United States.'' \1315\
---------------------------------------------------------------------------

    \1314\ See also ASR at 1 (stating that the ICE Sugar No. 11 (SB) 
and ICE Sugar No. 16 (SF) contracts are commonly used by commercial 
participants for hedging).
    \1315\ 85 FR at 11668, fn. 507.
---------------------------------------------------------------------------

    Finally, as the Commission noted in the 2020 NPRM, the Commission 
believes that the ICE Sugar No. 11 (SB) and ICE Sugar No. 16 (SF) 
contracts together ``[a]s a pair'' are ``crucial tools for risk 
management and for ensuring reliable pricing.'' \1316\ The Commission's 
view is informed by the fact that both ICE Sugar No. 11 (SB) and ICE 
Sugar No. 16 (SF) call for delivery of the same size and quality of raw 
cane sugar, with the

[[Page 3397]]

former contract calling for delivery from 29 different country origins 
of growth, including the United States, and the latter contract calling 
for delivery of domestic origin.\1317\ This implies that there is 
likely to be a common group of market participants trading in both 
contracts. Based on its experience in other markets, the Commission 
understands that U.S. firms may utilize both contract markets to hedge 
cash positions and offset other related risks even if their inventories 
cannot be delivered against both contracts.
---------------------------------------------------------------------------

    \1316\ Id.
    \1317\ See ICE Sugar No. 16 Futures Product Specs, 
Intercontinental Exchange website, available at https://www.theice.com/products/914/Sugar-No-16-Futures;  see also Sugar No. 
11 Futures Product Specs, Intercontinental Exchange website, 
available at https://www.theice.com/products/23/Sugar-No-11-Futures.
---------------------------------------------------------------------------

    In that regard and as discussed above in Section III.C.2.b, the 
Commission analyzed average open interest and average notional values 
for ICE Sugar No. 11 (SB) and ICE Sugar No. 16 (SF) for the period 
January 1, 2019 through December 31, 2019. Specifically, average open 
interest in ICE Sugar No. 11 (SB) (947,198 OI) is more than 100 times 
the size of average open interest in ICE Sugar No. 16 (SF) (8,485 
OI).\1318\ Similarly, the average notional value for ICE Sugar No. 11 
(SB) ($13,535,036,765 Notional OI) is roughly 54 times greater than the 
average notional value for ICE Sugar No. 16 (SF) ($250,447,669 Notional 
OI).\1319\ In terms of average trading volume for the same time period, 
the ICE Sugar No. 11 (SB) contract trades approximately 146,077 
contracts per day, whereas the ICE Sugar No. 16 (SF) contract trades 
approximately 307 contracts per day.\1320\ Accordingly, the Commission 
believes, and the data supports, that U.S. commercial participants use 
the more-liquid ICE Sugar No. 11 (SB) contract to hedge domestically 
sourced raw sugar or domestic inventories and for price discovery for 
sugar produced and consumed in the United States. \1321\
---------------------------------------------------------------------------

    \1318\ Calculations are based on data submitted to the 
Commission pursuant to part 16 of the Commission's regulations and 
does not include delta adjusted option on futures contracts.
    \1319\ Id.
    \1320\ Id.
    \1321\ USDA data reflects that each year, U.S. commercial firms 
hold over 1 million metric tons of raw sugar as inventory (after 
accounting for all imports, production, and use during the year).
---------------------------------------------------------------------------

6. Commission Determination
    For the reasons stated in the 2020 NPRM and further discussed here, 
the Commission finds that position limits are necessary for the 25 core 
referenced futures contracts.

D. Necessity Finding as to Linked Contracts

    The Commission finds that position limits on futures and options on 
futures contracts that are linked to core referenced futures contracts 
are necessary to enable position limits to function effectively for 
commodities where position limits have been found to be necessary in 
connection with the relevant core referenced futures contracts. As 
explained in detail above at Section II.A.16, due to the nature of the 
linkages specified in the definition of ``referenced contract'' in 
Sec.  150.1, and the resulting possibilities for arbitrage, contracts 
linked to core referenced futures contracts, including cash-settled 
linked contracts, function together with the linked core referenced 
futures contract as part of one market.\1322\ As a result, without 
position limits on such linked contracts, excessive speculative 
positions in these contracts can affect associated core referenced 
futures contracts and cash commodity markets in a variety of ways that 
undermine the effectiveness of position limits on the core contracts.
---------------------------------------------------------------------------

    \1322\ For further discussion of referenced contracts and linked 
contracts, see supra Section II.A.16.
---------------------------------------------------------------------------

    For example, large positions in linked contracts can serve as a 
vehicle for profiting from manipulation of the prices of core 
referenced futures contracts and cash commodities.\1323\ Conversely, 
excessive speculation that artificially affects the price of a linked 
contract can distort pricing, liquidity, and delivery in the market for 
the core referenced futures contract and cash commodity to which the 
contract is linked.\1324\ Finally, physically-settled indirectly linked 
contracts, if not subject to position limits, can serve as a vehicle 
for evasion through the creation of contracts that are economically 
equivalent to core referenced futures contracts.\1325\
---------------------------------------------------------------------------

    \1323\ Id. (discussing the use of linked contracts to manipulate 
prices of physically-settled contracts and the use of cash-market 
transactions to affect prices of physically-settled futures 
contracts and their linked counterparts).
    \1324\ Id.
    \1325\ See supra Section II.A.16. (discussing referenced 
contracts).
---------------------------------------------------------------------------

    The Commission therefore finds that position limits for futures 
contracts and options on futures contracts that are linked to core 
referenced futures contracts are necessary within the meaning of 
paragraph 4a(a)(1) where limits are necessary for the associated core 
referenced futures contracts.

E. Necessity Finding for Spot/Non-Spot Month Position Limits

    As discussed above in Section II.B.2. and in the 2020 NPRM, the 
Commission preliminarily determined that Federal position limits should 
only apply to spot month positions except with respect to the nine 
legacy agricultural contracts, where non-spot month position Federal 
position limits have been in place for many years. As discussed above, 
the Commission is adopting this aspect of the rule as proposed. 
Consistent with this policy determination, the Commission finds that 
position limits are necessary during all months for the nine legacy 
agricultural contracts. The Commission further finds that position 
limits are necessary only during the spot month for the 16 non-legacy 
core referenced futures contracts and unnecessary outside of the spot 
month.\1326\
---------------------------------------------------------------------------

    \1326\ At least one commenter asked to Commission to explicitly 
clarify this point, see ISDA at 3.
---------------------------------------------------------------------------

    The Commission makes this necessity finding for substantially the 
reasons set forth above, including in responses to comments on the 
spot/non-spot month issue. Briefly, certain potential sources of sudden 
or unreasonable fluctuations or unwarranted changes in commodity prices 
caused by excessive speculation, particularly corners, squeezes, and 
certain convergence problems, are associated primarily with large 
positions held during spot months.\1327\ And, to the extent that these 
problems may arise in prior months, they are mitigated by exchange 
policies including exchange-set position limits and position 
accountability.\1328\ As a result, even if position limits may have 
benefits outside the spot month, restricting Federal position limits to 
spot months for most commodities is consistent with the Commission's 
interpretation of the paragraph 4a(a)(1) necessity requirement as 
directing the Commission to impose position limits where they are most 
economically justified as an efficient mechanism for achieving the 
statutory objectives.
---------------------------------------------------------------------------

    \1327\ See supra Section II.B.2. (discussing Final Rule 
provisions).
    \1328\ Id.
---------------------------------------------------------------------------

    The Commission similarly finds position limits in non-spot months 
to be necessary for the legacy agricultural contracts for substantially 
the reasons discussed above.\1329\ These limits were put in place 
pursuant to past statutory necessity findings and have been in place 
for decades without the Commission observing problems that

[[Page 3398]]

would give reasons to remove them.\1330\ And they are generally 
supported by many market participants.\1331\ Because no commenters 
argued that the Commission should eliminate Federal non-spot month 
position limits for the nine legacy agricultural contracts and because 
these limits have been in existence for decades, the Commission 
believes that it would be imprudent to eliminate them absent any 
specific reason in support thereof, particularly insofar as maintaining 
them, by definition, will result in no new costs or burdens. The 
Commission further notes that maintaining non-spot month limits for the 
nine legacy agricultural contracts will not change the existing 
dynamics of these markets.
---------------------------------------------------------------------------

    \1329\ See supra Section II.B.2. (discussing Final Rule 
provisions).
    \1330\ Id.
    \1331\ Id. The Commission notes that while ISDA did not 
specifically address the nine legacy agricultural contracts, it 
suggested that the Commission ``should finalize the proposed Federal 
position limits rules only for physically delivered spot month 
futures contracts, in the first phase.'' See ISDA at 3-4.
---------------------------------------------------------------------------

    The Commission is therefore satisfied that these limits remain an 
efficient mechanism for achieving the objectives of CEA section 4a.

IV. Related Matters

A. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the Commodity Exchange Act (``CEA'' or ``Act'') 
requires the Commodity Futures Trading Commission (``Commission'') to 
consider the costs and benefits of its actions before promulgating a 
regulation under the CEA.\1332\ Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations (collectively, 
the ``section 15(a) factors'').\1333\
---------------------------------------------------------------------------

    \1332\ 7 U.S.C. 19(a).
    \1333\ Id.
---------------------------------------------------------------------------

    The Commission interprets section 15(a) to require the Commission 
to consider only those costs and benefits of its changes that are 
attributable to the Commission's discretionary determinations (i.e., 
changes that are not otherwise required by statute) compared to the 
existing status quo baseline requirements. For this purpose, the status 
quo requirements, which serve as the baseline for the consideration of 
the costs and benefits of the regulations adopted in this final 
position limits rulemaking (``Final Rule''), include the CEA's 
statutory requirements as well as any applicable existing Commission 
regulations.\1334\ As a result, any changes to the Commission's 
regulations that are required by the CEA or other applicable statutes 
are not deemed to be discretionary changes for purposes of discussing 
related costs and benefits of the Final Rule.
---------------------------------------------------------------------------

    \1334\ This cost-benefit consideration section is divided into 
seven parts, including this introductory section, with respect to 
any applicable CEA or regulatory provisions.
---------------------------------------------------------------------------

    The Commission anticipates that the Final Rule will affect market 
participants differently depending on their business models and scale 
of participation in the commodity contracts that are covered by the 
Final Rule.\1335\ The Commission also anticipates that the Final Rule 
may result in ``programmatic'' costs to some market participants. 
Generally, affected market participants may incur increased costs 
associated with developing or revising, implementing, and maintaining 
compliance functions and procedures. Such costs might include those 
related to the monitoring of positions in the relevant referenced 
contracts; related filing, reporting, and recordkeeping requirements; 
and the costs of changes to information technology systems.
---------------------------------------------------------------------------

    \1335\ For example, the Final Rule could result in increased 
costs to market participants who may need to adjust their trading 
and hedging strategies to ensure that their aggregate positions do 
not exceed Federal position limits, particularly those who will be 
subject to Federal position limits for the first time (i.e., those 
who may trade contracts for which there are currently no Federal 
position limits). On the other hand, existing costs could decrease 
for those existing market participants whose positions would fall 
below the new Federal position limits and therefore such market 
participants would not be required to adjust their trading 
strategies and/or apply for exemptions from the limits, particularly 
if the Final Rule improves market liquidity or other metrics of 
market health. Similarly, for those market participants who would 
become subject to the Federal position limits, general costs would 
be lower to the extent such market participants can leverage their 
existing compliance infrastructure in connection with existing 
exchange position limit regimes, relative to those market 
participants that do not currently have such systems.
---------------------------------------------------------------------------

    The Commission has determined that it is not feasible to quantify 
the costs or benefits with reasonable precision and instead has 
identified and considered the costs and benefits qualitatively.\1336\ 
The Commission believes that, for many of the costs and benefits, 
quantification is not feasible with reasonable precision, because 
quantification requires understanding all market participants' business 
models, operating models, cost structures, and hedging strategies, 
including an evaluation of the potential alternative hedging or 
business strategies that could be adopted under the Final Rule. 
Further, while Congress has tasked the Commission with establishing 
such Federal position limits as the Commission finds are ``necessary,'' 
some of the benefits, such as mitigating or eliminating manipulation or 
excessive speculation, may be very difficult or infeasible to quantify. 
These benefits, moreover, will likely manifest over time and be 
distributed over the entire market.
---------------------------------------------------------------------------

    \1336\ With respect to the Commission's analysis under its 
discussion of its obligations under the Paperwork Reduction Act 
(``PRA''), the Commission has endeavored to quantify certain costs 
and other burdens imposed on market participants related to 
collections of information as defined by the PRA. See generally 
Section IV.B. (discussing the Commission's PRA determinations).
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    In light of these limitations, to inform its consideration of costs 
and benefits of the Final Rule, the Commission in its discretion relies 
on: (1) Its experience and expertise in regulating the derivatives 
markets; (2) information gathered through public comment letters \1337\ 
and meetings with a broad range of market participants; and (3) certain 
Commission data, such as the Commission's Large Trader Reporting System 
and data reported to swap data repositories.
---------------------------------------------------------------------------

    \1337\ While the general themes contained in comments submitted 
in response to prior proposals informed this rulemaking, the 
Commission withdrew the 2013 Proposal, the 2016 Supplemental 
Proposal, and the 2016 Reproposal. See supra Section I.A.
---------------------------------------------------------------------------

    The Commission considers the benefits and costs discussed below in 
the context of international markets, because market participants and 
exchanges subject to the Commission's jurisdiction for purposes of 
position limits may be organized outside of the United States; some 
industry leaders typically conduct operations both within and outside 
the United States; and market participants may follow substantially 
similar business practices wherever located. Where the Commission does 
not specifically refer to matters of location, the discussion of 
benefits and costs below refers to the effects of the Final Rule on all 
activity subject to it, whether by virtue of the activity's physical 
location in the United States or by virtue of the activity's connection 
with, or effect on, U.S. commerce under CEA section 2(i).\1338\
---------------------------------------------------------------------------

    \1338\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission sought comments on all aspects of the cost and 
benefit considerations in the 2020 NPRM, including: (1) Identification 
and assessment of any costs and benefits not discussed in the 2020 
NPRM; (2) data and any other information to assist or otherwise inform 
the Commission's

[[Page 3399]]

ability to quantify or qualify the costs and benefits of the 2020 NPRM; 
and (3) substantiating data, statistics, and any other information to 
support positions posited by comments with respect to the Commission's 
consideration of costs and benefits.\1339\ The Commission also 
requested specific comments regarding its considerations of the 
benefits and costs of proposed Sec. Sec.  150.3 and 150.9, as well as 
comments on whether a Commission-administered exemption process, such 
as the process in proposed Sec.  150.3, would promote more consistent 
and efficient decision-making or whether an alternative to proposed 
Sec.  150.9 would result in a superior cost-benefit profile.\1340\ 
Last, the Commission requested comment on all aspects of the 
Commission's discussion of the 15(a) factors for the 2020 NPRM.\1341\
---------------------------------------------------------------------------

    \1339\ 85 FR 11671, 11698.
    \1340\ 85 FR 11693.
    \1341\ 85 FR 11700.
---------------------------------------------------------------------------

    The Commission identifies and discusses the costs and benefits of 
the Final Rule organized conceptually by topic, and certain topics may 
generally correspond with a specific regulatory section. The 
Commission's discussion is organized as follows: (1) This introduction 
discussion section; (2) a discussion of the Commission's necessity 
finding with respect to the 25 core referenced futures contracts that 
are subject to the Federal position limits framework; (3) the Federal 
position limit levels (final Sec.  150.2), and the definitions of 
``referenced contract'' and ``economically equivalent swap''; (4) the 
Commission's exemptions from Federal position limits (final Sec.  
150.3), including the Federal bona fide hedging definition (final Sec.  
150.1); (5) the streamlined process for the Commission to recognize 
non-enumerated bona fide hedges (final Sec.  150.9) and to grant other 
exemptions for purposes of Federal position limits (final Sec.  150.3) 
and related reporting changes to part 19 of the Commission's 
regulations; (6) the exchange-set position limits framework and 
exchange-granted exemptions thereto (final Sec.  150.5); and (7) the 
section 15(a) factors.
2. Costs and Benefits of Commission's Necessity Finding for the 25 Core 
Referenced Futures Contracts With Respect to Liquidity and Market 
Integrity and Resulting Impact on Market Participants and Exchanges
    Rather than discussing the general costs and benefits of the 
Federal position limits framework in this section, the Commission will 
instead address the potential costs and benefits resulting from the 
Commission's necessity finding with respect to the 25 core referenced 
futures contracts.\1342\ The discussion in this section begins with an 
overview of the Commission's Federal position limits framework in part 
one followed by an overview of the Commission's interpretation of the 
criteria for finding position limits necessary within the meaning of 
CEA section 4a(a)(1) in part two. An overview of the Commission's 
necessity finding for the 25 core referenced futures contracts, linked 
``referenced contracts,'' and spot/non-spot month position limits is 
discussed in part three. Finally, part four includes a discussion of 
the potential costs and benefits of the Commission's necessity finding 
for the 25 core referenced futures contracts with respect to (a) the 
liquidity and integrity of the futures and related options markets; and 
(b) market participants and exchanges.
---------------------------------------------------------------------------

    \1342\ This Section does not address the cost-benefit 
implications for imposing position limits on futures contracts and 
options thereon that are directly or indirectly linked to a core 
referenced futures contract. That discussion is below in Section 
IV.A.4. Further, this Section does not address the cost-benefit 
implications for maintaining non-spot month position limits on the 
nine legacy agricultural contracts. The Commission is of the view 
that the Final Rule should not have any cost-benefit consideration 
impacts due to the existence of Federal non-spot month position 
limits on the nine legacy agricultural commodities since the 
Commission is maintaining the status quo with respect to the 
existence of such limits for those contracts. As a result, the 
Commission does not expect there to be a change with respect to the 
costs and benefits of its approach by simply finding that Federal 
position limits continue to be necessary during the non-spot months 
for the nine legacy agricultural commodities. However, with the 
exception of CBOT Oats (O), CBOT KC HRS Wheat (KW), and MGEX HRS 
Wheat (MWE), the final rule will result in higher non-spot month 
position limit levels for the remaining legacy agricultural 
commodities. See infra Section IV.A.4. (addressing the costs and 
benefits of generally increased non-spot month position limit levels 
for the legacy agricultural contracts).
---------------------------------------------------------------------------

i. Federal Position Limits Framework
    The Commission currently enforces and sets Federal spot and non-
spot month position limits only for futures and options on futures 
contracts on the nine legacy agricultural commodities.\1343\ The Final 
Rule expands the scope of commodity derivative contracts subject to the 
Commission's existing Federal position limits framework \1344\ to 
include (a) futures contracts and options on futures contracts on 16 
additional contracts during the spot month only, for a total of 25 core 
referenced futures contracts,\1345\ (b) futures contracts and options 
on futures contracts directly or indirectly linked to one of the 25 
core referenced futures contracts, and (c) swaps that are 
``economically equivalent'' to certain referenced contracts.\1346\ 
Under this Final Rule, Federal non-spot month position limits will 
continue to apply only to futures and options on futures on the nine 
legacy agricultural commodities. As discussed above in Section 
III.B.2., while economically equivalent swaps are encompassed within 
the ``referenced contract'' definition, such swaps are subject to 
Federal position limits pursuant to CEA section 4a(a)(5) and therefore 
not subject to a necessity determination. The cost-benefit implications 
of the Commission's ``economically equivalent swap'' definition are 
discussed further below.
---------------------------------------------------------------------------

    \1343\ The nine legacy agricultural contracts currently subject 
to Federal spot and non-spot month limits are: CBOT Corn (C), CBOT 
Oats (O), CBOT Soybeans (S), CBOT Wheat (W), CBOT Soybean Oil (SO), 
CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), ICE Cotton 
No. 2 (CT), and CBOT KC Hard Red Winter Wheat (KW).
    \1344\ 17 CFR 150.2. Because the Commission had not yet 
implemented the Dodd-Frank Act's amendments to the CEA regarding 
position limits, except with respect to aggregation (see generally 
Final Aggregation Rulemaking, 81 FR at 91454) and the vacated 2011 
Position Limits Rulemaking's amendments to 17 CFR 150.2 (see ISDA, 
887 F. Supp. 2d 259 (2012)), the existing baseline or status quo 
consisted of the provisions of the CEA relating to position limits 
immediately prior to effectiveness of the Dodd-Frank Act amendments 
to the CEA and the relevant provisions of existing parts 1, 15, 17, 
19, 37, 38, 140, and 150 of the Commission's regulations, subject to 
the aforementioned exceptions.
    \1345\ The 16 new products that are subject to Federal spot 
month position limits for the first time include seven agricultural 
(CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE 
Coffee C (KC), ICE FCOJ-A (OJ), ICE Sugar No. 11 (SB), and ICE Sugar 
No. 16 (SF)), four energy (NYMEX Light Sweet Crude Oil (CL), NYMEX 
New York Harbor ULSD Heating Oil (HO), NYMEX New York Harbor RBOB 
Gasoline (RB), NYMEX Henry Hub Natural Gas (NG)), and five metals 
(COMEX Gold (GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX 
Palladium (PA), and NYMEX Platinum (PL)) contracts.
    \1346\ See supra Section II.A.4. (defining the term 
``economically equivalent swap'' for purposes of the Federal 
position limits framework under the Final Rule).
---------------------------------------------------------------------------

ii. The Commission's Interpretation of Section 4a
    As previously discussed, the Commission interprets CEA section 4a 
to require that the Commission make an antecedent ``necessity'' finding 
that establishing Federal position limits is ``necessary'' to diminish, 
eliminate, or prevent certain burdens on interstate commerce with 
respect to the physical commodities in question.\1347\ As the statute 
does not define the term ``necessary,'' the Commission must apply its 
expertise in construing this term, and, as discussed further below, 
must do so consistent with the policy

[[Page 3400]]

goals articulated by Congress, including in CEA sections 4a(a)(2)(C) 
and 4a(a)(3), as noted throughout this discussion of the Commission's 
cost-benefit considerations.\1348\
---------------------------------------------------------------------------

    \1347\ See supra Section III.B. (discussing legal standard for 
necessity finding).
    \1348\ In promulgating the position limits framework, Congress 
instructed the Commission to consider several factors: First, CEA 
section 4a(a)(3) requires the Commission when establishing position 
limits, to the maximum extent practicable, in its discretion, to (i) 
diminish, eliminate, or prevent excessive speculation; (ii) deter 
and prevent market manipulation, squeezes, and corners; (iii) ensure 
sufficient market liquidity for bona fide hedgers; and (iv) ensure 
that the price discovery function of the underlying market is not 
disrupted. Second, CEA section 4a(a)(2)(C) requires the Commission 
to strive to ensure that any limits imposed by the Commission will 
not cause price discovery in a commodity subject to position limits 
to shift to trading on a foreign exchange.
---------------------------------------------------------------------------

    Under this Final Rule, the Commission is establishing position 
limits on 25 core referenced futures contracts \1349\ and any futures 
contracts or options on futures contracts directly or indirectly linked 
to the core referenced futures contracts,\1350\ on the basis that 
position limits on such contracts are ``necessary'' to achieve the 
purposes of the CEA. In reaching this conclusion, the Commission 
analyzed (1) the importance of these contracts to the operation of the 
underlying cash commodity market, including that they require physical 
delivery; and (2) the importance of the underlying commodity to the 
economy as a whole.\1351\ As discussed above, the Commission is of the 
view that evidence demonstrating one or both of these factors is 
sufficient to establish that position limits are necessary because each 
factor relates to the statutory objective identified in paragraph 
4a(a)(1).\1352\ As a result, the Commission has concluded that it must 
exercise its judgment in light of facts and circumstances, including 
its experience and expertise, in determining whether Federal position 
limit levels are economically justified.\1353\
---------------------------------------------------------------------------

    \1349\ See supra Section III.C. (discussing necessity finding 
for the 25 core referenced futures contracts).
    \1350\ See supra Section III.D. (discussing necessity finding 
for linked contracts).
    \1351\ See supra Section III.B. (discussing and adopting legal 
standard for necessity finding in 2020 NPRM).
    \1352\ Id.
    \1353\ Id.
---------------------------------------------------------------------------

iii. The Commission's Necessity Finding
    With respect to the first factor of the Commission's necessity 
analysis, the Commission focused on physically-settled futures 
contracts because they perform an important price discovery function 
for many cash-market participants and may be affected by corners and 
squeezes, which can occur near the expiration of these contracts, 
compared to cash-settled contracts.\1354\ Based on the above 
discussion, the Commission determined that the 25 core referenced 
futures contracts are important to their respective underlying cash 
markets because they (1) are the physically-settled contracts in 
physical commodities traded on U.S. exchanges that are the most used 
for hedging and price discovery by commercial participants, as measured 
by open interest, notional value, and trading volume; and (2) serve as 
key benchmarks for use in pricing cash-market and other 
transactions.\1355\ Upon consideration of the second factor, as 
discussed in further detail above, the Commission has determined that 
the cash markets underlying the 25 core referenced futures contracts 
are all, to varying degrees, vitally important to the U.S. economy 
because many of the commodities underlying the 25 contracts are among 
the most important physical commodities, as measured by production and 
use, for commodities for which physically-settled futures contracts are 
traded on U.S. exchanges.\1356\ For these reasons, the Commission finds 
that position limits are necessary for the 25 core referenced futures 
contracts to achieve the purposes of the CEA.\1357\
---------------------------------------------------------------------------

    \1354\ See supra Section III.C.2.a. (discussing the link between 
the derivatives markets and underlying cash-markets).
    \1355\ See supra Section III.C.2.b. (discussing the Commission's 
determination that the 25 core referenced futures contracts are used 
extensively for hedging and price discovery, thus establishing a 
close link between both markets).
    \1356\ See supra Section III.C.3. (discussing second factor of 
necessity analysis).
    \1357\ See supra Section III.C. (discussing necessity finding 
for 25 core referenced futures contracts).
---------------------------------------------------------------------------

    As noted previously, the Commission has determined that position 
limits for futures and options on futures contracts that are linked to 
core referenced futures contracts are necessary within the meaning of 
paragraph 4a(a)(1) because such position limits are likely to make 
position limits for core referenced futures contracts more effective in 
preventing manipulation and other sources of sudden or unreasonable 
fluctuations or unwarranted changes in the price of the underlying 
commodity.\1358\
---------------------------------------------------------------------------

    \1358\ See supra Section III.D. (discussing necessity finding 
for linked contracts).
---------------------------------------------------------------------------

    Further, the Commission has determined that position limits are 
necessary during all months for the nine legacy agricultural contracts, 
where non-spot month Federal position limits have been in place for 
decades, and only necessary during the spot month for the 16 additional 
core referenced futures contracts.\1359\ Specifically, the Commission 
found that certain potential sources of sudden or unreasonable 
fluctuations or unwarranted changes in commodity prices caused by 
excessive speculation, particularly corners, squeezes, and certain 
convergence problems, are associated primarily with large positions 
held during spot months.\1360\ And, to the extent that these problems 
may arise in prior months, they are mitigated by exchange policies 
including exchange-set position limits and position 
accountability.\1361\ As a result, even if position limits may have 
benefits outside the spot month, restricting Federal position limits to 
spot months for most commodities is consistent with the Commission's 
interpretation of the CEA section 4a(a)(1) necessity requirement as 
directing the Commission to impose position limits where they are 
economically justified as an efficient mechanism for achieving the 
statutory objectives.
---------------------------------------------------------------------------

    \1359\ See supra Section III.E. (discussing necessity finding 
for spot/non-spot month position limits).
    \1360\ See supra Section III.C.2.a. (discussing link between 
derivatives market and cash markets).
    \1361\ See supra Section III.E. (discussing necessity finding 
for spot/non-spot month position limits).
---------------------------------------------------------------------------

    The Commission similarly found position limits in non-spot months 
to be necessary for the nine legacy agricultural contracts for the 
reasons previously stated above.\1362\ Briefly, these limits were put 
in place pursuant to past statutory necessity findings and have been in 
place for decades without the Commission observing problems or concerns 
by market participants that would give reasons to remove them.\1363\ 
For these reasons, the Commission has determined that it would be 
imprudent to eliminate them absent any specific reason in support 
thereof.
---------------------------------------------------------------------------

    \1362\ Id.
    \1363\ Id.
---------------------------------------------------------------------------

iv. Potential Costs and Benefits of the Commission's Necessity Finding 
for the 25 Core Referenced Futures Contracts
    In this section, the Commission will discuss potential costs and 
benefits resulting from the Commission's necessity finding with respect 
to: (1) The liquidity and integrity of the futures and related options 
markets; and (2) market participants and exchanges. The Commission 
discusses each factor in turn below.
a. Potential Impact of the Scope of the Commission's Necessity Findings 
on Market Liquidity and Integrity
    The Commission has determined that the 25 core referenced futures 
contracts included in its necessity finding are

[[Page 3401]]

among the most liquid physical commodity contracts, as measured by open 
interest and trading volume,\1364\ and, therefore, imposing positions 
limits on these contracts may impose costs on market participants by 
constraining liquidity because a trader may be prevented from trading 
due to a position limit reducing liquidity on the other side of the 
contract. However, to the extent that the nine legacy agricultural 
contracts already are subject to existing Federal position limits, the 
Final Rule does not represent a change to the status quo baseline 
(although, as noted below, the applicable Federal position limits will 
increase under the Final Rule for most of the nine legacy agricultural 
contracts and the associated costs and benefits are discussed 
thereunder). Nonetheless, the Commission believes that any potential 
harmful effect on liquidity will be muted, as a result of the generally 
high levels of open interest and trading volumes of the respective 25 
core referenced futures contracts. This is so because, all other things 
being equal, large, liquid markets tend to have more participants and 
tend to be less concentrated. As a result, in such markets, if position 
limits on some occasion restrict trading by one or a small number of 
large traders, it is highly likely that other traders will be 
participating in the market in sufficient volume for the purpose of 
providing liquidity on reasonable terms.
---------------------------------------------------------------------------

    \1364\ See supra Section III.C.2.b. (discussing average open 
interest and average daily trading volume for the 25 core referenced 
futures contracts for the period January 1, 2019 through December 
31, 2019).
---------------------------------------------------------------------------

    The Commission has determined that, as a general matter, focusing 
on the 25 core referenced futures contracts may benefit market 
integrity since these contracts generally are amongst the largest 
physically-settled contracts with respect to relative levels of open 
interest and trading volumes.\1365\ The Commission therefore believes 
that excessive speculation or potential market manipulation in such 
contracts is more likely to affect additional market participants and 
therefore potentially more likely to cause an undue and unnecessary 
burden (e.g., potential harm to market integrity or liquidity) on 
interstate commerce. Because each core referenced futures contract is 
physically-settled, as opposed to cash-settled, the Final Rule focuses 
on preventing corners and squeezes in those contracts where such market 
manipulation could cause significant harm in the price discovery 
process for their respective underlying commodities.\1366\
---------------------------------------------------------------------------

    \1365\ Id.
    \1366\ The Commission must also make this determination in light 
of its limited available resources and responsibility to allocate 
taxpayer resources in an efficient manner to meet the goals of CEA 
section 4a(a)(1), 7 U.S.C. 6a(a)(1), and the CEA generally.
---------------------------------------------------------------------------

    While the Commission recognizes that market participants may engage 
in market manipulation through cash-settled futures contracts and 
options on futures contracts, the Commission has determined that 
focusing on the physically-settled core referenced futures contracts 
will benefit market integrity by reducing the risk of corners and 
squeezes in particular. In addition, not imposing position limits on 
additional commodities may foster non-excessive speculation, leading to 
better prices and more efficient resource allocation in these 
commodities. This may ultimately benefit commercial end users and 
possibly be passed on to the general public in the form of better 
pricing. As noted above, the scope of the Commission's necessity 
finding with respect to the 25 core referenced futures contracts allows 
the Commission to focus on those contracts that, in general, the 
Commission recognizes as having particular importance in the price 
discovery process for their respective underlying commodities as well 
as potentially acute economic burdens that would arise from excessive 
speculation causing sudden or unreasonable fluctuations or unwarranted 
changes in the commodity prices underlying these contracts.\1367\
---------------------------------------------------------------------------

    \1367\ See supra Section III.C.2.b.
---------------------------------------------------------------------------

    To the extent the Commission did not include additional commodities 
in its necessity finding, those markets will not receive the benefits 
intended from the Final Rule's Federal position limits framework. It is 
conceivable that this could entice bad actors to turn to those markets 
for illegal schemes. On the other hand, markets outside the 25 core 
referenced futures contracts are not left totally exposed. Some of the 
potential harms to market integrity associated with not including 
additional commodities within the Federal position limits framework 
could be mitigated to an extent by exchanges, which can use tools other 
than position limits, such as margin requirements or position 
accountability at lower levels than the Federal position limits adopted 
in the Final Rule, to defend against certain market behavior.
    Further, burdens related to potential market manipulation for 
markets outside the 25 core referenced futures contracts may be 
mitigated through exchanges also establishing exchange-set position 
limits. Under final Sec.  150.5(a) and (b), exchanges are required to 
adopt exchange-set position limits both (i) for contracts subject to 
Federal position limits and (ii) during the spot month for physical 
commodity contracts not subject to Federal position limits.\1368\ Final 
Sec.  150.5(b) also requires exchanges to adopt position limits or 
position accountability outside the spot month for those physical 
commodity contracts not subject to Federal position limits outside of 
the spot month.
---------------------------------------------------------------------------

    \1368\ As discussed earlier in this release, final Sec.  
150.5(a) requires exchange-set limits for contracts subject to 
Federal limits to be no higher than the Federal limit. Final Sec.  
150.5(b)(1) requires exchanges to establish position limits for 
spot-month contracts in physical commodities that are not subject to 
Federal position limits at a level that is ``necessary and 
appropriate to reduce the potential threat of market manipulation or 
price distortion of the contract's or the underlying commodity's 
price or index.'' See supra Section II.D. (discussing Final Sec.  
150.5).
---------------------------------------------------------------------------

    Exchange-set position limits, including amendments to existing 
limits, are reviewed by Commission staff via submissions under part 40 
of the Commission's regulations, and must meet standards established by 
the Commission, including in Sec. Sec.  150.1 and 150.5.\1369\ While 
the review of exchange-set limits is focused on the adequacy of the 
exchange-set position limit to minimize the potential for manipulation, 
it isn't reviewed considering all of the CEA section 4a(a)(3)(B) 
factors as Federal position limits require. Thus, exchange-set limits 
may be set at a more restrictive level than a Federal speculative 
position limit might be set for the same contract if it were subject to 
Federal limits and therefore may have higher compliance and liquidity 
costs than Federal limits on the same contract for periods of time. 
Exchange limits may be updated much faster and more frequently than 
Federal limits can be updated.\1370\ Therefore, any added compliance 
and liquidity costs may only be realized in the short-term relative to 
any compliance and liquidity costs from a Federal limit on the same 
contract.
---------------------------------------------------------------------------

    \1369\ Further, as part of the submission process, exchanges are 
encouraged to determine exchange-set limits based on the guidance in 
Appendix C to part 38 (``Demonstration of compliance that a contract 
is not readily susceptible to manipulation''). See 17 CFR part 38, 
Appendix C. Appendix C provides guidance on calculating deliverable 
supply for physical commodity contracts based on the terms and 
conditions of the futures contract and also refers to part 150 for 
specific information regarding the establishment of speculative 
position limits including exchange-set speculative position limits.
    \1370\ Exchanges can self-certify amendments to exchange-set 
limits under Sec.  40.6. Federal position limits are updated only 
through the rulemaking process.

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

[[Page 3402]]

    Although the Commission does not find that exchange-set limits 
render Federal position limits unnecessary for the 25 core referenced 
futures contracts and associated markets, due to their overall 
importance, these tools do diminish the potential costs of refraining 
from imposing Federal position limits outside of the 25 core referenced 
futures contracts. Bad actors may also be deterred by the Commission's 
anti-manipulation authority and the Commission's authority to purse 
violations of exchange-set limits.\1371\
---------------------------------------------------------------------------

    \1371\ See, e.g., In the Matter of Sukarne SA de CV, CFTC No. 
20-60, 2020 WL 5701586 (Sept. 18, 2020) (imposing a $35,000 civil 
monetary penalty for a one-day violation of exchange-set position 
limits in CME live cattle futures).
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b. Potential Impact of the Scope of the Commission's Necessity Findings 
on Market Participants and Exchanges
    The Commission acknowledges that the Final Rule's Federal position 
limits framework could impose certain administrative, logistical, 
technological, and financial burdens on exchanges and market 
participants, especially with respect to developing or expanding 
compliance systems and the adoption of monitoring policies.\1372\ The 
Commission, however, believes that these burdens will be mostly 
incremental as many of the fixed costs have already been incurred by 
exchanges and market participants. For example, exchanges are currently 
required to comply with comparable requirements such as calculating 
average daily trading volume. Further, market participants are required 
to comply with existing requirements such as existing Federal position 
limits and exchange-set limits and accountability levels.\1373\
---------------------------------------------------------------------------

    \1372\ See, e.g., ISDA at 4 (``new Federal position limits 
rulemaking will involve significant compliance costs and burdens . . 
. that the CFTC can mitigate . . . by starting with final rules only 
for physically-delivered spot month futures contracts in a first 
phase.'').
    \1373\ See NFPEA at 6 and 14 (explaining that the Federal 
position limits framework would ``place unnecessary regulatory 
burdens and costs on the NFP Energy Entities, without providing the 
Commission with useful or usable information about speculators, 
speculative transactions or speculative positions'' and asserting 
that ``[t]here is no regulatory benefit in terms of reducing the 
burdens of excessive speculation on CFTC-regulated markets to 
balance against the costs and burdens for NFP Energy Entities (on-
speculators) to study, understand and apply the Commission's 
Speculative Position Limits rules to their transactions and 
positions''). See also supra Section II.C.14.i. (discussing NFPEA's 
request for an exemption from the Federal position limits framework 
and how the Final Rule addresses many of the concerns raised by 
NFPEA).
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    The Commission further believes that these potential burdens are 
mitigated by (1) the compliance date of January 1, 2022 in connection 
with the Federal position limits for the 16 non-legacy core referenced 
futures contracts, and (2) the compliance date of January 1, 2023 for 
both (a) economically equivalent swaps that are subject to Federal 
position limits under the Final Rule and (b) the elimination of 
previously-granted risk management exemptions (i.e., market 
participants may continue to rely on their previously-granted risk 
management exemptions until January 1, 2023).\1374\ These delayed 
compliance deadlines should mitigate compliance costs by permitting the 
update and build out of technological and compliance systems more 
gradually. They may also reduce the burdens on market participants not 
previously subject to position limits, who will have a longer period of 
time to determine whether they may qualify for certain bona fide 
hedging recognitions or other exemptions, and to possibly alter their 
trading or hedging strategies.\1375\ Further, the delayed compliance 
dates will reduce the burdens on exchanges, market participants, and 
the Commission by providing each with more time to resolve 
technological and other challenges for compliance with the new 
regulations. In turn, the Commission anticipates that the extra time 
provided by the delayed compliance dates will result in more robust 
systems for market oversight, which should better facilitate the 
implementation of the Final Rule and avoid unnecessary market 
disruptions while exchanges and market participants prepare for its 
implementation. However, the delayed compliance deadlines will extend 
the time it will take to realize the benefits identified above.
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    \1374\ See supra Section I.D. (discussing effective date and 
compliance date of the Final Rule).
    \1375\ Commenters on the Commission's notice of a proposed 
rulemaking for a new position limits proposal issued on February 27, 
2020 (``2020 NPRM'') and prior proposals have requested a sufficient 
phase-in period. See supra Section I.D.iv. (discussing comments 
regarding compliance period of Final Rule); see also 81 FR at 96815 
(implementation timeline).
---------------------------------------------------------------------------

    This January 1, 2022 compliance date also applies to exchange 
obligations under final Sec.  150.5, and market participants' related 
obligation to temporarily continue providing Forms 204/304 in 
connection with bona fide hedges. Furthermore, with respect to 
exchanges' implementation of Sec.  150.9, the Commission is clarifying 
that exchanges may choose to implement the streamlined process for non-
enumerated bona fide hedge applications as soon as the Final Rule's 
effective date,\1376\ or anytime thereafter (or not at all).
---------------------------------------------------------------------------

    \1376\ The Final Rule's effective date is March 15, 2021 (the 
``Effective Date'').
---------------------------------------------------------------------------

    CME expressed concern that it may receive an influx of exemption 
applications at the end of the compliance period, and therefore 
suggested a rolling process where market participants are grandfathered 
into their current exemptions, permitting them to file for those 
exemptions on the same annual schedule.\1377\ ISDA urged the Commission 
to recognize the burdens associated with implementing a new set of 
rules, and adopt a phase-in to minimize market disruptions and 
increases in compliance costs.\1378\ As noted above, the Commission 
seeks to alleviate the compliance burdens on exchanges associated with 
the Final Rule by providing for a compliance date of January 1, 2022 
for exchanges with respect to their obligations under Sec.  150.5. The 
Commission believes CME's concern is mitigated since exchanges, at 
their discretion, may implement final Sec.  150.9 as soon as the 
Effective Date, which will allow exchanges to review non-enumerated 
bona fide hedges on a rolling basis between the Effective Date and the 
end of the compliance period rather than having to process a large 
number of applications at once. Furthermore, market participants with 
existing Commission-granted non-enumerated or anticipatory bona fide 
hedge recognitions are not required to reapply to the Commission for a 
new recognition under the Final Rule. The delayed compliance should 
better facilitate the implementation of the Final Rule by preventing 
unnecessary market disruptions and reducing the burdens on exchanges, 
market participants, and the Commission by providing each with more 
time to resolve technological and other challenges for compliance with 
the new regulations.
---------------------------------------------------------------------------

    \1377\ CME Group at 8.
    \1378\ ISDA at 2.
---------------------------------------------------------------------------

    The 2020 NPRM did not provide a specific date as the compliance 
date but rather stated ``365 days after publication . . . in the 
Federal Register,'' and did not provide a separate compliance date for 
economically equivalent swaps or related to previously-granted risk 
management exemptions. In response, several commenters requested the 
that Commission further extend the compliance date for swaps to provide 
market participants additional time to identify which swaps would be 
deemed economically equivalent to a referenced contract, refine their 
compliance

[[Page 3403]]

systems, and manage other operational and administrative 
challenges.\1379\ These commenters generally stressed that burdens 
related to economically equivalent swaps may be greater than related 
futures contracts and options thereon.\1380\ The Commission generally 
agrees with commenters that additional time would reduce burdens 
associated with establishing compliance and monitoring systems, and has 
therefore extended the compliance date for economically equivalent 
swaps until January 1, 2023. Because the Commission understands that 
risk management positions tend to also involve OTC swap positions, the 
Commission believes that having the same compliance date as 
economically equivalent swaps in connection with the elimination of the 
risk management exemption would similarly reduce burdens.
---------------------------------------------------------------------------

    \1379\ MFA/AIMA at 8; NCFC at 6; NGSA at 15-16; SIFMA AMG at 9-
10; and Citadel at 9.
    \1380\ Id.
---------------------------------------------------------------------------

3. Federal Position Limit Levels (Final Sec.  150.2)
i. General Approach
    Existing Sec.  150.2 establishes Federal position limit levels that 
apply net long or net short to futures and, on a futures-equivalent 
basis, to options on futures contracts on nine legacy physically-
settled agricultural contracts.\1381\ The Commission has previously set 
separate Federal position limits for: (i) The spot month, and (ii) a 
single month and all-months-combined (i.e., ``non-spot months'').\1382\ 
For the existing spot month Federal position limit levels, the contract 
levels are based on, among other things, 25% or lower of the estimated 
deliverable supply (``EDS'').\1383\ For the existing non-spot month 
position limit levels, the levels are generally set at 10% of open 
interest for the first 25,000 contracts of open interest, with a 
marginal increase of 2.5% of open interest thereafter (the ``10/2.5% 
formula'').
---------------------------------------------------------------------------

    \1381\ The nine legacy agricultural contracts subject to 
existing Federal spot and non-spot month position limits were: CBOT 
Corn (C), CBOT Oats (O), CBOT Soybeans (S), CBOT Wheat (W), CBOT 
Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat 
(MWE), ICE Cotton No. 2 (CT), and CBOT KC Hard Red Winter Wheat 
(KW).
    \1382\ For clarity, limits for single and all-months-combined 
apply separately. However, the Commission previously has applied the 
same limit levels to the single month and all-months-combined. 
Accordingly, the Commission will discuss the single and all-months 
limits, i.e., the non-spot month limits, together.
    \1383\ See supra Section II.B.1--Existing Sec.  150.2 
(discussing that establishing spot month levels at 25% or less of 
EDS is consistent with past Commission practices).
---------------------------------------------------------------------------

    Final Sec.  150.2 revises and expands the existing Federal position 
limits framework as follows. First, during the spot month, Sec.  150.2: 
(i) Subjects 16 additional core referenced futures contracts and their 
associated referenced contracts to Federal spot month position limits, 
which are based on, among other things, the Commission's existing 
approach of establishing limit levels at 25% or lower of EDS, for a 
total of 25 core referenced futures contracts (and their associated 
referenced contracts) subject to Federal spot month position limits 
(i.e., the nine legacy agricultural contracts plus the 16 additional 
contracts); \1384\ and (ii) updates the existing spot month levels for 
the nine legacy agricultural contracts based on, among other things, 
revised EDS.\1385\
---------------------------------------------------------------------------

    \1384\ The 16 new products that are subject to Federal spot 
month position limits for the first time include seven agricultural 
(CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE 
Coffee C (KC), ICE FCOJ-A (OJ), ICE Sugar No. 11 (SB), and ICE Sugar 
No. 16 (SF)), four energy (NYMEX Light Sweet Crude Oil (CL), NYMEX 
NY Harbor ULSD Heating Oil (HO), NYMEX NY Harbor RBOB Gasoline (RB), 
and NYMEX Henry Hub Natural Gas (NG)), and five metals (COMEX Gold 
(GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), 
and NYMEX Platinum (PL)) contracts.
    \1385\ The Final Rule maintains the current spot month limits on 
CBOT Oats (O).
---------------------------------------------------------------------------

    Second, for non-spot month position limit levels, final Sec.  150.2 
revises the 10/2.5% formula so that: (i) The incremental 2.5% increase 
takes effect after the first 50,000 contracts of open interest, rather 
than after the first 25,000 contracts under the existing rule (the 
``marginal threshold level''); and (ii) the limit levels are calculated 
by applying the updated 10/2.5% formula to open interest data for the 
two 12-month periods from July 2017 to June 2018 and July 2018 to June 
2019 of the applicable futures contracts and delta-adjusted options on 
futures contracts.\1386\ The 12-month period yielding the higher limit 
is selected as the non-spot month limit for that legacy agricultural 
commodity.
---------------------------------------------------------------------------

    \1386\ As discussed below, for most of the legacy agricultural 
commodities, this results in a higher non-spot month limit. However, 
the Commission is not changing the non-spot month limits for either 
CBOT Oats (O) or MGEX Hard Red Spring Wheat (MWE) based on the 
revised open interest since this would result in a reduction of non-
spot month limits from 2,000 to 700 contracts for CBOT Oats (O) and 
12,000 to 5,700 contracts for MGEX HRS Wheat (MWE). Similarly, the 
Commission also is maintaining the current non-spot month limit for 
CBOT KC Hard Red Winter Wheat (KW). Furthermore, the Commission is 
adopting a separate single month position limit level of 5,950 
contracts for ICE Cotton No. 2 (CT). The all-months-combined 
position limit level for ICE Cotton No. 2 (CT) is set at 11,900 
contracts, based on the modified 10/2.5% formula and updated open 
interest figures.
---------------------------------------------------------------------------

    Third, the final Federal position limits framework expands to cover 
(i) any cash-settled futures and related options on futures contracts 
directly or indirectly linked to any of the 25 proposed physically-
settled core referenced futures contracts as well as (ii) any 
economically equivalent swaps.
    For spot month positions, the Federal position limits in final 
Sec.  150.2 apply separately, net long or short, to cash-settled 
referenced contracts and to physically-settled referenced contracts in 
the same commodity. This results in a separate net long/short position 
for each category so that cash-settled contracts in a particular 
commodity are netted with other cash-settled contracts in that 
commodity, and physically-settled contracts in a given commodity are 
netted with other physically-settled contracts in that commodity; a 
cash-settled contract and a physically-settled contract may not be 
netted with one another during the spot month. Outside the spot month, 
cash and physically-settled contracts in the same commodity are netted 
together to determine a single net long/short position.
    Fourth, final Sec.  150.2 subjects pre-existing positions, other 
than pre-enactment swaps and transition period swaps, to Federal 
position limits during the spot month and non-spot months.
    In setting the Federal position limit levels, the Commission seeks 
to advance the enumerated statutory objectives with respect to position 
limits in CEA section 4a(a)(3)(B).\1387\ The Commission recognizes that 
relatively high Federal position limit levels may be more likely to 
support some of the statutory goals and less likely to advance others. 
For instance, a relatively higher Federal position limit level may be 
more likely to benefit market liquidity for hedgers or ensure that the 
price discovery of the underlying market is not disrupted, but may be 
less likely to benefit market integrity by being less effective at 
diminishing, eliminating, or preventing excessive speculation or at 
deterring and preventing market manipulation, corners, and squeezes. In 
particular, setting relatively high Federal position limit levels may 
result in excessively large speculative positions and/or increased 
volatility, especially during speculative showdowns (when two market 
participants disagree about the proper market price and trade 
aggressively in large quantities

[[Page 3404]]

expressing their view causing the market price to be volatile), which 
may cause some market participants to retreat from the commodities 
markets due to perceived decreases in market integrity. In turn, fewer 
market participants may result in lower liquidity levels for hedgers 
and harm to the price discovery function in the underlying markets.
---------------------------------------------------------------------------

    \1387\ See supra Sections II.B.3.ii.a(1) and II.B.4.iii.a(4) 
(further discussing the CEA's statutory objectives for the Federal 
position limits framework).
---------------------------------------------------------------------------

    Conversely, setting a relatively lower Federal position limit level 
may be more likely to diminish, eliminate, or prevent excessive 
speculation, but may also limit the availability of certain hedging 
strategies, adversely affect levels of liquidity, and increase 
transaction costs.\1388\ Additionally, setting Federal position limits 
too low may cause non-excessive speculation to exit a market, which 
could reduce liquidity, cause ``choppy'' \1389\ prices and reduced 
market efficiency, and increase option premia to compensate for the 
more volatile prices. The Commission in its discretion has nevertheless 
endeavored to set Federal position limit levels, to the maximum extent 
practicable, to benefit the statutory goals identified by Congress.
---------------------------------------------------------------------------

    \1388\ For example, relatively lower Federal position limits may 
adversely affect potential hedgers by reducing liquidity. In the 
case of reduced liquidity, a potential hedger may face unfavorable 
spreads and prices, in which case the hedger must choose either to 
delay implementing its hedging strategy and hope for more favorable 
spreads in the near future or to choose immediate execution (to the 
extent possible) at a less favorable price.
    \1389\ ``Choppy'' prices often refer to illiquidity in a market 
where transacted prices bounce between the bid and the ask prices. 
Market efficiency may be harmed in the sense that transacted prices 
might need to be adjusted for the bid-ask bounce to determine the 
fundamental value of the underlying contract.
---------------------------------------------------------------------------

    As discussed above, the contracts that are subject to the Federal 
position limits adopted in the Final Rule are currently subject to 
either Federal or exchange-set position limits (or both). To the extent 
that the Federal position limit levels in final Sec.  150.2 are higher 
than the existing Federal position limit levels for either the spot or 
non-spot month, market participants currently trading these contracts 
could engage in additional trading under the Federal position limit 
levels in final Sec.  150.2 that otherwise would be prohibited under 
existing Sec.  150.2.\1390\ On the other hand, to the extent an 
exchange--set position limit level is lower than its corresponding 
Federal position limit level in final Sec.  150.2, the Federal position 
limit does not affect market participants since market participants are 
required to comply with the lower exchange--set position limit level 
(to the extent that the exchanges maintain their current levels).\1391\
---------------------------------------------------------------------------

    \1390\ For the spot month, all the legacy agricultural contracts 
other than CBOT Oats (O) have higher Federal position limit levels. 
For the non-spot months, all the legacy agricultural contracts other 
than CBOT Oats (O), MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat 
(KW), have higher Federal position limit levels.
    \1391\ While the Final Rule generally either increases or 
maintains the Federal position limits for both the spot months and 
non-spot months compared to existing Federal position limits, where 
applicable, and exchange limits, the Federal spot month position 
limit level for COMEX Copper (HG) is below the existing exchange-set 
level. Accordingly, market participants may have to change their 
trading behavior with respect to COMEX Copper (HG), which could 
impose compliance and transaction costs on these traders, to the 
extent their existing trading exceeds the lower Federal spot month 
position limit levels.
---------------------------------------------------------------------------

ii. Spot Month Levels
    The Commission is maintaining 25% of EDS as a ceiling for Federal 
spot month position limits, except for cash-settled NYMEX Henry Hub 
Natural Gas (``NYMEX NG'') referenced contracts, which is discussed 
below. Based on the Commission's experience overseeing Federal position 
limits for decades, and overseeing exchange-set position limits 
submitted to the Commission pursuant to part 40 of the Commission's 
regulations, none of the Federal spot month position limit levels 
listed in final Appendix E of part 150 of the Commission's regulations: 
(i) Are so low as to reduce liquidity for bona fide hedgers or disrupt 
the price discovery function of the underlying market; \1392\ or (ii) 
so high as to invite excessive speculation, manipulation, corners, or 
squeezes because, among other things, any potential economic gains 
resulting from the manipulation may be insufficient to justify the 
potential costs, including the costs of acquiring, and ultimately 
offloading, the positions used to effect the manipulation.\1393\
---------------------------------------------------------------------------

    \1392\ The Federal spot month position limit levels adopted in 
the Final Rule are set at, or higher than, existing Federal spot 
month position limit levels (for the nine legacy agricultural 
contracts) or at, or higher than, existing exchange-set spot month 
position limit levels (for the 16 non-legacy core referenced futures 
contracts). As a result, the Commission does not believe that 
liquidity will be reduced with respect to the core referenced 
futures contracts and their associated referenced contracts. 
Consequently, the Commission also believes that the Federal spot 
month position limit levels will be less burdensome on market 
participants. See AFIA at 1.
    \1393\ This is driven primarily by the Federal spot month 
position limit levels being set at or below 25% of EDS.
---------------------------------------------------------------------------

    The Commission considered alternative Federal spot month position 
limit levels provided by Better Markets, which requested a standard 
Federal spot month position limit level of 10% of EDS, which could be 
adjusted as needed.\1394\ The Commission believes that this across-the-
board approach fails to take into account the differences between the 
core referenced futures contracts and could result in material costs to 
certain types of referenced contracts without concomitant benefits. For 
example, the Commission has determined to set the Federal spot month 
position limit levels for eight core referenced futures contracts below 
10% of EDS. Raising the levels to 10% of EDS for some of these 
contracts could increase the risk of market manipulation. As an 
example, raising the Federal position limit level to 10% of EDS would 
result in an increase of approximately 46% over the proposed and final 
Federal spot month position limit level for CBOT KC HRS Wheat (KW). The 
Commission believes that, despite the increased potential for market 
manipulation, this would result in a negligible improvement in 
liquidity, because the level for CBOT KC HRS Wheat (KW) is being set as 
a ceiling within the Federal position limits framework.
---------------------------------------------------------------------------

    \1394\ Better Markets at 41. Other commenters, such as PMAA and 
AFR, generally suggested lowering Federal spot month position limit 
levels. However, neither provided specific levels or a formula for 
determining alternative levels. As a result, the Commission is 
unable to engage in a cost-benefit analysis with respect to their 
suggestions.
---------------------------------------------------------------------------

    On the other end of the spectrum, for some core referenced futures 
contracts with proposed and final Federal position limit levels higher 
than 10% of EDS, decreasing the levels to 10% of EDS could have a 
material negative impact on liquidity. For example, this would result 
in a reduction in the Federal spot month position limit levels by 
approximately 60% for the seven core referenced futures contracts for 
which the Commission is adopting a Federal spot month position limit 
level of 25% of EDS.\1395\ This could cause a significant decrease in 
liquidity in those markets, as speculative traders may not be of 
sufficient size and quantity to take the other side of bona fide 
hedgers' positions. This may impact the price discovery function and 
hedging utility of those contracts because hedgers could not transact 
at better prices provided by the presence of the speculative traders. 
Furthermore, it could severely restrict the breadth of exchange-set 
spot month position limit levels that an exchange may set, which would 
provide less

[[Page 3405]]

flexibility to the exchanges to respond to rapidly changing market 
conditions.
---------------------------------------------------------------------------

    \1395\ The seven such core referenced futures contracts are: (1) 
MGEX HRS Wheat (MWE); (2) ICE Cocoa (CC); (3) ICE Coffee C (KC); (4) 
ICE FCOJ-A (OJ); (5) ICE Sugar No. 11 (SB); (6) ICE Sugar No. 16 
(SF); and (7) NYMEX Henry Hub Natural Gas (NYMEX NG).
---------------------------------------------------------------------------

    The Commission also considered PMAA's statement that ``the spot-
month limit of 25 percent of deliverable supply is not sufficiently 
aggressive to deter excessive speculation.'' \1396\ However, PMAA 
provides no defined alternative for the Commission to consider, which 
makes it difficult to compare the costs and benefits of PMAA's 
suggested approach. Nonetheless, the Commission acknowledges that, as a 
general principle, lowering position limit levels may decrease the 
likelihood of excessive speculation.\1397\ However, that may come at 
the cost of liquidity for bona fide hedgers. The Commission notes that 
PMAA's suggestion would apply to only seven of the 25 core referenced 
futures contracts that have Federal spot month position limit levels 
set at 25% of EDS in the Final Rule.\1398\ The others are all set well 
below 25% of EDS, with the highest being 19.29% of EDS for CBOT Oats 
(O). For all core referenced futures contracts, including ones that 
have Federal spot month position limit levels set at 25% of EDS, the 
Commission reviewed the methodology underlying the EDS figures and the 
Federal spot month position limit levels, and determined that they 
advance the objectives of CEA section 4a(a)(3), including preventing 
excessive speculation and manipulation, while also ensuring sufficient 
market liquidity for bona fide hedgers. Finally, the Final Rule's 
position limits framework also leverages the exchanges' expertise and 
ability to quickly set and adjust their exchange-set spot month 
position limits at any level lower than the Federal spot month position 
limit levels in response to market conditions, which relieves some of 
the potential costs of setting the Federal spot month position limit 
levels at 25% of EDS (i.e., a higher likelihood of excessive 
speculation compared to lower levels) for the seven core referenced 
futures contracts discussed above.
---------------------------------------------------------------------------

    \1396\ PMAA at 2.
    \1397\ However, based on the Commission's past experience in 
setting Federal speculative position limits, the Commission notes 
that it is very unlikely that there will be excessive speculation if 
the Federal spot month position limit level is set at 25% or less of 
EDS.
    \1398\ The seven such core referenced futures contracts are: (1) 
MGEX HRS Wheat (MWE); (2) ICE Cocoa (CC); (3) ICE Coffee C (KC); (4) 
ICE FCOJ-A (OJ); (5) ICE Sugar No. 11 (SB); (6) ICE Sugar No. 16 
(SF); and (7) NYMEX Henry Hub Natural Gas (NYMEX NG).
---------------------------------------------------------------------------

    The Commission also considered CME Group's recommendation with 
respect to the non-CME Group-listed core referenced futures contracts 
``that the Commission not adopt final spot month position limit levels 
at 25% of deliverable supply as a rigid formula and, based on the 
factors previously described above, work with the exchange to determine 
an appropriate limit based on the market dynamics previously 
described.'' \1399\ CME Group commented that, ``[t]aking an across-the-
board approach by setting a Federal limit at the full 25 percent of 
deliverable supply could have a significant negative impact on many 
markets across all asset classes. . . . For example, setting a uniform 
and high Federal limit without regard to the unique characteristics of 
a particular contract market can encourage exchanges to set limits for 
competitive reasons rather than for regulatory purposes . . . [and] 
that perverse incentive structure could lead to a race to the bottom 
and undermine the statutory goals of deterring manipulation and 
excessive speculation through position limits.'' \1400\ The Commission 
agrees that mechanically applying a Federal spot month position limit 
level of 25% of EDS can undermine the statutory goals of CEA section 
4a(a)(3). However, in proposing the Federal spot month position limit 
levels, the Commission did not mechanically apply 25% of EDS as a rigid 
formula for the non-CME Group-listed core referenced futures contracts. 
Instead, as it did for the CME Group-listed core referenced futures 
contracts, the Commission reviewed the methodology underlying the EDS 
figures and the Federal spot month position limit levels, and 
determined that they advance the objectives of CEA section 4a(a)(3), 
including preventing excessive speculation and manipulation, while also 
ensuring sufficient market liquidity for bona fide hedgers. The 
Commission also considered the Federal spot month position limit levels 
in the context of the Final Rule's position limits framework, which 
leverages the exchanges' expertise and ability to quickly set and 
adjust their exchange-set spot month position limits at any level lower 
than the Federal spot month position limit levels in response to market 
conditions, which relieves some of the potential costs of setting the 
Federal spot month position limit levels at 25% of EDS. Furthermore, 
the Commission considered comments received in response to the 2020 
NPRM before finalizing the Federal spot month position limit levels. 
This is evidenced in the changes to the Federal spot month position 
limit levels with respect to NYMEX Henry Hub Natural Gas (NG) and ICE 
Cotton No. 2 (CT), the latter of which is set at 12.95% of EDS in the 
Final Rule.
---------------------------------------------------------------------------

    \1399\ CME Group at 5. CME considered the following factors: 
contract specifications, market participation, physical market 
fundamentals, delivery process, convergence, market liquidity, 
volatility, market participant concentration, and market participant 
feedback.
    \1400\ CME Group at 5.
---------------------------------------------------------------------------

    The Commission also recognizes comments from Better Markets and 
NEFI, which state that exchanges have incentives to maximize 
shareholder profits, which could be accomplished by, among other 
things, maximizing trading.\1401\ One way exchanges could spur trading 
in the context of setting Federal spot month position limit levels in 
this rulemaking is by taking steps to ensure that the Federal spot 
month position limit levels are set as high as possible by providing 
higher EDS figures and recommending higher Federal spot month position 
limit levels. A potential cost of extremely high Federal spot month 
position limit levels is harm to market integrity through excessive 
speculation and manipulation. However, the Commission believes that 
these costs are mitigated through a number of mechanisms. First, the 
Commission independently assessed and verified the exchanges' EDS 
estimates, which included: (1) Working closely with the exchanges to 
independently verify that all EDS methodologies and figures are 
reasonable; \1402\ and (2) reviewing each exchange-recommended level 
for compliance with the requirements established by the Commission and/
or by Congress, including those in CEA section 4a(a)(3)(B).\1403\ 
Second, the Commission conducted its own analysis of the exchange-
recommended Federal spot month position limit levels and determined 
that the levels adopted herein are: (1) Low enough to diminish, 
eliminate, or prevent excessive speculation and also protect price 
discovery; (2) high enough to ensure that there is sufficient market 
liquidity for bona fide hedgers; (3) fall within a range of acceptable 
limit levels; and (4) are properly calibrated to account for 
differences between markets. Third, the Commission notes that exchanges 
have significant incentives and obligations to maintain well-
functioning markets as self-regulatory organizations that are 
themselves subject to regulatory requirements. Specifically, the DCM 
and

[[Page 3406]]

SEF Core Principles require exchanges to, among other things, list 
contracts that are not readily susceptible to manipulation, and surveil 
trading on their markets to prevent market manipulation, price 
distortion, and disruptions of the delivery or cash-settlement 
process.\1404\ Fourth, exchanges also have significant incentives to 
maintain well-functioning markets to remain competitive with other 
exchanges. Market participants may choose exchanges that are less 
susceptible to sudden or unreasonable fluctuations or unwarranted 
changes caused by corners, squeezes, and manipulation, which could, 
among other things, harm the price discovery function of the commodity 
derivative contracts and negatively impact the delivery of the 
underlying commodity, bona fide hedging strategies, and market 
participants' general risk management.\1405\ In addition, several 
academic studies, including one concerning futures exchanges and 
another concerning demutualized stock exchanges, support the conclusion 
that exchanges are able to both satisfy shareholder interests and meet 
their self-regulatory organization responsibilities.\1406\ Finally, the 
Commission itself conducts general market oversight through, among 
other things, its own surveillance program to ensure well-functioning 
markets.
---------------------------------------------------------------------------

    \1401\ Better Markets at 22-23; NEFI at 3.
    \1402\ As discussed in detail in Section II.B.3.iii.b., the 
verification involved: confirming that the methodology and data for 
the underlying commodity reflected the commodity characteristics 
described in the core referenced futures contract's terms and 
conditions; replicating exchange EDS figures using the methodology 
provided by the exchange; and working with the exchanges to revise 
the methodologies as needed.
    \1403\ See supra Section II.B.3.ii.a(1).
    \1404\ 17 CFR 38.200; 17 CFR 38.250; 17 CFR 37.300; and 17 CFR 
37.400.
    \1405\ Kane, Stephen, Exploring price impact liquidity for 
December 2016 NYMEX energy contracts, n.33, U.S. Commodity Futures 
Trading Commission website, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_priceimpact.pdf.
    \1406\ See David Reiffen and Michel A. Robe, Demutualization and 
Customer Protection at Self-Regulatory Financial Exchanges, Journal 
of Futures Markets, Vol. 31, 126-164 (in many circumstances, an 
exchange that maximizes shareholder (rather than member) income has 
a greater incentive to aggressively enforce regulations that protect 
participants from dishonest agents); and Kobana Abukari and Isaac 
Otchere, Has Stock Exchange Demutualization Improved Market Quality? 
International Evidence, Review of Quantitative Finance and 
Accounting, Dec 09, 2019, https://doi.org/10.1007/s11156-019-00863-y 
(demutualized exchanges have realized significant reductions in 
transaction costs in the post-demutualization period).
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a. NYMEX Henry Hub Natural Gas (NYMEX NG) Cash-Settled Referenced 
Contracts
    Based on comments received \1407\ and based on the existing 
exchange-set practices with respect to the NYMEX NG core referenced 
futures contract and its associated cash-settled referenced contracts, 
the Commission is permitting market participants to hold a position in 
cash-settled NYMEX NG referenced contracts up to the Federal spot month 
position limit level of 2,000 referenced contracts per exchange and 
another position in cash-settled economically equivalent NYMEX NG OTC 
swaps that has a notional amount of up to 2,000 equivalent-sized 
contracts. This is: (i) A modification from the proposed Federal spot 
month position limit level for NYMEX NG referenced contracts, in which 
market participants would be able to hold only 2,000 cash-settled NYMEX 
NG referenced contracts aggregated between all exchanges and the OTC 
swaps market; but (ii) a continuation of the existing exchange-set spot 
month position limit framework that has been in place for over a 
decade. The Commission believes that this modification from the 2020 
NPRM will, relative to the proposed approach, help minimize liquidity 
costs for market participants trading in both cash and physically-
settled natural gas derivatives markets, in which the markets for cash-
settled NYMEX NG referenced contracts is significantly more liquid than 
the market for the physically-settled NYMEX NG core referenced futures 
contract during the spot month. This is, in part, because this 
modification will continue to allow existing market participants ``to 
optimize the proportion of physically-settled and cash-settled natural 
gas contracts that they wish to hold.'' \1408\ Finally, although the 
Commission acknowledges that market participants may hold an aggregate 
position in the cash-settled NYMEX NG referenced contracts that is in 
excess of 25% of EDS, the Commission does not believe that this will 
lead to excessive speculation and volatility in the natural gas 
markets, because of the highly liquid nature of the cash-settled 
natural gas markets and the Commission's experience in overseeing the 
exchange-set framework with respect to cash-settled natural gas 
contracts.
---------------------------------------------------------------------------

    \1407\ See MFA/AIMA at 11-12; Citadel at 7-8; and SIFMA AMG at 
10-11.
    \1408\ MFA/AIMA at 11-12.
---------------------------------------------------------------------------

b. ICE Cotton No. 2 (CT)
    The Commission also modified the Federal spot month position limit 
level for ICE Cotton No. 2 (CT) by adopting a level of 900 contracts, 
instead of 1,800 contracts as proposed. The Commission is adopting the 
level of 900 contracts based on its analysis of the alternatives 
suggested by bona fide hedgers using the ICE Cotton No. 2 (CT) core 
referenced futures contract.\1409\ The Commission received two defined 
alternatives to the proposed level of 1,800 contracts--300 contracts 
and 900 contracts. Specifically, based on those comments, the 
Commission believes that it could further improve protections against 
corners and squeezes without materially sacrificing liquidity for bona 
fide hedgers by reducing the Federal spot month position limit level 
from the proposed 1,800 contracts to 900 contracts. However, the 
Commission believes that retaining the existing Federal spot month 
limit level of 300 contracts may cause concerns about adequate 
liquidity, especially because it would be the lowest Federal spot month 
position limit level, by far, in terms of percent of EDS, among all 
core referenced futures contracts, and the Commission has observed 
illiquidity during the early part of the spot month.\1410\
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    \1409\ AMCOT at 1-2; ACSA at 8; Ecom at 1; Southern Cotton at 2; 
NCC at 1; Mallory Alexander at 2; Canale Cotton at 2; IMC at 2; Olam 
at 3; DECA at 2; Moody Compress at 1; ACA at 2; Choice at 1; East 
Cotton at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; NCC at 2; 
Omnicotton at 2; Toyo at 2; Texas Cotton at 2; Walcot at 2; White 
Gold at 1; LDC at 1; SW Ag at 2; NCTO at 2; Parkdale at 2; and 
IFUS--Estimated Deliverable Supply--Cotton Methodology, August 2020, 
IFUS Comment Letter (Aug. 14, 2020).
    \1410\ At 300 contracts, the Federal spot month position limit 
level for ICE Cotton No. 2 (CT) would be set at 4.32% of EDS. CBOT 
KC HRS Wheat (KW) generally has the lowest Federal spot month 
position limit level in terms of percentage of EDS at 6.82%, which 
is 58% higher than 4.32%. However, following the close of trading on 
the business day prior to the last two trading days of the contract 
month, CME Live Cattle (LC) has the lowest Federal spot month 
position limit level in terms of percentage of EDS at 5.29%, which 
is 22% higher than 4.32%.
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iii. Levels Outside of the Spot Month
a. The 10/2.5% Formula
    The Commission has determined that the existing 10/2.5% formula 
generally has functioned well for the existing nine legacy agricultural 
contracts, and has successfully benefited the markets by taking into 
account the competing goals of facilitating both liquidity formation 
and price discovery, while also protecting the markets from harmful 
market manipulation and excessive speculation. However, since the 
existing Federal non-spot month position limit levels are based on open 
interest levels from 2009 (except for CBOT Oats (O), CBOT Soybeans (S), 
and ICE Cotton No. 2 (CT), for which existing levels are based on the 
respective open interest from 1999), the Commission is revising the 
levels based on the periods from July 2017 to June 2018 and July 2018 
to June 2019 to reflect the general increases in open interest \1411\ 
that have

[[Page 3407]]

occurred over time in the nine legacy agricultural contracts (other 
than CBOT Oats (O), MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat 
(KW)).\1412\
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    \1411\ The Commission notes that NGFA commented ``NGFA still is 
not completely convinced that open interest is the best yardstick 
for this exercise,'' because ``[a]s volume and open interest grow, 
Federal non-spot limits expand correspondingly . . . which leads to 
yet higher volume and open interest . . . which again prompts 
expanded Federal non-spot limits . . . and so on.'' However, NGFA 
did not provide any alternatives to utilizing open interest for 
determining Federal non-spot month position limit levels. As 
discussed previously in the Final Rule, the Commission believes that 
open interest is an appropriate way of measuring market activity for 
a particular contract and that a formula based on open interest, 
such as the 10/2.5% formula: (1) Helps ensure that positions are not 
so large relative to observed market activity that they risk 
disrupting the market; (2) allows speculators to hold sufficient 
contracts to provide a healthy level of liquidity for hedgers; and 
(3) allows for increases in position limits and position sizes as 
markets expand and become more active. Furthermore, the Commission 
notes that under the Final Rule, Federal non-spot month position 
limit levels do not automatically increase with higher open interest 
levels. In order to make any amendments to the Federal position 
limit levels, the Commission is required to engage in notice-and-
comment rulemaking.
    \1412\ For most of the legacy agricultural commodities, this 
results in a higher non-spot month limit. However, the Commission is 
not changing the non-spot month limits for either CBOT Oats (O) or 
MGEX HRS Wheat (MWE) based on the revised open interest since this 
would result in a reduction of non-spot month limits from 2,000 to 
700 contracts for CBOT Oats (O) and 12,000 to 5,700 contracts for 
MGEX HRS Wheat (MWE). Similarly, the Commission also is maintaining 
the current non-spot month limit for CBOT KC HRW Wheat (KW). See 
supra Section II.B.4.--Federal Non-Spot Month Position Limit Levels 
for further discussion.
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    Since the increase for most of the Federal non-spot position limits 
is predicated on the increase in open interest, as reflected in the 
revised data reviewed by the Commission, the Commission believes that 
the increases may enhance, or at least should maintain, general 
liquidity, which the Commission believes may benefit those with bona 
fide hedging positions, and commercial end users in general. On the 
other hand, the Commission believes that many market participants, 
especially commercial end users, generally accept that the existing 
Federal non-spot month position limit levels for the nine legacy 
agricultural commodities function well, including promoting liquidity 
and facilitating bona fide hedging in the respective markets. As a 
result, the Final Rule may in some cases result in higher Federal non-
spot month position limits, which could increase speculation without 
achieving any concomitant benefits of increased liquidity for bona fide 
hedgers compared to the status quo.
    The Commission also recognizes that there could be potential costs 
to keeping the existing 10/2.5% formula (even if revised to reflect 
current open interest levels) compared to alternative formulae that 
would result in even higher Federal position limit levels. First, while 
the 10/2.5% formula may have reflected ``normal'' observed market 
activity through 1999 when the Commission adopted it, there have been 
changes in the markets themselves and the entities that participate in 
those markets. When adopting the 10/2.5% formula in 1999, the 
Commission's experience in these markets reflected aggregate futures 
and options open interest well below 500,000 contracts, which no longer 
reflects market reality.\1413\ As the nine legacy agricultural 
contracts (with the exception of CBOT Oats (O)) all have open interest 
well above 25,000 contracts, and in some cases above 500,000 contracts, 
the existing formula may act as a negative constraint on liquidity 
formation relative to the higher revised formula. Further, if open 
interest continues to increase over time, the Commission anticipates 
that the existing 10/2.5% formula could impose even greater marginal 
costs on bona fide hedgers by potentially constraining liquidity 
formation (i.e., as the open interest of a commodity contract 
increases, a greater relative proportion of the commodity's open 
interest is subject to the 2.5% limit level rather than the initial 10% 
limit). In turn, this may increase costs to commercial firms, which may 
be passed to the public in the form of higher prices.
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    \1413\ See 64 FR at 24038, 24039 (May 5, 1999). As discussed in 
the preamble, the data show that by the 2015-2018 period, five of 
the nine legacy agricultural contracts had maximum open interest 
greater than 500,000 contracts. The contracts for CBOT Corn (C), 
CBOT Soybeans (S), and CBOT KC HRW Wheat (KW) saw increased maximum 
open interest by a factor of four to five times the maximum open 
interest during the years leading up to the Commission's adoption of 
the 10/2.5% formula in 1999. Similarly, the contracts for CBOT 
Soybean Meal (SM), CBOT Soybean Oil (SO), CBOT Wheat (W), and MGEX 
HRS Wheat (MWE) saw increased maximum open interest by a factor of 
three to four times. See supra Section II.B.4., Federal Non-Spot 
Month Position Limit Levels, for further discussion.
---------------------------------------------------------------------------

    Further, to the extent there may be certain liquidity constraints, 
the Commission has determined that this potential concern could be 
mitigated, at least in part, by the Final Rule's change to increase the 
marginal threshold level from 25,000 contracts to 50,000 contracts, 
which the Commission believes should provide an appropriate increase in 
the Federal non-spot month position limit levels for most contracts to 
better reflect the general increase observed in open interest across 
futures markets. The Commission acknowledges that, as an alternative, 
the Commission could have adopted a marginal threshold level above 
50,000 contracts, but notes that each increase of 25,000 contracts in 
the marginal threshold level would only increase the permitted non-spot 
month level by 1,875 contracts (i.e., (10% of 25,000 contracts)-(2.5% 
of 25,000 contracts) = 1,875 contracts). The Commission has observed 
based on current data that changing the marginal threshold to 50,000 
contracts could benefit several market participants per legacy 
agricultural commodity who otherwise would bump up against the non-spot 
month position limit levels based on the status quo threshold of 25,000 
contracts. As a result, the Commission has determined that changing the 
marginal threshold level could result in marginal benefits and costs 
for many of the legacy agricultural commodities, but the Commission 
acknowledges the change is relatively minor compared to revising the 
existing 10/2.5% formula based on updated open interest data.
    Second, the Commission recognizes that an alternative formula that 
allows for higher Federal non-spot month position limit levels, 
compared to the existing 10/2.5% formula, could benefit liquidity and 
market efficiency by creating a framework that is more conducive to the 
larger liquidity providers that have entered the market over 
time.\1414\ Compared to when the Commission first adopted the 10/2.5% 
formula, today there are relatively more large non-commercial traders, 
such as banks, managed money traders, and swap dealers, which generally 
hold long positions and act as aggregators or market makers that 
provide liquidity to short positions (e.g., commercial hedgers).\1415\ 
These dealers also function in the swaps market and use the futures 
market to hedge their exposures. Accordingly, to the extent that larger 
non-commercial market makers and liquidity providers have entered the 
market--particularly to the extent they are able to take offsetting 
positions to commercial short interests--a hypothetical alternative 
formula that would permit higher Federal non-spot month position limit 
levels might provide greater market liquidity, and possibly increased 
market efficiency, by allowing for greater market-making 
activities.\1416\
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    \1414\ See supra Section II.B.4., Federal Non-Spot Month 
Position Limit Levels, for further discussion.
    \1415\ Id.
    \1416\ For example, the Commission is aware of several market 
makers that either have left particular commodity markets, or 
reduced their market making activities. See, e.g., McFarlane, Sarah, 
Major Oil Traders Don't See Banks Returning to the Commodity Markets 
They Left, The Wall Street Journal (Mar. 28, 2017), available at 
https://www.wsj.com/articles/major-oil-traders-dont-see-banks-returning-to-the-commodity-markets-they-left-1490715761?mg=prod/com-wsj (describing how ``Morgan Stanley sold its oil trading and 
storage business . . . and J.P. Morgan unloaded its physical 
commodities business . . . .''); Decambre, Mark, Goldman Said to 
Plan Cuts to Commodity Trading Desk: WSJ (Feb. 5, 2019), available 
at https://www.marketwatch.com/story/goldman-said-to-plan-cuts-to-commodity-trading-desk-wsj-2019-02-05 (describing how Goldman Sachs 
``plans on making cuts within its commodity trading platform . . . 
.'').

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[[Page 3408]]

    However, the Commission believes that any purported benefits 
related to a hypothetical alternative formula, or a suggested 
alternative such as the one provided by ISDA,\1417\ that would allow 
for higher Federal non-spot month position limits would be minimal at 
best. Liquidity providers are still able to maintain, and possibly 
increase, market making activities under the Final Rule since the 
Federal non-spot month position limits are generally still increasing 
under the existing 10/2.5% formula to reflect the increase in open 
interest. Further, to the extent that the Final Rule's elimination of 
the risk management exemption could theoretically force liquidity 
providers to reduce their trading activities, the Commission believes 
that certain liquidity-providing activity of the existing risk 
management exemption holders may still be permitted under the Final 
Rule, either as a result of the pass-through swap provision or because 
of the general increase in limits based on the revised open interest 
levels.\1418\ Furthermore, bona fide hedgers and end-users generally 
have not requested a revised formula to allow for significantly higher 
Federal non-spot month position limits. The Commission also recognizes 
an additional benefit to market integrity of the Final Rule compared to 
a hypothetical alternative formula: While the Commission believes that 
the pass-through swap provision is narrowly-tailored to enable 
liquidity providers to continue providing liquidity to bona fide 
hedgers, in contrast, an alternative formula that would allow higher 
limit levels for all market participants would potentially permit 
increased excessive speculation and increase the probability of market 
manipulation or harm the underlying price discovery function.\1419\
---------------------------------------------------------------------------

    \1417\ ISDA at 7.
    \1418\ See supra Sections II.A.1.x. (discussing pass-through 
swap provision), II.B.4.iii.a(1)(i) (discussing increases in open 
interest); see also NCFC at 7 (stating that NCFC is ``confident that 
the substantial increase in the overall speculative position limits 
and allowances for pass-through swaps will limit any potential loss 
of liquidity'' that might be associated with the elimination of the 
risk management exemption).
    \1419\ See Section II.B.4.iv.a(2)(iii).
---------------------------------------------------------------------------

    Additionally, some \1420\ have voiced general concern that 
permitting increased Federal non-spot month limits in the nine legacy 
agricultural contracts (at any level), especially in connection with 
commodity indices, could disrupt price discovery and result in a lack 
of convergence between futures and cash prices, resulting in increased 
costs to end users, which ultimately could be borne by the public. The 
Commission has not seen data demonstrating this causal connection, but 
acknowledges arguments to that effect.\1421\
---------------------------------------------------------------------------

    \1420\ AMCOT at 1-2; Moody Compress at 1; ACA at 2; Jess Smith 
at 2; McMeekin at 2; Memtex at 2; Mallory Alexander at 2; Walcot at 
2; White Gold at 2; LDC at 2; Southern Cotton at 2-3; and Better 
Markets at 44-48.
    \1421\ IECA expressed similar concerns with respect to commodity 
index funds. IECA at 4 (stating that a June 2009 bipartisan report 
of the Senate Permanent Subcommittee for Investigation concluded 
that the ``activities of commodity index traders, in the aggregate, 
constituted `excessive speculation,' '' and that index funds have 
caused an ``unwarranted burden on commerce.''). The Commission notes 
that one of the concerns that prompted the 2008 moratorium on 
granting risk management exemptions was a lack of convergence 
between futures and cash prices in wheat. Some at the time 
hypothesized that perhaps commodity index trading was a contributing 
factor to the lack of convergence, and, some have argued that this 
could harm price discovery since traders holding these positions may 
not react to market fundamentals, thereby exacerbating any problems 
with convergence. However, the Commission has determined for various 
reasons that risk management exemptions did not lead to the lack of 
convergence since the Commission understands that many commodity 
index traders vacate contracts before the spot month and therefore 
would not influence convergence between the spot and futures price 
at expiration of the contract. Further, the risk-management 
exemptions granted prior to 2008 remain in effect, yet the 
Commission is unaware of any significant convergence problems 
relating to commodity index traders at this time. Additionally, 
there did not appear to be any convergence problems between the 
period when Commission staff initially granted risk management 
exemptions and 2007. Instead, the Commission believes that the 
convergence issues that started to occur around 2007 were due to the 
contract specification underpricing the option to store wheat for 
the long futures holder making the expiring futures price more 
valuable than spot wheat.
---------------------------------------------------------------------------

    Third, if the Final Rule's Federal non-spot position limits are too 
high for a commodity, the Final Rule might be less effective in 
deterring excessive speculation and market manipulation for that 
commodity's market. Conversely, if the Commission's Federal position 
limit levels are too low for a commodity, the Final Rule could unduly 
constrain liquidity for bona fide hedgers or result in a diminished 
price discovery function for that commodity's underlying market. In 
either case, the Commission would view these as costs imposed on market 
participants. However, to the extent the Commission's Federal non-spot 
month position limit levels could be too high, the Commission believes 
these costs could be mitigated because exchanges would potentially be 
able to establish lower non-spot month position limit levels.\1422\ 
Moreover, these concerns may be mitigated further to the extent that 
exchanges use other tools for protecting markets aside from position 
limits, such as establishing position accountability levels below 
Federal position limit levels or imposing liquidity and concentration 
surcharges to initial margin if vertically integrated with a 
derivatives clearing organization. Further, as discussed below, the 
Commission is maintaining current Federal non-spot month position limit 
levels for CBOT Oats (O), MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat 
(KW), which otherwise would be lower based on current open interest 
levels for these contracts.
---------------------------------------------------------------------------

    \1422\ The Commission notes that several commenters, including 
Better Markets, stated that exchanges may have financial incentives 
to increase trading volume, which could incentivize exchanges to set 
the highest possible exchange-set position limit levels. See, e.g., 
Better Markets at 22-24, 46-47. While the Commission acknowledges 
that this is the case, the Commission also believes that such costs 
are sufficiently mitigated through exchange statutory and regulatory 
obligations, the Commission's oversight of the exchanges, and the 
exchanges' own financial incentives to maintain well-functioning 
markets. This is discussed more in depth in Sections II.B.2.iv.b and 
III.B.3.iii.b(3)(iii).
---------------------------------------------------------------------------

b. Setting a Lower Single Month Position Limit Level for ICE Cotton No. 
2 (CT)
    The Commission is adopting a single month position limit level of 
5,950 contracts, which is 50% of the proposed level of 11,900 
contracts, which, in turn, was based on the modified 10/2.5% formula. 
This was in response to numerous comments from end-users suggesting 
that the Commission set the single month position limit level lower 
than the all-months-combined position limit level.\1423\
---------------------------------------------------------------------------

    \1423\ E.g., LDC at 2; Moody Compress at 1; ACA at 2; Jess Smith 
at 2; McMeekin at 2; Memtex at 2; Mallory Alexander at 2; Walcot at 
2; and White Gold at 1.
---------------------------------------------------------------------------

    The Commission notes that there could be a benefit to setting the 
single month position limit level lower than the all-months-combined 
position limit level, because it could help diminish excessive 
speculation or prevent price distortions if traders hold unusually 
large positions in contracts outside of the spot month and those 
traders simultaneously exit those positions immediately before the spot 
month.
    However, the Commission acknowledges that there could be a cost to 
adopting a single month limit that is half of the all-months-combined 
position limit levels. Specifically, it

[[Page 3409]]

would restrict a speculative trader's ability to take opposite 
positions to bona fide hedgers by, for example, entering into calendar 
spread transactions that would normally provide liquidity to bona fide 
hedgers. Thus, by adopting the lower single month limit, liquidity in 
deferred month contracts would be reduced because the speculative 
trader would not be able to hold positions in excess of the single 
month limit. Nonetheless, the Commission believes that, based on the 
unanimous comments from the end-users of the ICE Cotton No. 2 (CT) 
contract requesting a lower single month position limit level, such 
costs may not materially negatively impact liquidity for bona fide 
hedgers.
c. Exceptions to the 10/2.5% Formula for CBOT Oats (O), MGEX Hard Red 
Spring Wheat (MWE), and CBOT Kansas City Hard Red Winter Wheat (KW)
    Based on the Commission's experience since 2011 with Federal non-
spot month position limit levels for the MGEX HRS Wheat (``MWE'') and 
CBOT KC HRW Wheat (``KW'') core referenced futures contracts, the 
Commission is maintaining the Federal non-spot month position limit 
levels for MWE and KW at the existing level of 12,000 contracts, rather 
than reducing them to the lower level that would result from applying 
the proposed updated 10/2.5% formula. Maintaining the status quo for 
the MWE and KW Federal non-spot month position limit levels results in 
partial wheat parity between those two wheat contracts, but not with 
CBOT Wheat (``W''), which increases to 19,300 contracts under the Final 
Rule.
    The Commission believes that this benefits the MWE and KW markets 
since the two species of wheat are similar to one another; accordingly, 
decreasing the Federal non-spot month position limit levels for MWE 
could impose liquidity costs on the MWE market and harm bona fide 
hedgers, which could further harm liquidity for bona fide hedgers in 
the KW market. On the other hand, although commenters requested raising 
the Federal non-spot month position limit level for KW to match the 
level for W,\1424\ the Commission has determined not to raise the 
Federal non-spot month position limit levels for KW and for MWE as well 
to the Federal non-spot month position limit level for W. This is 
because the limit level for W appears to be extraordinarily large in 
comparison to open interest in KW and MWE markets, and the limit levels 
for both the KW and the MWE contracts are already larger than the limit 
levels would be based on the 10/2.5% formula. While W is a potential 
substitute for KW and MWE, it is not similar to the same extent that 
MWE and KW are to one another, and so the Commission has determined 
that partial wheat parity outside of the spot month will maintain 
liquidity and price discovery while not unnecessarily inviting 
excessive speculation or potential market manipulation in the MWE and 
KW markets.
---------------------------------------------------------------------------

    \1424\ SIFMA AMG at 3-4; ISDA at 12; PIMCO at 4-5; MFA/AIMA at 
12; and Citadel at 6-7.
---------------------------------------------------------------------------

    Likewise, based on the Commission's experience since 2011 with the 
Federal non-spot month speculative position limit for CBOT Oats (O), 
the Commission is maintaining the limit level at the current 2,000 
contracts level, rather than reducing it to the lower level that would 
result from applying the updated 10/2.5% formula based on current open 
interest. The Commission has determined that there is no evidence of 
potential market manipulation or excessive speculation, and so there 
would be no perceived benefit to reducing the Federal non-spot month 
position limit for the CBOT Oats (O) contract, while reducing the level 
could impose liquidity costs.
iv. Subsequent Spot and Non-Spot Month Position Limit Levels
    The Commission received several comments concerning updates to the 
Federal position limit levels, with commenters requesting that the 
Commission periodically review the levels and revise them if 
appropriate.\1425\ One commenter was concerned that the Federal 
position limit levels could become too high over time,\1426\ while the 
rest were concerned that the levels could become too low.\1427\ In 
addition, CME Group also suggested that exchanges should update the EDS 
figures ``every two years [and] . . . DCMs should be provided the 
opportunity to submit data voluntarily to the Commission on a more 
frequent basis.'' \1428\
---------------------------------------------------------------------------

    \1425\ MFA/AIMA at 5 (stating that ``the Commission should 
direct exchanges to periodically monitor the proposed new position 
limit levels''); PIMCO at 6 (urging the CFTC ``to include . . . a 
mandatory requirement to regularly (and at least annually) review 
and update limits as markets grow and change''); SIFMA AMG at 10 
(suggesting the Final Rule should require ``that the Commission 
regularly consult with exchanges and review and adjust position 
limits when it is necessary to do so based on relevant market 
factors''); ISDA at 10 (stating that ``the Commission must regularly 
convene and consult with exchanges on deliverable supply and, if 
appropriate, propose notice and comment rulemaking to adjust limit 
levels''); and IATP at 16-17 (proposing that the Commission should 
engage in ``an annual review of position limit levels to give 
[commercial hedgers] legal certainty over that period'' and also 
retain ``the authority to revise position limits . . . if data 
monitoring and analysis show that those annual limit levels are 
failing to prevent excessive speculation and/or various forms of 
market manipulation'').
    \1426\ IATP at 16-17.
    \1427\ MFA/AIMA at 5-6; PIMCO at 6; SIFMA AMG at 10; and ISDA at 
10.
    \1428\ CME Group at 5.
---------------------------------------------------------------------------

    The Commission recognizes that there may be costs if Federal 
position limit levels become too high or low over time. For example, 
levels that become too high may permit excessive speculation; levels 
that become too low may negatively impact liquidity. However, the 
Commission believes that the Final Rule's position limits framework, 
which utilizes Federal position limit levels as ceilings and allows 
exchange-set position limits to operate under that ceiling, will 
mitigate such potential costs. Specifically, because the Federal 
position limits are utilized as ceilings, this framework will enable 
exchanges to respond to market conditions through a greater range of 
acceptable exchange-set position limit levels than if the Federal 
position limit levels did not operate as ceilings. Furthermore, because 
such exchange actions can be effectuated significantly faster than 
modifying Federal position limits, the Final Rule's position limits 
framework is able to quickly respond to rapidly evolving market 
conditions through exchange-action as well.\1429\
---------------------------------------------------------------------------

    \1429\ Furthermore, the Commission notes that updating EDS 
figures and Federal position limit levels is a resource-intensive 
endeavor for both the Commission and the exchanges. Also, periodic, 
predetermined review intervals may not always align with market 
changes or other events resulting in material changes to deliverable 
supply that would warrant adjusting Federal spot month position 
limit levels. As a result, the Commission believes that it would be 
more efficient, timely, and effective to review the EDS figure and 
the Federal position limit level for a core referenced futures 
contract if warranted by market conditions, including changes in the 
underlying cash market, which the Commission and exchanges 
continually monitor.
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v. Phase-In of Federal Position Limit Levels
    The Commission received comments requesting that the Commission 
``consider phasing in these adjustments for agricultural commodities to 
assess the impacts of increasing limits on contract performance.'' 
\1430\ CMC also noted that, ``[a] phased approach could provide market 
participants, exchanges, and the Commission a way to build in scheduled 
pauses to evaluate the effects of increased limits, thereby fostering 
confidence and trust in the markets.'' \1431\
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    \1430\ AFIA at 2; CMC at 6.
    \1431\ CMC at 6. Although commenters did not provide specific 
details about what they meant by ``phase-in,'' the Commission 
understands these comments to mean that they are requesting a 
gradual, step-up increase in Federal spot month and non-spot month 
position limit levels over time for agricultural core referenced 
futures contracts, instead of having the new Federal position limit 
levels apply all at once.

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[[Page 3410]]

    The Commission acknowledges that there could be some benefit in 
implementing a formal, gradual phase-in for the Federal position limit 
levels, because this could allow the Commission to more incrementally 
assess whether there are any issues with respect to the referenced 
contract markets.\1432\ However, the Commission believes that the 
position limits framework that is implemented in the Final Rule 
effectively provides a similar, but more flexible result. Specifically, 
market participants will still be subject to the exchange-set spot 
month position limit levels even after the Final Rule's Federal spot 
month position limit levels go into effect. The existing exchange-set 
position limit levels are lower than the corresponding Federal levels 
as adopted in this Final Rule for most core referenced futures 
contracts \1433\ and, unless and until exchanges affirmatively modify 
their exchange-set spot month position limit levels pursuant to part 40 
of the Commission's regulations,\1434\ the operative spot month 
position limit levels for market participants trading exchange-listed 
referenced contracts will be the exchange-set ones. So, if an exchange 
deems it appropriate to maintain its existing exchange-set position 
limit levels and does not choose to adopt the new applicable Federal 
speculative position limit level as the new exchange-set speculative 
limit for any relevant referenced contract listed on its exchange, then 
there will be no practical change from the status quo for market 
participants from a position limits perspective. If the exchange 
believes that it is appropriate to raise its exchange-set spot month 
position limit levels either up to the Federal position limit levels or 
lower levels as it deems appropriate, then the exchange may do so in a 
way that is tailored for each referenced contract (including through a 
phased-in approach) and that is informed by the exchange's knowledge of 
each market.
---------------------------------------------------------------------------

    \1432\ As a preliminary matter, the Commission believes that the 
referenced contract markets will be able to function in an orderly 
fashion when the final Federal position limit levels go into effect. 
This is because, among other things, the final Federal spot month 
position limit levels are supported by the updated EDS figures and 
are set at or below 25% of EDS, and the final Federal non-spot month 
position limit levels are supported by increased open interest and 
are generally set pursuant to the modified 10/2.5% formula. The 
three core referenced futures contracts that do not strictly follow 
the 10/2.5% formula in the non-spot month (i.e., CBOT KC HRW Wheat 
(KW), MGEX HRS Wheat (MWE), and CBOT Oats (O)) do not require any 
phase-in period, because they remain at existing Federal and 
exchange-set non-spot month position limit levels.
    \1433\ Nineteen of the core referenced futures contracts will 
have Federal spot month position limit levels that are higher than 
current exchange-set spot month position limit levels. COMEX Copper 
(HG), CBOT Oats (O), NYMEX Platinum (PL), and NYMEX Palladium (PA) 
will have Federal spot month position limit levels that are equal to 
the current exchange-set spot month position limit levels. The last 
two steps of the Federal spot month step-down position limit levels 
for CME Live Cattle (LC) are equal to the corresponding last two 
steps of exchange-set spot month step-down position limit levels. 
Finally, although currently there is technically no exchange-set 
spot month position limit for ICE Sugar No. 16, this contract is 
subject to a single month position limit level of 1,000 contracts, 
which effectively serves as its spot month position limit level. As 
a result, the Federal spot month position limit level for ICE Sugar 
No. 16 will effectively be higher than its current exchange-set spot 
month position limit level.
    \1434\ 17 CFR part 40.
---------------------------------------------------------------------------

    A further benefit to the Final Rule's position limits framework 
over a federally-mandated phase-in is that exchanges have greater 
flexibility (relative to the Commission) to quickly modify exchange-set 
levels, including modifying any phase-in levels, to respond to sudden 
and changing market conditions.
vi. Core Referenced Futures Contracts and Linked Referenced Contracts; 
Netting
    The definitions of the terms ``core referenced futures contract'' 
and ``referenced contract'' set the scope of contracts to which Federal 
position limits apply. As discussed above, by applying the Federal 
position limits to ``referenced contracts,'' the Final Rule expands the 
Federal position limits beyond the 25 physically-settled ``core 
referenced futures contracts'' listed in final Appendix E to part 150 
by also including any cash-settled and physically-settled ``referenced 
contracts'' linked thereto, as well as swaps that meet the 
``economically equivalent swap'' definition in final Sec.  150.1 and 
thus qualify as ``referenced contracts.'' \1435\
---------------------------------------------------------------------------

    \1435\ As discussed in the preamble, the position limits 
framework also applies to physically-settled swaps that qualify as 
economically equivalent swaps. However, the Commission believes that 
physically-settled economically equivalent swaps would be few in 
number.
---------------------------------------------------------------------------

a. Referenced Contracts
    The Commission has determined that including futures contracts and 
options thereon that are ``directly'' or ``indirectly linked'' to the 
core referenced futures contracts, including cash-settled contracts, 
under the definition of ``referenced contract'' in final Sec.  150.1 
helps prevent the evasion of Federal position limits--especially during 
the spot month--through the creation of a financially equivalent 
contract that references the price of a core referenced futures 
contract, or of the commodity underlying a core referenced futures 
contract. The Commission has determined that this benefits market 
integrity and potentially reduces costs to market participants that 
otherwise could result from market manipulation.
    The Commission also recognizes that including cash-settled 
contracts within the final Federal position limits framework may impose 
additional compliance costs on market participants and exchanges. 
Further, the Federal position limits--especially outside the spot 
month--may not provide all of the benefits discussed above with respect 
to market integrity and manipulation because there is no physical 
delivery outside the spot month and therefore there is reduced concern 
for corners and squeezes. However, to the extent that there is 
manipulation or price distortion involving such non-spot, cash-settled 
contracts, the Commission's authority to regulate and oversee futures 
and related options on futures markets (other than through establishing 
Federal position limits) may also be effective in uncovering or 
preventing manipulation or distortion, especially in the non-spot cash 
markets, and may result in relatively lower compliance costs incurred 
by market participants. Similarly, the Commission acknowledges that 
exchange oversight could provide similar benefits to market oversight 
and prevention of market manipulation, but with lower costs imposed on 
market participants--given the exchanges' deep familiarity with their 
own markets and their ability to tailor a response to a particular 
market disruption--compared to Federal position limits.
    The ``referenced contract'' definition in final Sec.  150.1 also 
includes ``economically equivalent swap,'' and, for the reasons 
discussed below, includes a narrower set of swaps compared to the set 
of futures contracts and options thereon that would be, under the 
``referenced contract'' definition, captured as either ``directly'' or 
``indirectly linked'' to a core referenced futures contract.\1436\
---------------------------------------------------------------------------

    \1436\ See infra Section IV.A.3.vi.e. (discussing economically 
equivalent swaps).
---------------------------------------------------------------------------

b. List of Referenced Contracts \1437\
---------------------------------------------------------------------------

    \1437\ Appendix C of the Final Rule provides staff guidance to 
assist market participants and exchanges in determining whether a 
particular contract qualifies as a referenced contract.
---------------------------------------------------------------------------

    The Commission's publication of the Staff Workbook is intended to 
provide a non-exhaustive list of exchange-traded

[[Page 3411]]

referenced contracts that are subject to Federal position limits. 
Although the Commission expects to timely update this list of 
contracts, the omission of a contract from the Staff Workbook does not 
mean that such contract is outside the definition of a referenced 
contract subject to Federal position limits.
    Additionally, the Staff Workbook will provide a linkage between 
each referenced contract, and either the core referenced futures 
contract or referenced contract, as applicable to which it is linked, 
to aid in market participants' understanding of the Commission's 
determination.
    Although some commenters believed that the Commission should 
require exchanges to publish and maintain a definitive list of 
referenced contracts (other than economically equivalent swaps) \1438\ 
the Commission believes that the centralized publication of this 
Workbook creates efficiency by providing market participants a known 
access location, and minimizes costs by not requiring redundant 
publication.
---------------------------------------------------------------------------

    \1438\ MFA/AIMA at 7; Citadel at 4-5; SIFMA AMG at 11-12.
---------------------------------------------------------------------------

    The Commission's concurrent publication of the Staff Workbook 
provides a non-exhaustive list of exchange-traded referenced contracts, 
and will help market participants in determining categories of 
contracts that fit within the referenced contract definition. This 
effort is intended to provide clarity to market participants regarding 
which exchange-traded contracts are subject to Federal position limits.
c. Netting and Related Treatment of Cash-Settled Referenced Contracts
    Under paragraph (1) of the final ``referenced contract'' 
definition, referenced contracts include a core referenced futures 
contract, and any cash-settled futures contracts and options on futures 
contacts that are directly or indirectly linked to a physically-settled 
core referenced futures contract.
    PIMCO and SIFMA AMG contended that cash-settled referenced 
contracts should not be subject to Federal position limits at all 
because cash-settled contracts do not introduce the same risk of market 
manipulation. They argued that subjecting cash-settled referenced 
contracts to Federal position limits would increase transaction costs 
and reduce market liquidity and depth in these instruments.\1439\
---------------------------------------------------------------------------

    \1439\ PIMCO at 3; SIFMA AMG at 4-7. These entities did not 
specifically argue that cash-settled contracts should be excluded 
from the ``referenced contract'' definition; rather, they contended 
that in general such instruments should not be subject to Federal 
position limits. The Commission notes that this is technically a 
different argument since cash-settled instruments could be exempt 
from position limits but still qualify as ``referenced contracts.'' 
Nevertheless, the practical result is the same.
---------------------------------------------------------------------------

    ISDA argued that cash-settled contracts should not be included in 
an immediate Federal position limits rulemaking, and should instead be 
deferred until the Commission has adopted Federal limits with respect 
to physically-delivered spot month futures contracts, and after which 
the Commission should revisit Federal limits for cash-settled 
contracts.\1440\
---------------------------------------------------------------------------

    \1440\ ISDA at 3-5.
---------------------------------------------------------------------------

    FIA and ICE argued that limits for cash-settled referenced 
contracts should be higher relative to Federal position limits for 
physically-settled referenced contracts. They similarly argued that 
cash-settled referenced contracts are ``not subject to corners and 
squeezes'' and will `` `ensure market liquidity for bona fide hedgers.' 
'' \1441\
---------------------------------------------------------------------------

    \1441\ ICE at 3, 15 (also arguing that cash-settled limits 
should apply per exchange, rather than across exchanges); FIA at 7-
8.
---------------------------------------------------------------------------

    In contrast, CME supported the Commission's approach for spot-month 
parity for physically-settled and cash-settled referenced contracts 
across all commodity markets. CME explained that absent such parity, 
one side of the market could be vulnerable to artificial distortions 
from manipulations on the other side of the market, regulatory 
arbitrage, and liquidity drain to the other side of the market.\1442\
---------------------------------------------------------------------------

    \1442\ CME Group at 6.
---------------------------------------------------------------------------

    The Commission believes that its parity approach, including parity 
with respect to the size of the Federal position limits for both cash-
settled and physically-settled contracts, benefits market integrity, 
liquidity, and price discovery by not providing skewed incentives to a 
market participant to favor one group of contracts over the other, or 
providing avenues for manipulation that this rulemaking seeks to avoid.
    The Commission is also generally adopting Federal position limits 
on an aggregated, instead of on a per-DCM basis.\1443\ FIA and ICE 
suggested that Federal position limits for cash-settled referenced 
contracts should apply per DCM (rather than in the aggregate across 
DCMs).\1444\ The Commission views DCM-based limits as restrictive and 
costly for the most innovative DCMs, as DCM-based limits would 
necessarily represent a smaller volume of contracts available than 
would an aggregated limit. By making the full aggregated Federal 
position limit available to the contract that is most responsive to the 
needs of the market, the Commission believes that this provides a 
market-wide benefit by promoting innovation and competition in the 
marketplace.
---------------------------------------------------------------------------

    \1443\ The Commission is permitting market participants to hold 
a position in cash-settled NYMEX NG referenced contracts up to the 
Federal spot month position limit on a per exchange basis. This is 
discussed more in depth in Section IV.A.3.ii.a.
    \1444\ FIA at 7-8; ICE at 13.
---------------------------------------------------------------------------

    The Final Rule permits market participants to net positions outside 
the spot month in linked physically-settled and cash-settled referenced 
contracts, but during the spot month market participants may not net 
their positions in cash-settled referenced contracts against their 
positions in physically-settled referenced contracts. The Commission 
believes that final Sec.  150.2(a) and (b) benefits liquidity formation 
and bona fide hedgers outside the spot months since the netting rules 
facilitate the management of risk on a portfolio basis for liquidity 
providers and market makers. In turn, improved liquidity may benefit 
bona fide hedgers and other end users by facilitating their hedging 
strategies and reducing related transaction costs (e.g., improving 
execution timing and reducing bid-ask spreads). On the other hand, the 
Commission recognizes that allowing such netting could increase 
transaction costs and harm market integrity by allowing for a greater 
possibility of market manipulation since market participants and 
speculators can maintain larger gross positions outside the spot month. 
However, the Commission has determined that such potential costs may be 
mitigated since concerns about corners and squeezes generally are less 
acute outside the spot month given there is no physical delivery 
involved, and because there are tools other than Federal position 
limits for preventing and deterring other types of manipulation, 
including banging the close, such as exchange-set limits and 
accountability and surveillance both at the exchange and Federal level.
    Moreover, prohibiting the netting of physical and cash positions 
during the spot month should benefit bona fide hedgers as well as price 
discovery of the underlying markets since market makers and speculators 
are not able to maintain a relatively large position in the physical 
markets by netting it against its positions in the cash markets.\1445\ 
While

[[Page 3412]]

this may increase compliance and transaction costs for speculators, it 
may benefit some bona fide hedgers and end users. It may also impose 
costs on exchanges, including increased surveillance and compliance 
costs and lost fees related to the trading that such market makers or 
speculators otherwise might engage in absent Federal position limits or 
with the ability to net their physical and cash positions.
---------------------------------------------------------------------------

    \1445\ Otherwise, a market participant could maintain large, 
offsetting positions in excess of limits in both the physically-
settled and cash-settled contract, which might harm market integrity 
and price discovery and undermine the Federal position limits 
framework. For example, absent such a restriction in the spot month, 
a trader could stand for over 100% of deliverable supply during the 
spot month by holding a large long position in the physical-delivery 
contract along with an offsetting short position in a cash-settled 
contract, which effectively would corner the market.
---------------------------------------------------------------------------

d. Exclusions From the ``Referenced Contract'' Definition
    Although the ``referenced contract'' definition in final Sec.  
150.1 includes linked contracts, it explicitly excludes location basis 
contracts,\1446\ commodity index contracts, swap guarantees, trade 
options that satisfy Sec.  32.3 of the Commission's regulations,\1447\ 
outright price reporting agency index contracts, and monthly average 
pricing contracts.
---------------------------------------------------------------------------

    \1446\ ICE further recommended that additional basis and spread 
contracts be excluded from the referenced contract definition. ICE 
at 10-11. The Commission has determined not to exclude these 
additional contracts from the referenced contract definition, as, 
among other reasons discussed further above, the Commission views 
the constraints on the liquidity and volatility associated with 
other excluded contracts as not present to an equal degree in basis 
and spread contracts proposed to be excluded by ICE.
    \1447\ 17 CFR 32.3.
---------------------------------------------------------------------------

    First, the ``referenced contract'' definition explicitly excludes 
location basis contracts, which are contracts that reflect the 
difference between two delivery locations or quality grades of the same 
commodity.\1448\ The Commission believes that excluding location basis 
contracts from the ``referenced contract'' definition benefits market 
integrity by preventing a trader from obtaining an extraordinarily 
large speculative position in the commodity underlying the referenced 
contract. Absent this exclusion, a market participant could increase 
its exposure in the commodity underlying the referenced contract by 
using the location basis contract to net down against its position in a 
referenced contract, and then further increase its position in the 
referenced contract that would otherwise be restricted by position 
limits. Similarly, the Commission believes that the exclusion of 
location basis contracts reduces hedging costs for hedgers and 
commercial end-users, as they are able to more efficiently hedge the 
cost of commodities at their preferred location without the risk of 
possibly hitting a position limits ceiling or incurring compliance 
costs related to applying for a bona fide hedge recognition related to 
such position.\1449\
---------------------------------------------------------------------------

    \1448\ The term ``location basis contract'' generally means a 
derivative that is cash-settled based on the difference in price, 
directly or indirectly, of (1) a core referenced futures contract; 
and (2) the same commodity underlying a particular core referenced 
futures contract at a different delivery location than that of the 
core referenced futures contract. See Appendix C to final part 150. 
For clarity, a core referenced futures contract may have 
specifications that include multiple delivery points or different 
grades (i.e., the delivery price may be determined to be at par, a 
fixed discount to par, or a premium to par, depending on the grade 
or quality). The above discussion regarding location basis contracts 
is referring to delivery locations or quality grades other than 
those contemplated by the applicable core referenced futures 
contract.
    \1449\ AGA agrees that the exclusion of location basis contracts 
from the ``referenced contract'' definition creates certain netting 
benefits and may allow commercial end-users to more efficiently 
hedge the cost of commodities at a preferred location. AGA at 9. In 
general, AGA supported all of the proposed exclusions from the 
``referenced contract'' definition in the 2020 NPRM, as it believes 
that market participants benefit from clear rules and definitions 
that help prevent ``potential disagreement leading to increased 
transaction costs, potential loss of liquidity, and compliance 
strategies that generally make the markets less efficient.'' Id.
---------------------------------------------------------------------------

    Excluding location basis contracts from the ``referenced contract'' 
definition also could impose costs for market participants that wish to 
trade location basis contracts since, as noted, such contracts are not 
subject to Federal position limits and thus could be more easily 
subject to manipulation by a market participant that obtained an 
excessively large position. However, the Commission believes such costs 
are mitigated because location basis contracts generally demonstrate 
less volatility and are less liquid than the core referenced futures 
contracts, meaning the Commission believes that it would be an 
inefficient method of manipulation (i.e., too costly to implement and 
therefore, the Commission believes that the probability of manipulation 
is low). Further, excluding location basis contracts from the 
``referenced contract'' definition is consistent with existing market 
practice since the market treats a contract on one grade or delivery 
location of a commodity as different from another grade or delivery 
location. Accordingly, to the extent that this exclusion is consistent 
with current market practice, any benefits or costs already may have 
been realized.
    Second, the Commission has concluded that excluding commodity index 
contracts from the ``referenced contract'' definition benefits market 
integrity by preventing speculators from using a commodity index 
contract to net down an outright position in a referenced contract that 
is a component of the commodity index contract, which would allow the 
speculator to take on large outright positions in the referenced 
contracts and therefore result in increased speculation, undermining 
the Federal position limits framework.\1450\ However, the Commission 
believes that this exclusion could impose costs on market participants 
that trade commodity index contracts since, as noted, such contracts 
are not subject to Federal position limits and thus could be more 
easily subject to manipulation by a market participant that obtained an 
excessively large position. The Commission believes such costs would be 
mitigated because the commodities comprising the index are themselves 
subject to limits, and because commodity index contracts generally tend 
to exhibit low volatility since they are diversified across many 
different commodities. Further, the Commission believes that it is 
possible that excluding commodity index contracts from the definition 
of ``referenced contract'' could result in some trading shifting to 
commodity index contracts, which may reduce liquidity in exchange-
listed core referenced futures contracts, harm pre-trade transparency 
and the price discovery process in the futures markets, and depress 
open interest (as volumes shift to index positions, which would not 
count toward open interest calculations). However, the Commission 
believes that the probability of this occurring is low because the 
Commission believes that using commodity index contracts is an

[[Page 3413]]

inefficient means of obtaining exposure to a specific commodity.
---------------------------------------------------------------------------

    \1450\ Further, the Commission believes that prohibiting the 
netting of a commodity index position with a referenced contract is 
required by its interpretation of the Dodd-Frank Act's amendments to 
the CEA's definition of ``bona fide hedging transaction or 
position.'' The Commission interprets the amended CEA definition to 
eliminate the Commission's ability to recognize risk management 
positions as bona fide hedges or transactions. See infra Section 
IV.A.4, Exemptions from Federal Position Limits--Bona Fide Hedging 
Recognitions, Spread and Other Exemptions (Final Sec. Sec.  150.1 
and 150.3), for further discussion. In this regard, the Commission 
has observed that it is common for swap dealers to enter into 
commodity index contracts with participants for which the contract 
would not qualify as a bona fide hedging position (e.g., with a 
pension fund). Failing to exclude commodity index contracts from the 
``referenced contract'' definition could enable a swap dealer to use 
positions in commodity index contracts as a risk management hedge by 
netting down its offsetting outright futures positions in the 
components of the index. Permitting this type of risk management 
hedge would subvert the statutory pass-through swap language in CEA 
section 4a(c)(2)(B), which the Commission interprets as prohibiting 
the recognition of positions entered into for risk management 
purposes as bona fide hedges unless the swap dealer is entering into 
positions opposite a counterparty for which the swap position is a 
bona fide hedge.
---------------------------------------------------------------------------

    Third, the Commission's determination to exclude trade options from 
the referenced contract definition is consistent with the historical 
practice of the Commission, in which it has exempted a number of trade 
options from Commission requirements. This exclusion benefits end-users 
who hedge their physical risk through these instruments, yet do not 
contribute to excessive speculation.
    Fourth, the Commission's exclusion of swap guarantees from the 
referenced contract definition will help avoid any potential confusion 
regarding the application of position limits to guarantees of swaps. 
The Commission understands that swap guarantees generally serve as 
insurance, and, in many cases, swap guarantors guarantee the 
performance of an affiliate in order to entice a counterparty to enter 
into a swap with such guarantor's affiliate. As a result, the 
Commission believes that swap guarantees do not contribute to excessive 
speculation, market manipulation, squeezes, or corners. Furthermore, 
the Commission believes that swap guarantees were not contemplated when 
Congress articulated its policy goals in CEA section 4a(a).\1451\
---------------------------------------------------------------------------

    \1451\ To the extent that swap guarantees may lower costs for 
uncleared OTC swaps in particular by incentivizing a counterparty to 
enter into a swap with the guarantor's affiliate, excluding swap 
guarantees may benefit market liquidity, which is consistent with 
the CEA's statutory goals in CEA section 4a(a)(3)(B) to ensure 
sufficient liquidity for bona fide hedgers when establishing its 
position limit framework.
---------------------------------------------------------------------------

    Fifth, the Final Rule reaffirms the Commission's determination that 
an outright price reporting agency index contract does not qualify as a 
``referenced contract.'' \1452\ To provide market participants clarity 
regarding this determination, the Commission modified the regulatory 
text of the ``referenced contract'' definition in final Sec.  150.1 to 
explicitly exclude the term ``outright price reporting agency index 
contracts.'' \1453\ The exclusion of outright price reporting agency 
index contracts from the ``referenced contract'' definition benefits 
market participants through clarity and mitigation of costs, such as 
costs to monitor positions for aggregation and other compliance 
purposes. The Commission believes that this exclusion maintains market 
integrity as it would be costly to employ these contracts to circumvent 
position limits.
---------------------------------------------------------------------------

    \1452\ As explained in the preamble to the Final Rule, the 
Commission has concluded that an ``outright price reporting agency 
index contract,'' which is based on an index published by a price 
reporting agency that surveys cash-market transaction prices (even 
if the cash-market practice is to price at a differential to a 
futures contract), is not directly or indirectly linked to the 
corresponding referenced contract. See supra Section 
II.A.16.iii.b(4)(v) (discussing new exclusions from the ``referenced 
contract'' definition).
    \1453\ The Commission does not believe this technical change to 
the regulatory text represents a change in policy. See supra Section 
II.A.16.
---------------------------------------------------------------------------

    Finally, the Commission has concluded that excluding ``monthly 
average pricing contracts'' \1454\ from the ``referenced contract'' 
definition benefits market integrity by ensuring sufficient market 
liquidity for bona fide hedgers due to: (1) The difficulty and expense 
of any entity artificially moving the price of the monthly average by 
manipulating one or more component prices within the contract; and (2) 
the widespread use of these contracts by, and their utility to, 
commercial entities in hedging their risk. As with the outright price 
reporting agency index contracts, this exclusion benefits market 
participants to the extent it mitigates costs to monitor positions for 
aggregation and other compliance purposes.
---------------------------------------------------------------------------

    \1454\ The definition of the new term ``monthly average pricing 
contracts'' in Appendix C of this Final Rule is intended to cover 
the types of contracts generally referred to in the industry as 
calendar-month average, trade-month average, and balance-of-the-
month contracts. See supra Section II.A.16.iii.b(4)(v) (discussing 
new exclusions from the ``referenced contract'' definition).
---------------------------------------------------------------------------

e. Economically Equivalent Swaps
    The existing Federal position limits framework does not include 
Federal position limit levels on swaps. The Dodd-Frank Act added CEA 
section 4a(a)(5), which requires that when the Commission imposes 
Federal position limits on futures contracts and options on futures 
contracts pursuant to CEA section 4a(a)(2), the Commission also 
establish limits simultaneously for ``economically equivalent'' swaps 
``as appropriate.'' \1455\ As the statute does not define the term 
``economically equivalent,'' the Commission is applying its expertise 
in construing such term consistent with the policy goals articulated by 
Congress, including in CEA sections 4a(a)(2)(C) and 4a(a)(3) as 
discussed below.
---------------------------------------------------------------------------

    \1455\ CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA 
section 4a(a)(4) separately authorizes, but does not require, the 
Commission to impose Federal position limits on swaps that meet 
certain statutory criteria qualifying them as ``significant price 
discovery function'' swaps. 7 U.S.C. 6a(a)(4). The Commission 
reiterates, for the avoidance of doubt, that the definitions of 
``economically equivalent'' in CEA section 4a(a)(5) and 
``significant price discovery function'' in CEA section 4a(a)(4) are 
separate concepts and that contracts can be economically equivalent 
without serving a significant price discovery function.
---------------------------------------------------------------------------

    Specifically, under the Commission's definition of ``economically 
equivalent swap'' set forth in final Sec.  150.1, a swap generally 
qualifies as economically equivalent with respect to a particular 
referenced contract so long as the swap shares ``identical material'' 
contract specifications, terms, and conditions with the referenced 
contract. Further, any differences between the swap and referenced 
contract with respect to the following are disregarded for purposes of 
determining whether the swap qualifies as economically equivalent: (i) 
Lot size or notional amount; (ii) for a natural gas swap and a 
referenced contract that are both physically-settled, delivery dates 
diverging by less than two calendar days, and for any other swap and 
referenced contract that are both physically-settled, delivery dates 
diverging by less than one calendar day; \1456\ and (iii) post-trade 
risk-management arrangements.\1457\
---------------------------------------------------------------------------

    \1456\ As discussed below, the definition of ``economically 
equivalent swap'' with respect to natural gas referenced contracts 
contains the same terms, except that it includes delivery dates 
diverging by less than two calendar days.
    \1457\ See supra Section II.A.4. (further discussing the 
Commission's definition of ``economically equivalent swap'').
---------------------------------------------------------------------------

    As discussed in turn below, the Commission believes that the Final 
Rule's definition of ``economically equivalent swaps'' benefits (1) 
market integrity by protecting against excessive speculation and 
potential manipulation and (2) market liquidity by not favoring OTC or 
foreign markets over domestic markets. Additionally, (3) the Commission 
will discuss the costs and benefits related to the Final Rule's 
economically equivalent swap definition's treatment of natural gas 
swaps; and (4) the Commission will address the several proposed 
alternative definitions included in commenter letters.
    As discussed further below, with respect to exchange-set position 
limits on swaps, the Commission proposed to delay compliance with DCM 
Core Principle 5 and SEF Core Principle 6, as compliance would 
otherwise be impracticable, and, in some cases, impossible, at this 
time. In the 2020 NPRM, the Commission explained that this delay was 
based largely on the fact that exchanges cannot view positions in OTC 
swaps across the various places they are trading, including on 
competitor exchanges. The Commission is maintaining this approach to 
permit exchanges to delay compliance with respect to exchange-set 
position limits on swaps, although the Commission emphasizes, for the 
avoidance of doubt, that it will monitor and enforce swaps for 
compliance with Federal position limits subject to the compliance dates

[[Page 3414]]

discussed above.\1458\ However, the Commission notes that in two years, 
the Commission will reevaluate the ability of exchanges to establish 
and implement appropriate surveillance mechanisms to implement DCM Core 
Principle 5 and SEF Core Principle 6 with respect to swaps.
---------------------------------------------------------------------------

    \1458\ For discussion of the relevant compliance dates for the 
Final Rule, see supra Section I.D.
---------------------------------------------------------------------------

(1) Benefits and Costs Related to Market Integrity
    The Commission believes that the final economically equivalent swap 
definition benefits market integrity in two ways. First, the final 
definition protects against excessive speculation and potential market 
manipulation by limiting the ability of speculators to obtain excessive 
positions through netting. As explained above, under the Final Rule, 
market participants may net positions across linked referenced 
contracts, including positions across linked referenced contracts in 
economically equivalent swaps and futures.\1459\ Accordingly, a more 
inclusive ``economically equivalent'' definition that would encompass 
additional swaps (e.g., swaps that may differ in their ``material'' 
terms or physically-settled swaps with delivery dates that diverge by 
one day or more) could make it easier for market participants to 
inappropriately net down against their referenced futures contracts by 
allowing market participants to structure swaps that do not necessarily 
offer identical risk or economic exposure or sensitivity as the linked 
futures contract, but which could still be netted under the Final 
Rules. In such a hypothetical case, a market participant could enter 
into an OTC swap with a maturity that differs by days or even weeks in 
order to net down a position in a referenced contract, enabling the 
market participant to hold an even greater position in the referenced 
contract.
---------------------------------------------------------------------------

    \1459\ See supra Section II.B.10. (discussing netting).
---------------------------------------------------------------------------

    Similarly, applying Federal position limits to swaps that share 
identical ``material'' terms with their corresponding referenced 
contracts benefits market integrity by preventing market participants 
from escaping the position limits framework merely by altering non-
material terms, such as holiday conventions. On the other hand, the 
Commission recognizes that such a narrow ``economically equivalent 
swap'' definition could impose costs on the marketplace by possibly 
permitting excessive speculation since market participants would not be 
subject to Federal position limits if they were to enter into swaps 
that may have different material terms (e.g., penultimate swaps to the 
extent a penultimate futures contract or options contract does not 
exist to which a penultimate swap could possibly be deemed to be 
``economically equivalent'' and therefore subject to the applicable 
Federal position limits) \1460\ but may nonetheless be sufficiently 
correlated to their corresponding referenced contract. In this case, it 
is possible that there may be potential for excessive speculation, 
market manipulation, or it is possible that market participants could 
leave the futures markets for the swaps markets, which could introduce 
new costs to commercial market participants due to reduced market 
liquidity or disruptions to the price discovery function.\1461\ 
Nonetheless, to the extent that swaps currently are not subject to 
Federal position limit levels, such potential costs would remain 
unchanged compared to the status quo.
---------------------------------------------------------------------------

    \1460\ Or, in the case of natural gas referenced contracts, 
which would potentially include penultimate swaps as economically 
equivalent swaps, a swap with a maturity of less than one day away 
from the penultimate swap. See supra Sections II.A.4.iii.f. and 
II.B.3.vi. (discussing natural gas swaps).
    \1461\ The Commission acknowledges that liquidity could shift to 
penultimate swaps, which would impose costs on price discovery and 
market efficiency in the futures markets, in cases where there are 
no corresponding penultimate futures contracts or options contracts 
(and therefore the swap would not be deemed to be an economically 
equivalent swap), but the Commission believes that this concern is 
mitigated for two reasons. First, basis risk may exist between the 
penultimate swap and the referenced contract, and so the Commission 
believes that a market participant is less likely to hold a 
penultimate swap the greater the economic difference compared to the 
corresponding referenced contract. Second, the absence of 
penultimate futures contracts or options contracts may indicate lack 
of appropriate penultimate liquidity to hedge or offset one's 
penultimate swap position and therefore may militate against 
entering into penultimate swaps.
---------------------------------------------------------------------------

    Second, the relatively narrow final definition benefits market 
integrity, and reduces associated compliance and implementation costs, 
by permitting exchanges, market participants, and the Commission to 
focus resources on those swaps that pose the greatest threat for 
facilitating corners and squeezes--that is, those swaps with 
substantially identical delivery dates and identical material economic 
terms to futures and options on futures subject to Federal position 
limits. While swaps that have different material terms than their 
corresponding referenced contracts, including different delivery dates, 
may potentially be used for engaging in market manipulation, the final 
definition benefits market integrity by allowing exchanges and the 
Commission to focus on the most sensitive period of the spot month, 
including with respect to the Commission's and exchanges' various 
surveillance and enforcement functions. To the extent market 
participants would be able to use swaps that fall outside the scope of 
the final definition to effect market manipulation, such potential 
costs would remain unchanged from the status quo since no swaps are 
currently covered by existing Federal position limits. The Commission 
however acknowledges that its narrow economically equivalent swap 
definition may introduce possible burdens to market integrity--as the 
form of an opportunity cost--since fewer swaps are covered under the 
Federal position limits compared to the alternative in which the 
Commission adopted a broader definition.
    Further, the Final Rule's delayed compliance with respect to the 
establishment and enforcement of exchange-set limits on swaps benefits 
exchanges by facilitating exchanges' ability to establish surveillance 
and compliance systems. As noted above, exchanges currently lack 
sufficient data regarding individual market participants' open swap 
positions since exchanges cannot view positions in OTC swaps across the 
various places they are trading, including competitor exchanges, which 
means that requiring exchanges to establish oversight over market 
participants' positions currently could impose substantial costs and 
also may be impractical to achieve.\1462\
---------------------------------------------------------------------------

    \1462\ SIFMA AMG agrees with the Commission's assessment, 
stating that ``[s]ince the exchanges do not have visibility into OTC 
swaps markets, market participants and the CFTC would be responsible 
for implementing position limits on swaps without the benefit of the 
exchanges' extensive experience in monitoring and applying position 
limits for exchange-listed contracts.'' SIFMA AMG at 10.
---------------------------------------------------------------------------

    As a result, the Commission has determined that allowing exchanges 
delayed compliance with respect to swaps reduces unnecessary costs. 
Nonetheless, the Commission's determination to permit exchanges to 
delay implementing Federal position limits on swaps could incentivize 
market participants to leave the futures markets and instead transact 
in economically-equivalent swaps, which could reduce liquidity in the 
futures and related options markets. However, the Commission emphasizes 
that the Commission will oversee and enforce compliance with Federal 
position limits for economically equivalent swaps, which should 
mitigate the concern related to incentivizing futures contracts and 
related options on futures contracts to move trading and related 
liquidity to

[[Page 3415]]

the OTC swaps markets. With respect to exchange-set position limits on 
swaps, the Commission notes that in two years, the Commission will 
reevaluate the ability of exchanges to establish and implement 
appropriate surveillance mechanisms to implement position limits for 
economically equivalent swaps at the exchange level.\1463\
---------------------------------------------------------------------------

    \1463\ In response to the 2020 NPRM's proposal to permit 
exchanges to delay oversight and enforcement of exchanges' position 
limit rules on economically equivalent swaps, IATP stated that 
``[d]elaying compliance with position limit requirement [sic] to 
avoid imposing costs on market participants makes it appear that the 
Commission is serving as a swap dealer booster, although swap 
dealers are amply resourced to provide the necessary data to the 
exchanges and to the Commission. The Commission is bending over 
backward to avoid requiring swaps market participants from paying 
the costs of exchange trading.'' However, the Commission emphasizes 
that the Commission will still implement, oversee, and enforce 
Federal position limits on swaps. As a result, the proposed delayed 
enforcement of exchange-set position limits is designed to reduce 
costs imposed on exchanges rather than swap dealers, which will be 
subject to Federal position limits under the Final Rule.
---------------------------------------------------------------------------

    Additionally, while futures contracts and options thereon are 
subject to clearing and exchange oversight, economically equivalent 
swaps may be transacted bilaterally off-exchange (i.e., OTC swaps). As 
a result, it is relatively easy to create customized OTC swaps that may 
be highly correlated to its corresponding futures (or options) 
contract, which would allow the market participant to create an 
exposure in the underlying commodity similar to the referenced 
contract's exposure. Due to the relatively narrow ``economically 
equivalent swap'' definition, the Commission believes that it may be 
possible for market participants to attempt to avoid Federal position 
limits by entering into such OTC swaps.\1464\ While such swaps may not 
be perfectly correlated to their corresponding referenced contracts, 
market participants may find this risk acceptable in order to avoid 
Federal position limits. An increase in OTC swaps at the expense of 
futures contracts and options on futures contracts may impose costs on 
market integrity due to lack of exchange oversight. If liquidity were 
to move from futures exchanges to the OTC swaps markets, non-dealer 
commercial entities may face increased transaction costs and widening 
spreads, as swap dealers gain market power in the OTC market relative 
to centralized exchange trading. The Commission is unable to quantify 
the costs of these potential harms. However, while the Commission 
acknowledges these potential costs, such costs to those contracts that 
already have limits (including Federal and/or exchange-set position 
limits) on them already may have been realized in the marketplace 
because swaps are not subject to Federal position limits under the 
status quo.
---------------------------------------------------------------------------

    \1464\ In contrast, since futures contracts and options on 
futures contracts are created by exchanges and submitted to the 
Commission for either self-certification or approval under part 40 
of the Commission's regulations, a market participant would not be 
able to customize an exchange-traded futures contract or option on 
futures contract.
---------------------------------------------------------------------------

    Lastly, under the Final Rule, market participants are able to 
determine whether a particular swap satisfies the definition of 
``economically equivalent swap,'' as long as market participants make a 
reasonable, good faith effort in reaching their determination and are 
able to provide sufficient evidence, if requested, to support a 
reasonable, good faith effort.\1465\ The Commission anticipates that 
this flexibility will benefit market integrity by providing a greater 
level of certainty to market participants, in contrast to the 
alternative in which market participants would be required to first 
submit swaps to the Commission staff and wait for feedback or approval. 
On the other hand, the Commission also recognizes that not having the 
Commission explicitly opine on whether a swap would qualify as 
economically equivalent could cause market participants to avoid 
entering into such swaps.\1466\ In turn, this could lead to less 
efficient hedging strategies if the market participant is forced to 
turn to the futures markets (e.g., a market participant may choose to 
transact in the OTC swaps markets for various reasons, including 
liquidity, margin requirements, or simply better familiarity with ISDA 
and swap processes over exchange-traded futures). However, as noted 
below, the Commission reserves the right to declare whether a swap or 
class of swaps is or is not economically equivalent, and a market 
participant could petition, or request informally, that the Commission 
make such a determination, although the Commission acknowledges that 
there could be costs associated with this, including delayed timing and 
monetary costs.
---------------------------------------------------------------------------

    \1465\ See supra Section II.A.4.g (discussing market 
participants' discretion in determining whether a swap is 
economically equivalent). Regarding the obligations of swap dealers 
to monitor position limits, ISDA commented that the requirements 
imposed by Sec.  23.601 are burdensome and requested additional 
guidance regarding same. ISDA at 10. The Commission believes it is 
unnecessary to provide further detail with respect to Sec.  23.601 
because, as discussed above and in the preamble, the Commission will 
defer to a market participant's determination as long as the market 
participant is able to provide sufficient support to show that it 
made a reasonable, good faith effort in applying its discretion. 
Furthermore, the Commission is not adopting any amendments to Sec.  
23.601, so the baseline status quo in connection with Sec.  23.601 
is unchanged under the Final Rule. See supra Section II.A.4.g.
    \1466\ For example, NRECA believes that a standardized reference 
source to confirm whether a particular swap is subject to Federal 
position limits would benefit market participants: ``Because the 
Commission has determined not to codify its interpretations and 
other guidance, or to establish a single reference source for 
assistance in confirming `swap/not-a-swap' distinction, the two 
counterparties to a bilateral off-facility energy transaction must 
make the `swap/not-a-swap' determination without the benefit of 
standardized rules or product definitions. Although the terms of 
many off-facility, bilateral energy commodity transactions are 
highly-customized, other such transactions may be many iterations 
closer to futures contract `look-alikes,' that is, to referenced 
contracts. If such a transaction is (or may be) a `swap,' such a 
swap would then also need to be evaluated to determine whether it 
was `economically equivalent' under the Speculative Position Limits 
Rules.'' NRECA at 18; see also CEWG at 30-31.
---------------------------------------------------------------------------

    Further, the Commission recognizes that requiring market 
participants to conduct reasonable due diligence and maintain related 
records also could impose new compliance costs. Additionally, the 
Commission recognizes that certain market participants could assert 
that an OTC swap is (or is not) ``economically equivalent'' depending 
upon whether such determination benefits the market participant. In 
such a case, market participants could theoretically subvert the intent 
of the Federal position limits framework, although the Commission 
believes that such potential costs would be mitigated due to the 
Commission's surveillance functions and authority to declare that a 
particular swap or class of swaps either does or does not qualify as 
economically equivalent.
(2) The Final Definition Could Increase Benefits or Costs Related to 
Market Liquidity and Price Discovery
    First, the final economically equivalent swap definition could 
benefit market liquidity by being, in general, less disruptive to the 
swaps markets, which in turn may reduce the potential for disruption 
for the price discovery function compared to a possible alternative, 
broader definition. For example, if the Commission were to adopt an 
alternative to its final ``economically equivalent swap'' definition 
that encompassed a broader range of swaps by including, for example, 
delivery dates that diverge by one or more calendar days--perhaps by 
several days or weeks--a market participant (including speculators) 
with a large portfolio of swaps could more easily bump up against the 
applicable position limits and therefore would have an incentive either 
to reduce its

[[Page 3416]]

swaps activity or move its swaps activity to foreign jurisdictions. If 
there were many similarly situated market participants, the market for 
such swaps could become less liquid, which in turn could harm liquidity 
for bona fide hedgers as large liquidity providers could move to other 
markets.
    Second, the final definition could benefit market liquidity by 
being sufficiently narrow to reduce incentives for liquidity providers 
to move to foreign jurisdictions, such as the European Union 
(``EU'').\1467\ Additionally, the Commission believes that proposing a 
definition similar to that used by the EU will benefit international 
comity.\1468\ Further, market participants trading in both U.S. and EU 
markets would find the final definition to be familiar, which may help 
reduce compliance costs for those market participants that already have 
systems and personnel in place to identify and monitor such swaps. As 
discussed by SIFMA AMG, ``[m]any market participants are active in 
markets and products that are regulated by the CFTC and EU authorities. 
Having different definitions would be costly for firms, since they 
would have to build out different compliance functions, and inefficient 
for markets.'' \1469\ As noted above, any differences between the Final 
Rule's ``economically equivalent swap'' and the EU's corresponding 
definition by the addition of the ``material'' qualifier should lead to 
the benefits identified in the above discussion, along with the 
corresponding costs.
---------------------------------------------------------------------------

    \1467\ In this regard, the final definition is similar in 
certain ways to the EU definition for OTC contracts that are 
``economically equivalent'' to commodity derivatives traded on an EU 
trading venue. The applicable European regulations define an OTC 
derivative to be ``economically equivalent'' when it has ``identical 
contractual specifications, terms and conditions, excluding 
different lot size specifications, delivery dates diverging by less 
than one calendar day and different post trade risk management 
arrangements.'' While the Commission's final definition is similar, 
the Commission's final definition requires ``identical material'' 
terms rather than simply ``identical'' terms. Further, the 
Commission's final definition excludes different ``lot size 
specifications or notional amounts'' rather than referencing only 
``lot size'' since swaps terminology usually refers to ``notional 
amounts'' rather than to ``lot sizes.'' See EU Commission Delegated 
Regulation (EU) 2017/591, 2017 O.J. (L 87).
    \1468\ Both the Commission's definition and the applicable EU 
regulation are intended to prevent harmful netting. See European 
Securities and Markets Authority, Draft Regulatory Technical 
Standards on Methodology for Calculation and the Application of 
Position Limits for Commodity Derivatives Traded on Trading Venues 
and Economically Equivalent OTC Contracts, ESMA/2016/668 at 10 (May 
2, 2016), available at https://www.esma.europa.eu/sites/default/files/library/2016-668_opinion_on_draft_rts_21.pdf (``[D]rafting the 
[economically equivalent OTC swap] definition in too wide a fashion 
carries an even higher risk of enabling circumvention of position 
limits by creating an ability to net off positions taken in on-venue 
contracts against only roughly similar OTC positions.'')
    The applicable EU regulator, the European Securities and Markets 
Authority (``ESMA''), recently released a ``consultation paper'' 
discussing the status of the existing EU position limits regime and 
specific comments received from market participants. According to 
ESMA, no commenter, with one exception, supported changing the 
definition of an economically equivalent swap (referred to as an 
``economically equivalent OTC contract'' or ``EEOTC''). ESMA further 
noted that for some respondents, ``the mere fact that very few EEOTC 
contracts have been identified is no evidence that the regime is 
overly restrictive.'' See European Securities and Markets Authority, 
Consultation Paper MiFID Review Report on Position Limits and 
Position Management Draft Technical Advice on Weekly Position 
Reports, ESMA70-156-1484 at 46, Question 15 (Nov. 5, 2019), 
available at https://www.esma.europa.eu/document/ consultation-
paper-position-limits.
    \1469\ SIFMA AMG at 6-7.
---------------------------------------------------------------------------

(3) The Final Definition Could Create Costs or Benefits Related to 
Market Liquidity for the Natural Gas Market
    SIFMA AMG commented that ``financially-settled penultimate day 
expiry products in natural gas should be excluded from limits to the 
same extent as penultimate day expiry contracts for each of the other 
24 core referenced futures contracts. To introduce a change from 
existing exchange practice (under which these financially-settled 
penultimate day contracts are out of scope) could introduce an 
otherwise avoidable disruption to trading during the closing days of 
the natural gas contract month, with no corresponding benefits to 
market oversight or integrity.'' \1470\
---------------------------------------------------------------------------

    \1470\ SIFMA AMG at 11. For the purpose of this comment, even 
though SIFMA AMG refers generally to ``financially-settled 
penultimate'' contracts in natural gas, the Commission assumes it is 
referring to penultimate cash-settled economically equivalent swaps 
since penultimate futures contracts and options on futures contracts 
are included under the ``referenced contract'' definition.
---------------------------------------------------------------------------

    As discussed in greater detail in the preamble, the Commission 
recognizes that the market dynamics in natural gas are unique in 
several respects, including the fact that unlike with respect to other 
core referenced futures contracts, for natural gas, relatively liquid 
spot-month and penultimate cash-settled futures exist.\1471\ However, 
in contrast to SIFMA AMG's comment, the Commission has determined that 
creating an exception to the proposed ``economically equivalent swap'' 
definition for natural gas benefits market liquidity by not 
unnecessarily favoring existing natural gas penultimate contracts over 
spot contracts. The Commission is especially sensitive to potential 
market manipulation in the natural gas markets since market 
participants--to a significantly greater extent compared to the other 
core referenced futures contracts that are included in the Final Rule--
regularly trade in both the physically-settled core referenced futures 
contract and the cash-settled look-alike referenced contracts that are 
penultimate contracts. Accordingly, the Commission has concluded that a 
slightly broader definition of ``economically equivalent swap'' to 
encompass penultimate natural gas swaps uniquely benefits the natural 
gas markets by helping to deter and prevent manipulation of a 
physically-settled contract to benefit a related cash-settled contract, 
including penultimate positions.
---------------------------------------------------------------------------

    \1471\ See supra Section II.A.4.iii.f. (discussing economically 
equivalent natural gas swaps).
---------------------------------------------------------------------------

(4) Alternatives to the ``Economically Equivalent Swap'' Definition
    Several commenters provided alternative approaches to the 2020 
NPRM's proposed ``economically equivalent swap'' definition.
    First, SIFMA AMG argued that the Commission should not impose 
Federal position limits on swaps at all, and that the proposed Federal 
position limits were ``unnecessary and would in fact impose cost 
burdens . . . that are not commensurate with any of the suggested 
benefits . . . .'' \1472\ Similarly, CHS stated that ``[t]here is 
little doubt, from CHS's perspective, that including economically 
equivalent swaps as `referenced contracts' for position limit purposes 
will result in a material burden for (a) commercial end-users and (b) 
small to mid-sized FCMs that focus on the needs of grain and energy 
hedgers, which are referred to as `Commodity-Focused FCMs'. The costs 
of compliance on such participants will likely be large and time-
consuming, and possibly entail some risk of operational error arising 
out of the implementation process.'' \1473\
---------------------------------------------------------------------------

    \1472\ SIFMA AMG at 6-7. Additional commenters similarly argued 
that subjecting swaps to position limits is unnecessary and would 
increase costs without commensurate benefits. E.g., CHS at 5; NCFC 
at 5; and ISDA at 5.
    \1473\ CHS at 4. See also NCFC at 5 (similarly stating that 
``[t]he costs of compliance on such participants will likely be 
large and time-consuming, and possibly entail some risk of 
operational error arising out of the implementation process.''). CHS 
further stated, ``[w]ith respect to commercial end-users, absent 
additional Commission guidance CHS believes that the burdens will 
take the form of (a) determining which types of swaps will be deemed 
to be economically equivalent swaps, (b) making significant and 
costly modifications to systems to identify and track transactions 
for reporting purposes, (c) developing tools for swaps aggregation 
purposes (or manually conducting such tasks if such a tool is not 
readily available to be interpolated into existing systems) and (d) 
determining intra-day positions when addressing economically 
equivalent swaps, which will require real-time system reporting and 
real-time exception alerts, among other things . . . . In these 
respects, CHS asks the Commission to be mindful and more fully 
address the costs and benefits applicable to commercial end-users 
and Commodity-Focused FCMs, and to provide more clarity regarding 
the scope of referenced contracts. As a guide, CHS urges the 
Commission to maintain as narrow a definition of `referenced 
contract' as possible. CHS also urges the Commission, both in the 
context of market participants generally and commercial end-users 
and Commodity-Focused FCMs particularly, to address CHS's 
recommendations in the following section.'' Id. at 4-5. NCFC 
similarly stated that ``NCFC believes any Federal speculative 
position limits rule should not unduly burden commercial end-users 
who utilize derivatives markets for economically appropriate risk 
management activities.'' NCFC at 7.

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

[[Page 3417]]

    However, as discussed above, the Dodd-Frank Act added CEA section 
4a(a)(5), which explicitly requires that the Commission impose Federal 
position limits on swaps that are ``economically equivalent'' to the 
futures contracts and options on futures contracts subject to Federal 
position limits, and that the Commission establish limits 
simultaneously for ``economically equivalent'' swaps. Accordingly, from 
the perspective of this cost-benefit discussion, the question is not 
whether the Final Rule should encompass swaps at all, but only the 
extent to which swaps should be incorporated as ``economically 
equivalent'' pursuant to CEA section 4a(a)(5). Nonetheless, the 
Commission recognizes that subjecting economically equivalent swaps to 
Federal position limits could impose the compliance costs referenced 
above by CHS and others. However, to the extent that the Final Rule 
adopts a narrow ``economically equivalent swap'' definition, the 
Commission anticipates these costs should be mitigated compared to 
alternative definitions, while simultaneously satisfying the statutory 
requirement under CEA section 4a(a)(5).
    Second, CME and Better Markets both suggested that the general 
``referenced contract'' definition that applies to futures contracts 
and options on futures contracts should also apply to swaps, rather 
than the narrower ``economically equivalent swap'' definition. 
Similarly, NEFI argued that the narrower ``economically equivalent 
swap'' definition could allow for easy avoidance of Federal position 
limits.\1474\ The Commission discusses the possible costs and benefits 
of the Final Rule's narrow definition versus this proposed alternative 
of a broader definition throughout this cost-benefit discussion of 
economically equivalent swaps, and the reasons discussed by the 
Commission throughout this section similarly apply in response to 
CME's, Better Markets', and NEFI's proposed alternative to establish a 
broader ``economically equivalent swap'' definition.
---------------------------------------------------------------------------

    \1474\ NEFI at 3.
---------------------------------------------------------------------------

    Third, SIFMA AMG argued that while it opposed including swaps 
within the Final Rule, to the extent the Commission determines to 
include swaps within the Final Rule, that, in the alternative, at least 
cash-settled swaps should be excluded from the economically equivalent 
swap definition since these types of swaps ``have not historically been 
the source of manipulative corners, squeezes, or other disruptions 
related to physical commodity prices, and SIFMA AMG does not believe 
limits on these products would be necessary to further deter and 
prevent this type of trading activity.'' \1475\
---------------------------------------------------------------------------

    \1475\ SIFMA AMG at 7. SIFMA AMG further argued that ``imposing 
spot month limits only on physically-settled futures contracts would 
avoid such confusion, and more importantly, would adequately address 
the products of greatest concern and would serve to reduce 
compliance costs and related burdens (i.e., technology builds, 
personnel allocation, training, etc.) for the Commission and market 
participants by allowing the Commission to observe the impact of 
limits for physically-settled futures prior to evaluating whether to 
extend limits to a broader scope of derivatives products.'' SIFMA 
AMG at 5-6.
    PIMCO and ISDA similarly argue that neither cash-settled swaps 
nor futures contracts should be subject to position limits. PIMCO at 
3; ISDA at 5 (arguing that position limits on cash-settled 
referenced contracts, whether futures contracts or swaps, ``impose a 
level of cost and complexity in implementation that does not 
correspond to any identified regulatory or policy benefit of such 
limits.'') AQR similarly argued that the ``opportunity or ability to 
use a swap to squeeze or corner an underlying physical commodity is 
extremely remote and thus extension of position limits to swaps 
would likely not be merited based on an analysis of the costs and 
benefits of such action.'' AQR at 10.
---------------------------------------------------------------------------

    However, the Commission believes that SIFMA AMG's proposed 
alternative to exclude all cash-settled swaps ex ante would impose 
liquidity costs for bona fide hedgers since excluding all cash-settled 
swaps could incentivize liquidity to move from corresponding cash-
settled referenced contracts to cash-settled OTC swaps, potentially 
harming the liquidity in the futures markets, including liquidity for 
bona fide hedgers. This could also harm price discovery if significant 
liquidity and trading migrates from the exchange-traded futures markets 
to the more opaque OTC swaps markets. For example, as noted above, if 
liquidity were to move from futures exchanges to the OTC swaps markets, 
non-dealer commercial entities may face increased transaction costs and 
widening spreads, as swap dealers gain market power in the OTC market 
relative to centralized exchange trading. The Commission is unable to 
quantify the costs of these potential harms.\1476\
---------------------------------------------------------------------------

    \1476\ However, while the Commission acknowledges these 
potential costs, such costs to the nine legacy agricultural 
contracts may already have been realized because their corresponding 
swaps are not subject to Federal position limits under the status 
quo. Nonetheless, the Commission also recognizes that certain of the 
16 non-legacy core referenced futures contracts that would be 
subject to Federal position limits for the first time under the 
Final Rule may have larger, more liquid swaps markets than the nine 
legacy agricultural contracts, and therefore potentially larger 
concomitant benefits and/or costs.
---------------------------------------------------------------------------

    Furthermore, the Commission notes that CEA section 4a(a)(3) does 
not merely refer to corners and squeezes, but also refers to 
``manipulation'' generally. Accordingly, the Commission believes that 
the Final Rule will better benefit market integrity to the extent that 
cash-settled swaps would be subject to the Final Rule by helping to 
prevent other forms of manipulation, such as ``banging'' or ``marking'' 
the close.
    Fourth, in contrast to the alternative posited by SIFMA AMG 
immediately above in which the Commission would exclude all cash-
settled swaps, Better Markets believed that the Final Rule's exclusion 
of certain cash-settled swaps could actually impose costs on liquidity 
formation. Better Markets thus proposed an alternative where settlement 
type (i.e., cash-settled versus physically-settled) was not considered 
to be a ``material'' difference and therefore cash-settled swaps could 
be deemed to be ``economically equivalent'' to core referenced futures 
contracts, which are all physically-settled. Better Markets argued that 
the 2020 NPRM's economically equivalent definition ``essentially 
excludes'' cash-settled swaps from Federal position limits because 
cash-settled swaps would not be able to qualify as economically 
equivalent to a physically-settled core referenced futures 
contract.\1477\ As Better Markets commented, distinguishing between 
cash-settled and physically-settled swaps and futures contracts by 
deeming settlement type (i.e., cash-settled vs. physically-settled 
settlement) to be a material term would ``incentivize[ ] speculative 
liquidity formation away from more liquid, more transparent, and more 
restrictive futures exchanges and to the swaps markets.'' \1478\
---------------------------------------------------------------------------

    \1477\ Better Markets at 32.
    \1478\ Id.
---------------------------------------------------------------------------

    However, the Commission does not believe that the treatment of 
cash-settled swaps under the Final Rule imposes such costs, at least to 
the extent assumed by Better Markets. The

[[Page 3418]]

Commission believes Better Markets' concern is mitigated since under 
the Final Rule cash-settled swaps are subject to Federal position 
limits only if there is a corresponding (i.e., ``economically 
equivalent'') cash-settled futures contract or option on a futures 
contract.\1479\ That is, cash-settled swaps are free from Federal 
position limits if there are no corresponding cash-settled futures 
contracts or options on futures contracts. In these situations, if no 
corresponding futures contract or option thereon exists, then there is 
no liquidity formation in cash-settled futures contracts and options on 
futures contracts with which a cash-settled swap would be competing for 
liquidity in the first place.\1480\
---------------------------------------------------------------------------

    \1479\ The Commission notes that a swap could be deemed to be 
``economically equivalent'' to any referenced contract, including 
cash-settled look-alikes, and that the ``economically equivalent 
swap'' definition is not limited to core referenced futures 
contracts.
    \1480\ In contrast to Better Markets, AQR noted that any 
``extension of position limits to swaps risks negatively impacting 
commercial hedgers by reducing market liquidity, increasing 
transaction costs, and increasing commodity market volatility. While 
the Commission cannot entirely avoid those risks if compelled to 
impose such limits, the proposed approach to economically equivalent 
swaps may mitigate them in ways that allow the Commission to fully 
discharge its statutory obligation without unnecessarily restricting 
market activity.'' AQR at 11.
---------------------------------------------------------------------------

    Fifth, FIA proposed an alternative in which cash-settled 
economically equivalent swaps would be subject to a separate (higher) 
Federal spot-month position limit levels compared to their 
corresponding referenced contracts, and FIA argued that its proposed 
alternative would benefit innovation and competition between 
exchanges.\1481\ However, the Commission believes that establishing 
separate (or higher) position limits for economically equivalent swaps 
could impose liquidity costs and burden market integrity and price 
discovery.
---------------------------------------------------------------------------

    \1481\ FIA at 7-8. The Commission generally addresses FIA's 
argument about innovation and competition in the preamble above 
under Section II.B.10.v.
---------------------------------------------------------------------------

    In particular, separate position limits for cash-settled swaps 
would make it easier for potential manipulators to engage in market 
manipulation, such as ``banging'' or ``marking'' the close, by 
effectively permitting higher Federal position limits in cash-settled 
referenced contracts. For example, a market participant would be able 
to double its cash-settled positions by maintaining positions in both 
cash-settled futures and cash-settled economically equivalent swaps 
since under FIA's proposed alternative positions in each contract type, 
that is futures contracts (including options thereon) and swaps, would 
be subject to their own separate position limits for purposes of 
Federal position limits.
    Furthermore, imposing position limits separately on economically 
equivalent swaps and futures contracts (and options thereon) as 
requested under FIA's proposed alternative would mean that market 
participants would not be able to net their economically equivalent 
swaps with their futures positions. In contrast, the absence of 
separate Federal position limits for economically equivalent swaps 
means that market participants are able to net economically equivalent 
swaps with other referenced contracts, i.e., futures contracts against 
swaps. The Commission also recognizes that netting could permit larger 
speculative positions in futures markets for market participants who 
did not previously have bona fide hedge exemptions, but who have 
positions in swaps in the same commodity that could be netted against 
futures contracts in the same commodity. This observation might seem to 
be at cross-purposes with the relatively narrow ``economically 
equivalent swap'' definition. However, the Commission is concerned that 
separate position limits for swaps could impair liquidity in futures 
contracts or swaps, as the case may be. For example, a market 
participant (including a market maker or speculator) with a large 
portfolio of swaps (or futures contracts) near the applicable position 
limit would be assumed to have a strong preference for executing 
futures contracts (or swaps) transactions in order to maintain a swaps 
(or futures contracts) position below the applicable position limit. If 
there were many similarly situated market participants, the market for 
such swaps (or futures contracts) could become less liquid, which could 
burden market efficiency and impose higher trading costs for bona fide 
hedgers. The absence of separate position limits for swaps should 
decrease the possibility of illiquid markets for referenced contracts 
subject to Federal position limits. Because economically equivalent 
swaps and the corresponding futures contracts and options on futures 
contracts are close substitutes for each other, the absence of separate 
position limits should allow greater integration between the 
economically equivalent swaps and corresponding futures and options 
markets for referenced contracts, which should benefit price discovery, 
and should also provide market participants with more flexibility 
whether hedging, providing liquidity or market making, or speculating, 
which should benefit market efficiency and price discovery.
    Sixth, COPE alternatively requested that the Commission explicitly 
exclude physically-settled swaps, or at least provide specific examples 
of the contracts intended to be included.\1482\ While the Commission 
provides greater clarity in the corresponding preamble discussion 
above,\1483\ the Commission has determined that excluding all 
physically-settled swaps ex ante is inconsistent with the statutory 
goals in CEA section 4a(a)(3)(B), especially the requirements to deter 
corners and squeezes and to ensure sufficient market liquidity for bona 
fide hedgers enumerated in CEA section 4a(a)(3)(B)(ii) and (iii), 
respectively. For example, excluding physically-settled swaps could 
potentially incentivize liquidity to move from physically-settled core 
referenced futures contracts to physically-settled swaps, which could 
impose costs both on market liquidity for bona fide hedgers and also on 
market integrity by enabling potential manipulators to accumulate large 
directional positions in physically-settled contracts to effect a 
corner and squeeze more easily. This could additionally harm price 
discovery as liquidity and trading would move from the more transparent 
exchange-traded futures contracts and options thereon to the more 
opaque OTC swaps markets.
---------------------------------------------------------------------------

    \1482\ COPE at 4-5.
    \1483\ See Section II.A.4.iii.d(1).
---------------------------------------------------------------------------

    Seventh, NCFC stated that it ``appreciate[s] that CFTC proposed a 
narrow definition of an economically equivalent swap under a Federal 
position limits regime. Likewise, we do not object to an inclusion of 
such swaps in theory since our members use them for legitimate hedging 
purposes. However, NCFC continues to be concerned with the operational 
difficulties, burdens, and costs for commercial end users and small- to 
mid-sized FCMs that focus on the needs of agricultural hedgers of 
including swaps for position limit purposes. The costs of compliance on 
such participants will likely be large and time-consuming, and possibly 
entail some risk of operational error arising out of the implementation 
process.'' \1484\ As a result, NCFC suggested, as an alternative to the 
2020 NPRM's approach, that the Final Rule exclude from a commercial 
end-user's Federal position limits those agricultural commodity swaps 
that are transacted by invoking the ``End-User Exemption to Mandatory 
Clearing'' rule.\1485\

[[Page 3419]]

According to NCFC, those swap contracts already must meet the test ``to 
hedge or mitigate commercial risk,'' and are ``not used for a purpose 
that is in the nature of speculation, investing, or trading,'' as 
outlined in Sec.  50.50 of the Commission's regulations, and therefore, 
by definition, these contracts should not be subject to end-user 
Federal speculative position limits.\1486\
---------------------------------------------------------------------------

    \1484\ NCFC at 5.
    \1485\ Id.
    \1486\ Id.
---------------------------------------------------------------------------

    The Commission understands NCFC's concern, but believes NCFC's 
alternative is unnecessary for two reasons. First, to the extent a swap 
described by NCFC would ``hedge or mitigate commercial risk,'' the 
Commission believes that the costs described by NCFC are mitigated 
since such swap likely would qualify for an enumerated bona fide hedge 
under the Final Rule and therefore would not contribute to a commercial 
end-user's net position for Federal position limits purposes.\1487\ 
Second, the Commission believes the purported benefits related to 
NCFC's alternative are limited since physical commodity swaps are not 
required to be cleared under the Commission's existing regulations, so 
determining whether the end-user clearing exemption applies is not 
necessarily a helpful proxy in determining whether a swap is 
``economically equivalent'' or not for purposes of CEA section 
4a(a)(5).
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    \1487\ To the extent an FCM would not be able to qualify for a 
bona fide hedge, the Commission believes that excepting such swaps 
for purely financial firms would functionally have the same effect 
as maintaining the risk-management exemption, which Congress, 
through the Dodd-Frank Act's amendments to the CEA, has directed the 
Commission to eliminate. See Section II.A.4.iii. Nonetheless, to the 
extent that NCFC's comment is limited to small- and medium-sized 
FCMs, the Commission does not believe that such FCMs generally will 
violate the Federal position limit levels based on the Commission's 
understanding of existing market dynamics and positions held by 
market participants under the status quo, and therefore costs should 
be comparatively mitigated for small- and medium-sized FCMs.
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vii. Pre-Existing Positions
    Final Sec.  150.2(g) imposes Federal position limits on ``pre-
existing positions'' \1488\--other than pre-enactment swaps and 
transition period swaps--during both the spot month and non-spot month.
---------------------------------------------------------------------------

    \1488\ Final Sec.  150.1 defines ``pre-existing position'' to 
mean ``any position in a commodity derivative contract acquired in 
good faith prior to the effective date'' of any applicable position 
limit.
---------------------------------------------------------------------------

    The Commission believes that final Sec.  150.2(g) benefits market 
integrity since pre-existing positions (other than pre-enactment and 
transition period swaps) that exceed spot-month limits could result in 
market or price disruptions as positions are rolled into the spot 
month.\1489\ The Commission recognizes some costs and benefits 
associated with final Sec.  150.2(g)(2) may have already been realized 
given that the nine legacy agricultural contracts are already subject 
to the Federal non-spot month position limits. Therefore, exchanges and 
market participants should not incur any significant new costs to 
comply with Sec.  150.2(g)(2), and will likely continue to benefit from 
market integrity as a result of the Final Rule.
---------------------------------------------------------------------------

    \1489\ The Commission is particularly concerned about protecting 
the spot month in physical-delivery futures from corners and 
squeezes.
---------------------------------------------------------------------------

    In response to the 2020 NPRM, FIA and MGEX suggested that the 
Commission alternatively restructure the provision to include just two 
categories, ``pre-existing swaps'' and ``pre-existing futures,'' 
because the variability of exemptive relief could create operational 
challenges for market participants.'' \1490\ Although the Commission 
did not adopt the terms ``pre-existing swaps'' and ``pre-existing 
futures'' for the Final Rule as FIA and MGEX suggested, the practical 
effect is that final Sec.  150.2(g) creates two categories--(1) pre-
existing futures contracts (including options thereon), which are 
subject to both the spot month and non-spot month Federal position 
limits; and (2) pre-existing swaps, which are not subject to such 
limits. Furthermore, to offset the operational challenges or other 
burdens associated with final Sec.  150.2(g), the Commission is 
delaying the compliance date to January 1, 2022 in connection with the 
Federal position limits for the 16 non-legacy core referenced futures 
contracts, and further delaying the compliance date to January 1, 2023 
for swaps that are subject to Federal position limits under the Final 
Rule.
---------------------------------------------------------------------------

    \1490\ FIA at 8-9; MGEX at 4.
---------------------------------------------------------------------------

viii. Anti-Evasion
    Final Sec.  150.2(i) provides that, if used to willfully circumvent 
or evade speculative position limits: (1) A commodity index contract, 
monthly average pricing contract, outright price reporting contract, 
and/or a location basis contract will be considered to be a referenced 
contract; (2) a bona fide hedging transaction or position recognition 
or spread exemption will no longer apply; and (3) a swap will 
considered to be an economically equivalent swap even if it does not 
meet the economically equivalent swap definition set forth in Sec.  
150.1. This provision serves to deter and prevent a number of potential 
methods of evading Federal position limits, the specifics of which the 
Commission may not be able to anticipate. Like the Federal position 
limits it supports, Sec.  150.2(i) helps to protect market integrity by 
preventing excessive speculation and market manipulation. However, the 
Commission also recognizes possible costs to market participants due to 
uncertainty under the Final Rule's anti-evasion provision since it may 
be difficult for market participants to determine, as a bright-line 
matter, whether their positions and trading strategies represent 
legitimate avoidance of position limits or instead represent malfeasant 
evasive practices.\1491\ As a result, the lack of a bright-line 
standard could potentially impose liquidity costs as market 
participants may instead choose to engage in less efficient trading 
strategies in order to err cautiously to avoid engaging in potentially 
``evasive'' behavior.
---------------------------------------------------------------------------

    \1491\ SIFMA AMG at 7, n.16 (noting that the anti-evasion 
provision makes the application of the proposed ``economically 
equivalent swap'' definition less clear because it incorporates a 
subjective measure of intent); see also FIA at 25 (questioning how a 
participant would distinguish a strategy that minimizes position 
size with an evasive strategy); Better Markets at 33 (describing the 
anti-evasion provision as a ``useful deterrent,'' but noting that 
the willful circumvention standard would be difficult to meet and 
partially turns on the Commission's consideration of the legitimate 
business purpose analysis).
---------------------------------------------------------------------------

    As an alternative to the ``willfully'' standard, FIA recommended 
that the anti-evasion analysis be based on the presence of ``deceit, 
deception, or other unlawful or illegitimate activity.'' \1492\ Because 
a position that does not involve fraud or deceit can still involve 
other indicia of evasive activity, the proposed alternative would be 
less effective in protecting market integrity to the extent it failed 
to capture evasive activity. Further, the incorporation of a standard 
other than ``willful'' would create confusion to market participants by 
resulting in divergent standards among Commission rulemakings 
concerning evasion.
---------------------------------------------------------------------------

    \1492\ FIA at 25-26.
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4. Exemptions From Federal Position Limits--Bona Fide Hedging 
Recognitions, Spread and Other Exemptions (Final Sec. Sec.  150.1 and 
150.3)
i. Background
    The Final Rule provides for several exemptions that, subject to 
certain conditions, permit a trader to exceed the applicable Federal 
position limit set forth in final Sec.  150.2. Specifically, Sec.  
150.3 generally maintains but modifies, as discussed below, the two 
existing Federal exemptions that include (1) bona fide hedging 
positions and (2) spread positions. Final Sec.  150.3 also includes new 
Federal exemptions

[[Page 3420]]

for certain conditional spot month positions in natural gas, financial 
distress positions, and pre-enactment and transition period swaps. 
Final Sec.  150.1 sets forth the definitions for which positions may 
qualify as a ``bona fide hedging transaction or position'' and for 
``spread transaction.'' \1493\
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    \1493\ The Commission currently defines this term in existing 
Sec.  1.3 in the plural as ``bona fide hedging transactions or 
positions'' while the Final Rule defines it in the singular ``bona 
fide hedging transaction or position.'' See supra Section I.E. 
(discussing use of certain terminology). This discussion sometimes 
refers to the ``bona fide hedging transaction or position'' 
definition as ``bona fide hedges,'' ``bona fide hedging,'' or ``bona 
fide hedge positions.'' For the purpose of this discussion, the 
terms have the same meaning.
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ii. Bona Fide Hedging Definition; Enumerated Bona Fide Hedges; and 
Guidance on Spot Month Hedge Exemption Restrictions and Measuring Risk
    The Commission is adopting several amendments to the bona fide 
hedge definition. First, the Commission is revising some of the general 
elements of the ``bona fide hedging transaction or position'' 
definition in final Sec.  150.1 to conform the Commission's regulatory 
definition to the statutory bona fide hedge definition in CEA section 
4a(c), as amended by Congress in the Dodd-Frank Act. As discussed in 
greater detail in the preamble, the Final Rule (1) revises the 
temporary substitute test, consistent with the Commission's 
understanding of the Dodd-Frank Act's amendments to section 4a of the 
CEA, to no longer recognize as bona fide hedges certain risk management 
positions; (2) revises the economically appropriate test to make 
explicit that the position must be economically appropriate to the 
reduction of ``price risk''; and (3) eliminates the incidental test and 
orderly trading requirement, which the Dodd-Frank Act did not include 
in section 4a of the CEA. The Commission believes that these amendments 
to the existing general elements of the regulatory definition include 
non-discretionary changes that are required by Congress's amendments to 
section 4a of the CEA, or in the case of the incorporation of ``price 
risk,'' do not represent a change from the status quo baseline. The 
Commission is also amending the bona fide hedge definition to conform 
to the CEA's statutory definition, by adding a provision for positions 
that qualify as pass-through swaps and pass-through swap offsets.\1494\
---------------------------------------------------------------------------

    \1494\ As discussed in Section II.A.--Sec.  150.1--Definitions 
of the preamble, the existing definition of ``bona fide hedging 
transactions and positions'' appears in existing Sec.  1.3 of the 
Commission's regulations; the revised definition of this term, in 
singular form, now appears in Sec.  150.1.
---------------------------------------------------------------------------

    Second, the Commission is maintaining the distinction between 
enumerated and non-enumerated bona fide hedges but is (1) moving the 
location of the enumerated bona fide hedges, which will remain part of 
the regulatory text, from the existing definition of ``bona fide 
hedging transactions and positions'' currently found in Commission 
regulation Sec.  1.3 to final Appendix A in part 150; \1495\ and (2) 
expanding the list of enumerated hedges, which will continue to be 
self-effectuating for Federal position limit purposes, thereby not 
requiring prior Commission approval.
---------------------------------------------------------------------------

    \1495\ For the avoidance of doubt, Appendix A will still be 
incorporated as part of the Commission's regulations under the Final 
Rule. In contrast, the 2020 NPRM had proposed to make Appendix A 
Acceptable Practices.
---------------------------------------------------------------------------

    Third, the Commission is proposing guidance in Appendix B with 
respect to (i) whether an entity may measure risk on a net or gross 
basis for purposes of determining its bona fide hedge positions, and 
(ii) factors exchanges could consider when applying a restriction on an 
exemption against holding a position under a bona fide hedge or spread 
transaction exemption in excess of limits during the lesser of the last 
five days of trading or the time period for the spot month in a 
physically-delivered contract, or otherwise limit the size of such 
position.
    The Commission expects that these modifications related to bona 
fide hedging will primarily benefit physical commodity commercial 
market participants, as well as their counterparties. CEA section 
4a(c)(1) directs the Commission to exclude bona fide hedge positions 
from any Federal position limits framework. Further, the Commission 
believes that, generally, recognizing bona fide hedges supports all 
section 15(a) factors under this cost-benefit discussion. For example, 
recognizing bona fide hedges encourages participation in the futures 
markets by commercial market participants.\1496\ Increasing 
participation from different types of market participants, including 
commercial market participants: (i) protects the legitimate commercial 
activity of cash-market participants,\1497\ (ii) increases 
competitiveness, and (iii) supports the financial integrity of futures 
markets. Further, increased participation and competitiveness will 
benefit price discovery. Finally, an expanded list of enumerated bona 
fide hedges supports sound risk management practices by commercial 
market participants and their counterparties, which may result in 
indirect benefits to commodity end users or the public.\1498\
---------------------------------------------------------------------------

    \1496\ NFPEA at 6 (stating that ``Congress intended the 
Commission to protect end-users' continued access to cost-effective 
commercial risk management tools, and did not intend to burden end-
users with unnecessary regulatory compliance obligations'').
    \1497\ AGA expressed its support of an expanded list of 
enumerated hedges by stating that, ``consistent with the mandate of 
the CEA, any speculative position limits regime adopted by the CFTC 
must be established in a way that allows commercial end-users, such 
as natural gas utilities, to continue to enter into bona fide hedges 
to manage, hedge and mitigate the commercial risks of their natural 
gas distribution business in a non-burdensome and cost-effective 
manner on behalf of customers.'' AGA at 2.
    \1498\ In expressing overall support for the proposed definition 
of bona fide hedging transaction or position in the 2020 NPRM, CME 
Group noted that the Commission's recognition of a wider range of 
commercial hedging practices generally reflects Congress's intent 
not to unduly burden bona fide hedgers. CME Group at 9.
---------------------------------------------------------------------------

    Recognizing an expanded list of enumerated bona fide hedges, which 
are self-effectuating and do not require prior approval from the 
Commission, will mitigate related compliance costs for those contract 
markets that will be newly subject to Federal position limits under the 
Final Rule. This is in comparison to an alternative scenario in which a 
narrow set of available enumerated hedges would have required market 
participants to obtain prior approval before availing themselves of an 
exemption for Federal position limit purposes.
    The Commission notes that this section will discuss the substantive 
exemptions for Federal position limit purposes while the next section 
will discuss the process for the Commission or exchanges, as 
applicable, to grant exemptions and bona fide hedge recognitions.
a. Bona Fide Hedging Definition
(1) Elimination of Risk Management Exemptions; Addition of the Pass-
Through Swap
Exemption
    The Commission is eliminating the word ``normally'' from the bona 
fide hedge definition's temporary substitute test and, as a result, 
prohibiting recognition, as bona fide hedges, of risk management 
positions in physical commodity derivatives subject to Federal 
speculative position limits. This amendment conforms the regulatory 
bona fide hedging definition with the Commission's interpretation that 
the removal of the word ``normally'' from the CEA's section 4a(c)(2) 
statutory temporary substitute test by the Dodd-Frank Act signaled 
Congressional intent

[[Page 3421]]

to cease recognizing ``risk management'' positions as bona fide hedges 
for physical commodities.
    Additionally, in accordance with CEA section 4a(c)(2)(B), the 
Commission is, however, expanding the bona fide hedging definition to 
also include as a bona fide hedge any position that qualifies as a 
pass-through swap/swap offset, discussed further below.\1499\ The 
Commission believes that including pass-through swaps and pass-through 
swap offsets within the definition of a bona fide hedge will mitigate 
some of the potential impact resulting from the rescission of the risk 
management exemption,\1500\ and the Commission discusses the costs and 
benefits related to the pass-through swap provision further below.
---------------------------------------------------------------------------

    \1499\ See infra Section IV.A.4.ii.a(2). The existing bona fide 
hedging definition in Sec.  1.3 requires that a position must 
``normally'' represent a substitute for transactions or positions 
made at a later time in a physical marketing channel (i.e., the 
``temporary substitute test''). The Dodd-Frank Act amended the 
temporary substitute language that previously appeared in the 
statute by removing the word ``normally'' from the phrase normally 
``represents a substitute for transactions made or to be made or 
positions taken or to be taken at a later time in a physical 
marketing channel.'' 7 U.S.C. 6a(c)(2)(A)(i). The Commission 
interprets this change as reflecting Congressional direction that a 
bona fide hedging position in physical commodities must always (and 
not just ``normally'') be in connection with the production, sale, 
or use of a physical cash-market commodity.
     Previously, the Commission stated that, among other things, the 
inclusion of the word ``normally'' in connection with the pre-Dodd-
Frank-Act version of the temporary substitute language indicated 
that the bona fide hedging definition should not be construed to 
apply only to firms using futures to reduce their exposures to risks 
in the cash market, and that to qualify as a bona fide hedge, a 
transaction in the futures market did not need to be a temporary 
substitute for a later transaction in the cash market. See 
Clarification of Certain Aspects of the Hedging Definition, 52 FR at 
27195, 27196 (Jul. 20, 1987). In other words, that 1987 
interpretation took the view that a futures position could still 
qualify as a bona fide hedging position even if it was not in 
connection with the production, sale, or use of a physical 
commodity. Accordingly, based on the Commission's interpretation of 
the revised statutory definition of bona fide hedging in CEA section 
4a(c)(2), risk-management hedges would not be recognized under the 
Commission's bona fide hedging definition in Sec.  150.1.
    \1500\ See, e.g., ICE at 5-6 (contending that eliminating risk 
management exemptions could make it less efficient and more 
expensive for commercial end-users to hedge risks and that pass-
through exemption is an inadequate substitution); ISDA at 6-7 
(arguing that the elimination of the risk management exemptions will 
result in increased costs for ``tailored over-the-counter financial 
products, . . . will cause some dealers to exit the business and 
will in any event lead to decreases in liquidity in the underlying 
futures markets, with a corresponding increase in volatility.''); 
see also supra Section II.A.1.iii.a(4) (discussing elimination of 
the risk management exemptions).
---------------------------------------------------------------------------

    As discussed below, the Final Rule's pass-through provisions should 
help address certain of the hedging needs of persons seeking to offset 
the risk from swap books, allowing for sufficient liquidity in the 
marketplace for both bona fide hedgers and their counterparties. 
Accordingly, under the Final Rule, market participants with positions 
that do not otherwise satisfy the bona fide hedging definition or 
qualify for another exemption are no longer able to rely on recognition 
of such risk-reducing techniques as bona fide hedges. Market 
participants who provide liquidity to commercial market participants 
and have obtained or requested a risk management exemption under the 
existing definition, and who do not qualify for a pass-through swap 
offset, may resort to other hedging strategies. These other hedging 
strategies may result in increased costs for these liquidity providers 
for those activities that are not eligible for the bona fide hedge 
treatment.
    The Commission recognizes the possible liquidity costs as a result 
of eliminating risk management exemptions. Specifically, the Commission 
considered the risk that dealers who approach or exceed the Federal 
position limit may decide to pull back on providing liquidity, 
including to bona fide hedgers, due to the exclusion of risk management 
positions from the bona fide hedge definition. However, the Commission 
considered the risk of possible reduced liquidity against various 
factors and believes that the potential cost of reduced liquidity will 
be mitigated for several reasons.
    First, the Final Rule extends the compliance date by which risk 
management exemption holders must reduce their positions to comply with 
Federal position limits under the Final Rule to January 1, 2023. This 
delay provides sufficient time for existing positions to roll off and/
or be replaced with positions that conform with the Federal position 
limits adopted in this Final Rule.
    Second, for the nine legacy agricultural contracts, the Final Rule 
generally sets Federal non-spot month position limit levels higher than 
existing non-spot limits, which may enable additional dealer activity 
described above.\1501\ The remaining non-legacy 16 core referenced 
futures contracts will not be subject to non-spot month Federal 
position limits and will remain subject to existing exchange-set limits 
or accountability levels outside of the spot month, which does not 
represent a change from the status quo. The generally higher levels 
with respect to the nine legacy agricultural contracts, and the 
exchanges' flexible accountability regimes with respect to the new 16 
core referenced futures contracts, should mitigate at least some 
potential costs related to the prohibition on recognizing risk 
management positions as bona fide hedges.
---------------------------------------------------------------------------

    \1501\ See infra Section II.B.4. (discussing non-spot month 
limit levels). Final Sec.  150.2 generally increases position limits 
for non-spot months for contracts that currently are subject to the 
Federal position limits framework other than for CBOT Oats (O), CBOT 
KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), for which the 
Commission is maintaining existing levels.
---------------------------------------------------------------------------

    Third, the Final Rule may improve market competitiveness and reduce 
transaction costs. As noted above, existing holders of the risk 
management exemption, and the levels permitted thereunder, are 
currently confidential, and the Commission is no longer granting new 
risk management exemptions to potential new liquidity providers. 
Accordingly, by eliminating the risk management exemption, the Final 
Rule benefits the public and strengthens market integrity by improving 
market transparency since certain dealers are no longer able to 
maintain the grandfathered risk management exemption while other 
dealers lack this ability under the status quo. While the Commission 
believes that the risk management exemption may allow dealers to 
provide additional market making activities, which benefits market 
liquidity and may result in lower prices for end-users, as noted above, 
the potential costs resulting from removing the risk management 
exemption may be mitigated by the Final Rule's revised position limit 
levels that reflect current EDS for spot month levels and current open 
interest and trading volume for non-spot month levels. Therefore, the 
Commission believes that existing risk management exemption holders 
should be able to continue providing liquidity to bona fide hedgers, 
but acknowledges that some may not to the same degree as under the 
exemption. However, the Commission believes that any potential harm to 
liquidity should be mitigated.
    Further, the spot month and non-spot month levels, which generally 
are higher than the status quo, together with the elimination of the 
risk management exemptions that benefit only certain dealers, may 
enable new liquidity providers to enter the markets on a level playing 
field with the existing risk management exemption holders. With the 
possibility of additional liquidity providers, the framework may 
strengthen market integrity by decreasing concentration risk 
potentially posed by too few market makers. However, the benefits to 
market liquidity the Commission described above may be muted since this 
analysis is predicated, in part, on the

[[Page 3422]]

understanding that dealers are the predominant large traders. Data in 
the Commission's Supplementary COT and its underlying data indicate 
that risk-management exemption holders are not the only large 
participants in these markets--large commercial firms also hold large 
positions in such commodities.
    Fourth, although the Commission will no longer recognize risk 
management positions as bona fide hedges under this Final Rule, the 
Commission maintains other authorities, including the authority under 
CEA section 4a(a)(7), to exempt risk management positions from Federal 
position limits.
    Fifth, consistent with existing industry practice, exchanges may 
continue to recognize risk management positions for contracts that are 
not subject to Federal position limits, including for excluded 
commodities.
    Finally, as discussed immediately below, the Commission believes 
the recognition of pass-through swaps and pass-through swap offsets 
could mitigate, to some extent, the costs to the market in general, or 
to specific market participants, resulting from the risk management 
exemption's elimination.\1502\
---------------------------------------------------------------------------

    \1502\ NCFC concurs that ``the substantial increase in the 
overall speculative position limits and allowances for pass-through 
swaps will limit any potential loss of liquidity'' that may result 
from the elimination of the risk management exemption. NCFC at 7.
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(2) Pass-Through Swaps and Pass-Through Swap Offsets
    The revised bona fide hedging definition, consistent with the Dodd-
Frank Act's changes to CEA section 4a(c)(2), permits the recognition as 
bona fide hedges of futures and options on futures positions that 
offset pass-through swaps entered into by dealers and other liquidity 
providers (the ``pass-through swap counterparty'') \1503\ opposite bona 
fide hedging swap counterparties (the ``bona fide hedge 
counterparty''), as long as: (1) The pass-through swap counterparty 
receives from the bona fide hedging swap counterparty a written 
representation that the pass-through swap qualifies as a bona fide 
hedge; and (2) the pass-through swap counterparty enters into a futures 
or option on a futures position or a swap position to offset and reduce 
the price risk attendant to the pass-through swap.\1504\ Accordingly, a 
subset of risk management exemption holders and transactions they enter 
into could continue to benefit from an exemption, and potential 
counterparties could benefit from the liquidity they provide, as long 
as the position being offset qualifies as a bona fide hedge for the 
bona fide hedge counterparty.
---------------------------------------------------------------------------

    \1503\ Such pass-through swap counterparties are typically swap 
dealers providing liquidity to bona fide hedgers.
    \1504\ See paragraph (2)(i) of the proposed bona fide hedging 
definition. Of course, if the pass-through swap qualifies as an 
``economically equivalent swap,'' then the pass-through swap 
counterparty does not need to rely on the pass-through swap 
provision since it may be able to offset its long (or short) 
position in the economically equivalent swap with the corresponding 
short (or long) position in the futures or option on futures 
position or on the opposite side of another economically equivalent 
swap.
---------------------------------------------------------------------------

    The Commission has determined that any resulting costs or benefits 
related to the proposed pass-through swap exemption are a result of 
Congress's amendments to CEA section 4a(c) rather than the Commission's 
discretionary action. On the other hand, the Commission's discretionary 
action to require the pass-through swap counterparty to receive and 
maintain a written representation from the bona fide hedging swap 
counterparty that the pass-through swap qualifies as a bona fide 
hedging position causes the swap counterparty to incur marginal 
recordkeeping costs.\1505\ The Commission considered comments 
requesting the elimination of the pass-through swap provision 
recordkeeping requirement in Sec.  150.3(d) based on arguments that 
requiring this recordkeeping was not practical.\1506\ The Commission is 
not persuaded by those arguments as the recordkeeping requirements 
assist the Commission in verifying that the pass-through swap provision 
is only being utilized to offset risks arising from bona fide hedges. 
Accordingly, the Commission is finalizing the proposed pass-through 
swap recordkeeping requirement in Sec.  150.3(d), subject to certain 
conforming changes to reflect amendments to the pass-through swap 
paragraph of the bona fide hedging definition.
---------------------------------------------------------------------------

    \1505\ To the extent that the pass-through swap counterparty is 
a swap dealer or major swap participant, it already may be subject 
to similar recordkeeping requirements under Sec.  1.31 and part 23 
of the Commission's regulations. As a result, such costs may already 
have been realized.
    \1506\ Cargill at 10; EEI/EPSA at 7-8; FIA at 11-12; CMC at 5; 
Shell at 6-7; ICE at 6-7; ISDA at 11-12.
---------------------------------------------------------------------------

    Since not all swaps entered into by a commercial entity may qualify 
as a bona fide hedge, the Commission declines commenters' requests that 
a pass-through swap counterparty may reasonably rely solely upon the 
fact that the counterparty is a commercial end user and, absent an 
agreement between the counterparties, that the swap appears to be 
consistent with hedges entered into by end users in the same line of 
business. The Commission, however, is amending the regulatory text to 
provide flexibility and avoid a prescriptive requirement that would 
otherwise cause additional costs or burdens.
    Instead, the Final Rule provides that the pass-through swap 
counterparty (i.e., the swap dealer) may rely in good faith on a 
written representation made by its bona fide hedging swap counterparty, 
unless the pass-through swap counterparty has information that would 
cause a reasonable person to question the accuracy of the 
representation. The Commission is adding the written representation 
requirement to enable the Commission to verify that only market 
participants with bona fide hedge exemptions are able to pass-through 
those exemptions to their swap dealer counterparties. To avoid a 
prescriptive requirement that would incur additional costs to market 
participants, the Final Rule does not prescribe the form or manner by 
which the pass-through swap counterparty obtains the written 
representation. The Commission recognizes that such flexibility would 
allow for the bona fide hedging counterparty to make such 
representations on a relationship basis through counterparty 
relationship documentation (e.g., through ISDA documentation) or on a 
transaction basis (e.g., through trade confirmations or in other forms 
as agreed upon by the parties), based on the most cost efficient manner 
for the market participants.
    The Final Rule's pass-through swap provision, consistent with the 
Dodd-Frank Act's changes to CEA section 4a(c)(2), also addresses a 
situation where a participant who qualifies as a bona fide hedging swap 
counterparty (i.e., a participant with a position in a previously-
entered into swap that qualified, at the time the swap was entered 
into, as a bona fide hedging position under the revised definition) 
seeks, at some later time, to offset that swap position.\1507\ Such 
step might be taken, for example, to respond to a change in the 
participant's risk exposure in the underlying commodity. As a result, a 
participant could use futures contracts or options on futures contracts 
in excess of Federal position limits to offset the price risk of a 
previously-entered into swap, which would allow the participant to 
exceed Federal position limits using either new futures or options on 
futures or swap positions that reduce the risk of the original swap.
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    \1507\ See paragraph (2)(ii) of the ``bona fide hedging 
transaction or position'' definition in Sec.  150.1.
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    The Commission expects the pass-through swap provision to 
facilitate

[[Page 3423]]

dynamic hedging by market participants. The Commission recognizes that 
a significant number of market participants use dynamic hedging to more 
effectively manage their portfolio risks. Therefore, this provision may 
increase operational efficiency. In addition, by permitting dynamic 
hedging, a greater number of dealers should be better able to provide 
liquidity to the market, as these dealers will be able to more 
effectively manage their risks by entering into pass-through swaps with 
bona fide hedgers as counterparties. Moreover, market participants are 
not precluded from using swaps that are not ``economically equivalent 
swaps'' for such risk management purposes since swaps that are not 
deemed to be ``economically equivalent'' to a referenced contract are 
not subject to the Commission's position limits framework.
(3) Limiting ``Risk'' to ``Price'' Risk; Elimination of the Incidental 
Test and Orderly Trading Requirement
    The bona fide hedging definition's ``economically appropriate 
test'' set out in final Sec.  150.1 explicitly provides that only 
hedges that offset price risks can be recognized as bona fide hedging 
transactions or positions. The Commission does not believe that this 
particular change imposes any new costs or benefits, as it is 
consistent with both the existing bona fide hedging definition \1508\ 
as well as the Commission's longstanding policy.\1509\ Nonetheless, the 
Commission realizes that hedging occurs for more types of risks than 
price (e.g., volumetric hedging) and hedging solely to protect against 
changes in value of non-price risks would fall outside the category of 
a bona fide hedge, which offsets the ``price risk'' of an underlying 
commodity cash position.
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    \1508\ The existing bona fide hedging definition in Sec.  1.3 
provides that ``no transactions or positions shall be classified as 
bona fide hedging unless their purpose is to offset price risks 
incidental to commercial cash or spot operations.'' (emphasis 
added). Accordingly, the definition in final Sec.  150.1 merely 
moves this requirement to the definition's revised ``economically 
appropriate test'' requirement.
    \1509\ For example, in promulgating existing Sec.  1.3, the 
Commission explained that a bona fide hedging position must, among 
other things, ``be economically appropriate to risk reduction, such 
risks must arise from operation of a commercial enterprise, and the 
price fluctuations of the futures contracts used in the transaction 
must be substantially related to fluctuations of the cash-market 
value of the assets, liabilities or services being hedged.'' Bona 
Fide Hedging Transactions or Positions, 42 FR at 14832, 14833 (Mar. 
16, 1977). The Dodd-Frank Act added CEA section 4a(c)(2), which 
copied the ``economically appropriate test'' from the Commission's 
definition in Sec.  1.3. See also 78 FR at 75702, 75703.
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    In response to commenters, the Commission clarifies in the preamble 
that price risk can be informed and impacted by various other types of 
risks.\1510\ The Commission agrees with commenters who stated that 
market participants form independent economic assessments of how 
different risks (including, but not limited to, geopolitical, turmoil, 
weather, or counterparty) might create or impact the price risk of 
underlying commodities.\1511\ The Commission recognizes these risks can 
create price risks and understands that firms may manage these 
potential risks to their businesses differently and in the manner most 
suitable for their business. By limiting the economically appropriate 
prong to price risk, the Commission is reiterating its historical 
practice (which has adequately applied to the legacy agricultural 
contracts for decades) to recognize hedges of price risk of an 
underlying commodity position as bona fide hedges while acknowledging 
that price risk may itself be impacted by non-price risks. Market 
participants may continue to manage non-price risks in a variety of 
ways, which may include participation in the futures markets or 
exposure to other financial products. In fact, market participants may 
decide to use futures contracts that are not subject to Federal 
position limits, if they determine such contracts will help them manage 
non-price risks faced by their businesses.
---------------------------------------------------------------------------

    \1510\ See supra Section II.A.1.iii.b (discussing economically 
appropriate test); Cargill at 3.
    \1511\ See, e.g., CMC at 3.
---------------------------------------------------------------------------

    Alternatively, commenters suggested that the Commission permit 
market participants to use the non-enumerated hedge process to receive 
recognition of hedges of non-price risk on a case-by-case basis.\1512\ 
The Commission is precluded from adopting this alternative in light of 
its view that price risk is required to satisfy the CEA's economically 
appropriate test. Further, the Commission is unaware of commercial 
market participants historically seeking non-enumerated bona fide hedge 
recognition for non-price risk in the spot month.
---------------------------------------------------------------------------

    \1512\ MGEX at 2; FIA at 11.
---------------------------------------------------------------------------

    The Commission further implements Congress's Dodd-Frank Act 
amendments that did not include in the statutory bona fide hedge 
definition the incidental test and orderly trading requirement by 
eliminating those elements from to the Commission's regulatory 
definition. As discussed in the preamble, the Commission believes that 
these changes do not represent a change in policy or regulatory 
requirement. As a result, the Commission does not identify any costs or 
benefits related to these changes.
b. Enumerated Bona Fide Hedges
    The Commission maintains, and incorporates in final Sec.  150.3, a 
list of enumerated bona fide hedges in Appendix A to part 150 of the 
Commission's regulations that includes: (i) All of the existing 
enumerated hedges; and (ii) additional enumerated bona fide hedges. The 
Commission reinforces that hedging practices not otherwise listed may 
still be deemed, on a case-by-case basis, to comply with the proposed 
bona fide hedging definition (i.e., non-enumerated bona fide hedges). 
As discussed further below, the enumerated bona fide hedges in Appendix 
A are ``self-effectuating'' for purposes of Federal position limit 
levels. This is expected to help in ensuring timely hedging and 
therefore reduce compliance costs associated with seeking an 
exemption.\1513\
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    \1513\ For example, AGA expressed support for the Commission's 
proposal to recognize anticipatory merchandising as an enumerated 
hedge because it promotes liquidity. AGA at 8. AGA stated that 
``[a]bsent such an enumerated hedge, there would be a piecemeal 
approach to permitting such hedges which could reduce liquidity, 
raise costs, and create undue risks for gas utilities, without any 
regulatory benefits toward the Commission's goal to reduce excessive 
speculative activities.'' Id.
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(1) Treatment of Unfixed Price Transactions
    As discussed in the preamble, the Commission has long recognized 
fixed-price commitments as the basis for a bona fide hedge.\1514\ Under 
existing Sec.  1.3, only one enumerated hedge explicitly mentions 
``unfixed price,'' and its availability is limited to circumstances 
where a market participant has both an unfixed-price purchase and an 
unfixed-price sale on hand (precluding a market participant with only 
an unfixed-price purchase or an unfixed price sale from qualifying for 
this particular enumerated hedge).\1515\ In 2012, Commission staff 
issued interpretive letter 12-07 (``Staff Letter 12-07''), which 
clarified that a commercial entity may qualify for the existing 
enumerated bona fide hedge for unfilled anticipated requirements even 
if the commercial entity has entered into long-term, unfixed-price 
supply or requirements contracts because, as staff explained, the 
unfixed-price purchase

[[Page 3424]]

contract does not ``fill'' the commercial entity's anticipated 
requirements.\1516\
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    \1514\ See supra Section I.
    \1515\ See, e.g., paragraphs (2)(i)(A) and 2(ii)(A) of existing 
Sec.  1.3.
    \1516\ CFTC Staff Letter 12-07 at 1, issued August 16, 2012, 
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm, 
title search ``12-07.''
---------------------------------------------------------------------------

    The Final Rule affirms and broadens the application of the 
interpretation provided in Staff Letter No. 12-07. As a result, 
commercial market participants with unfixed price transactions may 
qualify for bona fide hedge treatment under the enumerated bona fide 
hedges for anticipatory merchandising, anticipated unsold production, 
or anticipated unfilled requirements.\1517\ The Commission clarifies 
that a commercial market participant that enters into an unfixed-price 
transaction will not be precluded from qualifying for one of these 
anticipatory enumerated bona fide hedges as long as the commercial 
entity otherwise satisfies all requirements for such anticipatory bona 
fide hedge, including demonstrating its anticipated need in the 
physical marketing channel related to either its unsold production, 
unfilled requirements, and/or merchandising, as applicable.\1518\ As 
such, merely entering into an unfixed-price transaction is not alone 
sufficient to demonstrate compliance with one of the enumerated 
anticipatory bona fide hedges.
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    \1517\ See supra Section II.A.1.iv (discussing treatment of 
unfixed price transactions).
    \1518\ The specific requirements associated with each enumerated 
bona fide hedge, including each anticipatory bona fide hedge, are 
described in detail further below.
---------------------------------------------------------------------------

    The same costs and benefits described above with respect to an 
expanded list of enumerated bona fide hedge recognitions also apply to 
such recognition based on unfixed-price transactions. The Commission's 
treatment of unfixed price transactions under the Final Rule will 
benefit physical commodity commercial market participants. As discussed 
previously, CEA section 4a(c)(1) directs the Commission to exclude bona 
fide hedge positions from any Federal position limits framework. In 
accordance with CEA section 4a(c)(1), the Commission's treatment of 
unfixed price transactions entered into by commercial market 
participants protects the legitimate commercial activity of cash-market 
participants,\1519\ thereby encouraging participation in the futures 
markets by commercial market participants. Additionally, bona hedge 
treatment for qualified unfixed price transactions benefits the public 
by allowing commercial market participants to more effectively and 
predictably hedge their price risks, thus controlling costs that might 
be passed on to the public.\1520\ However, to the extent the Commission 
currently allows exemptions related to unfixed-price transactions, the 
costs and benefits already may be realized by market participants and 
may not represent a change from the status quo baseline.
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    \1519\ See Cargill at 6 (stating that the Commission should 
recognize unfixed price transactions as they are ``fundamental to 
price risk management and routinely used by firms to manage risk'').
    \1520\ CEWG at 18 (discussing storage hedges, stating that 
``(``[n]ot allowing commercial energy firms to utilize these 
industry-standard hedges on an enumerated basis because they are 
``anticipatory'' in nature or viewed as a form of 
``merchandising''--or both--could result in storage assets being 
underutilized, which could increase volatility in physical and 
financial markets for energy commodities that ultimately could 
translate into higher costs for consumers'').
---------------------------------------------------------------------------

    Alternatively, several commenters requested that the Commission 
create a new enumerated bona fide hedge for unfixed-price transactions 
or amend the existing enumerated bona fide hedge for offsetting unfixed 
purchase and sales.\1521\ The Commission does not believe that this is 
necessary since, as described above, commercial market participants may 
continue to both qualify for anticipatory bona fide hedges while also 
entering into unfixed-price transactions. Further, the Commission 
believes that neither of these alternatives is suitable because there 
is an inherent difficulty in evaluating the propriety of a hedge of an 
unfixed price obligation with a fixed-price futures contract due to the 
basis risk that exists until the unfixed price obligation is fixed. 
Given differences among markets, creating a new enumerated bona fide 
hedge for any unfixed price transaction could, under certain 
circumstances, impose costs on market integrity, including by enabling 
potential market manipulation and/or allowing excessive speculation by 
potentially affording bona fide hedging treatment for speculative 
transactions. To the extent that a market participant does not qualify 
for an enumerated bona fide hedge in connection with an unfixed-price 
transaction, the Commission believes that any potential harms or costs 
to that market participant would be mitigated because the participant 
could still avail itself of the process under Sec. Sec.  150.3 and 
150.9 for non-enumerated bona fide hedges.\1522\
---------------------------------------------------------------------------

    \1521\ See, e.g., Ecom at 1; ACA at 2; CEWG at 19-21; Chevron at 
11; CME Group at 8-9; DECA at 2; East Cotton at 2; Gerald Marshall 
at 2; IFUS at 5-7; IMC at 2; Jess Smith at 2; LDC at 2; Mallory 
Alexander at 2; McMeekin at 2; Memtex at 2; Moody Compress 1; NCC at 
1; NGFA at 7; Olam at 2; Omnicotton at 2; Canale Cotton at 2; Shell 
at 7; Southern Cotton at 2; Suncor at 7; SW Ag at 2; Toyo at 2; 
Texas Cotton at 2; Walcot at 2; White Gold at 2.
    \1522\ One commenter maintains that reliance on the non-
enumerated bona fide hedge process for management of unpriced 
physical purchase or sale commitments ``will impose procedural 
hurdles, uncertainty, and additional costs on a critically important 
function of the supply chain in the U.S. economy.'' CEWG at 21. 
Another commenter stated that imposing a burden on commercial end 
users with unpriced physical purchase or sale commitments to rely on 
the non-enumerated hedge exemption process is contrary to the intent 
and language of the CEA. Cargill at 6. These concerns, however, are 
mitigated because, under the Final Rule, commercial market 
participants with unfixed price transactions may qualify for bona 
fide hedge treatment under the enumerated bona fide hedges for 
anticipatory merchandising, anticipated unsold production, or 
anticipated unfilled requirements.
---------------------------------------------------------------------------

(2) Elimination of the Five-Day Rule
    The Final Rule eliminates the existing restriction on holding 
certain enumerated bona fide hedges during the last five days of 
trading under existing Sec.  1.3. Instead, under final Sec.  
150.5(a)(2)(ii)(H), the exchanges have discretion to determine, for 
purposes of their own exchange-granted exemptions (for contracts 
subject to Federal position limits), whether to apply a restriction 
against holding positions in excess of limits during the lesser of the 
last five days of trading or the time period for the spot month in such 
physical-delivery contract (the ``Five-Day Rule''). Under final Sec.  
150.5(a)(2)(ii)(H), exchanges are able to establish their own Five-Day 
Rule, or otherwise limit the size of positions. The exchanges would 
thus have the ability and discretion, but not an obligation, to apply a 
five-day Rule or similar restriction to exemptions on any contracts 
subject to Federal position limits, regardless of whether such 
contracts have been subject to Federal position limits before.\1523\ 
The Commission has determined that exchanges are well-informed with 
respect to their respective markets, and well-positioned to make a 
determination with respect to imposing the Five-Day Rule in connection 
with recognizing bona fide hedges for their respective commodity 
contracts.
---------------------------------------------------------------------------

    \1523\ The Commission is adopting Appendix B and Appendix G of 
this Final Rule to provide guidance for exchanges to consider when 
determining whether to impose the Five-Day Rule or similar 
requirements on bona fide hedge exemptions and spread exemptions, 
respectively.
---------------------------------------------------------------------------

    In general, the Commission believes that, on the one hand, limiting 
a trader's ability to establish a position in this manner by requiring 
the Five-Day Rule could result in increased costs related to 
operational inefficiencies, as a trader may believe that holding a 
position late into the spot period is necessary for the bona fide hedge 
position. On the other hand, the Commission believes that price 
convergence may be particularly sensitive to potential market 
manipulation or excessive speculation during the spot period. 
Accordingly, the Commission believes that the

[[Page 3425]]

determination to not impose the Five-Day Rule with respect to any of 
the enumerated bona fide hedges for Federal purposes, but to instead 
rely on exchanges' determinations with respect to exchange-granted 
exemptions, helps to better optimize these considerations. The 
Commission notes there is a potential cost to market integrity and 
price convergence since the Five-Day Rule is being eliminated as a 
blanket Federal requirement from some enumerated hedges while the 
exchanges will now have guidance from the Commission to consider when 
choosing whether to grant a position limits exemption subject to a 
five-day rule or similar restriction.\1524\ Under this new framework, 
however, the Commission will continue to leverage its own market 
surveillance and oversight functions to ensure that exchanges continue 
to comply with their legal obligations, including with respect to Core 
Principles 2, 3, 4, and 5, among others.\1525\ With an expanded list of 
contracts subject to Federal position limits, it is best to provide the 
exchanges additional discretion to protect their markets using tools 
other than a five-day rule, and to supplement that discretion with 
guidance highlighting the importance of the spot month to ensure price 
convergence and an orderly delivery process. Finally, the Commission 
believes a concern over oversight is also mitigated by the fact that 
the exchanges have an economic incentive to ensure that price 
convergence occurs with their respective contracts since commercial 
end-users would be less willing to use such contracts for hedging 
purposes if price convergence failed to occur in such contracts as they 
may generally desire to hedge cash-market prices with futures 
contracts.
---------------------------------------------------------------------------

    \1524\ Better Markets at 61 (discussing elimination of the Five-
Day Rule and Appendix B guidance by stating that '' the CFTC 
proposes to abolish the rule for enumerated hedges, over-relying 
instead--and again--on the judgment of the exchanges to determine 
whether to apply the Five-Day Rule, or apply and grant fact specific 
waivers'').
    \1525\ Core Principle 4, 7 U.S.C. 7b-3(f)(4)(B); 7 U.S.C. 7b-
3(f)(2); 7 U.S.C. 7b-3(f)(3); 7 U.S.C.7b-3(f)(5).
---------------------------------------------------------------------------

    The Commission is also adopting guidance in Appendix B to part 150 
on factors for the exchanges to consider when granting an exemption 
subject to a restriction against holding physically delivered futures 
contracts into the spot month. In response to some commenters who 
stated that the proposed guidance was too prescriptive and would result 
in additional burdens,\1526\ the Commission clarifies and reiterates 
the appendix is not intended to be used as a mandatory checklist. The 
Commission, however, has determined it is helpful to provide the 
exchanges with guidance highlighting the importance of the spot month 
to ensure price convergence and an orderly delivery process. Since 
price convergence and an orderly trading environment serve as a 
deterrent to mitigate certain types of market manipulation schemes such 
as corners and squeezes, the guidance is intended to include a non-
exclusive list of considerations the Commission expects the exchanges 
to consider when determining whether to allow a position in excess of 
limits throughout the spot month. The Commission does not expect the 
guidance to impose additional burdens on the exchanges, as the 
exchanges currently have in place market surveillance practices or 
procedures to review the appropriateness of an exemption during the 
relevant referenced contract's spot period. The guidance is intended to 
supplement that existing process.
---------------------------------------------------------------------------

    \1526\ Cargill at 9; CME Group at 9 (stating that the ``CME 
Group believes the proposed guidance could be interpreted to cause 
unnecessary burden and costs to market participants. The guidance 
appears to create a formal process for firms to provide information 
outlined in the Appendix as part of their bona fide hedge exemption 
applications, but the Proposal does not seem to consider this 
additional burden in its cost analysis'').
---------------------------------------------------------------------------

    As discussed in the preamble, the guidance does not impose any 
additional reporting requirements on market participants, and the 
factors described in the guidance apply simply to the exchanges' 
evaluation of the specific contract market when considering whether an 
exemption shall be granted subject to any condition or limitation in 
the spot month. Finally, the Commission is making certain amendments to 
the guidance to ensure that the factors maintain a flexible approach, 
particularly where existing exchange application requirements already 
require market participants to provide relevant cash-market 
information.
c. Guidance for Measuring Risk
    The Commission is issuing guidance in paragraph (a) of final 
Appendix B to part 150 on whether positions may be hedged on either a 
gross or net basis. Under the guidance, among other things, a trader 
may measure risk on a gross basis if that approach is consistent with 
the trader's historical practice and is not intended to evade 
applicable limits. The key cost associated with allowing gross hedging 
is that it may provide opportunity for hidden speculative trading or 
for cherry picking of positions in a manner that subverts positions 
limits.\1527\
---------------------------------------------------------------------------

    \1527\ For example, using gross hedging, a market participant 
could potentially point to a large long cash position as 
justification for a bona fide hedge, even though the participant, or 
an entity with which the participant is required to aggregate, has 
an equally large short cash position that would result in the 
participant having no net price risk to hedge as the participant had 
no price risk exposure to the commodity prior to establishing such 
derivative position. Instead, the participant created price risk 
exposure to the commodity by establishing the derivative position.
---------------------------------------------------------------------------

    Such risk is mitigated to a certain extent by the guidance's 
provisos that the trader does not switch between net hedging and gross 
hedging in order to evade limits and that the trader must demonstrate, 
upon request by the Commission or an exchange, the justifications for 
measuring risk on a gross basis.\1528\ By focusing on consistency and 
historical practice with respect to the manner in which a person 
measures risk, the guidance enables market participants to measure risk 
on a gross basis when dictated by the nature of the exposure, but not 
simply when utilizing gross hedging will yield a larger exposure than 
net hedging, or will otherwise subvert Federal position limit or 
aggregation requirements. However, the Commission also recognizes that 
there are myriad ways in which organizations are structured and engage 
in commercial hedging practices, including the use of multi-line 
business strategies in certain industries that are subject to Federal 
position limits for the first time under this Final Rule and for which 
net hedging could impose significant costs or be operationally 
unfeasible.\1529\
---------------------------------------------------------------------------

    \1528\ The proposed guidance on gross hedging positions in the 
2020 NPRM provided that an exchange document the justifications for 
recognizing a gross position as a non-enumerated bona fide hedge 
pursuant to Sec.  150.9. Several commenters alternatively requested 
elimination of that requirement as imposing unnecessary burdens 
directly on exchanges and indirectly on market participants. See 
CEWG at 4; FIA at 14; and MGEX at 3. Because the Commission and 
exchanges have other tools for accessing such information, the 
Commission eliminated that requirement from the guidance in Appendix 
B of this Final Rule. Under final Sec.  150.3(b)(2) and (e) and 
final Sec.  150.9(e)(5), and (g), the Commission has access to any 
information related to the applicable exemption request, and 
therefore concludes that eliminating this requirement does not 
result in any related costs and benefits.
    \1529\ FIA stated that ``the recommendation to implement 
specific policies and procedures governing gross and net hedging has 
the potential to create unnecessary, unintended and burdensome 
conflicts with other company policies, such as accounting policies, 
with little or no measurable benefit.'' FIA at 15. The Final Rule 
clarifies that the guidance does not require market participants to 
develop written policies or procedures setting forth when gross or 
net hedging is appropriate.

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[[Page 3426]]

iii. Spread Exemptions
    Under existing Sec.  150.3, certain spread exemptions are self-
effectuating. Specifically, existing Sec.  150.3 allows for ``spread or 
arbitrage positions'' that are ``between single months of a futures 
contract and/or, on a futures-equivalent basis, options thereon, 
outside of the spot month, in the same crop year; provided, however, 
that such spread or arbitrage positions, when combined with any other 
net positions in the single month, do not exceed the all-months limit 
set forth in Sec.  150.2.'' \1530\
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    \1530\ 17 CFR 150.3. CEA section 4a(a)(1) provides the 
Commission with authority to exempt from position limits 
transactions ``normally known to the trade'' as ``spreads'' or 
``straddles'' or ``arbitrage'' or to fix limits for such 
transactions or positions different from limits fixed for other 
transactions or positions.
---------------------------------------------------------------------------

    Final Sec. Sec.  150.1 and 150.3 amend the existing spread position 
exemption for Federal position limits by (i) listing, in the spread 
transaction definition, specific types of spread exemptions that are 
self-effectuating for purposes of Federal limits and that may be 
granted by an exchange; (ii) creating a process that requires a person 
to apply for spread exemptions (that are not listed in the spread 
transaction definition) directly with the Commission pursuant to final 
Sec.  150.3; \1531\ and (iii) providing guidance on the types of spread 
positions that meet the spread transaction definition in a new Appendix 
G to part 150 under the Final Rule. In addition, final Sec.  150.3 
permits spread exemptions outside the same crop year and/or during the 
spot month.\1532\
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    \1531\ The ``spread transaction'' definition lists the most 
common types of spread positions: intra-market spread, inter-market 
spread, intra-commodity spread, or inter-commodity spread, including 
a calendar spread, quality differential spread, processing spread, 
product or by-product differential spread, or futures-option spread. 
Final Sec.  150.3(b) also permits market participants to apply to 
the Commission for other spread transactions.
    \1532\ As discussed under final Sec.  150.3, spread exemptions 
identified in the proposed ``spread transaction'' definition in 
final Sec.  150.1 are self-effectuating, similar to the status quo, 
and do not represent a change to the status quo baseline. The 
related costs and benefits, particularly with respect to requesting 
exemptions with respect to spreads other than those identified in 
the proposed ``spread transaction'' definition, are discussed under 
the respective sections below.
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    In connection with the spread exemption provisions, the Commission 
is relaxing the prohibition for contracts during the same crop year 
and/or the spot month so that market participants may receive spread 
exemptions outside the same crop year and/or during the spot month. 
There may be benefits that result from permitting these types of spread 
exemptions. For example, the Commission believes that permitting spread 
exemptions in different crop years or during the spot month may 
potentially improve price discovery and provide market participants 
with the ability to use additional strategies involving spread 
positions, which may reduce hedging costs.
    As in the inter-market wheat example discussed below, the spread 
relief, which is not limited to the same crop year, may better link 
prices between two markets (e.g., the price of MGEX wheat futures and 
the price of CBOT wheat futures). Put another way, permitting spread 
exemptions outside the same crop year may enable pricing in two 
different but related markets for substitute goods to be more highly 
correlated, which benefits market participants with a price exposure to 
the underlying protein content in wheat generally, rather than that of 
a particular commodity.
    However, the Commission also recognizes certain potential costs to 
permitting spread exemptions during the spot month, particularly to 
extend into the last five days of trading. This feature could raise the 
risk of allowing participants in the market at a time in the contract 
where only those interested in making or taking delivery should be 
present. When a contract goes into expiration, open interest and 
trading volume naturally decrease, as traders not interested in making 
or taking delivery roll their positions into deferred calendar months. 
The presence of large spread positions, normally tied to large 
liquidity providers so close to the expiration of a futures contract, 
could lead to disruptions in the price discovery function of the 
contract by disrupting the futures/cash price convergence. This could 
lead to increased transaction costs and harm the hedging utility for 
end-users of the futures contract, which could lead to higher costs 
passed on to consumers.
    However, the Commission believes that these concerns are mitigated, 
as spread exemptions will not be self-effectuating for purposes of 
exchange-set position limits. Accordingly, exchanges will continue to 
apply their expertise in overseeing and maintaining the integrity of 
their markets. For example, an exchange could: Refuse to grant a spread 
exemption if the exchange determines that the exemption is inconsistent 
with the requirements of Sec.  150.5(a) or harmful to its markets; 
require a market participant to reduce its positions; or implement a 
five-day rule for spread exemptions, as discussed above.\1533\ The 
Commission has also provided guidance to exchanges in a new Appendix G 
to support exchange analysis of whether to grant a particular spread 
exemption and to remind exchanges of their oversight obligations when 
granting spread exemptions.
---------------------------------------------------------------------------

    \1533\ See supra Section II.A.1.viii. (discussing the Five-Day 
Rule).
---------------------------------------------------------------------------

    Generally, the Commission finds that, by allowing speculators to 
execute inter-market and intra-market spreads, speculators are able to 
hold a greater amount of open interest in underlying contract(s), and 
therefore, bona fide hedgers may benefit from any increase in market 
liquidity. Spread exemptions may also lead to better price continuity 
and price discovery if market participants who seek to provide 
liquidity (for example, through entry of resting orders for spread 
trades between different contracts) receive a spread exemption, and 
thus would not otherwise be constrained by a position limit.
    For clarity, the Commission has identified the following two 
examples of spread positions that could benefit from the spread 
exemptions permitted by this Final Rule:
     Reverse crush spread in soybeans on the CBOT subject to an 
inter-market spread exemption. In the case where soybeans are processed 
into two different products, soybean meal and soybean oil, the crush 
spread is the difference between the combined value of the products and 
the value of soybeans. There are two actors in this scenario: The 
speculator and the soybean processor. The spread's value approximates 
the profit margin from actually crushing (or mashing) soybeans into 
meal and oil. The soybean processor may want to lock in the spread 
value as part of its hedging strategy, establishing a long position in 
soybean futures and short positions in soybean oil futures and soybean 
meal futures, as substitutes for the processor's expected cash-market 
transactions (the long position hedges the purchase of the anticipated 
inputs for processing and the short position hedges the sale of the 
anticipated soybean meal and oil products). On the other side of the 
processor's crush spread, a speculator takes a short position in 
soybean futures against long positions in soybean meal futures and 
soybean oil futures. The soybean processor may be able to lock in a 
higher crush spread because of liquidity provided by such a speculator 
who may need to rely upon a spread exemption. In this example, the 
speculator is accepting basis risk represented by the crush spread, and 
the speculator is providing liquidity to the soybean processor. The 
crush spread positions may result in greater correlation between the 
futures prices of

[[Page 3427]]

soybeans on the one hand and those of soybean oil and soybean meal on 
the other hand, which means that prices for all three products may move 
up or down together in a more correlated manner.
     Wheat spread subject to inter-market spread exemptions. 
There are two actors in this scenario: The speculator and the wheat 
farmer. In this example, a farmer growing hard wheat would like to 
reduce the price risk of her crop by shorting a MGEX wheat futures. 
There, however, may be no hedger, such as a mill, that is immediately 
available to trade at a desirable price for the farmer. There may be a 
speculator willing to offer liquidity to the hedger; however, the 
speculator may wish to reduce the risk of an outright long position in 
MGEX wheat futures through establishing a short position in CBOT wheat 
futures (soft wheat). Such a speculator, who otherwise would have been 
constrained by a position limit at MGEX and/or CBOT, may seek 
exemptions from MGEX and CBOT for an inter-market spread, that is, for 
a long position in MGEX wheat futures and a short position in CBOT 
wheat futures of the same maturity. As a result of the exchanges 
granting an inter-market spread exemption to such a speculator, who 
otherwise may be constrained by limits, the farmer might be able to 
transact at a higher price for hard wheat than might have existed 
absent the inter-market spread exemptions. Under this example, the 
speculator is accepting basis risk between hard wheat and soft wheat, 
reducing the risk of a position on one exchange by establishing a 
position on another exchange, and potentially providing liquidity to a 
hedger. Further, spread transactions may aid in price discovery 
regarding the relative protein content for each of the hard and soft 
wheat contracts.
iv. Conditional Spot Month Exemption Positions in Natural Gas
    Final Sec.  150.3(a)(4) provides a new Federal conditional spot 
month position limit exemption for cash-settled NYMEX NG referenced 
contracts. The conditional exemption permits traders to acquire 
positions up to 10,000 cash-settled NYMEX NG referenced contracts (the 
Federal spot month limit in final Sec.  150.2 for cash-settled NYMEX NG 
is 2,000 cash-settled NYMEX NG referenced contracts per exchange and 
another 2,000 cash-settled NYMEX NG referenced contracts in the OTC 
swaps market) per exchange that lists a cash-settled NYMEX NG 
referenced contract, along with an additional position in cash-settled 
economically equivalent NYMEX NG OTC swaps that has a notional amount 
of up to 10,000 equivalent-sized contracts, as long as such person does 
not also hold positions in the physically-settled NYMEX NG referenced 
contract.\1534\
---------------------------------------------------------------------------

    \1534\ The NYMEX NG contract is the only natural gas contract 
included as a core referenced futures contract under the Final Rule.
---------------------------------------------------------------------------

    NYMEX, IFUS, and Nodal currently have rules in place establishing a 
conditional spot month limit exemption of up to 5,000 equivalent-sized 
cash-settled natural gas contracts per exchange, provided that the 
market participant does not hold any physically-settled natural gas 
contracts. Finalizing the conditional limit exemption for NYMEX NG 
enables the NYMEX NG referenced contract market to continue to operate 
as it has under the existing exchange-set conditional limit exemption 
framework, which the Commission notes has functioned well based on its 
observation over the past decade. Removing the conditional limit 
exemption will result in reduced liquidity, including for commercial 
hedgers seeking to offset price risks but not necessarily looking to 
make or take delivery, due to the significantly lower positions a 
market participant would be able to hold in the cash-settled NYMEX NG 
referenced contracts.
    Several commenters suggested removing the NYMEX NG conditional 
limit exemption's requirement to divest all holdings in the physically-
settled NYMEX NG referenced contract.\1535\ The Commission believes 
that this could result in significant costs to the market by 
encouraging manipulation of the physically-settled NYMEX NG referenced 
contract to benefit a large position in the cash-settled NYMEX NG 
referenced contract available through the conditional limit exemption. 
Specifically, without this divestiture requirement, a trader could hold 
up to 40,000 cash-settled NYMEX NG referenced contracts and 2,000 
physically-settled NYMEX NG referenced contracts. At these levels, it 
may not require much movement in the physically-settled markets to 
disproportionately benefit the cash-settled holdings. As a result, the 
requirement to exit the physically-settled contract is critical for 
reducing a market participant's incentive to manipulate the cash 
settlement price by, for example, banging-the-close or distorting 
physical delivery prices in the physically-settled contract to benefit 
leveraged cash-settled positions.
---------------------------------------------------------------------------

    \1535\ ISDA at 8; SIFMA AMG at 10-11; FIA at 7-8; NGSA at 12-14; 
Citadel at 7; CCI at 4; EEI/EPSA at 4.
---------------------------------------------------------------------------

    CME commented that the conditional limit exemption for NYMEX NG 
could ``incentivize the manipulation of a cash commodity price in order 
to benefit a position in a cash-settled contract.'' \1536\ The 
Commission notes that the conditional limit exemption does provide for 
a substantial increase in a trader's cash-settled position, but the 
core requirement that a trader must divest out of the physically-
settled NYMEX NG referenced contract during the spot month period is 
intended to address and reduce the incentive for a trader to manipulate 
the physically-settled NYMEX NG core referenced futures contract to 
benefit a position in the cash-settled NYMEX NG referenced contracts. 
Furthermore, based on its experience in monitoring the NYMEX NG market 
since the conditional limit exemption was adopted, the Commission has 
not observed any market manipulations attributable to a trader 
utilizing the conditional limit exemption. That said, the Commission is 
aware of instances where traders violated the conditional exemption by 
holding or trading in the physically-settled NYMEX NG core referenced 
futures contracts. The exchanges also detected and took corrective 
action against those traders. The Commission will continue to closely 
monitor natural gas trader positions across exchanges and work with the 
exchanges to ensure the CME Group's concerns continue to be addressed 
to protect the market participants and the public and defend the 
financial integrity and price discovery function of the NYMEX NG core 
referenced futures contract.\1537\
---------------------------------------------------------------------------

    \1536\ CME Group at 6.
    \1537\ See IFUS Rule 6.20(c) and NYMEX Rule 559.F. See, e.g., 
Nodal Rulebook Appendix C (equivalent rule of Nodal).
---------------------------------------------------------------------------

    Further, the Commission has heeded natural gas traders' concerns 
about disrupting market practices and harming liquidity in the cash-
settled contract, which could increase the cost of hedging and possibly 
prevent convergence between the physical delivery futures and cash 
markets.\1538\ While a trader with a position in the physically-settled 
NYMEX NG referenced contract may incur costs associated with 
liquidating that position in order to meet the conditions of the 
Federal exemption, such costs are incurred outside of the Final Rule, 
as the trader would have to do so as a condition of the exchange-level

[[Page 3428]]

exemption under current exchange rules.\1539\
---------------------------------------------------------------------------

    \1538\ See 81 FR at 96862, 96863.
    \1539\ See IFUS Rule 6.20(c) and NYMEX Rule 559.F. See, e.g., 
Nodal Rulebook Appendix C (equivalent rules of Nodal).
---------------------------------------------------------------------------

v. Financial Distress Exemption
    Final Sec.  150.3(a)(3) provides an exemption for certain financial 
distress circumstances, including the default of a customer, affiliate, 
or acquisition target of the requesting entity that may require the 
requesting entity to take on, in short order, the positions of another 
entity. In codifying the Commission's historical practice, the Final 
Rule accommodates transfers of positions from financially distressed 
firms to financially secure firms. The disorderly liquidation of a 
position threatens price impacts that may harm the efficiency and price 
discovery function of markets, and Sec.  150.3(a)(3) makes it less 
likely that positions are prematurely or needlessly liquidated. The 
Commission has determined that costs related to filing and 
recordkeeping are negligible. The Commission cannot accurately estimate 
how often this exemption may be invoked because emergency or distressed 
market situations are unpredictable and dependent on a variety of firm 
and market-specific factors as well as general macroeconomic 
indicators.\1540\ The Commission, nevertheless, believes that emergency 
or distressed market situations that might trigger the need for this 
exemption are infrequent, and that codifying this historical practice 
adds transparency to the Commission's oversight responsibilities.
---------------------------------------------------------------------------

    \1540\ See 81 FR at 96862, 96863.
---------------------------------------------------------------------------

vi. Pre-Enactment and Transition Period Swaps Exemption
    Final Sec.  150.3(a)(5) provides an exemption from position limits 
for positions acquired in good faith in any ``pre-enactment swap,'' or 
in any ``transition period swap,'' in either case as defined in final 
Sec.  150.1. A person relying on this exemption may net such positions 
with post-effective date commodity derivative contracts for the purpose 
of complying with any non-spot month speculative positions limits, but 
may not net against spot month positions. This exemption is self-
effectuating, and the Commission believes that Sec.  150.3(a)(5) 
benefits both individual market participants by lessening the impact of 
the Federal position limits in final Sec.  150.2, and market liquidity 
in general as liquidity providers initially will not be forced to 
reduce or exit their positions.
    Final Sec.  150.3(a)(5) benefits price discovery and convergence by 
prohibiting large traders seeking to roll their positions into the spot 
month from netting down positions in the spot-month against their pre-
enactment swap or transition period swap. The Commission acknowledges 
that, on its face, including a ``good-faith'' requirement in final 
Sec.  150.3(a)(5) could hypothetically diminish market integrity since 
determining whether a trader has acted in ``good faith'' is inherently 
subjective and could result in disparate treatment among traders, where 
certain traders may assert a more aggressive position in order to seek 
a competitive advantage over others. The Commission believes the risk 
of any such unscrupulous trader or exchange is mitigated since 
exchanges are still subject to Commission oversight and to DCM Core 
Principles 4 (``prevention of market disruption'') and 12 (``protection 
of markets and market participants''), among others. The Commission has 
determined that market participants who voluntarily employ this 
exemption also incur negligible recordkeeping costs.
5. Process for the Commission or Exchanges To Grant Exemptions and Bona 
Fide Hedge Recognitions for Purposes of Federal Position Limits (Final 
Sec. Sec.  150.3 and 150.9) and Related Changes to Part 19 of the 
Commission's Regulations
    Existing Sec. Sec.  1.47 and 1.48 set forth the process for market 
participants to apply to the Commission for recognition of certain bona 
fide hedges for purposes of Federal position limits, and existing Sec.  
150.3 set forth the types of spread exemptions a person can rely on for 
purposes of Federal position limits. Under existing Commission 
practices, spread exemptions and certain enumerated bona fide hedges 
are generally self-effectuating and do not require market participants 
to apply to the Commission for purposes of Federal position limits. 
Market participants are currently, however, required to file Form 204 
monthly reports \1541\ to justify certain position limit overages.
---------------------------------------------------------------------------

    \1541\ In the case of cotton, market participants currently file 
the relevant portions of Form 304.
---------------------------------------------------------------------------

    Further, for those bona fide hedges for which market participants 
are required to apply to the Commission, existing regulations and 
market practice require market participants to apply both to the 
Commission for purposes of Federal position limits and also to the 
relevant exchanges for purposes of exchange-set limits. The Commission 
has determined that this dual application process creates 
inefficiencies for market participants.
    Final Sec. Sec.  150.3 and 150.9, taken together, make several 
changes to the process of acquiring bona fide hedge recognitions and 
spread exemptions for Federal position limits purposes. Final 
Sec. Sec.  150.3 and 150.9 maintain certain elements of the status quo 
while also adopting certain changes to facilitate the exemption 
process.\1542\
---------------------------------------------------------------------------

    \1542\ In this section the Commission discusses the costs and 
benefits related to the application process for these exemptions and 
bona fide hedge recognitions. For a discussion of the costs and 
benefits related to the scope of the exemptions and bona fide hedge 
recognitions, see supra Section IV.A.4.
---------------------------------------------------------------------------

    First, with respect to the proposed enumerated bona fide hedges, 
final Sec.  150.3 maintains the status quo by providing that those 
enumerated bona fide hedges that currently are self-effectuating for 
the nine legacy agricultural contracts will continue to remain self-
effectuating for the nine legacy agricultural contracts for purposes of 
Federal position limits.\1543\ Similarly, the enumerated bona fide 
hedges for the additional 16 contracts that are newly subject to 
Federal position limits (i.e., those contracts other than the nine 
legacy agricultural contracts) also are self-effectuating for purposes 
of Federal position limits.
---------------------------------------------------------------------------

    \1543\ Final Sec.  150.3(a)(1)(i). Under the status quo, market 
participants must apply to the Commission for recognition of certain 
enumerated anticipatory bona fide hedges. The Final Rule also makes 
these enumerated anticipatory bona fide hedges self-effectuating for 
the nine legacy agricultural contracts.
---------------------------------------------------------------------------

    Second, for recognition of any non-enumerated bona fide hedge in 
connection with any referenced contract, market participants are 
required to apply either directly to the Commission under final Sec.  
150.3 or through an exchange that adheres to certain requirements under 
final Sec.  150.9. The Commission notes that existing regulations 
require market participants to apply to the Commission for recognition 
of non-enumerated bona fide hedges, and so the Final Rule does not 
represent a change to the status quo in this respect for the nine 
legacy agricultural contracts.
    Third, final Sec.  150.3 maintains the status quo by providing that 
the most common spread exemptions for the nine legacy agricultural 
contracts remain self-effectuating. Similarly, these common spread 
exemptions also are self-effectuating for the additional 16 contracts 
that are newly subject to Federal position limits. These common spread 
exemptions are listed in the

[[Page 3429]]

``spread transaction'' definition under final Sec.  150.1.\1544\
---------------------------------------------------------------------------

    \1544\ Final Sec.  150.1 defines ``spread transaction'' to 
include an intra-market spread, inter-market spread, intra-commodity 
spread, or inter-commodity spread, including a calendar spread, 
quality differential spread, processing spread, product or by-
product differential spread, or futures-option spread.
---------------------------------------------------------------------------

    Fourth, for any spread exemption not listed in the ``spread 
transaction'' definition, market participants are required to apply 
directly to the Commission under final Sec.  150.3. There is no 
exception for the nine legacy agricultural products, nor are market 
participants permitted to apply through an exchange under final Sec.  
150.9 for these types of spread exemptions.\1545\
---------------------------------------------------------------------------

    \1545\ As discussed below, the Final Rule also eliminates the 
Form 204 and the equivalent portions of the Form 304.
---------------------------------------------------------------------------

    The Commission anticipates that most--if not all--market 
participants will utilize the exchange-centric process set forth in 
final Sec.  150.9 with respect to applying for recognition of non-
enumerated bona fide hedges, rather than applying directly to the 
Commission under Sec.  150.3. Market participants are likely already 
familiar with the processes set forth in Sec.  150.9, which is intended 
to leverage the processes currently in place at the exchanges for 
addressing requests for bona fide hedge recognitions from exchange-set 
limits. In the sections below, the Commission will discuss the costs 
and benefits related to both processes.
i. Process for Requesting Exemptions and Bona Fide Hedge Recognitions 
Directly From the Commission (Final Sec.  150.3)
    Under existing Sec. Sec.  1.47 and 1.48, and existing Sec.  150.3, 
the processes for obtaining a recognition of a bona fide hedge or for 
relying on a spread exemption, are similar in some respects and 
different in other respects than the approach adopted in final Sec.  
150.3. Existing Sec. Sec.  1.47 and 1.48 require market participants 
seeking recognition of non-enumerated bona fide hedges and enumerated 
anticipatory bona fide hedges, respectively, for purposes of Federal 
position limits to apply directly to the Commission for prior approval.
    In contrast, existing non-anticipatory enumerated bona fide hedges 
and spread exemptions are self-effectuating, which means that market 
participants are not required to submit any information to the 
Commission for prior approval, although such market participants must 
subsequently file Form 204 or Form 304 each month in order to describe 
their cash-market positions and justify their bona fide hedge position. 
There currently is no codified Federal process related to financial 
distress exemptions or natural gas conditional spot month exemptions.
    Final Sec.  150.3 provides a process for market participants to 
apply directly to the Commission for recognition of non-enumerated bona 
fide hedges or spread exemptions not included in the ``spread 
transaction'' definition in final Sec.  150.1, which in each case would 
not be self-effectuating under the Final Rule. Under final Sec.  150.3, 
any person seeking Commission recognition of these types of bona fide 
hedges or spread exemptions (as opposed to applying for recognition of 
non-enumerated bona fide hedges using the exchange-centric process 
under proposed Sec.  150.9 described below) are required to submit a 
request directly to the Commission and to provide information similar 
to what is currently required under existing Sec. Sec.  1.47 and 
1.48.\1546\
---------------------------------------------------------------------------

    \1546\ For bona fide hedges and spread exemptions, this 
information includes: (i) A description of the position in the 
commodity derivative contract (including the name of the underlying 
commodity and the derivative position size) or of the spread 
position for which the application is submitted; (ii) an explanation 
of the hedging strategy, including a statement that the position 
complies with the applicable requirements for, and the definition 
of, a bona fide hedging transaction or position, and information to 
demonstrate why the position satisfies such requirements and 
definition; (iii) a statement concerning the maximum size of all 
gross positions in commodity derivative contracts for which the 
application is submitted; (iv) for bona fide hedges, a description 
of the applicant's activity in the cash markets and swaps markets 
for the commodity underlying the position for which the application 
is submitted, including information regarding the offsetting cash 
positions; and (v) any other information that may help the 
Commission determine whether the position meets the applicable 
requirements for a bona fide hedge position or spread transaction.
---------------------------------------------------------------------------

a. Existing Bona Fide Hedges That Currently Require Prior Submission to 
the Commission Under Existing Sec. Sec.  1.47 and 1.48 for the Nine 
Legacy Agricultural Contracts
    Under the Final Rule, the Commission maintains the distinction 
between enumerated bona fide hedges and non-enumerated bona fide hedges 
in final Sec.  150.3: (1) Enumerated bona fide hedges continue to be 
self-effectuating; (2) enumerated anticipatory bona fide hedges are now 
self-effectuating, so market participants no longer need to apply to 
the Commission for recognition; and (3) non-enumerated bona fide hedges 
still require market participants to apply for recognition. Market 
participants that choose to apply directly to the Commission for a bona 
fide hedge recognition (i.e., for non-enumerated bona fide hedges) are 
subject to an application process that generally is similar to what the 
Commission currently administers for the non-enumerated bona fide 
hedges and the enumerated anticipatory bona fide hedges.\1547\
---------------------------------------------------------------------------

    \1547\ As noted above, under the existing framework, market 
participants are not required to apply for any type of bona fide 
hedge recognition or spread exemption from the Commission for any of 
the additional 16 contracts that are newly subject to Federal 
position limits (i.e., those contracts other than the nine legacy 
agricultural contracts); rather, under the existing framework, such 
market participants must apply to the exchanges for bona fide hedge 
recognitions or exemptions for purposes of exchange-set position 
limits. Accordingly, to the extent that market participants do not 
need to apply to the Commission in connection with any of the 
additional 16 contracts, the Final Rule does not impose additional 
costs or benefits compared to the status quo.
---------------------------------------------------------------------------

    With respect to enumerated anticipatory bona fide hedges for the 
nine legacy agricultural contracts, for which market participants 
currently are required to apply to the Commission for recognition for 
Federal position limit purposes, the Commission anticipates that the 
Final Rule will benefit market participants by making such hedges self-
effectuating.\1548\ As a result, market participants will no longer be 
required to spend time and resources applying to the Commission.
---------------------------------------------------------------------------

    \1548\ As noted above, since market participants do not need to 
apply to the Commission for bona fide hedge recognition for any of 
the additional 16 contracts that are newly subject to Federal 
position limits, the Commission's proposal does not result in any 
additional costs or benefits to the extent such bona fide hedge 
recognitions are self-effectuating.
---------------------------------------------------------------------------

    Further, for these enumerated anticipatory hedges, existing Sec.  
1.48 requires market participants to submit either an initial or 
supplemental application to the Commission 10 days prior to entering 
into the bona fide hedge that would cause the hedger to exceed Federal 
position limits.\1549\ Under existing Sec.  1.48, a market participant 
could proceed with its proposed bona fide hedge if the Commission does 
not notify a market participant otherwise within the specific 10-day 
period. Under the Final Rule, because bona fide hedgers can implement 
enumerated anticipatory bona fide hedges without filing an application 
with the Commission for approval and waiting the requisite 10 days, 
they may be able to implement their hedging strategy more efficiently 
with reduced cost and risk. The

[[Page 3430]]

Commission acknowledges that making such bona fide hedges more 
efficient to obtain could increase the possibility of excess 
speculation since anticipatory exemptions are theoretically more 
difficult to substantiate compared to the other existing enumerated 
bona fide hedges.
---------------------------------------------------------------------------

    \1549\ Under the Commission's existing regulations, non-
anticipatory enumerated bona fide hedges are self-effectuating, and 
market participants do not have to file any applications for 
recognition under existing Commission regulations. However, existing 
Commission regulations require bona fide hedgers to file with the 
Commission monthly Form 204 (or Form 304 in connection with ICE 
Cotton No. 2 (CT)) reports discussing their underlying cash 
positions in order to substantiate their bona fide hedge positions.
---------------------------------------------------------------------------

    However, the Commission has gained significant experience over the 
years with bona fide hedging practices in general, and with enumerated 
anticipatory bona fide hedging practices in particular, and the 
Commission has determined that making such hedges self-effectuating 
should not increase the risk of excessive speculation or market 
manipulation compared to the status quo.
    For non-enumerated bona fide hedges, existing Sec.  1.47 requires 
market participants to submit (i) initial applications to the 
Commission 30 days prior to the date the market participant would 
exceed the applicable position limits and (ii) supplemental 
applications (i.e., applications for a market participant that desires 
to exceed the bona fide hedge amount provided in the person's previous 
Commission filing) 10 days prior for Commission approval, and market 
participants can proceed with their proposed bona fide hedges if the 
Commission does not intervene within the specific time (e.g., either 10 
days or 30 days).
    Final Sec.  150.3 similarly requires market participants that elect 
to apply directly to the Commission (as opposed to applying through an 
exchange pursuant to final Sec.  150.9) for a recognition of a non-
enumerated bona fide hedge for any of the 25 core referenced futures 
contracts to apply to the Commission prior to exceeding Federal 
position limits. Final Sec.  150.3 does not, however, prescribe a 
certain time period by which a bona fide hedger must apply or by which 
the Commission must respond. The Commission anticipates that the Final 
Rule benefits bona fide hedgers by enabling them, in many cases, to 
generally implement their hedging strategies sooner than the existing 
30-day or 10-day waiting period, as applicants will have access to an 
expanded list of enumerated hedges (which don't require prior 
Commission approval), a new streamlined process for applying through 
exchanges for non-enumerated hedges, increased position limits, and, as 
discussed here, a more flexible approach for applying directly to the 
Commission for a non-enumerated hedge. Considering these factors, the 
Commission believes that, ultimately, hedging-related costs would 
likely decrease. However, the Commission believes that there could also 
be circumstances in which the overall process for applying directly to 
the Commission could take longer than the existing timelines under 
Sec.  1.47, which could increase hedging-related costs if a bona fide 
hedger is compelled to wait longer, compared to existing Commission 
practices, before executing its hedging strategy.
    On the other hand, the Commission also recognizes that there could 
be potential costs to bona fide hedgers if, under the Final Rule, they 
are forced either to enter into less effective bona fide hedges, or to 
wait to implement their hedging strategy, as a result of the potential 
uncertainty that could result from Sec.  150.3 not requiring the 
Commission to respond within a certain amount of time. However, the 
Commission believes this concern is mitigated since market participants 
will likely also have the option to apply for a non-enumerated bona 
fide hedge under final Sec.  150.9. As explained further below, final 
Sec.  150.9(e)(3) is a streamlined process whereby a market participant 
in receipt of a notice of approval from the relevant exchange may 
elect, at its own risk, to exceed Federal position limits during the 
Commission's review period, which is limited to 10 (or 2) days under 
Sec.  150.9.\1550\
---------------------------------------------------------------------------

    \1550\ See supra Section II.G.7. (discussing when a person may 
exceed Federal position limits).
---------------------------------------------------------------------------

    This concern is also mitigated to the extent market participants 
utilize the Sec.  150.3 process that permits a market participant that 
demonstrates a ``sudden or unforeseen'' increase in its bona fide 
hedging needs to enter into a bona fide hedge without first obtaining 
the Commission's prior approval, as long as the market participant 
submits a retroactive application to the Commission within five 
business days of exceeding the applicable position limit. The 
Commission believes this ``five-business day retroactive exemption'' 
benefits bona fide hedgers compared to existing Sec. Sec.  1.47 and 
1.48, which require Commission prior approval, since hedgers that 
qualify to exercise the five-business day retroactive exemption are 
also likely facing more acute hedging needs--with potentially 
commensurate costs if required to wait. This provision also leverages, 
for Federal position limit purposes, existing exchange practices for 
granting retroactive exemptions from exchange-set limits.
    On the other hand, the proposed five-business day retroactive 
exemption could harm market liquidity and bona fide hedgers if the 
applicable exchange or the Commission were to not approve the 
retroactive request, and the Commission subsequently required 
liquidation of the position in question. As a result, such possibility 
could cause market participants to either enter into smaller bona fide 
hedge positions than they otherwise would, or cause the bona fide 
hedger to delay entering into its hedge, in either case potentially 
causing bona fide hedgers to incur increased hedging costs.
    However, the Commission believes this concern is partially 
mitigated since proposed Sec.  150.3 requires the purported bona fide 
hedger to exit its position in a ``commercially reasonable time,'' 
which the Commission believes should partially mitigate any costs 
incurred by the market participant compared to either an alternative 
that would require the bona fide hedger to exit its position 
immediately, or the status quo where the market participant either is 
unable to enter into a hedge at all without Commission prior approval.
b. Spread Exemptions and Non-Enumerated Bona Fide Hedges
    Final Sec.  150.3 imposes a new requirement for Federal position 
limit purposes for market participants to (1) apply either directly to 
the Commission pursuant to Sec.  150.3 or indirectly through an 
exchange pursuant to final Sec.  150.9 for any non-enumerated bona fide 
hedge; and (2) to apply directly to the Commission pursuant to Sec.  
150.3 for any spread exemptions not identified in the proposed ``spread 
transaction'' definition (the Commission notes that a market 
participant may not apply indirectly through an exchange for spread 
exemptions for Federal position limit purposes).\1551\ As noted above, 
common spread exemptions (i.e., those identified in the definition of 
``spread transaction'' in final Sec.  150.1) remain self-effectuating 
for the nine legacy agricultural products, and also are self-
effectuating for the 16 additional core referenced futures 
contracts.\1552\
---------------------------------------------------------------------------

    \1551\ As discussed below, for spread exemptions not identified 
in the proposed ``spread transaction'' definition in Sec.  150.3, 
market participants are required to apply directly to the Commission 
under Sec.  150.3 and are not able to apply under Sec.  150.9.
    \1552\ Existing Sec.  150.3(a)(2) does not specify a formal 
process for granting either spread exemptions or non-anticipatory 
enumerated bona fide hedges that are consistent with CEA section 
4a(a)(1), so, in practice, spread exemptions and non-anticipatory 
enumerated bona fide hedges have been self-effectuating.
---------------------------------------------------------------------------

    The baseline is the status quo under existing Sec.  150.3(a)(3), 
which provides that certain spread exemptions are self-effectuating for 
purposes of Federal position limits. As noted above, Sec.  150.3 is 
also the baseline for non-enumerated bona fide hedges. The final rule

[[Page 3431]]

maintains the status quo with respect to spread exemptions that meet 
the ``spread transaction definition'' for the nine legacy agricultural 
contracts as such spread exemptions will continue to be self-
effectuating. The final rule also maintains the status quo for any non-
enumerated bona fide hedge in one of the nine legacy agricultural 
contracts by requiring an applicant to receive prior approval, and 
similarly requiring prior approval for such non-enumerated bona fide 
hedges for the additional 16 contracts that are newly subject to 
Federal position limits.\1553\
---------------------------------------------------------------------------

    \1553\ The Commission discusses the costs and benefits related 
to the process for non-enumerated bona fide hedge recognitions with 
respect to the nine legacy agricultural products in the above 
section.
---------------------------------------------------------------------------

    The Commission concludes that there is a change to the status quo 
baseline with respect to the 16 non-legacy core referenced futures 
contracts to the extent that they will be subject to Federal position 
limits for the first time under the Final Rule. However, since the most 
common spread exemptions will be ``self-effectuating'' for Federal 
purposes, market participants will not need to do anything new, 
compared to the status quo, under the Final Rule in connection with 
self-effectuating spread exemptions. Accordingly, as a practical 
matter, the Commission does not believe that the Final Rule will impose 
any new costs or benefits with respect to the 16 non-legacy core 
referenced futures products related to the Final Rule's treatment of 
these self-effectuating spread exemptions since market participants 
will not need to do anything differently compared to the status quo 
(i.e., market participants will still need to obtain exchange approval 
of any spread exemption for purposes of exchange-set position limits, 
but will not be required to do anything for Federal purposes in 
connection with self-effectuating spread exemptions).
    Alternatively, several commenters advocated for the Commission to 
expand the proposed Sec.  150.9 process to also allow exchanges to 
grant ``non-enumerated'' spread exemptions for spread positions that do 
not meet the ``spread transaction'' definition.\1554\ As more fully 
explained in the preamble, the Commission determined not to expand 
Sec.  150.9 for two primary reasons.\1555\ First, most of the more 
common spread exemptions used by market participants fall within the 
scope of the Final Rule's expanded ``spread transaction'' definition 
and are self-effectuating for purposes of Federal position limits. 
Spread exemption requests that fall outside of the ``spread 
transaction'' definition are likely to be novel exemption requests that 
require Commission review.
---------------------------------------------------------------------------

    \1554\ See MFA/AIMA at 10; FIA at 21; Citadel at 8-9; ISDA at 9; 
ICE at 7-8.
    \1555\ See supra Sections II.G.4., II.G.5.
---------------------------------------------------------------------------

    Second, bona fide hedge recognitions and spread transactions are 
subject to different legal standards under CEA section 4a(a). Because 
CEA section 4a(a)(c)(2) provides clear criteria to the Commission for 
determining what constitutes a bona fide hedging transaction or 
position, the Commission has defined in detail the term ``bona fide 
hedging transaction or position'' in Sec.  150.1. As a result, the 
Commission is permitting exchanges to evaluate applications for non-
enumerated bona fide hedges for purposes of exchange-set limits in 
accordance with the same clear criteria used by the Commission. In 
contrast, CEA section 4(a)(a)(1) does not include clear criteria to the 
Commission for the granting of spread exemptions and requires the 
Commission to use its judgment to conduct a fact-specific analysis of 
novel spread exemption requests. Because exchanges would lack clear 
standards for assessing whether a particular spread position satisfies 
the requirements of the CEA, the Commission currently is uncomfortable 
with leveraging an exchange's analysis and determination with respect 
to novel spread exemption requests and believes that such an 
alternative could impose costs on risk management practices due to 
possible inconsistent treatment of such exemption requests across 
exchanges as well as potential uncertainty due to lack of a clear 
statutory standard.
    To the extent market participants are required to obtain prior 
approval for a non-enumerated bona fide hedge or spread exemption for 
any of the additional 16 contracts that are newly subject to Federal 
position limits, the Commission recognizes that Sec.  150.3 imposes 
costs on market participants who are now required to spend time and 
resources submitting applications to the Commission or an exchange, or 
both, as applicable, for prior approval of exemptions for Federal 
position limit purposes.\1556\ Further, compared to the status quo in 
which the proposed new 16 contracts are not subject to Federal position 
limits, the process in Sec.  150.3 could increase uncertainty since 
market participants are required to seek prior approval and wait for an 
undetermined amount of time for a Commission response. As a result, 
such uncertainty could cause market participants to either enter into 
smaller spread or bona fide hedging positions or do so at a later time. 
In either case, this could cause market participants to incur 
additional costs and/or implement less efficient hedging strategies.
---------------------------------------------------------------------------

    \1556\ The Commission's Paperwork Reduction Act analysis 
identifies some of these information collection burdens in greater 
specificity. See infra Section IV.B.3.ii.c. (discussing in greater 
detail the cost and benefits related to spread exemptions).
---------------------------------------------------------------------------

    However, the Commission believes that final Sec.  150.3's framework 
is familiar to market participants that currently apply to the 
Commission for bona fide exemptions for the nine legacy agricultural 
products, which should serve to reduce costs for some market 
participants associated with obtaining recognition of a bona fide hedge 
or spread exemption from the Commission for Federal position limits for 
those market participants.\1557\
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    \1557\ The Commission anticipates that the application process 
in Sec.  150.3(b) could slightly reduce compliance-related costs, 
compared to the status quo application process to the Commission 
under existing Sec. Sec.  1.47 and 1.48, because Sec.  150.3 
provides a single, standardized process for all bona fide hedge and 
spread exemption requests that is slightly less complex--and more 
clearly laid out in the proposed regulations--than the Commission's 
existing application processes. Nonetheless, since the Commission 
anticipates that most market participants would apply directly to 
exchanges for bona fide hedges when provided the option under Sec.  
150.9, the Commission believes that most market participants would 
incur the costs and benefits discussed thereunder.
---------------------------------------------------------------------------

    The Commission believes that this analysis also applies to the nine 
legacy agricultural contracts for spread exemptions that are not listed 
in the proposed ``spread transaction'' definition and therefore also 
requires market participants to apply to the Commission for these types 
of spread exemptions for the first time for the nine legacy 
agricultural products. However, because the Commission has determined 
that most spread transactions are self-effectuating (especially for the 
nine legacy agricultural contracts based on the Commission's 
experience), the Commission believes that Sec.  150.3 imposes only 
small costs with respect to spread exemptions for both the nine legacy 
agricultural contracts as well as the additional 16 contracts that are 
newly subject to Federal position limits.\1558\
---------------------------------------------------------------------------

    \1558\ ICE requested that market participants be able to apply 
for spread exemptions on a late or retroactive basis the same way 
they would be permitted to apply for bona fide hedge exemptions 
within five days of exceeding Federal position limits under proposed 
Sec. Sec.  150.3 and 150.9. ICE at 8. The Commission has determined 
not to permit late retroactive applications for spread exemptions 
under Sec.  150.3(a) because the Commission believes that the Final 
Rule provides sufficient flexibility to allow market participants to 
identify their exemption needs and submit timely applications. See 
supra Section II.C.4.iii. The Commission further believes that 
allowing retroactive spread exemptions (and other types of 
retroactive exemptions) could potentially be harmful to the market, 
as these types of strategies may involve non-risk-reducing or 
speculative activity that should be evaluated prior to a person 
exceeding Federal position limits. Id.

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

[[Page 3432]]

    While the Commission has years of experience granting and 
monitoring spread exemptions and enumerated and non-enumerated bona 
fide hedges for the nine legacy agricultural contracts, as well as 
overseeing exchange processes for administering exemptions from 
exchange-set limits on such commodities, the Commission does not have 
the same level of experience or comfort administering bona fide hedge 
recognitions and spread exemptions for the additional 16 contracts that 
are subject to the Federal position limits and the new exemption 
processes for the first time. Accordingly, the Commission recognizes 
that permitting enumerated bona fide hedges and spread exemptions 
identified in the ``spread transaction'' definition for these 
additional 16 contracts might not provide the purported benefits, or 
could result in increased costs, compared to the nine legacy 
agricultural products.
    The Commission also believes that Sec.  150.3 benefits market 
participants by providing them the option to choose the process for 
applying for a non-enumerated bona fide hedge (i.e., either directly 
with the Commission or, alternatively, through the exchange-centric 
process discussed under Sec.  150.9 below) for the additional 16 
contracts that are newly subject to Federal position limits that are 
more efficient given the market participants' unique facts, 
circumstances, and experience.\1559\ If a market participant chooses to 
apply through an exchange for Federal position limits pursuant to final 
Sec.  150.9, the market participant receives the added benefit of not 
being required to also submit another application directly to the 
Commission. The Commission anticipates that most market participants 
would apply directly to exchanges for non-enumerated bona fide hedges, 
pursuant to the streamlined process Sec.  150.9, as explained below, in 
which case the Commission believes that most market participants would 
incur the costs and benefits discussed thereunder. The Commission also 
believes that this analysis applies with respect to non-enumerated bona 
fide hedges for the nine legacy agricultural contracts.
---------------------------------------------------------------------------

    \1559\ As noted above, market participants seeking spread 
exemptions not listed in the proposed ``spread transaction'' 
definition in Sec.  150.1 are required to apply directly with the 
Commission under Sec.  150.3 and are not permitted to apply under 
Sec.  150.9. The Commission recognizes that these types of spread 
exemptions are difficult to analyze compared to either the spread 
exemptions identified in Sec.  150.1 or bona fide hedges in general. 
Accordingly, the Commission has determined to require market 
participants to apply directly to the Commission. Further, compared 
to the spread exemptions identified in final Sec.  150.1, the 
Commission anticipates relatively few requests, and so does not 
believe the application requirement will impose a large aggregate 
burden across market participants.
---------------------------------------------------------------------------

c. Exemption-Related Recordkeeping
    Final Sec.  150.3(d) requires persons who avail themselves of any 
of the foregoing exemptions to maintain complete books and records 
concerning all details of each of their exemptions and any related 
position, and to make such records available to the Commission upon 
request under Sec.  150.3(e).
    Several commenters recommended that the Commission delete the pass-
through swap recordkeeping requirements in proposed Sec.  150.3(d)(2) 
based on concerns it would place all compliance burdens on the pass-
through swap counterparty offering the swap rather than the bona fide 
hedging counterparty.\1560\ Commenters further expressed concerns the 
proposed provision would be burdensome to the extent it would require 
the pass-through swap counterparty to maintain records of each 
representation made by the bona fide hedging counterparty on a trade-
by-trade basis.\1561\
---------------------------------------------------------------------------

    \1560\ Cargill at 6; Shell at 6.
    \1561\ Id.
---------------------------------------------------------------------------

    The Commission intended Sec.  150.3(d)(2) to be an extension of 
market participants' existing obligations to maintain regulatory 
records under part 45 and Sec.  1.31. As discussed above, the revised 
``bona fide hedging transaction or position'' definition in final Sec.  
150.1 requires that a pass-through swap counterparty receive a written 
representation from its bona fide hedging swap counterparty in order 
for the pass-through swap to qualify as a bona fide hedge.\1562\ In 
light of that, final Sec.  150.3(d)(2) requires a person relying on the 
pass-through swap provision to maintain any records created for 
purposes of demonstrating a good faith reliance on that provision in 
accordance with Sec.  150.1.
---------------------------------------------------------------------------

    \1562\ See supra at Section II.A.1.x.
---------------------------------------------------------------------------

    These recordkeeping requirements benefit market integrity by 
providing the Commission with the necessary information to monitor the 
use of exemptions from speculative position limits and help to ensure 
that any person who claims any exemption permitted by Sec.  150.3 can 
demonstrate compliance with the applicable requirements. The Commission 
does not expect these requirements to impose significant new costs on 
market participants, as these requirements are in line with existing 
Commission and exchange-level recordkeeping obligations.
d. Exemption Renewals
    Consistent with existing Sec. Sec.  1.47 and 1.48, with respect to 
any Commission-recognized bona fide hedge or Commission-granted spread 
exemption pursuant to final Sec.  150.3, the Commission does not 
require a market participant to reapply annually to the 
Commission.\1563\ The Commission believes that this reduces burdens on 
market participants but also recognizes that not requiring market 
participants to annually reapply to the Commission ostensibly could 
harm market integrity since the Commission will not directly receive 
updated information with respect to particular bona fide hedgers or 
exemption holders prior to the trader exceeding the applicable Federal 
position limits.
---------------------------------------------------------------------------

    \1563\ As discussed below, with respect to exchange-set limits 
under Sec.  150.5 or the exchange process for Federal position 
limits under Sec.  150.9, market participants are required to 
annually reapply to exchanges.
---------------------------------------------------------------------------

    However, the Commission believes that any potential harm is 
mitigated since the Commission, unlike exchanges, has access to 
aggregate market data, including positions held by individual market 
participants. Further, Sec.  150.3 requires a market participant to 
submit a new application if any material information changes, or upon 
the Commission's request. In addition, the Commission will receive 
information about any annual renewals of such requests made to an 
exchange (for purposes of exchange-set limits) through the monthly 
exchange reports required under Sec.  150.5(a)(4). On the other hand, 
market participants benefit by not being required to annually submit 
new applications, which the Commission believes reduces compliance 
costs.
e. Exemptions for Financial Distress and Conditional Natural Gas 
Positions
    Final Sec.  150.3 codifies the Commission's existing informal 
practice with respect to exemptions for financial distress and existing 
industry practice with respect to the conditional spot month limit 
exemption positions in natural gas. The same costs and benefits 
described above with respect to applications for bona fide hedge 
recognitions and spread exemptions also apply to these exemptions. 
However, to the extent the Commission currently allows exemptions 
related to financial distress, the Commission has determined that the 
costs and benefits with respect to the related application

[[Page 3433]]

process already may be recognized by market participants.
ii. Process for Market Participants To Apply to an Exchange for Non-
Enumerated Bona Fide Hedge Recognitions for Purposes of Federal 
Position Limits (Final Sec.  150.9) and Related Changes to Part 19 of 
the Commission's Regulations
    Final Sec.  150.9 provides a framework whereby a market participant 
could avoid the existing dual application process described above and, 
instead, file one application with an exchange to receive a non-
enumerated bona fide hedging recognition, which as discussed previously 
is not self-effectuating for purposes of Federal position limits. Under 
this process, a person is allowed to exceed the Federal position limit 
levels following an exchange's review and approval of an application 
for a bona fide hedge recognition, provided that the Commission during 
its review does not notify the exchange otherwise within a certain 
period of time thereafter. Market participants who do not elect to use 
the process in final Sec.  150.9 for purposes of Federal position 
limits are required to request relief both directly from the Commission 
under Sec.  150.3, as discussed above, and also apply to the relevant 
exchange, consistent with existing practices.\1564\
---------------------------------------------------------------------------

    \1564\ As noted above, the Commission anticipates that most, if 
not all, market participants will use Sec.  150.9, rather than Sec.  
150.3, where permitted.
---------------------------------------------------------------------------

a. Final Sec.  150.9--Establishment of General Exchange Process
    Pursuant to final Sec.  150.9, exchanges that elect to process 
these applications are required to file new rules or rule amendments 
with the Commission under Sec.  40.5 of the Commission's regulations 
and obtain from applicants all information to enable the exchange and 
the Commission to determine that the facts and circumstances support a 
non-enumerated bona fide hedge recognition. Also, final Sec.  
150.9(e)(1) requires exchanges to provide real-time notification to the 
Commission of each initial determination to recognize a non-enumerated 
bona fide hedging transaction or position. The Commission believes that 
exchanges' existing practices generally are consistent with the 
requirements of Sec.  150.9, and, therefore, exchanges will only incur 
marginal costs, if any, to modify their existing practices to comply. 
Similarly, the Commission anticipates that establishing uniform, 
standardized exemption processes across exchanges benefits market 
participants by reducing compliance costs. On the other hand, the 
Commission recognizes that exchanges that wish to participate in the 
processing of applications with the Commission under Sec.  150.9 are 
required to expend resources to establish a process consistent with the 
Final Rule. However, to the extent exchanges have similar procedures, 
such benefits and costs may already have been realized by market 
participants and exchanges.
    The Commission believes that there are significant benefits to the 
Sec.  150.9 process that will be largely realized by market 
participants. The Commission has determined that the use of a single 
application to process both exchange and Federal position limits 
exemptions benefits market participants and exchanges by simplifying 
and streamlining the process. For applicants seeking recognition of a 
non-enumerated bona fide hedge, Sec.  150.9 should reduce duplicative 
efforts, because applicants are saved the expense of applying in 
parallel to both an exchange and the Commission for relief from 
exchange-set position limits and Federal position limits, respectively. 
Because many exchanges already possess similar application processes 
with which market participants are likely accustomed, compliance costs 
should be decreased in the form of reduced application-production time 
by market participants and reduced response time by exchanges.\1565\
---------------------------------------------------------------------------

    \1565\ The Commission has previously estimated the combined 
annual burden hours for submitting applications under both 
Sec. Sec.  1.47 and 1.48 to be 42 hours. See infra Section IV.B. 
(Paperwork Reduction Act) and 85 FR 11596, 11700 (Feb. 27, 2020).
---------------------------------------------------------------------------

    As discussed above, in connection with the recognition of bona fide 
hedges for Federal position limit purposes, current practices set forth 
in existing Sec. Sec.  1.47 and 1.48 require market participants to 
differentiate between (i) enumerated non-anticipatory bona fide hedges 
that are self-effectuating, and (ii) enumerated anticipatory bona fide 
hedges and non-enumerated bona fide hedges for which market 
participants must apply to the Commission for prior approval. Under the 
Final Rule, the Commission's application processes no longer 
distinguish among different types of enumerated bona fide hedges (e.g., 
anticipatory versus non-anticipatory enumerated bona fide hedges), and 
therefore, do not require exchanges to have separate processes for 
enumerated anticipatory positions under Sec.  150.9. The Final Rule 
also eliminates the requirement for bona fide hedgers to file Form 204 
or the relevant portions of Form 304, as applicable, with respect to 
any bona fide hedge, whether enumerated or non-enumerated.\1566\ The 
Commission expects this to benefit market participants by providing a 
more efficient and less complex process that is consistent with 
existing practices at the exchange-level.\1567\
---------------------------------------------------------------------------

    \1566\ See supra Section II.H.2. (discussing changes to part 19 
eliminating Form 204 and portions of Form 304).
    \1567\ See infra Section IV.A.5.iii. for discussion related to 
changes to part 19 regarding the provision of information by market 
participants, noting that the elimination of Form 204 by the Final 
Rule reduces the burden hours estimates by 300 annual aggregate 
burden hours.
---------------------------------------------------------------------------

    On the other hand, the Commission recognizes that Sec.  150.9 
imposes new costs related to non-enumerated bona fide hedges for the 
additional 16 contracts that are newly subject to Federal position 
limits. Under final Sec.  150.9(c), market participants are now 
required to submit applications, including information to demonstrate 
why a particular position qualifies as bona fide hedge, as defined in 
Sec.  150.1 and CEA section 4a(c)(2), to receive prior approval for 
Federal position limits purposes.\1568\ However, since the Commission 
understands that exchanges already require market participants to 
submit applications and receive prior approval under exchange-set 
limits for all types of bona fide hedges, the Commission does not 
believe Sec.  150.9 imposes any additional incremental costs on market 
participants beyond those already incurred under exchanges' existing 
processes.\1569\ Accordingly, the

[[Page 3434]]

Commission believes that any costs already may have been realized by 
market participants.
---------------------------------------------------------------------------

    \1568\ One commenter requested that the Commission provide 
additional factors that exchanges should consider when granting non-
enumerated bona fide hedge recognitions. ISDA at 9. As discussed 
more fully in the preamble, the Commission believes that the final 
regulations strike a reasonable tradeoff by providing sufficient 
guidance to the exchanges for their review and determination in the 
context of exchange limits, while preserving the exchanges' 
discretionary authority to determine what types of additional 
information, if any, to collect. See supra Section II.G.5. 
(discussing final Sec.  150.9(c)).
    \1569\ Under the 2020 NPRM, proposed Sec.  150.9(c)(1)(ii) would 
have required exchanges to request a ``factual and legal'' analysis 
from applicants for non-enumerated bona fide hedge recognitions. 85 
FR 11638. Two commenters expressed concern that the proposed 
requirement could be interpreted as requiring applications to engage 
legal counsel to complete their applications, which would result in 
additional costs to market participants. See CME Group at 10 and CMC 
at 11. The Commission did not intend for exchanges to require that 
applicants engage legal counsel to complete their applications for 
non-enumerated bona fide hedge recognitions. Final Sec.  
150.9(c)(1)(ii), instead of requiring a ``factual and legal 
analysis,'' requires an applicant to provide ``an explanation of the 
hedging strategy,'' including a statement that the position complies 
with the applicable requirements of the bona fide hedge definition, 
and information to demonstrate why the position satisfies the 
applicable requirements. See supra Section II.G.5. (discussing final 
Sec.  150.9(c)).
---------------------------------------------------------------------------

    Further, the Commission believes that employing a concurrent 
process with exchanges that are self-regulatory organizations 
responsible for overseeing non-enumerated bona fide hedges executed on 
their platforms and that are not self-effectuating for Federal position 
limits purposes benefits market integrity by ensuring that market 
participants are appropriately relying on such bona fide hedges and not 
entering into such positions in order to attempt to manipulate the 
market or evade position limits. However, to the extent that exchange 
oversight, consistent with Commission standards and DCM core 
principles, already exists, such benefits may already be realized.
b. Final Sec.  150.9--Exchange Expertise, Market Integrity, and 
Commission Oversight
    For non-enumerated bona fide hedge recognitions that require the 
Commission's prior approval, the Final Rule provides a framework that 
utilizes existing exchange resources and expertise so that fair access 
and liquidity are promoted at the same time market manipulations, 
squeezes, corners, and other conduct that would disrupt markets are 
deterred and prevented.\1570\ Final Sec.  150.9 builds on existing 
exchange processes, which the Commission believes strengthens the 
ability of the Commission and exchanges to monitor markets and trading 
strategies while reducing burdens on both the exchanges, which 
administer the process, and market participants, who utilize the 
process. For example, exchanges are familiar with their market 
participants' commercial needs, practices, and trading strategies, and 
already evaluate hedging strategies in connection with setting and 
enforcing exchange-set position limits.\1571\ Accordingly, exchanges 
should be able to readily identify bona fide hedges.
---------------------------------------------------------------------------

    \1570\ See CME Group at 7 (stating that the Sec.  150.9 
streamlined process would wisely leverage exchanges' long history of 
reviewing hedging approaches and applying those approaches to 
specific facts and circumstances, and would thereby advance the 
statutory goal of allowing commercial parties to ``hedge their 
legitimate anticipated business needs'' without imposing any undue 
burden in doing so).
    \1571\ For a discussion on the history of exemptions, see 78 FR 
at 75703-75706.
---------------------------------------------------------------------------

    For these reasons, the Commission has determined that allowing 
market participants to apply through an exchange under Sec.  150.9, 
rather than directly to the Commission as required under existing Sec.  
1.47, is likely to be more efficient than if the Commission itself 
initially had to review and approve all applications. The Commission 
considers the increased efficiency in processing applications under 
Sec.  150.9 as a benefit to bona fide hedgers and liquidity providers. 
By having the availability of the exchange's analysis and view of the 
markets, the Commission is better informed in its review of the market 
participant and its application, which in turn may further benefit 
market participants in the form of administrative efficiency and 
regulatory consistency. However, the Commission recognizes additional 
costs for exchanges required to create and submit real-time notices 
under final Sec.  150.9(e). In particular, commenters voiced concerns 
that the Commission's review of each non-enumerated bona fide hedge 
application could impose significant burdens on exchanges, market 
participants, and the Commission.\1572\ To the extent exchanges already 
provide similar notice to the Commission or to market participants, or 
otherwise are required to notify the Commission under certain 
circumstances, such benefits and costs already may have been realized. 
In addition, the Commission expects that, due to the expanded list of 
enumerated hedges and other exemptions available to market participants 
as well as the higher Federal limits in the Final Rule, there will be a 
manageable amount of non-enumerated bona fide hedges that exchanges and 
the Commission will review through the new streamlined process. The 
Commission also reiterates that Sec.  150.9 is an optional process that 
exchanges and market participants may elect to use in lieu of utilizing 
the traditional process of requesting non-enumerated bona fide hedges 
directly from the Commission under Sec.  150.3.
---------------------------------------------------------------------------

    \1572\ IFUS at 52 (stating that the ``exemption-by-exemption 
review of exchange decisions is a novel and significant departure 
from the longstanding process for the implementation of the position 
limits regime, imposes substantial burdens on the Commission and the 
exchanges, and decreases regulatory certainty for market 
participants regarding the status of an exemption''). See also ICE 
at 9 (questioning ``whether it is necessary for the Commission to 
routinely review each non-enumerated determination by the exchange'' 
and asserting that the Sec.  150.9 10-day review process ``imposes 
unnecessary burdens and delays on market participants'').
---------------------------------------------------------------------------

    On the other hand, to the extent exchanges become more involved 
with respect to review and oversight of market participants' bona fide 
hedges and spread exemptions, exchanges could incur additional costs. 
However, as noted, the Commission believes most of the costs have been 
realized by exchanges under current market practice.
    At the same time, the Commission also recognizes that this aspect 
of the Final Rule could hypothetically harm market integrity. Absent 
other provisions, since exchanges profit from increased activity, an 
exchange could hypothetically seek a competitive advantage by offering 
excessively permissive exemptions, which could allow certain market 
participants to utilize non-enumerated bona fide hedge recognitions to 
engage in excessive speculation or to manipulate market prices. If an 
exchange engaged in such activity, other market participants would 
likely face greater costs through increased transaction fees, including 
forgoing trading opportunities resulting from market prices moving 
against market participants and/or preventing the market participant 
from executing at its desired prices, which may also further lead to 
inefficient hedging.
    However, the Commission believes that these hypothetical costs are 
unfounded since under final Sec.  150.9 the Commission reviews the 
applications submitted by market participants for bona fide hedge 
recognitions and spread exemptions for Federal position limits. The 
Commission emphasizes that Sec.  150.9 is not providing exchanges with 
an ability to recognize a bona fide hedge or grant an exemption for 
Federal position limit purposes in lieu of a Commission review.\1573\ 
Rather, Sec.  150.9(e) and (f) require an exchange to provide the 
Commission with notice of the disposition of any application for 
purposes of exchange limits concurrently with the notice the exchange 
provides to the applicant, and the Commission will have 10 business 
days to make its determination for Federal position limits purposes 
(although, in connection with ``sudden or unforeseen increases'' in 
bona fide hedging needs, as discussed in connection with final Sec.  
150.3, Sec.  150.9 requires the Commission to make its determination 
within two business days). Each non-enumerated bona fide hedge approved 
by an exchange for purposes of its own limits is separately and 
independently reviewed by the Commission for purposes of Federal 
position limits. Finally, under DCM Core Principle 5 and SEF Core 
Principle 6, exchanges are accountable for administering position 
limits in a manner that reduces the potential threat of market 
manipulation or congestion. The Commission believes that these

[[Page 3435]]

requirements, working in concert, provide sufficient protection against 
any potential harm to market integrity.
---------------------------------------------------------------------------

    \1573\ See supra Section II.G. (discussing Commission 
determination of non-enumerated bona fide hedge applications 
submitted under Sec.  150.9).
---------------------------------------------------------------------------

    On the other hand, the Commission also recognizes that there could 
be potential costs to bona fide hedgers if, under the Final Rule, they 
wait up to 10 business days for the Commission to complete its review 
after the exchange's initial review--especially compared to the status 
quo for the 16 commodities that are subject to Federal position limits 
for the first time under the Final Rule and currently are not required 
to receive the Commission's prior approval. As a result, the Commission 
recognizes that a market participant could incur costs by waiting 
during the 10 business day period, or be required to enter into a less 
efficient hedge, which would harm liquidity.\1574\ However, the 
Commission believes this concern is mitigated since, under final Sec.  
150.9(e)(3), a market participant in receipt of a notice of approval 
from the relevant exchange may elect, at its own risk, to exceed 
Federal position limits during the Commission's 10-day review 
period.\1575\
---------------------------------------------------------------------------

    \1574\ See ICE at 9 (requesting that the Commission permit a 
``market participant to engage in hedging up to the requested 
exemption limit while waiting for approval'').
    \1575\ See supra Sections II.G.7. (discussing when a person may 
exceed Federal position limits).
---------------------------------------------------------------------------

    Further, final Sec.  150.9(c)(2)(i), similar to final Sec.  150.3, 
permits a market participant that demonstrates a ``sudden or 
unforeseen'' increase in its bona fide hedging needs to enter into a 
bona fide hedge without first obtaining the Commission's prior 
approval, as long as the market participant submits a retroactive 
application to the Commission within five business days of exceeding 
the applicable position limit.\1576\ In turn, the Commission only has 
two business days (as opposed to the default 10 business days) to 
complete its review for Federal purposes. The Commission believes this 
retroactive application exemption benefits bona fide hedgers compared 
to existing Sec.  1.47, which requires Commission prior approval, since 
hedgers that qualify to exercise the retroactive exemption are also 
likely facing more acute hedging needs--with potentially commensurate 
costs if required to wait. Absent the retroactive application 
exemption, market participants would be penalized and prevented from 
assuming appropriate hedges even though their hedging need arises from 
circumstances beyond their control. This provision also leverages, for 
Federal position limit purposes, existing exchange practices for 
granting retroactive exemptions from exchange-set limits.
---------------------------------------------------------------------------

    \1576\ Id.
---------------------------------------------------------------------------

    On the other hand, the retroactive application exemption could harm 
market liquidity and bona fide hedgers since the Commission is able to 
require a market participant to exit its position if the exchange or 
the Commission does not approve of the retroactive request. Such 
uncertainty could cause market participants to either enter into 
smaller bona fide hedge positions than it otherwise would, or could 
cause the bona fide hedger to delay entering into its hedge, in either 
case potentially causing bona fide hedgers to incur increased hedging 
costs. However, the Commission believes this concern is partially 
mitigated since Sec.  150.9 requires the purported bona fide hedger to 
exit its position in a ``commercially reasonable time,'' which the 
Commission believes should partially mitigate any costs incurred by the 
market participant compared to either an alternative that would require 
the bona fide hedger to exit its position immediately, or the status 
quo where the market participant is unable to enter into a hedge at all 
without Commission approval.
    As discussed in the preamble, the Commission received and 
considered two comments recommending a broader retroactive application 
exemption: (1) CME recommended that the Commission allow retroactive 
applications regardless of the circumstances and impose a position 
limits violation on an applicant in the event the exchange denies its 
application; and (2) ICE recommended that the Commission permit 
retroactive exemptions for other types of exemptions, as well as for 
position limit overages that occur as a result of operational or 
incidental issues where the applicant did not intend to evade position 
limits.\1577\ An expansion of this exception beyond bona fide hedge 
needs that arise due to sudden or unforeseen circumstances could 
disincentivize market participants from properly monitoring their 
hedging activities and filing applications in a timely manner. Because 
the Final Rule provides broad flexibility to market participants in the 
form of various exemptions, among other enhancements to the Federal 
position limits framework for bona fide hedges and other exemptions, 
the Commission determined not to expand the retroactive application 
provision in Sec.  150.9(c)(2)(ii).\1578\
---------------------------------------------------------------------------

    \1577\ See supra Section II.G.5.iii.b. (citing CME Group at 9-10 
and ICE at 10).
    \1578\ See supra Section II.G.5.ii. (discussing final Sec.  
150.9(c)(2)(i)).
---------------------------------------------------------------------------

    While existing Sec.  1.47 does not require market participants to 
annually reapply for certain bona fide hedges, final Sec.  150.9(c)(3) 
requires market participants to reapply at least annually with 
exchanges to maintain previously-approved non-enumerated bona fide 
hedge recognition for purposes of Federal position limits. Several 
commenters requested the Commission to clarify that an applicant is 
subject to the Commission's 10/2-day review process in Sec.  150.9(e) 
only for initial applications for non-enumerated bona fide hedges, and 
is not subject to such review for annual renewal applications unless 
the facts and circumstances materially change from those presented in 
the initial application. As discussed in the preamble, market 
participants are only subject to the Commission's 10/2-day review 
process for their initial applications for non-enumerated bona fide 
hedges unless there are material changes to their initial application.
    The Commission recognizes that requiring market participants to 
reapply annually could impose additional costs on those that are not 
currently required to do so. However, the Commission believes that this 
is consistent with industry practice with respect to exchange-set 
limits and that market participants are familiar with exchanges' 
exemption processes, which should reduce related costs.\1579\ Further, 
the Commission believes that market integrity is strengthened by 
ensuring that exchanges receive updated trader information that may be 
relevant to the exchange's oversight.\1580\ However, to the extent any 
of these benefits and costs reflects current market practice, they 
already may have been realized by exchanges and market participants.
---------------------------------------------------------------------------

    \1579\ See infra Section IV.A.6. (discussing final Sec.  150.5).
    \1580\ In contrast, the Commission, unlike exchanges, has access 
to aggregate market data, including positions held by individual 
market participants, and so the Commission has determined that 
requiring market participants to apply annually under final Sec.  
150.3, absent any changes to their application, does not benefit 
market integrity to the same extent.
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    The Commission anticipates additional costs for exchanges required 
to create and submit certain notifications and monthly reports. Final 
Sec.  150.9(e)(1) requires exchanges to provide real-time notification 
to the Commission of each initial determination to recognize a bona 
fide hedging transaction or position.\1581\

[[Page 3436]]

Final Sec.  150.5(a)(4) requires exchanges to provide monthly reports 
with necessary information in the form and manner required by the 
Commission. The exchange-to-Commission monthly report for contracts 
subject to Federal speculative position limits in final Sec.  
150.5(a)(4) further details the exchange's disposition of a market 
participant's application for recognition of a bona fide hedge position 
or spread exemption as well as the related position(s) in the 
underlying cash markets and swaps markets.\1582\ The Commission 
believes that such reports provide greater transparency by facilitating 
the tracking of these positions by the Commission and further assist 
the Commission in ensuring that a market participant's activities 
conform to the exchange's rules and to the CEA. The combination of the 
``real-time'' exchange notification and exchanges' provision of monthly 
reports to the Commission under final Sec. Sec.  150.9(e)(1) and 
150.5(a)(4), respectively, provides the Commission with enhanced 
surveillance tools on both a ``real-time'' and a monthly basis to 
ensure compliance with the requirements of the Final Rule. However, to 
the extent exchanges already provide similar notice to the Commission, 
or otherwise are required to notify the Commission under certain 
circumstances, such benefits and costs already may have been realized.
---------------------------------------------------------------------------

    \1581\ In addition to submitting a copy of any exchange-approved 
non-enumerated bona fide hedge application to the Commission under 
Sec.  150.9(e), an exchange may, on a voluntary basis, send the 
Commission an advance courtesy copy of the non-enumerated bona fide 
hedge application when the exchange first receives it from the 
applicant. For purposes of the cost-benefit considerations, we 
expect this to be a de minimis burden on an exchange that elects to 
provide the courtesy copy to the Commission. In addition, we expect 
that providing the courtesy copy could facilitate a more rapid 
Commission evaluation of applications submitted under Sec.  150.9, 
help facilitate additional regulatory certainty for market 
participants, and aid the Commission in its review of applications 
processed under Sec.  150.9.
    \1582\ In response to concerns from ICE that proposed Sec.  
150.5(a)(4) may be overly burdensome and redundant, the Commission 
clarified that the monthly report is required to capture only 
positions that are subject to Federal position limits (as opposed to 
other exchange-set non-enumerated exemptions), exchanges have 
discretion as to the best timing for submitting their reports so 
long as they are submitted on a monthly basis, and exchanges need 
not include factual and legal analysis in the monthly report. See 
supra Section II.D.3.iv. (discussing Sec.  150.5(a)(4)).
---------------------------------------------------------------------------

c. Final Sec.  150.9(d)--Recordkeeping
    Final Sec.  150.9(d) requires exchanges to maintain complete books 
and records of all activities relating to the processing and 
disposition of any applications, including applicants' submission 
materials,\1583\ and determination documents.\1584\ The Commission 
believes that this benefits market integrity and Commission oversight 
by ensuring that pertinent records are readily accessible, as needed by 
the Commission. However, the Commission acknowledges that such 
requirements impose costs on exchanges. Nonetheless, to the extent that 
exchanges are already required to maintain similar records, such costs 
and benefits already may be realized.\1585\
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    \1583\ One commenter requested that Sec.  150.9 allow exchanges 
to maintain records of applicants' positions on an aggregate basis, 
as opposed to requiring an exchange to match applicants' bona fide 
hedge positions to their underlying cash positions on a one-to-one 
basis. NGSA at 9. In the preamble, the Commission noted that final 
Sec.  150.9(d) does not prescribe the manner in which exchanges 
record application materials and information--it simply requires 
exchanges to keep a record of application materials and information 
collected. See supra Section II.G.6.iii.
    \1584\ Moreover, consistent with existing Sec.  1.31, the 
Commission expects that these records will be readily accessible 
until the termination, maturity, or expiration date of the bona fide 
hedge recognition or exempt spread position and during the first two 
years of the subsequent five-year retention period.
    \1585\ The Commission believes that exchanges that process 
applications for recognition of bona fide hedging transactions or 
positions and/or spread exemptions currently maintain records of 
such applications as required pursuant to other existing Commission 
regulations, including existing Sec.  1.31. The Commission, however, 
also believes that final Sec.  150.9(d) may impose additional 
recordkeeping obligations on such exchanges. The Commission 
estimates that each exchange electing to administer the processes 
will likely spend five (5) hours annually to comply with the 
recordkeeping requirement of final Sec.  150.9(d) and thus will 
incur minimal costs compared to the status quo. See generally 
Section IV.B. (discussing the Commission's PRA determinations).
---------------------------------------------------------------------------

d. Final Sec.  150.9(f)--Commission Revocation of Previously Approved 
Applications
    The Commission acknowledges that there may be costs to market 
participants if the Commission revokes a previously-approved non-
enumerated hedge recognition for Federal purposes under final Sec.  
150.9(f). Specifically, market participants could incur costs to unwind 
trades or reduce positions if the Commission required the market 
participant to do so under final Sec.  150.9(f)(2).
    However, the potential cost to market participants is mitigated 
under final Sec.  150.9(f) since the Commission provides a commercially 
reasonable time for a person to come back into compliance with the 
Federal position limits, which the Commission believes should mitigate 
transaction costs to exit the position and allow a market participant 
the opportunity to potentially execute other hedging strategies.
e. Final Sec.  150.9--Commodity Indexes and Risk Management Exemptions
    Final Sec.  150.9(b) prohibits exchanges from recognizing as a bona 
fide hedge any positions that include commodity index contracts and one 
or more referenced contracts, including exemptions known as risk 
management exemptions. The Commission recognizes that this prohibition 
could alter trading strategies that currently use commodity index 
contracts as part of an entity's risk management program. Although 
there likely is a cost to change risk management strategies for 
entities that currently rely on a bona fide hedge recognition for 
positions in commodity index contracts, as discussed above, the 
Commission believes that such financial products are not substitutes 
for positions in a physical market and therefore do not satisfy the 
statutory requirement for a bona fide hedge under section 4a(c)(2) of 
the Act.\1586\ In addition, the Commission further posits that this 
cost may be reduced or mitigated by the proposed increase in Federal 
position limit levels set forth in final Sec.  150.2, or by the 
implementation of the pass-through swap provision of the bona fide 
hedge definition in final Sec.  150.1.\1587\
---------------------------------------------------------------------------

    \1586\ See supra Section III.C.4. (discussing commodity 
indices); see supra Section IV.A.4.ii.a(1) (discussing elimination 
of the risk management exemption).
    \1587\ See supra Section IV.A.4.b.i(1) (discussing the pass-
through swap exemption).
---------------------------------------------------------------------------

iii. Related Changes to Part 19 of the Commission's Regulations 
Regarding the Provision of Information by Market Participants
    Under existing regulations, the Commission relies on Form 204 
\1588\ and Form 304,\1589\ known collectively as the ``series `04'' 
reports, to monitor for compliance with Federal position limits. Prior 
to the amendments to part 19 in the Final Rule, market participants 
that held bona fide hedging positions in excess of Federal position 
limits for the nine legacy agricultural contracts had to justify such 
overages by filing the applicable report (Form 304 for cotton and Form 
204 for the other eight legacy commodities) each month.\1590\ The

[[Page 3437]]

Commission has used these reports to determine whether a trader had 
sufficient cash positions to justify purported bona fide hedges 
positions using futures and options on futures positions above the 
applicable Federal position limits.
---------------------------------------------------------------------------

    \1588\ CFTC Form 204: Statement of Cash Positions in Grains, 
Soybeans, Soybean Oil, and Soybean Meal, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@forms/documents/file/cftcform204.pdf (existing Form 204).
    \1589\ CFTC Form 304: Statement of Cash Positions in Cotton, 
U.S. Commodity Futures Trading Commission website, available at 
https://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform304.pdf (existing Form 204). Parts I and II of Form 304 
address fixed-price cash positions used to justify cotton positions 
in excess of Federal position limits. As described below, Part III 
of Form 304 addresses unfixed price cotton ``on-call'' information, 
which is not used to justify cotton positions in excess of limits, 
but rather to allow the Commission to prepare its weekly cotton on-
call report.
    \1590\ 17 CFR 19.01.
---------------------------------------------------------------------------

    As discussed above, with respect to bona fide hedging positions, 
the Commission is adopting a streamlined approach, under final 
Sec. Sec.  150.5 and 150.9, to cash-market reporting that reduces 
duplication between the Commission and the exchanges. Generally, the 
Commission is adopting amendments to part 19 and related provisions in 
part 15 that: (i) Eliminate Form 204; and (ii) amend the Form 304, in 
each case to remove any cash-market reporting requirements. Under the 
Final Rule, the Commission instead relies on cash-market reporting 
submitted directly to the exchanges, pursuant to final Sec. Sec.  150.5 
and 150.9,\1591\ or requests cash-market information through a special 
call.\1592\
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    \1591\ See supra Section II.G.ii.3. (discussing final Sec.  
150.9). As discussed above, leveraging existing exchange application 
processes should avoid duplicative Commission and exchange 
procedures and increase the speed by which position limit exemption 
applications are addressed. For purposes of Federal position limits, 
the cash-market reporting regime discussed in this section of the 
release only pertains to bona fide hedges, not to spread exemptions, 
because the Commission has not traditionally relied on cash-market 
information when reviewing requests for spread exemptions.
    \1592\ See final Sec.  19.00(b).
---------------------------------------------------------------------------

    The cash-market and swap-market reporting elements of Sec. Sec.  
150.5 and 150.9 discussed above are largely consistent with current 
market practices with respect to exchange-set limits and thus should 
not result in any new costs.\1593\ The Final Rule's elimination of Form 
204 and the cash-market reporting segments of the Form 304 eliminate 
the reporting burden and associated costs.\1594\ Market participants 
should realize significant benefits by being able to submit cash-market 
reporting to one entity--the exchanges--instead of having to comply 
with duplicative reporting requirements between the Commission and 
applicable exchange, or implement new Commission processes for 
reporting cash-market data for market participants who will be newly 
subject to position limits.\1595\ Further, market participants are 
generally already familiar with exchange processes for reporting and 
recognizing bona fide hedging exemptions, which is an added benefit, 
especially for market participants that are newly subject to Federal 
position limits.
---------------------------------------------------------------------------

    \1593\ See, e.g., CME Rule 559 and ICE Rule 6.29.
    \1594\ Based on revised estimates of the current collections of 
information under existing part 19, the Commission estimates that 
the Final Rule reduces the collections of information in part 19 by 
600 reports and by 300 annual aggregate burden hours since the Final 
Rule eliminates Form 204. See infra Section IV.B. (Paperwork 
Reduction Act) and 85 FR 11596, 11700 (Feb. 27, 2020).
    \1595\ The Commission has noted that certain commodity markets 
are subject to Federal position limits for the first time. In 
addition, the existing Form 204 would be inadequate for reporting of 
cash-market positions relating to certain energy contracts that are 
subject to Federal position limits for the first time under the 
Final Rule.
---------------------------------------------------------------------------

    Further, these changes do not impact the Commission's existing 
provisions for gathering information through special calls relating to 
positions exceeding limits and/or to reportable positions. Accordingly, 
as discussed above, the Commission requires that all persons exceeding 
the Federal position limits set forth in final Sec.  150.2, as well as 
all persons holding or controlling reportable positions pursuant to 
existing Sec.  15.00(p)(1), must file any pertinent information as 
instructed in a special call.\1596\ The Commission acknowledges that, 
on its face, not obtaining the cash-market position information in the 
form of a series `04 report could hypothetically result in some 
increase in speculation; however, as set out above, this risk is 
mitigated by the Commission's special call authority and by the 
requirements that the exchanges receive this information under 
Sec. Sec.  150.5 and 150.9, as applicable. The Commission in turn would 
be able to receive this information from the applicable exchange. Final 
Sec.  19.00(a)(3) is similar to existing Sec.  19.00(a)(3), but 
requires any such person to file the information as instructed in the 
special call, rather than to file a series `04 report.\1597\ The 
Commission believes that relying on its special call authority is less 
burdensome for market participants than the existing Forms 204 and 304 
reporting costs, as special calls are discretionary requests for 
information whereas the series `04 reporting requirements are a 
monthly, recurring reporting burden for market participants. While 
collecting this data monthly would permit the Commission to analyze the 
bona fide hedges in a time series, which may be helpful in 
understanding trends in hedging techniques, the Commission will have 
access to this same data from the exchanges and could do the same 
analysis if required.
---------------------------------------------------------------------------

    \1596\ See final Sec.  19.00(b).
    \1597\ 17 CFR 19.00(a)(3).
---------------------------------------------------------------------------

    The Commission received one comment addressing the purported 
burdens that would accompany elimination of the cash-market reporting 
forms. Better Markets, for example, argued that eliminating these 
series `04 forms would impose additional reporting burdens on market 
participants by requiring participants to report cash-market 
information to multiple exchanges, and suggested that the Commission 
should instead ``ensure that all cash positions reporting is 
automated'' and ``amenable to aggregation'' in order to provide such 
information to the exchanges.\1598\ The Commission disagrees with 
Better Markets' concerns about increased reporting burdens and 
criticism of the existing reporting infrastructure for the reasons 
discussed above.\1599\ However, as noted above, eliminating the `04 
forms will reduce burdens on market participants.\1600\
---------------------------------------------------------------------------

    \1598\ Better Markets at 59-60.
    \1599\ See supra Section H.2.iii.-iv. (discussing Better 
Markets' comments and the Commission's responses thereto).
    \1600\ Id.
---------------------------------------------------------------------------

    Separately, ACSA argued for the elimination of Form 304 in its 
entirety.\1601\ ACSA asserted that Part III of Form 304, which is used 
to prepare the Commission's cotton on-call report, causes competitive 
harm to the U.S. cotton industry because the report divulges one market 
participant's proprietary information to another market participant 
and, according to ACSA, foreign mills believe that the report imposes 
risks and costs and are therefore more likely to purchase cotton from 
outside of the United States in order to avoid completing Part III of 
Form 304.\1602\
---------------------------------------------------------------------------

    \1601\ ACSA at 9-11.
    \1602\ See id.; see also NCTO at 1-2 (arguing against 
publication of the cotton-on-call report and that textile mills are 
particularly harmed when speculators trade against the cash-market 
positions disclosed in the cotton on-call report because textile 
mills purchase the majority of their cotton on call).
---------------------------------------------------------------------------

    As discussed in detail above at Section II.H.5.iv, the Commission 
believes that the cotton on-call report contributes to efficient price 
discovery,\1603\ and that continued publication of the cotton on-call 
report will not change the existing dynamics of the cotton market.
---------------------------------------------------------------------------

    \1603\ See, e.g., Glencore at 2. One commenter stated that it is 
difficult to see the benefit in limiting transparency in the cotton 
market and that cotton on-call report is useful and necessary 
because it allows market participants to identify market 
composition. Dunavant at 1. Similarly, another commenter stated that 
discontinuation of the cotton on-call report would widen the 
informational divide between large and small market participants 
while providing no benefits to the public or price discovery. Gerald 
Marshall at 3.
---------------------------------------------------------------------------

6. Exchange-Set Position Limits (Final Sec.  150.5)
i. Introduction
    Existing Sec.  150.5 addresses exchange-set position limits on 
contracts not

[[Page 3438]]

subject to Federal position limits under existing Sec.  150.2, and sets 
forth different standards for DCMs to apply in setting limit levels 
depending on whether the DCM is establishing limit levels: (1) On an 
initial or subsequent basis; (2) for cash-settled or physically-settled 
contracts; and (3) during or outside the spot month.
    In contrast, for physical commodity derivatives, final Sec.  
150.5(a) and (b): (1) Expands existing Sec.  150.5's framework to also 
cover contracts subject to Federal position limits under final Sec.  
150.2; (2) simplifies the existing standards that DCMs apply when 
establishing exchange-set position limits; and (3) provides non-
exclusive acceptable practices for compliance with those 
standards.\1604\ Additionally, final Sec.  150.5(d) requires DCMs to 
adopt aggregation rules that conform to existing Sec.  150.4.\1605\
---------------------------------------------------------------------------

    \1604\ See 17 CFR 150.2. Existing Sec.  150.5 addresses only 
contracts not subject to Federal position limits under existing 
Sec.  150.2 (aside from certain major foreign currency contracts). 
To avoid confusion created by the parallel Federal and exchange-set 
position limit frameworks, the Commission clarifies that final Sec.  
150.5 deals solely with exchange-set position limits and exemptions 
therefrom, whereas final Sec.  150.9 deals solely with the process 
for purposes of Federal position limits.
    \1605\ See 17 CFR 150.4.
---------------------------------------------------------------------------

    As a general matter, one factor (in addition to more specific 
factors discussed throughout this Final Rule's cost-benefit 
considerations) affecting the costs and benefits of the Federal 
position limits established by this Final Rule is the fact that 
exchanges, for many years, have had in place spot month position limits 
for all of the core referenced contracts and non-spot month limits for 
all of the nine legacy agricultural contracts.\1606\ Under final Sec.  
150.5(a) and (b), exchanges will be required to adopt exchange-set 
position limits both (i) for contracts subject to Federal position 
limits and (ii) during the spot month for physical commodity contracts 
not subject to Federal position limits. Exchanges also will be required 
to adopt position limits or position accountability outside the spot 
month for those physical commodity contracts not subject to non-spot 
month Federal position limits, although the specifics may change with 
evolving market conditions and regulatory requirements.\1607\ Exchange-
set position limits, broadly speaking, have much the same effect as 
Federal position limits since both restrict the size of speculative 
positions market participants may hold.\1608\ Moreover, there is 
significant interaction between Federal position limits and exchange-
set position limits. In particular, CEA section 5(d)(5)(B) provides 
that, for contracts where the Commission has established a position 
limit, exchange-set position limits must be set at a level no higher 
than the Federal limit.\1609\ In addition, where both the Commission 
and an exchange have position limits in place for a contract, final 
Sec.  150.5(a)(2) puts constraints on exemptions from the exchange-set 
limit that are tied to the Commission's position limits in ways 
described in detail in Section II.D.3, above. As a result, the costs 
and benefits considered by the Commission, to a considerable extent, 
are jointly attributable to Federal and exchange-set position limits. 
The Commission does not have information that would permit a 
quantitative evaluation of the extent to which this is true. 
Qualitatively, where position limits overlap, a greater attribution of 
costs and benefits to the Federal limits appears appropriate to the 
extent that Federal limits trigger exchange-set limits pursuant to CEA 
section 5(d)(5)(B). However, this is less true if an exchange elects to 
impose position limits that are more stringent than the Federal limits 
for particular contracts.\1610\
---------------------------------------------------------------------------

    \1606\ See Section II.D, supra, CME Group, Position Limits, 
https://www.cmegroup.com/market-regulation/position-limits.html; 
IFUS, Market Resources, Position Limits & Reporting, https://www.theice.com/futures-us/market-resources; CEA section 5(d)(5)(A) 
(requiring position limits or accountability); existing Sec.  150.5; 
final Sec.  150.5(a). This is generally true with the exception of 
ICE Sugar No. 16, which is only subject to exchange-set single month 
and all-months-combined position limits. However, the single month 
position limit effectively acts as the spot month position limits 
for this contract.
    \1607\ See supra Section II.D; see also CEA section 5(d)(5); 
final Sec.  150.5(a).
    \1608\ See ICE Futures U.S. at 3 (``There is no apparent benefit 
provided by adding a Federal position limit and guidance'' to ICE's 
procedures for position limits and exemptions to such limits.)
    \1609\ See also final Sec.  150.5(a)(1).
    \1610\ For example, exchanges sometimes reduce position limit 
levels in response to particular market conditions. See, e.g., ICE 
Futures U.S. at 3, n.3 (describing a reduction in spot month 
position limit for cocoa in March of 2020 in response to potential 
impact of disruptions to normal business conditions on ability of 
market participants to submit cocoa for grading). In addition, an 
exchange could routinely set a lower position limit based on its 
judgment of what is necessary to prevent manipulation or other 
problems or based on the preferences of important participants in 
its market.
---------------------------------------------------------------------------

    Despite the overlap in the effects of Federal and exchange-set 
position limits, there are a number of distinctive features of Federal 
position limits. Most importantly, as noted above, for contracts where 
Federal position limits are established, they establish a ceiling on 
positions that can be held, both as a matter of law under CEA section 
5(d)(5)(B) and as a matter of practicality since market participants 
must comply with Federal limits no matter what the level of exchange-
set limits. In addition, while exchanges can share information to some 
extent, the Commission regulates trading on all exchanges and therefore 
is generally in a position to better monitor and enforce compliance 
with position limits across more than one exchange, for example in 
connection with positions in a core referenced futures contract in one 
exchange and a linked cash-settled look-alike referenced contract on 
another exchange.
    There are other differences as well. Even where the Commission and 
an exchange set the same numerical position limit for a contract, final 
Sec.  150.5(a)(2) allows for the possibility that there may be some 
differences in the exemptions allowed.\1611\ And Federal position 
limits established pursuant to paragraph CEA section 4a(a)(2) are 
subject to a statutory requirement to achieve, to the maximum extent 
practicable, the multiple policy objectives set forth in subparagraph 
4a(a)(3)(B) of the CEA. By contrast, exchanges have a narrower 
statutory mandate to adopt position limits or position accountability 
to ``reduce the potential threat of market manipulation or 
congestion.'' \1612\ Finally, Federal position limits create compliance 
costs beyond those attributable to exchange-set position limits since 
market participants will need to establish systems to ensure compliance 
with Federal requirements. However, some compliance costs, for example 
keeping track of position levels, may be common to both forms of 
position limits.\1613\
---------------------------------------------------------------------------

    \1611\ See supra Section II.D.
    \1612\ CEA section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A). However, the 
statutory policy objectives for Federal position limits may 
indirectly affect exchange-set limits where Federal limits set a 
ceiling for exchange-set limits pursuant to CEA section 5(d)(5)(B), 
7 U.S.C. 7(d)(5)(B).
    \1613\ See supra Section III.B.2.c.ii; see also COPE at 3 (rule 
does not require market participants to create recordkeeping system 
to track data solely for purpose of filing forms with the Commission 
although some additions to existing tracking effort will be 
required).
---------------------------------------------------------------------------

    Exchange-set position limits for contracts and commodities not 
subject to Federal position limits also affect the costs and benefits 
of Federal position limits, and, in particular, of the Commission's 
finding that position limits are necessary only for the 25 CRFCs and 
contracts linked to them.\1614\

[[Page 3439]]

The Commission also has concluded that the existence of exchange-set 
limits and position accountability (discussed further below) mitigates 
the effects of not establishing Federal position limits for other 
commodity derivatives contracts.\1615\
---------------------------------------------------------------------------

    \1614\ For information on exchange-set position limits and 
position accountability for contracts and commodities not subject to 
Federal position limits, see, e.g., CME Group, Position Limits, 
https://www.cmegroup.com/market-regulation/position-limits.html; 
IFUS, Market Resources, Position Limits & Reporting, https://www.theice.com/futures-us/market-resources; CEA section 5(d)(5)(A) 
(requiring position limits or accountability); existing Sec.  150.5; 
final Sec.  150.5(b).
    \1615\ See infra Section IV.A.6.
---------------------------------------------------------------------------

ii. Physical Commodity Derivative Contracts Subject to Federal Position 
Limits Under the Final Rule (Final Sec.  150.5(a))
a. Exchange-Set Position Limits and Related Exemption Process
    For contracts subject to Federal position limits under the Final 
Rule, final Sec.  150.5(a)(1) requires DCMs to establish exchange-set 
limits no higher than the level set by the Commission. This is not a 
new requirement, and merely restates the applicable requirement in DCM 
Core Principle 5.\1616\
---------------------------------------------------------------------------

    \1616\ See Commission regulation Sec.  38.300 (restating DCMs' 
statutory obligations under the CEA 5(d)(5), 7 U.S.C. 7(d)(5)). 
Accordingly, the Commission will not discuss any costs or benefits 
related to this proposed change since it merely reflects an existing 
regulatory and statutory obligation.
---------------------------------------------------------------------------

    Final Sec.  150.5(a)(2) authorizes DCMs to grant exemptions from 
such limits and is generally consistent with current industry practice. 
The Commission has determined that codifying such practice establishes 
important, minimum standards needed for DCMs to administer--and the 
Commission to oversee--an effective and efficient program for granting 
exemptions to exchange-set limits in a manner that does not undermine 
the Federal position limits framework.\1617\
---------------------------------------------------------------------------

    \1617\ This standard is substantively consistent with current 
market practice. See, e.g., CME Rule 559 (providing that CME will 
consider, among other things, the ``applicant's business needs and 
financial status, as well as whether the positions can be 
established and liquidated in an orderly manner . . .'') and ICE 
Rule 6.29 (requiring a statement that the applicant's ``positions 
will be initiated and liquidated in an orderly manner . . .''). This 
standard is also substantively similar to existing Sec.  150.5's 
standard and is not intended to be materially different. See 
existing Sec.  150.5(d)(1) (an exemption may be limited if it would 
not be ``in accord with sound commercial practices or exceed an 
amount which may be established and liquidated in orderly 
fashion.'') 17 CFR 150.5(d)(1).
---------------------------------------------------------------------------

    In particular, Sec.  150.5(a)(2) protects market integrity and 
prevents exchange-granted exemptions from undermining the Federal 
position limits framework by requiring DCMs to either conform their 
exemptions to the type the Commission would grant under final 
Sec. Sec.  150.3 or 150.9, or to cap the exemption at the applicable 
Federal position limit level and to assess whether an exemption request 
would result in a position that is ``not in accord with sound 
commercial practices'' or would ``exceed an amount that may be 
established or liquidated in an orderly fashion in that market.''
    Absent other factors, this element of the Final Rule could 
potentially increase compliance costs for traders since each DCM could 
establish different exemption-related rules and practices. However, to 
the extent that rules and procedures currently differ across exchanges, 
any compliance-related costs and benefits for traders may already be 
realized. Similarly, absent other provisions, a DCM could 
hypothetically seek a competitive advantage by offering excessively 
permissive exemptions, which could allow certain market participants to 
utilize exemptions in establishing sufficiently large positions to 
engage in excessive speculation and to manipulate market prices. 
However, final Sec.  150.5(a)(2) mitigates these risks by requiring 
that exemptions that do not conform to the types the Commission may 
grant under final Sec.  150.3 cannot exceed final Sec.  150.2's 
applicable Federal position limit unless the Commission has first 
approved such exemption. Moreover, before a DCM could permit a new 
exemption category, final Sec.  150.5(e) requires a DCM to submit rules 
to the Commission allowing for such exemptions, allowing the Commission 
to ensure that the proposed exemption type would be consistent with 
applicable requirements, including with the requirement that any 
resulting positions would be ``in accord with sound commercial 
practices'' and may be ``established and liquidated in an orderly 
fashion.''
    Final Sec.  150.5(a)(2) additionally requires traders to re-apply 
to the exchange at least annually for the exchange-level exemption. The 
Commission recognizes that requiring traders to re-apply annually could 
impose additional costs on traders that are not currently required to 
do so. However, the Commission believes this is industry practice among 
existing market participants, who are likely already familiar with 
DCMs' exemption processes.\1618\ This familiarity should reduce related 
costs, and the Final Rule should strengthen market integrity by 
ensuring that DCMs receive updated information related to a particular 
exemption.
---------------------------------------------------------------------------

    \1618\ As noted above, the Commission believes this requirement 
is consistent with current market practice. See, e.g., CME Rule 559 
and ICE Rule 6.29. While ICE Rule 6.29 merely requires a trader to 
``submit to [ICE Exchange] a written request'' without specifying 
how often a trader must reapply, the Commission understands from 
informal discussions between Commission staff and ICE that traders 
must generally submit annual updates.
---------------------------------------------------------------------------

    The Commission received various comments pertaining to Sec.  
150.5(a)(2). CMC requested that the Commission clarify that each 
exchange has discretion to determine what information is required of 
applicants when applying for a spread exemption from exchange-set 
limits.\1619\ As noted in the 2020 NRPM, exchanges have discretion to 
determine what information is required of applicants applying for a 
spread exemption, or any other exemption from exchange-set limits, 
except for instances where the exchange is processing a non-enumerated 
bona fide hedge applications in accordance with the applications 
requirements of Sec.  150.9.\1620\ This flexibility permits exchanges 
to further mitigate costs and/or burdens associated with the exemption 
process by adopting protocols that leverage existing processes with 
which their participants are already familiar.
---------------------------------------------------------------------------

    \1619\ CMC at 7.
    \1620\ 85 FR 11644 (explaining that exchanges have flexibility 
to establish the application process as they see fit).
---------------------------------------------------------------------------

    CMC also requested that the Commission clarify that an exchange is 
not responsible for monitoring the use of spread positions for purposes 
of Federal position limits.\1621\ Exchanges are required to administer 
and monitor their position limits and any exemptions therefrom in 
accordance with DCM Core Principle 5 and SEF Core Principle 6, as 
applicable.\1622\ For an inter-market spread exemption where part of 
the spread position is executed on another exchange or over the 
counter, exchanges are encouraged to request information from the 
spread exemption applicant about the entire composition of the spread 
position.\1623\ Even though an exchange is not responsible for 
monitoring a trader's position on other exchanges, it is beneficial to 
the exchange to obtain this information so it is best informed about 
whether to grant the exemption. The Commission notes while an exchange 
may incur costs through requesting information from (or providing 
information to) another exchange, these costs already may have been 
realized by exchanges to the extent they reflect existing market 
practice. Similarly, such information sharing benefits market 
integrity, but such benefits likewise already may have been realized.
---------------------------------------------------------------------------

    \1621\ CMC at 7.
    \1622\ See supra Section II.D.3.ii.c.
    \1623\ See id.
---------------------------------------------------------------------------

    Final Sec.  150.5(a)(4) requires a DCM to provide the Commission 
with certain monthly reports regarding the disposition of any exemption

[[Page 3440]]

application, including the recognition of any position as a bona fide 
hedge, the exemption of any spread transaction or other position, the 
revocation or modification or previously granted recognitions or 
exemptions, or the rejection of any application, as well as certain 
related information similar to the information that applicants must 
provide the Commission under final Sec.  150.3 or an exchange under 
final Sec.  150.9, including underlying cash-market and swap-market 
information related to bona fide hedge positions. The Commission 
generally recognizes that this monthly reporting requirement could 
impose additional costs on exchanges, although the Commission also has 
determined that this requirement would assist with the Commission's 
oversight functions and therefore benefit market integrity. The 
Commission discusses this proposed requirement in greater detail in its 
discussion of final Sec.  150.9.\1624\
---------------------------------------------------------------------------

    \1624\ See supra Section IV.A.5.b.ii. (discussing monthly 
exchange-to-Commission report in final Sec.  150.5(a)).
---------------------------------------------------------------------------

    Further, while existing Sec.  150.5(d) does not explicitly address 
whether traders should request an exemption prior to taking on its 
position, final Sec.  150.5(a)(2), in contrast, explicitly authorizes 
(but does not require) DCMs to permit traders to file a retroactive 
exemption request due to ``demonstrated sudden or unforeseen increases 
in its bona fide hedging needs,'' but only within five business days 
after the trade and as long as the trader provides a supporting 
explanation.\1625\ As noted above, these provisions are largely 
consistent with existing market practice, and to this extent, the 
benefits and costs already may have been realized by DCMs and market 
participants.
---------------------------------------------------------------------------

    \1625\ Certain exchanges currently allow for the submission of 
exemption requests up to five business days after the trader 
established the position that exceeded a limit in certain 
circumstances. See, e.g., CME Rule 559 and ICE's ``Guidance on 
Position Limits'' (Mar. 2018).
---------------------------------------------------------------------------

b. Pre-Existing Positions
    Final Sec.  150.5(a)(3) requires DCMs to impose exchange-set 
position limits on ``pre-existing positions,'' other than pre-enactment 
swaps and transition period swaps.\1626\ The Commission believes that 
this approach benefits market integrity since pre-existing positions 
that exceed spot-month limits could result in market or price 
disruptions as positions are rolled into the spot month.\1627\
---------------------------------------------------------------------------

    \1626\ Final Sec.  150.1 defines ``pre-existing position'' to 
mean ``any position in a commodity derivative contract acquired in 
good faith prior to the effective date'' of any applicable position 
limit.
    \1627\ The Commission is particularly concerned about protecting 
the spot month in physical-delivery futures from corners and 
squeezes.
---------------------------------------------------------------------------

    The Commission is alleviating the burden associated with final 
150.5(a)(3) by delaying the compliance date to allow exchanges 
sufficient time to implement the Final Rule.
iii. Physical Commodity Derivative Contracts Not Subject to Federal 
Position Limits Under the Final Rule (Final Sec.  150.5(b))
a. Spot Month Limits and Related Acceptable Practices
    For cash-settled contracts during the spot month, existing Sec.  
150.5 sets forth the following qualitative standard: exchange-set 
limits should be ``no greater than necessary to minimize the potential 
for market manipulation or distortion of the contract's or underling 
commodity's price.'' However, for physically-settled contracts, 
existing Sec.  150.5 provides a one-size-fits-all parameter that 
exchange limits must be no greater than 25% of EDS.
    In contrast, the standard for setting spot month limit levels for 
physical commodity derivative contracts not subject to Federal position 
limits set forth in final Sec.  150.5(b)(1) does not distinguish 
between cash-settled and physically-settled contracts, and instead 
requires DCMs to apply the existing Sec.  150.5 qualitative standard to 
both.\1628\ The Commission also provides a related, non-exclusive 
acceptable practice that deems exchange-set position limits for both 
cash-settled and physically-settled contracts subject to Sec.  150.5(b) 
to be in compliance if the limits are no higher than 25% of the spot-
month EDS.
---------------------------------------------------------------------------

    \1628\ Final Sec.  150.5(b)(1) requires DCMs to establish 
position limits for spot-month contracts at a level that is 
``necessary and appropriate to reduce the potential threat of market 
manipulation or price distortion of the contract's or the underlying 
commodity's price or index.'' Existing Sec.  150.5 also 
distinguishes between ``levels at designation'' and ``adjustments to 
levels,'' although each category similarly incorporates the 
qualitative standard for cash-settled contracts and the 25% metric 
for physically-settled contracts. Final Sec.  150.5(b) eliminates 
this distinction. The Commission intends the final Sec.  150.5(b)(1) 
standard to be substantively the same as the existing Sec.  150.5 
standard for cash-settled contracts, except that under final Sec.  
150.5(b)(1), the standard applies to physically-settled contracts.
---------------------------------------------------------------------------

    Applying the existing Sec.  150.5 qualitative standard and non-
exclusive acceptable practice in final 150.5(b)(1), rather than a one-
size-fits-all regulation, to both cash-settled and physically-settled 
contracts during the spot month is expected to enhance market integrity 
by permitting a DCM to establish a more tailored, product-specific 
approach by applying other parameters that may take into account the 
unique liquidity and other characteristics of the particular market and 
contract, which is not possible under the one-size-fits-all 25% of EDS 
parameter set forth in existing Sec.  150.5. While the Commission 
recognizes that the existing 25% of EDS parameter has generally worked 
well, the Commission also recognizes that there may be circumstances 
where other parameters may be preferable and just as effective, if not 
more, including, for example, if the contract is cash-settled or does 
not have a reasonably accurate measurable deliverable supply, or if the 
DCM can demonstrate that a different parameter would better promote 
market integrity or efficiency for a particular contract or market.
    On the other hand, the Commission recognizes that final Sec.  
150.5(b)(1) could adversely affect market integrity by theoretically 
allowing DCMs to establish excessively high position limits in order to 
gain a competitive advantage, which also could harm the integrity of 
other markets that offer similar products.\1629\ However, the 
Commission believes these potential risks are mitigated since (i) final 
Sec.  150.5(e) requires DCMs to submit proposed position limits to the 
Commission, which will review those rules for compliance with Sec.  
150.5(b), including to ensure that the proposed limits are ``in accord 
with sound commercial practices'' and that they may be ``established 
and liquidated in an orderly fashion''; and (ii) final Sec.  
150.5(b)(3) requires DCMs to adopt position limits for any new contract 
at a ``comparable'' level to existing contracts that are substantially 
similar (i.e., ``look-alike contracts'') on other exchanges unless the 
exchange listing the new contracts demonstrates to the satisfaction of 
Commission staff, in their product filing with the Commission, how its 
levels comply with the requirements of Sec.  150.5(b)(1) and (2). 
Moreover, this latter requirement also may reduce the amount of time 
and effort needed for the DCM and Commission staff to assess proposed 
limits for any new contract that competes with another DCM's existing 
contract.
---------------------------------------------------------------------------

    \1629\ Since the existing Sec.  150.5 framework already applies 
the proposed qualitative standard to cash-settled spot-month 
contracts, any new risks resulting from the proposed standard would 
occur only with respect to physically-settled contracts, which are 
currently subject to the one-size-fits-all 25% EDS parameter under 
the existing framework.

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

[[Page 3441]]

b. Non-Spot Month Limits/Accountability Levels and Related Acceptable 
Practices
    Existing Sec.  150.5 provides one-size-fits-all levels for non-spot 
month contracts and allows for position accountability after a 
contract's initial listing only for those contracts that satisfy 
certain trading thresholds.\1630\ In contrast, for contracts outside 
the spot-month, final Sec.  150.5(b)(2) requires DCMs to establish 
either position limits or position accountability levels that satisfy 
the same proposed qualitative standard discussed above for spot-month 
contracts.\1631\ For DCMs that establish position limits, final 
Appendix F to part 150 sets forth related acceptable practices that 
provide non-exclusive parameters that are generally consistent with 
existing Sec.  150.5's parameters for non-spot month contracts.\1632\ 
For DCMs that establish position accountability, Sec.  150.1's 
definition of ``position accountability'' provides that a trader must 
reduce its position upon a DCM's request, which is generally consistent 
with existing Sec.  150.5's framework, but does not distinguish between 
trading volume or contract type, like existing Sec.  150.5. While DCMs 
are provided the ability to decide whether to use limit levels or 
accountability levels for any such contract, under either approach, the 
DCM has to set a level that is ``necessary and appropriate to reduce 
the potential threat of market manipulation or price distortion of the 
contract's or the underlying commodity's price or index.''
---------------------------------------------------------------------------

    \1630\ As noted above, in establishing the specific metric, 
existing Sec.  150.5 distinguishes between ``levels at designation'' 
and ``adjustments to [subsequent] levels.'' Final Sec.  150.5(b)(2) 
eliminates this distinction and applies the qualitative standard for 
all non-spot month position limit and accountability levels.
    \1631\ DCM Core Principle 5 requires DCMs to establish either 
position limits or accountability for speculators. See Commission 
regulation Sec.  38.300 (restating DCMs' statutory obligations under 
the CEA 5(d)(5)). Accordingly, inasmuch as final Sec.  150.5(b)(2) 
requires DCMs to establish position limits or accountability, the 
Final Rule does not represent a change to the status quo baseline 
requirements.
    \1632\ Specifically, the acceptable practices in final Appendix 
F to part 150 provides that DCMs are deemed to comply with final 
Sec.  150.5(b)(2)(i) qualitative standard if they establish non-spot 
limit levels no greater than any one of the following: (1) Based on 
the average of historical positions sizes held by speculative 
traders in the contract as a percentage of open interest in that 
contract; (2) the spot month limit level for that contract; (3) 
5,000 contracts (scaled up proportionally to the ratio of the 
notional quantity per contract to the typical cash-market 
transaction if the notional quantity per contract is smaller than 
the typical cash-market transaction, or scaled down proportionally 
if the notional quantity per contract is larger than the typical 
cash-market transaction); or (4) 10% of open interest in that 
contract for the most recent calendar year up to 50,000 contracts, 
with a marginal increase of 2.5% of open interest thereafter.
    These parameters have largely appeared in existing Sec.  150.5 
for many years in connection with non-spot month limits, either for 
levels at designation, or for subsequent levels, with certain 
revisions. For example, while existing Sec.  150.5(b)(3) has 
provided a limit of 5,000 contracts for energy products, existing 
Sec.  150.5(b)(2) provides a limit of 1,000 contracts for physical 
commodities other than energy products. The acceptable practice 
parameters in final Appendix F create a uniform standard of 5,000 
contracts for all physical commodities. The Commission expects that 
the 5,000 contract acceptable practice, for example, is a useful 
rule of thumb for exchanges because it allows them to establish 
limits and demonstrate compliance with Commission regulations in a 
relatively efficient manner, particularly for new contracts that 
have yet to establish open interest. The spot month limit level 
under item (2) above is a new parameter for non-spot month 
contracts.
---------------------------------------------------------------------------

    One commenter alternatively recommended that Sec.  150.5(b)(2) 
should require exchanges to set position limits and position 
accountability levels outside of the spot month at levels that reduce 
the potential threat of market manipulation or price distortion and the 
potential for sudden or unreasonable fluctuations or unwarranted 
changes.\1633\ For the reasons more fully discussed below, the 
Commission believes that outside the spot-month, either exchange-set 
position limits or exchange-set accountability levels are sufficient 
for exchanges to reduce these potential threats.
---------------------------------------------------------------------------

    \1633\ Better Markets at 47-48.
---------------------------------------------------------------------------

    Proposed Sec.  150.5(b)(2) benefits market efficiency by 
authorizing DCMs to determine whether position limits or accountability 
is best-suited outside of the spot month based on the DCM's knowledge 
of its markets. For example, position accountability could improve 
liquidity compared to position limits since liquidity providers may be 
more willing or able to participate in markets that do not have hard 
limits. As discussed above, DCMs are well-positioned to understand 
their respective markets, and best practices in one market may differ 
in another market, including due to different market participants or 
liquidity characteristics of the underlying commodities. For DCMs that 
choose to establish position limits, the Commission believes that 
applying the final Sec.  150.5 qualitative standard to contracts 
outside the spot-month benefits market integrity by permitting a DCM to 
establish a more tailored, product-specific approach by applying other 
tools that may take into account the unique liquidity and other 
characteristics of the particular market and contract, which is not 
possible under the existing Sec.  150.5 specific parameters for non-
spot month contracts. While the Commission recognizes that the existing 
parameters may have been well-suited to market dynamics when initially 
promulgated, the Commission also recognizes that open interest may have 
changed for certain contracts subject to final Sec.  150.5(b), and open 
interest will likely continue to change in the future (e.g., as new 
contracts may be introduced and as supply and/or demand may change for 
underlying commodities). In cases where open interest has not 
increased, the exchange may not need to change existing limit levels. 
But, for contracts where open interest has increased, the exchange is 
able to raise its limits to facilitate liquidity consistent with an 
orderly market. However, the Commission reiterates that the specific 
parameters in the acceptable practices set forth in final Appendix F to 
part 150 are merely non-exclusive examples, and an exchange is be able 
to establish higher (or lower) limits, provided the exchange submits 
its proposed limits to the Commission under final Sec.  150.5(e) and 
explains how its proposed limits satisfy the qualitative standard and 
are otherwise consistent with all applicable requirements.
    The Commission, however, recognizes that final Sec.  150.5(b)(2) 
could adversely affect market integrity by potentially allowing DCMs to 
establish position accountability levels rather than position limits, 
regardless of whether the contract exceeds the volume-based thresholds 
provided in existing Sec.  150.5. However, final Sec.  150.5(e) 
requires DCMs to submit any proposed position accountability rules to 
the Commission for review, and the Commission will determine on a case-
by-case basis whether such rules satisfy regulatory requirements, 
including the proposed qualitative standard. Similarly, in order to 
gain a competitive advantage, DCMs could theoretically set excessively 
high accountability (or position limit) levels, which also could 
potentially adversely affect markets with similar products. However, 
the Commission believes these risks are mitigated since (i) final Sec.  
150.5(e) requires DCMs to submit proposed position accountability (or 
limits) to the Commission, which will review those rules for compliance 
with Sec.  150.5(b), including to ensure that the exchange's proposed 
accountability levels (or limits) are ``necessary and appropriate to 
reduce the potential threat of market manipulation or price 
distortion'' of the contract or underlying commodity; and (ii) final 
Sec.  150.5(b)(3) requires DCMs to adopt position limits for any new 
contract at a ``comparable'' level to existing contracts that are 
substantially similar on other exchanges unless the exchange listing 
the new

[[Page 3442]]

contracts demonstrates to the satisfaction of Commission staff, in 
their product filing with the Commission, how its levels comply with 
the requirements of Sec.  150.5(b)(1) and (2).
c. Exchange-Set Limits on Economically Equivalent Swaps
    As discussed above, swaps that qualify as ``economically equivalent 
swaps'' are subject to the Federal position limits framework. However, 
the Commission has determined to permit exchanges to delay enforcing 
their respective exchange-set position limits on economically 
equivalent swaps at this time. Specifically, with respect to exchange-
set position limits on swaps, the Commission notes that in two years 
(which generally coincides with the compliance date for economically 
equivalent swaps), the Commission will reevaluate the ability of 
exchanges to establish and implement appropriate surveillance 
mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6. 
However, after the swap compliance period (January 1, 2023), the 
Commission underscores that it will enforce Federal position limits in 
connection with OTC swaps.
    Nonetheless, the Commission's determination to permit exchanges to 
delay implementing exchange-set position limits on swaps could 
incentivize market participants to leave the futures markets and 
instead transact in economically equivalent swaps, which could reduce 
liquidity in the futures and related options markets, which could also 
increase transaction and hedging costs. Delaying position limits on 
swaps therefore could harm market participants, especially end-users 
that do not transact in swaps, if many participants were to shift 
trading from the futures to the swaps markets. In turn, end-users could 
pass on some of these increased costs to the public at large.\1634\ 
However, the Commission believes that these concerns are mitigated to 
the extent the Commission still oversees and enforces Federal position 
limits even if the exchanges are not be required to do so.
---------------------------------------------------------------------------

    \1634\ On the other hand, the Commission has not seen any 
shifting of liquidity to the swaps markets--or general attempts at 
market manipulation or evasion of Federal position limits--with 
respect to the nine legacy core referenced futures contracts, even 
though swaps currently are not subject to Federal or exchange 
position limits.
---------------------------------------------------------------------------

iv. Position Aggregation
    Final Sec.  150.5(d) requires all DCMs that list physical commodity 
derivative contracts to apply aggregation rules that conform to 
existing Sec.  150.4, regardless of whether the contract is subject to 
Federal position limits under Sec.  150.2.\1635\ The Commission 
believes final Sec.  150.5(d) benefits market integrity in several 
ways. First, a harmonized approach to aggregation across exchanges that 
list physical commodity derivative contracts prevents confusion that 
could result from divergent standards between Federal position limits 
under Sec.  150.2 and exchange-set limits under Sec.  150.5(b). As a 
result, final Sec.  150.5(d) provides uniformity, consistency, and 
reduced administrative burdens for traders who are active on multiple 
trading venues and/or trade similar physical contracts, regardless of 
whether the contracts are subject to Sec.  150.2's Federal position 
limits. Second, a harmonized aggregation policy eliminates the 
potential for DCMs to use excessively permissive aggregation policies 
as a competitive advantage, which would impair the effectiveness of the 
Commission's aggregation policy and position limits framework. Third, 
since, for contracts subject to Federal position limits, final Sec.  
150.5(a) requires DCMs to set position limits at a level not higher 
than that set by the Commission under final Sec.  150.2, differing 
aggregation standards could effectively lead to an exchange-set limit 
that is higher than that set by the Commission. Accordingly, 
harmonizing aggregation standards reinforces the efficacy and intended 
purpose of final Sec. Sec.  150.2 and 150.5 and existing Sec.  150.4 by 
eliminating DCMs' ability to circumvent the applicable Federal 
aggregation and position limits rules.
---------------------------------------------------------------------------

    \1635\ The Commission adopted final aggregation rules in 2016 
under existing Sec.  150.4, which applies to contracts subject to 
Federal position limits under Sec.  150.2. See Final Aggregation 
Rulemaking, 81 FR at 91454. Under the Final Aggregation Rulemaking, 
unless an exemption applies, a person's positions must be aggregated 
with positions for which the person controls trading or for which 
the person holds a 10% or greater ownership interest. The Division 
of Market Oversight has issued time-limited no-action relief from 
some of the aggregation requirements contained in that rulemaking. 
See CFTC Letter No. 19-19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/download. Commission regulation Sec.  
150.4(b) sets forth several permissible exemptions from aggregation. 
The Commission, outside the Final Rule, will separately consider 
comments related to the Final Aggregation Rulemaking and 
codification of NAL 19-19.
---------------------------------------------------------------------------

    To the extent a DCM currently is not applying the Federal 
aggregation rules in existing Sec.  150.4, or similar exchange-based 
rules, final Sec.  150.5(d) could impose costs with respect to market 
participants trading referenced contracts for the 16 new commodities 
that are subject to Federal position limits for the first time. Market 
participants are required to update their trading and compliance 
systems to ensure they comply with the new aggregation rules.
7. Section 15(a) Factors \1636\
---------------------------------------------------------------------------

    \1636\ The discussion here covers the Final Rule amendments that 
the Commission has identified as being relevant to the areas set out 
in section 15(a) of the CEA: (i) Protection of market participants 
and the public; (ii) efficiency, competitiveness, and financial 
integrity of futures markets; (iii) price discovery; (iv) sound risk 
management practices; and (v) other public interest considerations. 
For amendments that are not specifically addressed, the Commission 
has not identified any effects.
---------------------------------------------------------------------------

i. Protection of Market Participants and the Public
    A chief purpose of speculative position limits is to preserve the 
integrity of derivatives markets for the benefit of commercial 
interests, producers, and other end- users that use these markets to 
hedge risk and of consumers that consume the underlying commodities. As 
discussed above, the Commission believes that the final position limits 
regime operates to deter excessive speculation and manipulation, such 
as corners and squeezes, which might impair the contract's price 
discovery function and liquidity for bona fide hedgers--and ultimately, 
protects the integrity and utility of the commodity markets for the 
benefit of both producers and consumers.
    The Commission is including 25 core referenced futures contracts, 
as well as any referenced contracts directly or indirectly linked 
thereto, within the final Federal position limits framework. In 
selecting the 25 core referenced futures contracts, the Commission 
analyzed (1) the importance of these contracts to the operation of the 
underlying cash commodity market, including that they require physical 
delivery; and (2) the importance of the underlying commodity to the 
economy as a whole. As discussed above, the Commission is of the view 
that evidence demonstrating one or both of these factors is sufficient 
to establish that position limits are necessary because each factor 
relates to the statutory objective identified in CEA section 
4a(a)(1).\1637\
---------------------------------------------------------------------------

    \1637\ See supra Section III.C. (discussing the necessity 
findings as to the 25 core referenced futures contacts).
---------------------------------------------------------------------------

    Of particular importance in the Commission's position limit regime 
are the limits on the spot month, because the Commission believes that 
deterring and preventing manipulative behaviors, such as corners and 
squeezes, is more urgent during this period. The spot month position 
limits are designed, among other things, to deter and prevent corners 
and squeezes, as spot months are more susceptible to such activities

[[Page 3443]]

than non-spot months, as well as promote a more orderly liquidation 
process at expiration.\1638\ By restricting derivatives positions to a 
proportion of the deliverable supply of the commodity, the spot month 
position limits reduce the possibility that a market participant can 
use derivatives to affect the price of the cash commodity (and vice 
versa).\1639\ Limiting a speculative position based on a percentage of 
deliverable supply also restricts a speculative trader's ability to 
establish a leveraged position in cash-settled derivative contracts, 
diminishing that trader's incentive to manipulate the cash settlement 
price. As the Commission has determined in the preamble, excessive 
speculation or manipulation during the spot month may cause sudden or 
unreasonable fluctuations or unwarranted changes in the price of the 
commodities underlying these contracts.\1640\ In this way, the 
Commission believes that the limits in the Final Rule benefit market 
participants that seek to hedge the spot price of a commodity at 
expiration, and benefit consumers who are able to purchase underlying 
commodities for which prices are determined by fundamentals of supply 
and demand, rather than influenced by excessive speculation, 
manipulation, or other undue and unnecessary burdens on interstate 
commerce.
---------------------------------------------------------------------------

    \1638\ See supra Sections II.A.19 and II.B.3.iii.
    \1639\ See supra Section II.B.3.iii.
    \1640\ See supra Section III.C. (discussing the necessity 
finding).
---------------------------------------------------------------------------

    The Commission believes that the Final Rule's Commission and 
exchange-centric processes for granting exemptions from Federal 
position limits, including non-enumerated bona fide hedging 
recognitions, help ensure the hedging utility of the derivatives 
markets for commercial end-users.
    First, the Final Rule allows exchanges to leverage existing 
processes and their knowledge of their own markets, including 
participant positions and activities, along with their knowledge of the 
underlying commodity cash market, which should allow for more timely 
review of exemption applications than if the Commission were to conduct 
such initial application reviews. This benefits the public by allowing 
producers and end-users of a commodity to more efficiently and 
predictably hedge their price risks, thus controlling costs that might 
be passed on to the public.
    Second, exchanges may be better-suited than the Commission to 
leverage their knowledge of their own markets, including participant 
positions and activities, along with their knowledge of the underlying 
commodity cash market, in order to recognize whether an applicant 
qualifies for an exemption and what the level for that exemption should 
be. This benefits market participants and the public by helping assure 
that exemption levels are set in a manner that meets the risk 
management needs of the applicant without negatively impacting the 
derivative and cash market for that commodity.
    Third, allowing for self-effectuating spread exemptions for 
purposes of Federal position limits could improve liquidity in all 
months for a listed contract or across commodities, benefitting hedgers 
by providing tighter bid-ask spreads for out-right trades. Furthermore, 
traders using spreads can arbitrage price discrepancies between 
calendar months within the same commodity contract or price 
discrepancies between commodities, helping ensure that futures prices 
more accurately reflect the underlying market fundamentals for a 
commodity.
    Lastly, the Commission will review each application for bona fide 
hedge recognitions (other than those bona fide hedges that would be 
self-effectuating under the Final Rule), but the Final Rule allows the 
Commission to also leverage the exchange's knowledge and experience of 
its own markets and market participants discussed above for market 
participants that applies to the Commission by first submitting the 
application for a non-enumerated bona fide hedge exemption to the 
exchange for purposed of exchange-set limits under final Sec.  150.9. 
Similarly, the Commission will review each application for a spread 
exemption that is not covered by the spread transaction definition and 
therefore is not self-effectuating for purposes of Federal position 
limits.
    The Commission also understands that there are costs to market 
participants and the public to setting position limit levels that are 
too high or too low. If the levels are set too high, there's greater 
risk of excessive speculation, which may harm market participants and 
the public. Further, to the extent that the limits are set at such a 
level that even without these proposed exemptions, the probability of 
nearing or breaching such levels may be negligible for most market 
participants, benefits associated with such exemptions may be reduced.
    Conversely, if the limits are set too low, transaction costs for 
market participants who are near or above the limit will rise as they 
transact in other instruments with higher transaction costs to obtain 
their desired level of speculative positions. Additionally, limits that 
are too low could incentivize speculators to leave the market and be 
unavailable to provide liquidity for hedgers, resulting in ``choppy'' 
prices. It is also possible for limits that are set too low to harm 
market efficiency because the views of some speculators might not be 
reflected fully in the price formation process.
    In setting the final Federal position limit levels, the Commission 
considered these factors in order to implement to the maximum extent 
practicable, as it finds necessary in its discretion, to apply the 
position limits framework articulated in CEA section 4a(a) to set 
Federal position limits to protect market integrity and price 
discovery, thereby benefiting market participants and the public.
ii. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Position limits help to prevent market manipulation or excessive 
speculation that may unduly influence prices at the expense of the 
efficiency and integrity of markets. The Final Rule's expansion of the 
Federal position limits regime to 25 core referenced futures contracts 
(e.g., the existing nine legacy agricultural contracts and the 16 new 
contracts) enhances the buffer against excessive speculation 
historically afforded exclusively to the nine legacy agricultural 
contracts, improving the financial integrity of those markets. 
Moreover, the limits in final Sec.  150.2 may promote market 
competitiveness by preventing a trader from gaining too much market 
power in the respective markets.
    Also, in the absence of position limits, market participants may be 
deterred from participating in a particular market if the market 
participants perceive that there is a participant with an unusually 
large speculative position exerting what they believe is unreasonable 
market power. A lack of participation may harm liquidity, and 
consequently, may harm market efficiency.
    On the other hand, traders who find position limits overly 
constraining may seek to trade in substitute instruments in order to 
meet their demand for speculative instruments. The substitute 
instruments could be futures contracts or swaps that are similar to or 
highly correlated with their corresponding core referenced futures 
contracts (but not otherwise deemed to be referenced contracts). They 
could also be trade options or other forward contracts. These traders 
may also decide to not trade beyond the Federal speculative position 
limit.

[[Page 3444]]

    Trading in substitute instruments may be less effective than 
trading in referenced contracts. For example, the trading of futures 
contracts has strong safeguards since futures contracts are by 
definition exchange-traded, which includes (1) the posting of initial 
and variation margin and (2) credit reviews and guarantees by futures 
commission merchants. These safeguards protect the integrity of futures 
markets but are generally not required for forward transactions, which 
are generally not traded on exchanges or centrally cleared. Forward 
contract nonperformance may result in dislocations in the physical 
marketing channel, which may lead to higher prices for consumers and 
end users and otherwise impose burdens on commerce. Further, with the 
use of substitute instruments, futures prices might not fully reflect 
all the speculative demand to hold the futures contract, because 
substitute instruments may not fully influence prices the same way that 
trading directly in the futures contract does. Thus, market efficiency 
and price discovery might be harmed, too.
    The Commission believes that focusing on the 25 core referenced 
futures contracts (included any referenced contracts linked thereto), 
which generally have high levels of open interest and trading volume 
and/or have been subject to existing Federal position limits for many 
years, should, in general, be less disruptive for the respective 
derivatives markets, which in turn may reduce the potential for 
disruption for the price discovery function of the underlying commodity 
markets as compared to including less liquid contracts (only to the 
extent that the Commission is able to make the requisite necessity 
finding for such contracts).
    Finally, the Commission believes that eliminating certain risk 
management positions as bona fide hedges, coupled with the increased 
non-spot month limit levels for most of the nine legacy agricultural 
contracts, will foster competition among swap dealers by subjecting all 
market participants, including all swap dealers, to the same non-spot 
month limit rather than limited staff-granted risk management 
exemptions. Accommodating risk management activity by additional 
entities with higher position limit levels may also help lessen the 
concentration risk potentially posed by a few commodity index traders 
holding exemptions that are not available to competing market 
participants.
iii. Price Discovery
    As discussed above, market manipulation may result in artificial or 
distorted prices.\1641\ Similarly, excessive speculation may result in 
``sudden or unreasonable fluctuations or unwarranted changes in the 
price of such commodity.'' \1642\ Position limits may help to prevent 
the price discovery function of the underlying commodity markets from 
being disrupted.\1643\ Also, in the absence of position limits, market 
participants might elect to trade less as a result of a perception that 
the market pricing does not reflect market forces, as a consequence of 
what they perceive is the exercise of too much market power by a 
concentration of several or one larger speculator. This reduced trading 
may result in a reduction in liquidity, which may have a negative 
impact on price discovery.
---------------------------------------------------------------------------

    \1641\ See supra Section II.A.16. (discussing the referenced 
contract definition).
    \1642\ See supra Section III.A. (discussing the necessity 
finding).
    \1643\ Id.
---------------------------------------------------------------------------

    On the other hand, imposing position limits raises the concerns 
that liquidity and price discovery may be diminished, because certain 
market segments, i.e., speculative traders, are restricted. For certain 
commodities, the Final Rule sets the levels of position limits at 
increased levels, to avoid harming liquidity that may be provided by 
speculators that would establish large positions, while restricting 
speculators from establishing extraordinarily large positions. The 
Commission further believes that the bona fide hedging recognition and 
exemption processes will foster liquidity and potentially improve price 
discovery by making it more efficient for market participants to apply 
for bona fide hedging recognitions and spread exemptions.
    In addition, position limits may serve as a prophylactic measure 
that reduces market volatility due to a participant otherwise engaging 
in large quantity trades in a short time interval that induce price 
impacts that interfere with price discovery. In particular, spot month 
position limits make it more difficult to mark the close of a futures 
contract to possibly benefit other contracts that settle on the closing 
futures price. Marking the close harms markets by spoiling convergence 
between futures prices and spot prices at expiration and by damaging 
price discovery.
iv. Sound Risk Management Practices
    The Final Rule promotes sound risk management practices by 
providing exemptions for bona fide hedgers to hedge their corresponding 
risk. In addition, the Commission crafted the Final Rule to ensure 
sufficient market liquidity for bona fide hedgers to the maximum extent 
practicable, e.g., by: (1) Creating a bona fide hedging definition that 
is broad enough to accommodate common commercial hedging practices, 
including anticipatory hedging, for a variety of commodity types; (2) 
maintaining the status quo with respect to existing bona fide hedge 
recognitions and spread exemptions that will remain self-effectuating 
and make additional bona fide hedges and spreads self-effectuating 
(i.e., certain anticipatory hedging); (3) providing additional ability 
for a streamlined process where market participants can make a single 
submission to an exchange in which the exchange and Commission will 
each review applications for non-enumerated bona fide hedge 
recognitions for purposes of Federal and exchange-set limits that are 
in line with commercial hedging practices; and (4) allowing for a 
conditional spot month limit exemption in natural gas.
    To the extent that monitoring for position limits requires market 
participants to create internal risk limits and evaluate position size 
in relation to the market, position limits may also provide an 
incentive for market participants to engage in sound risk management 
practices. Further, sound risk management practices will be promoted by 
the Final Rule to allow for market participants to measure risk in the 
manner most suitable for their business (i.e., net versus gross hedging 
practices), rather than having to conform their hedging programs to a 
one-size-fits-all standard that may not be suitable for their risk 
management needs. Finally, generally increasing non-spot month limit 
levels for the nine legacy agricultural contracts to levels that 
reflect observed levels of trading activity, based on recent data 
reviewed by the Commission, should allow swap dealers, liquidity 
providers, market makers, and others who have risk management needs, 
but who are not hedging a physical commercial, to soundly manage their 
risks.
v. Other Public Interest
    The Commission has not identified any additional public interest 
considerations related to the costs and benefits of this Final Rule.

B. Paperwork Reduction Act

1. Overview
    Certain provisions of the Final Rule amend or impose new 
``collection of information'' requirements as that term

[[Page 3445]]

is defined under the Paperwork Reduction Act (``PRA'').\1644\ An agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless it displays a valid control number 
from the Office of Management and Budget (``OMB''). The Final Rule 
modifies the following existing collections of information previously 
approved by OMB and for which the Commodity Futures Trading Commission 
(``Commission'') has received control numbers: (i) OMB control number 
3038-0009 (Large Trader Reports), which generally covers Commission 
regulations in parts 15 through 21; (ii) OMB control number 3038-0013 
(Aggregation of Positions), which covers Commission regulations in part 
150; \1645\ and (iii) OMB control number 3038-0093 (Provisions Common 
to Registered Entities), which covers Commission regulations in part 
40.
---------------------------------------------------------------------------

    \1644\ 44 U.S.C. 3501 et seq.
    \1645\ Currently, OMB control number 3038-0013 is titled 
``Aggregation of Positions.'' The Commission is renaming the OMB 
control number ``Position Limits'' to better reflect the nature of 
the information collections covered by that OMB control number.
---------------------------------------------------------------------------

    The Commission requested that OMB approve and revise OMB control 
numbers 3038-0009, 3038-0013, and 3038-0093 in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11.
2. Commission Reorganization of OMB Control Numbers 3038-0009 and 3038-
0013
    The Commission requested two non-substantive changes so that all 
collections of information related solely to the Commission's position 
limit requirements are consolidated under one OMB control number.\1646\ 
First, the Commission is transferring collections of information under 
part 19 (Reports by Persons Holding Bona Fide Hedge Positions and By 
Merchants and Dealers in Cotton) related to position limit requirements 
from OMB control number 3038-0009 to OMB control number 3038-0013. 
Second, the modified OMB control number 3038-0013 is renamed as 
``Position Limits.'' This renaming change is non-substantive and allows 
for all collections of information related to the Federal position 
limits requirements, including exemptions from speculative position 
limits and related large trader reporting, to be housed in one 
collection.
---------------------------------------------------------------------------

    \1646\ The Commission notes that certain collections of 
information under OMB control number 3038-0093 relate to several 
Commission regulations in addition to the Commission's final 
position limits framework. As a result, the collections of 
information discussed herein under this OMB control number 3038-0093 
are not being consolidated under OMB control number 3038-0013.
---------------------------------------------------------------------------

    A single collection makes it easier for market participants to know 
where to find the relevant position limits PRA burdens. The remaining 
collections of information under OMB control number 3038-0009 cover 
reports by various entities under parts 15, 17, and 21 \1647\ of the 
Commission's regulations, while OMB control number 3038-0013 holds 
collections of information arising from parts 19 and 150.
---------------------------------------------------------------------------

    \1647\ As noted above, OMB control number 3038-0009 generally 
covers Commission regulations in parts 15 through 21. However, it 
does not cover Sec. Sec.  16.02, 17.01, 18.04, or 18.05, which are 
under OMB control number 3038-0103. 78 FR at 69200 (transferring 
Sec. Sec.  16.02, 17.01, 18.04, and 18.05 to OMB Control Number 
3038-0103).
---------------------------------------------------------------------------

    As discussed in Section 3 below, this non-substantive 
reorganization results in: (i) A decreased burden estimate under 
control number 3038-0009 due to the transfer of the collection of 
information arising from obligations in part 19; and (ii) a 
corresponding increase of the amended part 19 burdens under control 
number 3038-0013. However, as discussed further below, the collection 
of information and burden hours arising from revised part 19 that is 
transferred to OMB control number 3038-0013 is less than the existing 
burden estimate under OMB control number 3038-0009 since the Final Rule 
amends existing part 19 by eliminating existing Form 204 and certain 
parts of Form 304 and the reporting burdens related thereto. As a 
result, market participants will see a net reduction of collections of 
information and burden hours under revised part 19.
3. Collections of Information
    The Final Rule amends existing regulations, and creates new 
regulations, concerning speculative position limits. Among other 
amendments, the Final Rule includes: (1) New and amended Federal spot-
month limits for the 25 core referenced futures contracts; (2) amended 
Federal non-spot limits for the nine legacy agricultural contracts 
subject to existing Federal position limits; (3) amended rules 
governing exchange-set limit levels and grants of exemptions therefrom; 
(4) an amended process for requesting certain spread exemptions and 
non-enumerated bona fide hedge recognitions for purposes of Federal 
position limits directly from the Commission; (5) a new streamlined 
process for recognizing non-enumerated bona fide hedge positions from 
Federal limit requirements; and (6) amendments to part 19 and related 
provisions that eliminate certain reporting obligations that require 
traders to submit a Form 204 and Parts I and II of Form 304.
    Specifically, the Final Rule amends parts 15, 17, 19, 40, and 150 
of the Commission's regulations to implement the revised Federal 
position limits framework. The Final Rule also transfers an amended 
version of the ``bona fide hedging transactions or positions'' 
definition from existing Sec.  1.3 to final Sec.  150.1, and removes 
Sec. Sec.  1.47, 1.48, and 140.97. The Final Rule revises existing 
collections of information covered by OMB control number 3038-0009 by 
amending part 19,\1648\ along with conforming changes to part 15, in 
order to narrow the scope of who is required to report under part 
19.\1649\
---------------------------------------------------------------------------

    \1648\ See supra Section IV.B.2 (discussing the transfer of 
information collection under part 19 from OMB control number 3038-
0009 to 3038-0013).
    \1649\ As noted above, the Commission accomplishes this by 
eliminating existing Form 204 and Parts I and II of Form 304. 
Additionally, changes to part 17, covered by OMB control number 
3038-0009, make conforming amendments to remove certain duplicative 
provisions and associated information collections related to 
aggregation of positions, which are in existing Sec.  150.4. These 
conforming changes do not impact the burden estimates of OMB control 
number 3038-0009.
---------------------------------------------------------------------------

    Furthermore, the Final Rule's amendments to part 150 revise 
existing collections of information covered by OMB control number 3038-
0013, including new reporting and recordkeeping requirements related to 
the application and request for relief from Federal position limit 
requirements submitted to exchanges. Finally, the Final Rule amends 
part 40 to incorporate a new reporting obligation into the definition 
of ``terms and conditions'' in Sec.  40.1(j) and results in a revised 
existing collection of information covered by OMB control number 3038-
0093.
i. OMB Control Number 3038-0009--Large Trader Reports; Part 19--Reports 
by Persons Holding Bona Fide Hedge Positions and by Merchants and 
Dealers in Cotton
    Under OMB control number 3038-0009, the Commission currently 
estimates that the collections of information related to existing part 
19, including Form 204 and Form 304, collectively known as the ``series 
`04'' reports, have a combined annual burden hours of 1,553 hours. 
Under existing part 19, market participants that hold bona fide hedging 
positions in excess of position limits for the nine legacy agricultural 
contracts subject to existing Federal position limits must file a 
monthly report on Form 204 (or Parts I and II of Form 304 for cotton). 
These reports show a snapshot of traders' cash

[[Page 3446]]

positions on one given day each month, and are used by the Commission 
to determine whether a trader has sufficient cash positions to justify 
futures and options on futures positions above the applicable Federal 
position limits in existing Sec.  150.2.
    The Final Rule amends part 19 to remove these reporting obligations 
associated with Form 204 and Parts I and II of Form 304. As discussed 
under final Sec.  150.9 below, the Commission has determined to 
eliminate these forms because the Commission will still receive 
adequate information to carry out its market and financial surveillance 
programs since its amendments to Sec. Sec.  150.5 and 150.9 enable the 
Commission to obtain the necessary information from the exchanges. To 
effect these changes to traders' reporting obligations, the Commission 
is eliminating (i) existing Sec.  19.00(a)(1), which requires the 
applicable persons to file a Form 204; and (ii) existing Sec.  19.01, 
which among other things, sets forth the cash-market information 
required to be submitted on Forms 204 and 304.\1650\ The Commission is 
maintaining Part III of Form 304, which requests information on 
unfixed-price ``on call'' purchases and sales of cotton and which the 
Commission utilizes to prepare its weekly cotton on-call report.\1651\ 
The Commission is also maintaining its existing special call authority 
under part 19.
---------------------------------------------------------------------------

    \1650\ As noted above, the amendments to part 19 affect certain 
provisions of part 15 and Sec.  17.00. Based on the elimination of 
Form 204 and Parts I and II of Form 304, as discussed above, the 
Commission is adopting conforming technical changes to remove 
related reporting provisions from (i) the ``reportable position'' 
definition in Sec.  15.00(p); (ii) the list of ``persons required to 
report'' in Sec.  15.01; and (iii) the list of reporting forms in 
Sec.  15.02. These conforming amendments to part 15 do not impact 
the existing burden estimates.
    \1651\ The Commission is adopting a conforming technical change 
to Part III of Form 304 to require traders to identify themselves on 
the Form 304 using their Public Trader Identification Number, in 
lieu of the CFTC Code Number required on previous versions of the 
Form 304. However, the Commission has determined that this does not 
result in any change to its existing PRA estimates with respect to 
the collections of information related to Part III of Form 304.
---------------------------------------------------------------------------

    The supporting statement for the current active information 
collection request for part 19 under OMB control number 3038-0009 
\1652\ states that in 2014: (i) 135 reportable traders filed the series 
`04 reports (i.e., Form 204 and Form 304 in the aggregate), (ii) 
totaling 3,105 series `04 reports, for a total of (iii) 1,553 burden 
hours.\1653\ However, based on more current and recent 2019 submission 
data, the Commission has revised its existing estimates slightly higher 
for the series `04 reports under part 19:
---------------------------------------------------------------------------

    \1652\ See ICR Reference No: 201906-3038-008.
    \1653\ 3,105 Series '04 submissions x 0.5 hours per submission = 
1,553 aggregate burden hours for all submissions. The Commission 
notes that it has estimated that it takes approximately 20 minutes 
to complete a Form 204 or 304. However, in order to err 
conservatively, the Commission now uses a figure of 30 minutes.
[GRAPHIC] [TIFF OMITTED] TR14JA21.014

    Accordingly, based on the above revised estimates, the Commission 
is revising its estimate of the current collections of information 
under existing part 19 to reflect that approximately 105 reportable 
traders \1654\ file a total of 3,460 responses annually \1655\ 
resulting in an aggregate annual burden of 1,730 
hours.^{1656 1657} The Final Rule reduces the current OMB 
control number 3038-0009 by these revised burden estimates under part 
19 as they will be transferred to OMB control number 3038-0013.
---------------------------------------------------------------------------

    \1654\ 55 Form 304 reports + 50 Form 204 reports = 105 
reportable traders.
    \1655\ 2,860 Form 304s + 600 Form 204s = 3,460 total annual 
series '04 reports.
    \1656\ 3,460 series `04 reports x 0.5 hours per report = 1,730 
annual aggregate burden hours.
    \1657\ These revised estimates result in an increased estimate 
under existing part 19 of 355 series '04 reports submitted by 
traders (3,460 estimated series '04 reports-3,105 submissions from 
the Commission's previous estimate = an increase of 355 response 
difference); an increase of 177 aggregate burden hours across all 
respondents (1,730 aggregate burden hours-1,553 aggregate burden 
hours from the Commission's previous estimate = an increase of 177 
aggregate burden hours); and a decrease of 30 respondent traders 
(105 respondents-135 respondents from the Commission's previous 
estimate = a decrease of 30 respondents).
---------------------------------------------------------------------------

    With respect to the overall collections of information transferred 
to OMB control number 3038-0013 based on the Commission's revised part 
19 estimate, the Commission estimates that the Final Rule reduces the 
collections of information in part 19 by 600 reports \1658\ and by 300 
annual aggregate burden hours since the Final Rule eliminates Form 204, 
as discussed above.\1659\ The Commission does not expect a change in 
the number of reportable traders that are required to file Part III of 
Form 304.\1660\ Thus, the Commission continues to expect approximately 
55 weekly Form 304 reports, for an annual total of 2,860 reports \1661\ 
for an aggregate total of 1,430 burden hours, which information 
collection burdens will be transferred to OMB control number 3038-
0013.\1662\
---------------------------------------------------------------------------

    \1658\ 50 monthly Form 204 reports x 12 months = 600 total 
annual reports.
    \1659\ 600 Form 204 reports x 0.5 burden hours per report = 300 
aggregate annual burden hours.
    \1660\ Since the Final Rule eliminates Parts I and II of Form 
304, amended Form 304 only refers to existing Part III of that form.
    \1661\ 55 weekly Form 304 reports x 52 weeks = 2,860 total 
annual Form 304 reports.
    \1662\ 2,860 Form 304 reports x 0.5 burden hours per report = 
1,430 aggregate annual burden hours.
---------------------------------------------------------------------------

    In addition, the Commission is maintaining its authority to issue 
special calls for information to any person claiming an exemption from 
speculative Federal position limits. While the position limits 
framework expands to traders in the 25 core referenced futures contacts 
(an increase from the existing nine legacy agricultural products), the 
position limit levels themselves are also generally higher. The higher 
position limit levels result in a smaller universe of traders who may 
exceed the position limits and thus be subject to a special call for 
information on their large position(s). Taking into account the higher 
limits

[[Page 3447]]

and smaller universe of traders who will likely exceed the position 
limits, the Commission estimates that it is likely to issue a special 
call for information to four reportable traders. The Commission 
estimates that it will take approximately five hours to respond to a 
special call. The Commission therefore estimates that industry will 
incur a total of 20 aggregate annual burden hours.\1663\
---------------------------------------------------------------------------

    \1663\ Four possible reportable traders x 5 hours each = 20 
aggregate annual burden hours.
---------------------------------------------------------------------------

ii. OMB Control Number 3038-0013--Aggregation of Positions (Renaming 
``Position Limits'')
a. Introduction; Bona Fide Hedge Recognition and Exemption Process
    The Final Rule amends the existing process for market participants 
to apply to obtain an exemption or recognition of a bona fide hedge 
position. Currently, the ``bona fide hedging transaction or position'' 
definition appears in existing Sec.  1.3. Under existing Sec. Sec.  
1.47 and 1.48, a market participant must apply directly to the 
Commission to obtain a bona fide hedge recognition in accordance with 
Sec.  1.3 for Federal position limit purposes.
    Final Sec. Sec.  150.3 and 150.9 establish an amended process for 
obtaining a bona fide hedge exemption or recognition, which includes: 
(i) A new bona fide hedging definition in Sec.  150.1, (ii) a new 
process administered by the exchanges in final Sec.  150.9 for 
recognizing non-enumerated bona fide hedging positions for Federal 
limit requirements, and (iii) an amended process to apply directly to 
the Commission for certain spread exemptions or for recognition of non-
enumerated bona fide hedging positions in final Sec.  150.3. Final 
Sec.  150.3 also includes new exemption types not explicitly listed in 
existing Sec.  150.3.
    The Commission has previously estimated the combined annual burden 
hours for submitting applications under both Sec. Sec.  1.47 and 1.48 
to be 42 hours.\1664\ The Final Rule largely maintains the existing 
process where market participants may apply directly to the Commission, 
although the Commission expects market participants to predominantly 
rely on the streamlined process to obtain recognition of their non-
enumerated bona fide hedging positions for purposes of Federal position 
limit requirements. Enumerated bona fide hedge positions remain self-
effectuating, which means that market participants do not need to apply 
to the Commission for purposes of Federal position limits, although 
market participants still need to apply to an exchange for recognition 
of bona fide hedge positions for purposes of exchange-set position 
limits. The Commission expects market participants to rely on the 
streamlined exchange process because all the contracts that are now 
subject to Federal position limits are already subject to exchange-set 
limits. Thus, most market participants are likely to already be 
familiar with an exchange-administered process, as adopted under Sec.  
150.9. Familiarity with an exchange-administered process will result in 
operational efficiencies, such as completing one application for non-
enumerated bona fide hedge requests for both Federal and exchange-set 
limits and thus a reduced burden on market participants.
---------------------------------------------------------------------------

    \1664\ The supporting statement for a previous information 
collection request, ICR Reference No: 201808-3038-003, for OMB 
control number 3038-0013, estimated that seven respondents would 
file the Sec. Sec.  1.47 and 1.48 submissions, and that each 
respondent would file two submissions for a total of 14 annual 
submissions, requiring 3 hours per response, for a total of 42 
burden hours for all respondents.
---------------------------------------------------------------------------

    As previously discussed, the Final Rule moves the ``bona fide hedge 
transaction or position'' definition to final Sec.  150.1. The Final 
Rule maintains the distinction between enumerated and non-enumerated 
bona fide hedges, and market participants are required to apply for 
recognition of non-enumerated bona fide hedge positions either directly 
from the Commission pursuant to Sec.  150.3 or through an exchange-
centric process under Sec.  150.9.\1665\ The Commission does not 
believe that this amendment has any PRA impacts since it is maintaining 
the status quo in which enumerated bona fide hedges are self-
effectuating while requiring traders to apply to the Commission or an 
exchange for recognition of non-enumerated bona fide hedge positions.
---------------------------------------------------------------------------

    \1665\ Currently, in order to determine whether a futures or an 
option on futures as a bona fide hedge, either (1) the position in 
question must qualify as an enumerated bona fide hedge, as defined 
in existing Sec.  1.3, or (2) the trader must file a statement with 
the Commission, pursuant to existing Sec.  1.47 (for non-enumerated 
bona fide hedges) and/or existing Sec.  1.48 (for enumerated 
anticipatory bona fide hedges). The Commission does not expect this 
change to have any PRA impacts.
---------------------------------------------------------------------------

b. Sec.  150.2 Speculative Limits
    Under final Sec.  150.2(f), upon request from the Commission, DCMs 
listing a core referenced futures contract are required to supply to 
the Commission deliverable supply estimates for each core referenced 
futures contract listed at that DCM. DCMs are only required to submit 
estimates if requested to do so by the Commission on an as-needed 
basis. When submitting estimates, DCMs are required to provide a 
description of the methodology used to derive the estimate, as well as 
any statistical data supporting the estimate. Appendix C to part 38 
sets forth guidance regarding estimating deliverable supply.
    Submitting deliverable supply estimates upon demand from the 
Commission for contracts subject to Federal position limits is a new 
reporting obligation for DCMs. The Commission estimates that six DCMs 
will be required to submit initial deliverable supply estimates. The 
Commission estimates that it will request each DCM that lists a core 
referenced futures contract to file one initial report for each core 
reference futures contract it lists on its market. Such requests from 
the Commission will result in one initial submission for each of the 25 
core referenced futures contracts. The Commission further estimates 
that it will take 20 hours to complete and file each report for a total 
annual burden of 500 hours for all respondents.\1666\ Accordingly, the 
changes to Sec.  150.2(f) result in an initial, one-time increase to 
the current burden estimates of OMB control number 3038-0013 of 25 
submissions across six respondent DCMs for the initial number of 
submissions for the 25 core referenced futures contracts and an 
initial, one-time burden of 500 hours.
---------------------------------------------------------------------------

    \1666\ 20 initial hours x 25 core referenced futures contracts = 
500 one-time, aggregate burden hours. While there is an initial 
annual submission, the Commission does not expect to require the 
exchanges to resubmit the supply estimates on an annual basis.
---------------------------------------------------------------------------

c. Sec.  150.3 Exemptions From Federal Position Limit Requirements
    Market participants may currently apply directly to the Commission 
for recognition of certain bona fide hedges under the process set forth 
in existing Sec. Sec.  1.47 and 1.48. There is no existing process that 
is codified under the Commission's regulations for spread exemptions or 
other exemptions included under final Sec.  150.3.
    Final Sec.  150.3(a) specifies the circumstances in which a trader 
could exceed Federal position limits.\1667\ With respect to non-
enumerated bona fide hedge recognitions and spread exemptions not 
identified in the proposed ``spread transaction'' definition in Sec.  
150.1, final Sec.  150.3(b) provides a process for market participants 
to request such non-

[[Page 3448]]

enumerated bona fide hedge recognitions or spread exemptions directly 
from the Commission (as previously noted, both enumerated bona fide 
hedges and spread exemptions identified in the proposed ``spread 
transaction'' definition are self-effectuating and do not require a 
market participant to submit an exemption request to the Commission). 
Final Sec.  150.3(b), (d), and (e) sets forth exemption-related 
reporting and recordkeeping requirements that impact the current burden 
estimates in OMB control number 3038-0013.\1668\ The collection of 
information under final Sec.  150.3(b), (d) and (e) is necessary for 
the Commission to determine whether to recognize a trader's position 
qualifies for one of the exemptions from Federal position limit 
requirements listed in Sec.  150.3(a).
---------------------------------------------------------------------------

    \1667\ Final Sec.  150.3(b) includes (1) recognitions of bona 
fide hedges under Sec.  150.3(b); (2) spread exemptions under Sec.  
150.3(b); (3) financial distress positions a person could request 
from the Commission under Sec.  140.99(a)(1); and (4) exemptions for 
certain natural gas positions held during the spot month. Final 
Sec.  150.3(b) also exempts pre-enactment and transition period 
swaps. The enumerated bona fide hedge recognitions and spread 
exemptions identified in the proposed ``spread transaction'' 
definition in Sec.  150.1 are self-effectuating.
    \1668\ Final Sec.  150.3(f) clarifies the implications on 
entities required to aggregate accounts under Sec.  150.4, and Sec.  
150.3(g) provides for delegation of certain authorities to the 
Director of the Division of Market Oversight. The changes to 
Sec. Sec.  150.3(f) and 150.3(g) do not impact the current estimates 
for these OMB control numbers. Also, the Final Rule reminds persons 
of the relief provisions in Sec.  140.99, covered by OMB control 
number 3038-0049, which does not impact the burden estimates.
---------------------------------------------------------------------------

    Final Sec.  150.3(b) establishes application filing requirements 
and recordkeeping and reporting requirements that are similar to 
existing requirements for bona fide hedge recognitions under existing 
Sec. Sec.  1.47 and 1.48. Although these requirements in final Sec.  
150.3 are new for market participants seeking spread exemptions (which 
are currently self-effectuating), the filing, recordkeeping, and 
reporting requirements in Sec.  150.3(b) are otherwise familiar to 
market participants that have requested certain bona fide hedging 
recognitions from the Commission under existing regulations.
    The Commission estimates that very few or no traders will request 
recognition of a non-enumerated bona fide hedge, and any traders that 
do would likely prefer the streamlined process in final Sec.  150.9 
(discussed further below) rather than applying directly to the 
Commission under final Sec.  150.3(b). Similarly, the Commission 
estimates that very few or no traders will submit a request for a 
spread exemption since the Commission has determined that the most 
common spread exemptions are included in the ``spread transaction'' 
definition and therefore are self-effectuating and do not need 
Commission approval for purposes of Federal position limits. The 
Commission expects that traders are likely to rely on the Sec.  
150.3(b) process when dealing with a spread transaction or non-
enumerated bona fide hedge position that poses a novel or complex 
question under the Commission's rules. Particularly when the exchanges 
have not recognized a particular hedging strategy as a non-enumerated 
bona fide hedge previously, the Commission expects market participants 
to seek more regulatory clarity under Sec.  150.3(b). In the event a 
trader submits such request under Sec.  150.3, the Commission estimates 
that traders would file one request per year for a total of one annual 
request for all respondents. The Commission further estimates that in 
such situation, it would take 20 hours to complete and file each 
report, for a total of 20 aggregate annual burden hours for all 
traders.
    Final Sec.  150.3(d) establishes recordkeeping requirements for 
persons who claim any exemptions or relief under Sec.  150.3. Section 
150.3(d) should help to ensure that if any person claims any exemption 
permitted under Sec.  150.3 such exemption holder can demonstrate 
compliance with the applicable requirements as follows:
    First, under Sec.  150.3(d)(1), any person claiming an exemption is 
required to keep and maintain complete books and records concerning 
certain details.\1669\ Section 150.3(d)(1) establishes recordkeeping 
requirements for any person relying on an exemption permitted under 
final Sec.  150.3(a). Under Sec.  150.3(d), the Commission estimates 
that 425 traders will create five records each, per year, for a total 
of 2,125 annual records for respondents. The Commission further 
estimates that it will take one hour to comply with the recordkeeping 
requirement of Sec.  150.3(d)(1) for a total of five aggregate annual 
burden hours for each trader.
---------------------------------------------------------------------------

    \1669\ The requirement includes all details of related cash, 
forward, futures, options on futures, and swap positions and 
transactions (including anticipated requirements, production, 
merchandising activities, royalties, contracts for services, cash 
commodity products and by-products, cross-commodity hedges, and 
records of bona fide hedging swap counterparties).
---------------------------------------------------------------------------

    Second, under Sec.  150.3(d)(2), a pass-through swap counterparty, 
as defined by Sec.  150.1, that relies on a written representation 
received from a bona fide hedging swap counterparty that the swap 
qualifies in good faith as a ``bona fide hedging position or 
transaction,'' as defined under Sec.  150.1, is required to: (i) 
Maintain the relevant books and records of any such written 
representation for at least two years following the expiration of the 
swap; and (ii) furnish any books and records of such written 
representation to the Commission upon request. Section 150.3(d)(2) 
creates a new recordkeeping obligation for certain persons relying on 
the pass-through swap representations, and the Commission estimates 
that 425 traders will be requested to maintain the required records. 
The Commission estimates that each trader will maintain at least five 
records per year for a total of 2,125 aggregate annual records for all 
respondents. The Commission further estimates that it will take one 
hour to comply with the recordkeeping requirement of Sec.  150.3(d) for 
a total of five annual burden hours for each trader and 2,125 aggregate 
annual burden hours for all traders.
    The Commission is moving existing Sec.  150.3(b), which currently 
allows the Commission or certain Commission staff to make special calls 
to demand certain information regarding persons claiming exemptions, to 
final Sec.  150.3(e), with some modifications to include swaps.\1670\ 
Together with the recordkeeping provision of Sec.  150.3(d), Sec.  
150.3(e) should enable the Commission to monitor the use of exemptions 
from speculative position limits and help to ensure that any person who 
claims any exemption permitted by Sec.  150.3 can demonstrate 
compliance with the applicable requirements. The Commission's existing 
collection under existing Sec.  150.3 estimated that the Commission 
issues two special calls per year for information related to 
exemptions, and that each response to a special call for information 
takes 3 burden hours to complete. This includes two burden hours to 
fulfill reporting requirements and one burden hour related to 
recordkeeping for an aggregate total for all respondents of six annual 
burden hours, broken down into four aggregate annual burden hours for 
reporting and two aggregate annual burden hours for 
recordkeeping.\1671\
---------------------------------------------------------------------------

    \1670\ Final Sec.  150.3(e) refers to commodity derivative 
contracts, whereas existing Sec.  150.3(b) refers to futures and 
options on futures. The change results in the inclusion of swaps.
    \1671\ The special call authority under part 19 and the special 
call authority discussed under Sec.  150.3 are similar in nature; 
however, part 19 applies to special calls regarding bona fide hedge 
recognitions and related underlying cash-market positions while the 
special calls under Sec.  150.3 applies to the other exemptions 
under Sec.  150.3.
---------------------------------------------------------------------------

    The Commission estimates that Sec.  150.3(e) imposes information 
collection burdens related to special calls by the Commission on 
approximately 18 additional respondents, for an estimated 20 special 
calls per year.\1672\ The Commission

[[Page 3449]]

estimates that these 20 market participants will provide one submission 
per year to respond to the special call for a total of 20 annual 
submissions for all respondents. The Commission estimates it will take 
a market participant approximately 10 hours to complete a response to a 
special call. Therefore, the Commission estimates responses to special 
calls for information will take an aggregate total of 200 burden hours 
for all traders.\1673\ The Commission notes that it is also maintaining 
its special call authority for reporting requirements under part 19 
discussed above.
---------------------------------------------------------------------------

    \1672\ 2 respondents subject to special calls under existing 
Sec.  150.3 + 18 additional respondents under final Sec.  150.3 = 20 
total respondents. The Commission estimates, at least during the 
initial implementation period, that it is likely to issue more 
special calls for information to monitor compliance with position 
limits, particularly in the commodity markets that will now be 
subject to Federal position limits for the first time.
    \1673\ 20 special calls x 10 burden hours per call = 200 total 
burden hours.
---------------------------------------------------------------------------

d. Sec.  150.5 Exchange-Set Limits and Exemptions
    Amendments to Sec.  150.5 refine the process, and establish non-
exclusive methodologies, by which exchanges may set exchange-level 
limits and grant exemptions therefrom, including separate methodologies 
for setting limit levels for contracts subject to Federal position 
limits (Sec.  150.5(a)) and physical commodity derivatives not subject 
to Federal position limits (Sec.  150.5(b)).\1674\ In compliance with 
part 40 of the Commission's regulations, exchanges currently have 
policies and procedures in place to address exemptions from exchange-
set limits through their rulebooks. The Commission expects that the 
exchanges will accordingly update their rulebooks, both to conform to 
new requirements and to incorporate the additional contracts that are 
subject to Federal position limits for the first time into their 
process for setting exchange-level limits and exemptions therefrom.
---------------------------------------------------------------------------

    \1674\ Final Sec.  150.5 addresses exchange-set position limits 
and exemptions therefrom, whereas final Sec.  150.9 addresses 
Federal position limits and a streamlined process for purposes of 
Federal position limits where an applicant may apply through an 
exchange to the Commission for recognition of an non-enumerated bona 
fide hedge for purposes of Federal position limits.
---------------------------------------------------------------------------

    The collections of information related to amended rulebooks under 
part 40 are covered by OMB control number 3038-0093. Separately, the 
collections of information related to applications for exemptions from 
exchange-set limits are covered by OMB control number 3038-0013.
    Under final Sec.  150.5(a)(1), for any contract subject to a 
Federal position limit, DCMs and, ultimately, SEFs, will be required to 
establish exchange-set position limits for such contracts. Under final 
Sec.  150.5(a)(2), exchanges that wish to grant exemptions from 
exchange-set limits on commodity derivative contracts subject to 
Federal position limits must require traders to file an application 
that shows a request for a bona fide hedge recognition or exemption 
conforms to a type that may be granted under final Sec.  150.3(a)(1)-
(4). Exchanges must require that such exchange-set limit exemption 
applications be filed in advance of the date such position would be in 
excess of the limits, but exchanges have the discretion to adopt rules 
allowing traders to file bona fide hedging applications within five 
business days after a trader took on such position due to sudden or 
unforeseen increases in the trader's bona fide hedging needs. Final 
Sec.  150.5(a)(2) also provides that exchanges must require that the 
trader reapply for the exemption at least annually. Final Sec.  
150.5(a)(4) requires each exchange to provide a monthly report showing 
the disposition of any exemption application, including the recognition 
of any position as a bona fide hedge, the exemption of any spread 
transaction, the renewal, revocation, or modification of a previously 
granted recognition or exemption, or the rejection of any 
application.\1675\
---------------------------------------------------------------------------

    \1675\ Additionally, each report should include the following 
details: (A) The date of disposition; (B) The effective date of the 
disposition; (C) The expiration date of any recognition or 
exemption; (D) Any unique identifier(s) the designated contract 
market or swap execution facility may assign to track the 
application, or the specific type of recognition or exemption; (E) 
If the application is for an enumerated bona fide hedging 
transaction or position, the name of the enumerated bona fide 
hedging transaction or position listed in Appendix A to this part; 
(F) If the application is for a spread transaction listed in the 
spread transaction definition in Sec.  150.1, the name of the spread 
transaction as it is listed in Sec.  150.1; (G) The identity of the 
applicant; (H) The listed commodity derivative contract or 
position(s) to which the application pertains; (I) The underlying 
cash commodity; (J) The maximum size of the commodity derivative 
position that is recognized by the designated contract market or 
swap execution facility as a bona fide hedging transaction or 
position, specified by contract month and by the type of limit as 
spot month, single month, or all-months-combined, as applicable; (K) 
Any size limitations or conditions established for a spread 
exemption or other exemption; and (L) For a bona fide hedging 
transaction or position, a concise summary of the applicant's 
activity in the cash markets and swaps markets for the commodity 
underlying the commodity derivative position for which the 
application was submitted.
---------------------------------------------------------------------------

    These collections of information related to exemptions from 
exchange-set limits are necessary to ensure that such exchange-set 
limits comply with Commission regulations, including that exchange 
limits are no higher than the applicable Federal level; to establish 
minimum standards needed for exchanges to administer the exchange's 
position limits framework; and to enable the Commission to oversee an 
exchange's exemptions process to ensure it does not undermine the 
Federal position limits framework. In addition, the Commission will use 
the information to confirm that exemptions are granted and renewed in 
accordance with the types of exemptions that may be granted under final 
Sec.  150.3(a)(1)-(4).
    The Commission estimates under final Sec.  150.5(a) that 425 
traders will submit applications to claim spread exemptions and bona 
fide hedge recognitions from exchange-set position limits on commodity 
derivatives contracts subject to Federal position limits set forth in 
Sec.  150.2. The Commission estimates that each trader on average will 
submit five applications to an exchange each year for a total of 2,125 
applications for all respondents. The Commission further estimates that 
it will take two hours to complete and file each application for a 
total of 10 annual burden hours for each trader and 4,250 aggregate 
burden hours for all traders.\1676\
---------------------------------------------------------------------------

    \1676\ To increase efficiency and reduce duplicative efforts, 
the Final Rule permits an exchange to have a single process in place 
that allows market participants to request non-enumerated bona fide 
hedge recognitions from both Federal and exchange-set position 
limits at the same time. The Commission believes that under a single 
process, the estimated burdens under final Sec.  150.5(a) discussed 
in this section for exemptions from exchange-set limits includes the 
burdens under the Federal limit exemption process for non-enumerated 
bona fide hedges under final Sec.  150.9 discussed below.
---------------------------------------------------------------------------

    The Commission estimates under final Sec.  150.5(a)(4) that six 
exchanges will provide monthly reports for an annual total of 72 
monthly reports for all exchanges.\1677\ The Commission further 
estimates that it will take five hours to complete and file each 
monthly report for a total of 60 annual burden hours for each exchange 
and 360 annual burden hours for all exchanges.\1678\
---------------------------------------------------------------------------

    \1677\ 6 exchanges x 12 months = 72 total monthly reports per 
year.
    \1678\ 5 hours per monthly report x 12 months = 60 hours per 
year for each exchange. 60 annual hours x 6 exchanges = 360 
aggregate annual hours for all exchanges.
---------------------------------------------------------------------------

    Final Sec.  150.5(b) requires exchanges, for physical commodity 
derivatives that are not subject to Federal position limits, to set 
limits during the spot month and to set either limits or accountability 
outside of the spot month. Under Sec.  150.5(b)(3), where multiple 
exchanges list contracts that are substantially the same, including 
physically-settled contracts that have the same underlying commodity 
and delivery location, or cash-settled contracts that are directly or 
indirectly linked to a physically-settled contract, the exchange must 
either adopt ``comparable'' limits for such contracts, or demonstrate 
to the Commission how

[[Page 3450]]

the non-comparable levels comply with the standards set forth in Sec.  
150.5(b)(1) and (2). Such a determination also must address how the 
levels are necessary and appropriate to reduce the potential threat of 
market manipulation or price distortion of the contract's or the 
underlying commodity's price or index. Final Sec.  150.5(b)(3) is 
intended to help ensure that position limits established on one 
exchange do not jeopardize market integrity or otherwise harm other 
markets. This provision may also improve the efficiency with which 
exchanges adopt limits on newly-listed contracts that compete with an 
existing contract listed on another exchange and help reduce the amount 
of time and effort needed for Commission staff to assess the new limit 
levels. Further, Sec.  150.5(b)(3) is consistent with the Commission's 
determination to generally apply equivalent Federal position limits to 
linked contracts, including linked contracts listed on multiple 
exchanges.
    The Commission estimates that under Sec.  150.5(b)(3), six 
exchanges will make submissions to demonstrate to the Commission how 
the non-comparable levels comply with the standards set forth in Sec.  
150.5(b)(1) and (2). The Commission estimates that each exchange on 
average will make three submissions each year for a total of 18 
submissions for all exchanges. The Commission further estimates that it 
will take 10 hours to complete and file each submission for a total of 
18 annual burden hours for each exchange and 180 burden hours for all 
exchanges.\1679\
---------------------------------------------------------------------------

    \1679\ 18 estimated annual submissions x 10 burden hours per 
submission = 180 aggregate annual burden hours.
---------------------------------------------------------------------------

    Final Sec.  150.5(b)(4) permits exchanges to grant exemptions from 
any exchange limit established for physical commodity contracts not 
subject to Federal position limits. To grant such exemptions, exchanges 
must require traders to file an application to show whether the 
requested exemption from exchange-set limits is in accord with sound 
commercial practices in the relevant commodity derivative market and/or 
that may be established and liquidated in an orderly fashion in that 
market. This collection of information is necessary to confirm that any 
exemptions granted from exchange limits on physical commodity contracts 
not subject to Federal position limits do not pose a threat of market 
manipulation or congestion, and maintains orderly execution of 
transactions. The Commission estimates that 200 traders will submit one 
application each year and that each application will take approximately 
two hours to complete, for an aggregate total of 400 burden hours per 
year for all traders.
    Final Sec.  150.5(e) reflects that, consistent with the definition 
of ``rule'' in existing Sec.  40.1, any exchange action establishing or 
modifying position limits or exemptions therefrom, or position 
accountability, in any case pursuant to Sec.  150.5(a), (b), or (c), 
including related guidance in Appendices F or G, to part 150, qualifies 
as a ``rule'' and must be submitted to the Commission pursuant to part 
40 of the Commission's regulations. Final Sec.  150.5(e) further 
provides that exchanges are required to review regularly any position 
limit levels established under Sec.  150.5 to ensure the level 
continues to comply with the requirements of those sections. The 
Commission estimates under Sec.  150.5(e) that six exchanges will 
submit revised rulebooks to satisfy their compliance obligations under 
part 40. The Commission estimates that each exchange on average will 
make one initial revision of its rulebook to reflect the new position 
limit framework for a total of six applications for all exchanges. The 
Commission further estimates that it will take 30 hours to revise a 
rulebook for a total of 30 annual burden hours for each exchange and 
180 burden hours for all exchanges.\1680\
---------------------------------------------------------------------------

    \1680\ 6 initial applications x 30 burden hours = 180 initial 
aggregate burden hours.
---------------------------------------------------------------------------

    This collection of information is necessary to ensure that the 
exchanges' rulebooks reflect the most up-to-date rules and requirements 
in compliance with the position limits framework. The information is 
used to confirm that exchanges are complying with their requirements to 
regularly review any position limit levels established under Sec.  
150.5.
e. Sec.  150.9 Exchange Process for Bona Fide Hedge Recognitions From 
Federal Position Limits
    Final Sec.  150.9 establishes a new streamlined process in which a 
trader could apply through an exchange to request a non-enumerated bona 
fide hedging recognition for purposes of Federal position limits. As 
part of the process, final Sec.  150.9 creates certain recordkeeping 
and reporting obligations on the market participant and the exchange, 
including: (i) An application to request non-enumerated bona fide hedge 
recognitions, which the trader submits to the exchange and which the 
exchange subsequently provides to the Commission if the exchange 
approves the application for purposes of exchange-set limits; (ii) a 
notification to the Commission and the applicant of the exchange's 
determination for purposes of exchange limits regarding the trader's 
request for recognition of a bona fide hedge or spread exemption; (iii) 
and a requirement to maintain full, complete and systematic records for 
Commission review of the exchange's decisions. The Commission believes 
that the exchanges that will elect to process applications for non-
enumerated bona fide hedging exemptions under Sec.  150.9(a) already 
have similar processes for the review and disposition of such exemption 
applications in place through their rulebooks for purposes of exchange-
set position limits.
    Accordingly, the estimated burden on an exchange to comply with 
final Sec.  150.9 will be less burdensome because the exchanges may 
leverage their existing policies and procedures to comply with the 
Final Rule. The Commission estimates that six exchanges will elect to 
process applications for non-enumerated bona fide hedge recognitions 
that satisfy the Federal position limit requirements under final Sec.  
150.9, and will be required to file amended rulebooks pursuant to part 
40 of the Commission's regulations. The Commission bases its estimate 
on the number of exchanges that have submitted similar rules to the 
Commission in the past.
    Final Sec.  150.9(c) requires a trader to submit an application 
with certain information to enable the exchange to determine whether it 
should recognize a position as a bona fide hedge for purposes of 
exchange-set position limits. Each applicant will need to reapply to 
the exchange for its non-enumerated bona fide hedge recognition at 
least on an annual basis by updating its original application. The 
Commission expects that traders will benefit from the streamlined 
framework established under final Sec.  150.9 because traders may 
submit one application to obtain a non-enumerated bona fide hedge 
recognition for purposes of both exchange-set and Federal position 
limits, as opposed to submitting separate applications to the 
Commission for Federal position limit purposes and separate 
applications to an exchange for exchange limit purposes.\1681\
---------------------------------------------------------------------------

    \1681\ The Commission believes the collections of information 
set forth above are necessary for the exchange to process requests 
for recognition of non-enumerated bona fide hedges for purposes of 
exchange-set position limits, and separately, if applicable, for the 
Commission to make its determination for purposes of Federal 
position limits. The information is used by the exchange to 
determine, and the Commission to review and determine, whether the 
facts and circumstances demonstrate it is appropriate to recognize a 
position as a non-enumerated bona fide hedging transaction or 
position.

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

[[Page 3451]]

    Accordingly, the estimated burden for traders requesting non-
enumerated bona fide hedge recognitions from exchange-set limits under 
Sec.  150.5(a) will subsume the burden estimates in connection with 
final Sec.  150.9 for requesting non-enumerated bona fide hedge 
recognition's from Federal position limits since the Commission 
believes exchanges will combine the two processes (i.e., any trader who 
applies through an exchange under final Sec.  150.9 for a non-
enumerated bona fide hedge for Federal position limits purposes also 
will be deemed to be applying at the same time under final Sec.  
150.5(a) for exchange position limits purposes and thus it would not be 
appropriate to distinguish between the two for PRA purposes). 
Accordingly, the Commission anticipates that six exchanges each will 
receive only one application for a non-enumerated bona fide hedge 
recognition under final Sec.  150.9 for a total of six aggregate annual 
applications for all exchanges; however, as noted above, this amount is 
included in the Commission's estimate in connection with final Sec.  
150.5(a).\1682\ Specifically, as discussed above in connection with 
final Sec.  150.5(a), the Commission estimates under final Sec. Sec.  
150.5(a) and 150.9(a) that 425 traders will submit applications to 
claim exemptions and/or bona fide hedge recognitions for contracts 
subject to Federal position limits as set forth in Sec.  150.2.\1683\
---------------------------------------------------------------------------

    \1682\ As discussed above, the process and estimated burdens 
under final Sec.  150.9 do not apply to Sec.  150.5(b) because final 
Sec.  150.5(b) applies to those physical commodity contracts that 
are not subject to Federal position limits (as opposed to final 
Sec.  150.5(a), which applies to those contracts subject to Federal 
position limits). As a result, a trader that would use the process 
established under Sec.  150.5(b) for exchange-set limits will not 
need to apply under final Sec.  150.9 since the traders would not 
need a bona fide hedge recognition or an exemption from Federal 
position limits.
    \1683\ As discussed in connection with final Sec.  150.5(a) 
above, the Commission estimates that each trader on average will 
make five applications each year for a total of 2,125 applications 
across all exchanges. The Commission further estimates that, for 
final Sec. Sec.  150.5(a) and 150.9(a), taken together, it will take 
two hours to complete and file each application for a total of 10 
annual burden hours for each trader and 4,250 aggregate annual 
burden hours for all traders (2,125 total annual applications x two 
burden hours per application = 4,250 aggregate annual burden hours). 
The Commission anticipates that compared to final Sec.  150.5(a), 
fewer traders will apply under final Sec.  150.9 since final Sec.  
150.9 applies only to non-enumerated bona fide hedge recognitions 
for Federal purposes. In comparison, while final Sec.  150.5 
encompasses these same applications for non-enumerated bona fide 
hedge recognitions (but for the purpose of exchange-set limits), 
final Sec.  150.5(a) also includes enumerated bona fide hedge 
applications along with spread exemption requests. The Commission's 
estimate of 4,250 aggregate annual burden hours encompasses all such 
requests from all traders. However, for the sake of clarity, the 
Commission anticipates that six exchanges each will receive one 
application per year for a non-enumerated bona fide hedge under 
final Sec.  150.9 (for a total of six applications across all 
exchanges); as noted, this burden is included in the Commission's 
estimate of 425 respondents in connection with its estimate under 
final Sec.  150.5(a).
---------------------------------------------------------------------------

    Final Sec.  150.9(d) requires exchanges to keep full, complete, and 
systematic records, including all pertinent data and memoranda, of all 
activities relating to the processing of such applications and the 
disposition thereof. In addition, as provided for in final Sec.  
150.9(g) and existing Sec.  1.31, the Commission may, in its 
discretion, at any time, review the exchange's records retained 
pursuant to final Sec.  150.9(d) or request additional information 
pursuant to Sec.  150.9(e)(5). The recordkeeping requirement is 
necessary for the Commission to review the exchanges' processes, 
retention of records, and compliance with requirements established and 
implemented under this section.
    Final Sec.  150.9(d) creates a new recordkeeping obligation 
consistent with the standards in existing Sec.  1.31.\1684\ The 
Commission estimates that six exchanges will each create one record in 
connection with final Sec.  150.9 each year for a total of six annual 
records for all respondents. The Commission further estimates that it 
will take five hours to comply with the recordkeeping requirement of 
Sec.  150.9(d) for a total of five annual burden hours for each 
exchange and 30 aggregate annual burden hours across all exchanges.
---------------------------------------------------------------------------

    \1684\ Consistent with existing Sec.  1.31, the Commission 
expects that these records will be readily available during the 
first two years of the required five-year recordkeeping period for 
paper records, and readily accessible for the entire five-year 
recordkeeping period for electronic records. In addition, the 
Commission expects that records required to be maintained by an 
exchange pursuant to this section will be readily accessible during 
the pendency of any application, and for two years following any 
disposition that did not recognize a derivative position as a bona 
fide hedge.
---------------------------------------------------------------------------

    Final Sec.  150.9(d) allows the Commission to inspect such books 
and records.\1685\ In the event the Commission exercises its authority 
to inspect such books and records, it estimates that the Commission 
will conduct an inspection of two exchanges per year and each exchange 
will incur four hours to make its books and records available to the 
Commission for review for a total of eight aggregate annual burden 
hours for the two estimated respondent exchanges.\1686\
---------------------------------------------------------------------------

    \1685\ Final Sec.  150.9(d)(1) requires the exchange to keep 
full, complete, and systematic records, which include all pertinent 
data and memoranda, of all activities relating to the processing of 
such applications and the disposition thereof. This requirement 
working in concert with Sec.  1.31 allows the Commission to inspect 
any such records. Separately, under Sec.  150.9(e)(5), if the 
Commission determines additional information is required to conduct 
its review, then it would notify the exchange and the relevant 
market participant of any issues identified and provide them with an 
opportunity to provide supplemental information.
    \1686\ 2 exchanges per year subject to a Commission inspection x 
4 hours per inspection request = 8 aggregate annual burden hours for 
all exchanges.
---------------------------------------------------------------------------

    Under final Sec.  150.9(e), an exchange needs to provide an 
applicant and the Commission with notice of any approved application of 
an exchange's determination to recognize bona fide hedges with respect 
to its own position limits for purposes of exceeding the Federal 
position limits. The notification requirement is necessary to inform 
the Commission of the details of the type of bona fide hedge 
recognitions being granted. The information is used to keep the 
Commission informed as to the manner in which an exchange administers 
its application procedures, and the exchange's rationale for permitting 
large positions.
    The Commission estimates that under final Sec.  150.9(e), six 
exchanges will submit notifications of approved application of an 
exchange's determination to recognize non-enumerated bona fide hedges 
for purposes of exceeding the Federal position limits. The Commission 
estimates that each exchange on average will make two notifications: 
One notification each to the applicant trader and to the Commission 
each year for a total of 12 notices for all exchanges. The Commission 
further estimates that it will take 0.5 hours to complete and file each 
notification for a total of one annual burden hour for each exchange 
and six burden hours for all exchanges.\1687\
---------------------------------------------------------------------------

    \1687\ Twelve notices for all exchanges x 0.5 hours per notice = 
six total burden hours across all exchanges.
---------------------------------------------------------------------------

    In addition to submitting a copy of any exchange-approved non-
enumerated bona fide hedge application to the Commission under Sec.  
150.9(e), the preamble clarifies that an exchange may, on a voluntary 
basis, send the Commission an advance courtesy copy of the non-
enumerated bona fide hedge application when the exchange first receives 
it from the applicant. Although this advance courtesy copy would be a 
voluntary submission, it is still considered a new information 
collection under the PRA. However, the Commission believes there is no 
corresponding burden for this filing because the Commission considers 
this practice to be in the ordinary course of business as it is usual 
and customary for exchanges to provide the Commission with advance 
copies of various filings under other Commission

[[Page 3452]]

regulations.\1688\ In the event that this practice is not considered 
usual and customary, the Commission estimates that the burden of such 
filing will be de minimis and take less than five minutes for an 
exchange to send an application to the Commission, if the exchange 
elects to do so (less than 30 total minutes in the aggregate across all 
exchanges: 6 exchanges x 1 advance copy x less than 5 minutes = less 
than 30 minutes).
---------------------------------------------------------------------------

    \1688\ For example, exchanges have frequently submitted advance 
courtesy copies of new rule filings and product filings to the 
Commission under the part 40 regulations.
---------------------------------------------------------------------------

iii. OMB Control Number 3038-0093--Provisions Common to Registered 
Entities
a. Sec.  150.9(a)
    Under final Sec.  150.9(a), exchanges that would like for their 
market participants to be able to exceed Federal position limits based 
on a non-enumerated bona fide hedge recognition granted by the exchange 
with respect to its own limits must maintain rules that establish 
processes consistent with the provisions of final Sec.  150.9 and must 
seek approval of such rules from the Commission pursuant to Sec.  40.5 
of the Commission's regulations. The collection of information is 
necessary to capture the new non-enumerated bona fide hedge process in 
the exchanges' rulebook, which is subject to Commission approval. The 
information is used to assess the process put in place by each exchange 
submitting amended rulebooks.
    The Commission has previously estimated the combined annual burden 
hours for both Sec. Sec.  40.5 and 40.6 to be 7,000 hours.\1689\ Upon 
implementation of final Sec.  150.9, the Commission estimates that six 
exchanges will each make one initial Sec.  40.5 rule filing per year 
for a total of six one-time initial submissions for all exchanges. The 
Commission further estimates that the exchanges will employ a 
combination of in-house and outside legal and compliance counsel to 
update existing rulebooks and it will take 25 hours to complete and 
file each rule for a total 25 one-time burden hours for each exchange 
and 150 one-time burden hours for all exchanges.
---------------------------------------------------------------------------

    \1689\ The supporting statement for the current active 
information collection request, ICR Reference No: 201503-3038-002, 
for OMB control number 3038-0013, estimated that seven respondents 
would file the Sec. Sec.  1.47 and 1.48 reports, and that each 
respondent would file two reports for a total of 14 annual 
responses, requiring three hours per response, for a total of 42 
burden hours for all respondents.
---------------------------------------------------------------------------

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the impact.\1690\ 
A regulatory flexibility analysis or certification typically is 
required for ``any rule for which the agency publishes a general notice 
of proposed rulemaking pursuant to'' the notice-and-comment provisions 
of the Administrative Procedure Act, 5 U.S.C. 553(b).\1691\ The 
requirements related to the Final Rule fall mainly on registered 
entities, exchanges, FCMs, swap dealers, clearing members, foreign 
brokers, and large traders. The Commission has previously determined 
that registered DCMs, FCMs, swap dealers, major swap participants, 
eligible contract participants, SEFs, clearing members, foreign brokers 
and large traders are not small entities for purposes of the RFA.\1692\
---------------------------------------------------------------------------

    \1690\ 44 U.S.C. 601 et seq.
    \1684\ 5 U.S.C. 601(2), 603-05.
    \1692\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618-19, (Apr. 30, 1982) (DCMs, FCMs, and large traders) 
(``RFA Small Entities Definitions''); Opting Out of Segregation, 66 
FR 20740-20743, (Apr. 25, 2001) (eligible contract participants); 
Position Limits for Futures and Swaps; Final Rule and Interim Final 
Rule, 76 FR 71626, 71680, (Nov. 18, 2011) (clearing members); Core 
Principles and Other Requirements for Swap Execution Facilities, 78 
FR 33476, 33548, (Jun. 4, 2013) (SEFs); A New Regulatory Framework 
for Clearing Organizations, 66 FR 45604, 45609, (Aug. 29, 2001) 
(DCOs); Registration of Swap Dealers and Major Swap Participants, 77 
FR 2613, Jan. 19, 2012, (swap dealers and major swap participants); 
and Special Calls, 72 FR 50209, (Aug. 31, 2007) (foreign brokers).
---------------------------------------------------------------------------

    Further, while the requirements under this rulemaking may impact 
nonfinancial end users, the Commission notes that position limits 
levels apply only to large traders. Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies, on behalf of the 
Commission, pursuant to 5 U.S.C. 605(b), that the actions taken herein 
will not have a significant economic impact on a substantial number of 
small entities. The Chairman made the same certification in the 2013 
Proposal,\1693\ the 2016 Supplemental Proposal,\1694\ the 2016 
Reproposal,\1695\ and the 2020 NPRM.\1696\
---------------------------------------------------------------------------

    \1693\ See 2013 Proposal, 78 FR at 75784.
    \1694\ See 2016 Supplemental Proposal, 81 FR at 38499.
    \1695\ See 2016 Reproposal, 81 FR at 96894.
    \1696\ See 2020 NPRM, 85 FR at 11708.
---------------------------------------------------------------------------

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\1697\ The Commission believes that the public 
interest to be protected by the antitrust laws is generally to protect 
competition. In the Proposal, the Commission requested comments on 
whether: (1) The proposed rules could be anticompetitive; (2) there are 
other less anticompetitive means of deterring and preventing price 
manipulation or any other disruptions to market integrity; and (3) 
requiring DCOs to impose initial margin surcharges in lieu of imposing 
position limits is feasible.
---------------------------------------------------------------------------

    \1697\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission does not anticipate that the position limits regime 
that it is adopting today will result in anticompetitive behavior. To 
the contrary, the Commission believes that the relatively high position 
limit levels (coupled with the numerous exemptions from position limits 
adopted as part of this rulemaking) do not establish any barriers to 
entry or competitive restraints. As noted above, the Commission 
encouraged comments from the public on any aspect of the rulemaking 
that may have the potential to be inconsistent with the antitrust laws 
or be anticompetitive in nature. The Commission received two (2) 
comments asserting that the proposed rule may be anticompetitive.
    ICE commented that it has concerns regarding the potential 
anticompetitive aspects of the Commission's approach to aggregation of 
contracts across all exchanges rather than on a per exchange 
basis.\1698\ In particular, ICE asserted that the aggregation of 
referenced contracts across all exchanges by the Commission fails to 
comply with the requirements of Section 15(b) of the CEA that requires 
the Commission take into consideration the public interest to be 
protected by the antitrust laws and endeavor to take the least 
anticompetitive means of achieving the purposes of the CEA.\1699\ ICE 
noted that an aggregated Federal position limit, across all exchanges, 
may make it very difficult for an exchange to launch a new contract or 
that would be aggregated with an existing contract for position limit 
purposes. In addition, ICE also indicated that launching a new exchange 
may even be more difficult given the aggregate approach to position 
limits across exchanges. The underlying

[[Page 3453]]

basis for ICE's assertion is that aggregation may potentially reduce 
the ability of a new exchange or new contract to attract enough 
liquidity to become sustainable. ICE argued that a more flexible 
approach to aggregation of positions that allows each exchange to 
develop its own liquidity (and establish its own limits), even for 
similar or look-alike contracts, would better advance the goals of 
developing robust and liquid markets while providing adequate means to 
protect against excessive speculation.
---------------------------------------------------------------------------

    \1698\ ICE at 12.
    \1699\ ICE believes that this is particularly true for cash-
settled contracts and for other contracts outside of the delivery 
month.
---------------------------------------------------------------------------

    Similarly, FIA commented that the Commission's aggregation of 
position limits across exchanges in connection with financially-settled 
reference contracts ``will reduce innovation and competition between 
exchanges because any new proposed financially-settled referenced 
futures contracts will have to share the same liquidity pool with 
existing financially-settled referenced futures contracts, including 
economically-equivalent swaps.'' \1700\ Instead, FIA argued that 
position limits should be established per designated contract spot 
month limits for financially-settled referenced contracts and a 
separate spot month limit should be established for economically-
equivalent swaps in order to enhance competition, innovation and 
liquidity for bona fide hedgers.
---------------------------------------------------------------------------

    \1700\ FIA at p. 8.
---------------------------------------------------------------------------

    As an initial legal matter, the Commission interprets CEA section 
4a(a)(6) to generally require aggregated Federal position limits across 
exchanges. CEA section 4a(a)(6) requires the Commission to ``establish 
limits . . . on the aggregate number or amount of positions . . . 
across--(A) contracts listed by designated contract markets . . . .'' 
Accordingly, even if the Commission were to grant ICE's claim in 
arguendo of possible anti-competitive affects, the requirement in CEA 
section 4a(a)(6) that Federal position limits should apply in the 
aggregate across exchanges is dispositive for the Commission's approach 
under the Final Rule.\1701\
---------------------------------------------------------------------------

    \1701\ As discussed in the preamble to this release, however, 
the Commission is making an exception under its exemptive authority 
for position limits in CEA section 4a(a)(7) for the NYMEX NG 
referenced contracts, which will be subject to a per-exchange 
position limit level, based on the unique liquidity characteristics 
of the natural gas markets.
---------------------------------------------------------------------------

    As stated above in Section II.B.10 of the preamble, the Commission 
disagrees with comments by ICE and FIA asserting that generally the 
aggregation of cash-settled positions across exchanges would impair 
competition and provide a barrier to financial innovation. Both 
commenters essentially advocate for a disaggregated Federal position 
limit that applies on a per-exchange basis based on the notion that 
this will promote and attract greater liquidity to the markets 
regardless of the potential for manipulation and/or market disruption. 
In contrast to these commenters' concerns, the Commission submits that 
in general an aggregate position limit framework across exchanges 
should promote, not prohibit, competition and therefore enhance 
liquidity formation.\1702\ The ability to apply the Federal position 
limits framework on a disaggregated basis would also significantly 
increase position limits so that the potential risk of excessive 
speculation and manipulation would become a much greater concern to the 
Commission based on the ability of market participants to hold larger 
positions in the aggregate across exchanges. Therefore, under the 
approach supported by ICE and FIA, the Commission would be required to 
re-adjust Federal position limits to a much lower level, potentially 
impacting liquidity and future financial innovation. The Commission 
also asserts that the application of the Federal position limit levels 
across exchanges promotes innovation and competition in the marketplace 
because the full aggregate position limit level is available for market 
participants regardless of the particular trading venue/exchange, 
which, by definition, promotes greater competition and significant 
price discovery.
---------------------------------------------------------------------------

    \1702\ The Commission believes that permitting Federal position 
limits to apply on a disaggregated, per-exchange basis also has the 
potential to further divide liquidity among several liquidity pools, 
which could make accessing liquidity for bona fide hedgers more 
difficult and reduce price discovery.
---------------------------------------------------------------------------

    As noted in the 2020 NPRM and the preamble of this adopting 
release,\1703\ the Commission is aware that exchanges may also have 
conflicting and competing interests in connection with the adoption of 
exchange position limits and accountability levels. Additionally, the 
final rules with respect to exchange-set position limits require any 
new commodity derivative contract to establish limits at a 
``comparable'' level to existing contracts that are substantially 
similar (i.e., ``look-alike contracts'') on other exchanges unless the 
exchange listing the new contract demonstrates to the satisfaction of 
Commission staff, in its product filing with the Commission, how its 
levels comply with the requirements of Sec.  150.5(b)(1) and (2). This 
requirement could potentially provide competitive advantages to the 
``first mover'' exchange since such exchange could effectively 
establish the position limit for all other exchanges that seek to list 
and trade substantially similar contracts.
---------------------------------------------------------------------------

    \1703\ See 85 FR 11596, 11677 at fn. 576; see also Section II.G. 
(discussing the Sec.  150.9 process and the role of the exchanges) 
and Section II.B.2 (discussing the role of exchanges in connection 
with non-spot month limits under Sec.  150.2).
---------------------------------------------------------------------------

    Although the Commission acknowledges these competitive concerns, 
the Commission believes that these concerns are mitigated because (i) 
an exchange is required to submit any proposed position limits to the 
Commission under part 40 of the Commission's regulations and (ii) an 
exchange is required pursuant to Sec.  150.5(b) to set limits that are 
necessary and appropriate to reduce the potential threat of market 
manipulation or price distortion of the contract's or the underlying 
commodity's price or index. In addition, for those commodity derivative 
contracts that are subject to a Federal speculative position limit 
under Sec.  150.2, the limit set by the exchange can be no higher than 
Federal speculative position limit specified in Sec.  150.2. The 
Commission believes that exchanges have significant incentives to 
maintain well-functioning markets to remain competitive with other 
exchanges. Market participants may choose exchanges that are less 
susceptible to sudden or unreasonable fluctuations or unwarranted 
changes caused by excessive speculation or corners, squeezes, and 
manipulation, which could, among other things, harm the price discovery 
function of the commodity derivative contracts and negatively impact 
the delivery of the underlying commodity, bona fide hedging strategies, 
and market participants' general risk management.\1704\ Furthermore, 
several academic studies, including one concerning futures exchanges 
and another concerning demutualized stock exchanges, support the 
conclusion that exchanges are able to both satisfy shareholder 
interests and meet their self-regulatory organization 
responsibilities.\1705\
---------------------------------------------------------------------------

    \1704\ Kane, Stephen, Exploring price impact liquidity for 
December 2016 NYMEX energy contracts, n.33, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_priceimpact.pdf.
    \1705\ See David Reiffen and Michel A. Robe, Demutualization and 
Customer Protection at Self-Regulatory Financial Exchanges, Journal 
of Futures Markets, Vol. 31, 126-164, Feb. 2011 (in many 
circumstances, an exchange that maximizes shareholder (rather than 
member) income has a greater incentive to aggressively enforce 
regulations that protect participants from dishonest agents); and 
Kobana Abukari and Isaac Otchere, Has Stock Exchange Demutualization 
Improved Market Quality? International Evidence, Review of 
Quantitative Finance and Accounting, Dec 09, 2019, https://doi.org/10.1007/s11156-019-00863-y (demutualized exchanges have realized 
significant reductions in transaction costs in the post-
demutualization period).

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

[[Page 3454]]

    The Commission has determined that the position limit rules adopted 
today serve the regulatory purpose of the CEA ``to deter and prevent 
price manipulation or any other disruptions to market integrity.'' 
\1706\ In addition, the Commission notes that the adopted position 
limit rules implement additional purposes and policies set forth in 
section 4a(a) of the CEA.\1707\ The Commission has considered the 
rulemaking and related comments to determine whether it is 
anticompetitive, and continues to believe that the position limits 
rulemaking will not result in any unreasonable restraint of trade or 
impose any material anticompetitive burden on trading in the markets.
---------------------------------------------------------------------------

    \1706\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
    \1707\ 7 U.S.C. 7a(a) (burdens on interstate commerce; trading 
or position limits).
---------------------------------------------------------------------------

Final Regulatory Text and Related Appendices

List of Subjects

17 CFR Part 1

    Agricultural commodity, Agriculture, Brokers, Committees, Commodity 
futures, Conflicts of interest, Consumer protection, Definitions, 
Designated contract markets, Directors, Major swap participants, 
Minimum financial requirements for intermediaries, Reporting and 
recordkeeping requirements, Swap dealers, Swaps.

17 CFR Part 15

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements, Swaps.

17 CFR Part 17

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements, Swaps.

17 CFR Part 19

    Commodity futures, Cottons, Grains, Reporting and recordkeeping 
requirements, Swaps.

17 CFR Part 40

    Commodity futures, Procedural rules, Reporting and recordkeeping 
requirements.

17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests, 
Organizations and functions (Government agencies).

17 CFR Part 150

    Bona fide hedging, Commodity futures, Cotton, Grains, Position 
limits, Referenced Contracts, Swaps.

17 CFR Part 151

    Bona fide hedging, Commodity futures, Cotton, Grains, Position 
limits, Referenced Contracts, Swaps.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 
(2012).


Sec.  1.3  [Amended]

0
2. In Sec.  1.3, remove the definition of the term ``bona fide hedging 
transactions and positions for excluded commodities''.

PART 15--REPORTS--GENERAL PROVISIONS

0
3. The authority citation for part 15 continues to read as follows:

    Authority:  7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 
7a, 9, 12a, 19, and 21, as amended by Title VII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 
Stat. 1376 (2010).


0
4. In Sec.  15.00, revise paragraph (p)(1) to read as follows:


Sec.  15.00   Definitions of terms used in parts 15 to 19, and 21 of 
this chapter.

* * * * *
    (p) * * *
    (1) For reports specified in parts 17 and 18 and in Sec.  19.00(a) 
and (b) of this chapter, any open contract position that at the close 
of the market on any business day equals or exceeds the quantity 
specified in Sec.  15.03 in either:
    (i) Any one futures of any commodity on any one reporting market, 
excluding futures contracts against which notices of delivery have been 
stopped by a trader or issued by the clearing organization of the 
reporting market; or
    (ii) Long or short put or call options that exercise into the same 
futures contract of any commodity, or other long or short put or call 
commodity options that have identical expirations and exercise into the 
same commodity, on any one reporting market.
* * * * *

0
5. In Sec.  15.01, revise paragraph (d) to read as follows:


Sec.  15.01   Persons required to report.

* * * * *
    (d) Persons, as specified in part 19 of this chapter, who:
    (1) Are merchants or dealers of cotton holding or controlling 
positions for future delivery in cotton that equal or exceed the amount 
set forth in Sec.  15.03; or
    (2) Are persons who have received a special call from the 
Commission or its designee under Sec.  19.00(b) of this chapter.
* * * * *


0
6. Revise Sec.  15.02 to read as follows:


Sec.  15.02   Reporting forms.

    Forms on which to report may be obtained from any office of the 
Commission or via https://www.cftc.gov. Listed below are the forms to 
be used for the filing of reports. To determine who shall file these 
forms, refer to the Commission rule listed in the column opposite the 
form number.

[[Page 3455]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.015

PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION 
MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

0
7. The authority citation for part 17 continues to read as follows:

    Authority:  7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 6t, 7, 7a, and 
12a.

0
8. In Sec.  17.00, revise paragraph (b) introductory text to read as 
follows:


Sec.  17.00   Information to be furnished by futures commission 
merchants, clearing members and foreign brokers.

* * * * *
    (b) Interest in or control of several accounts. Except as otherwise 
instructed by the Commission or its designee and as specifically 
provided in Sec.  150.4 of this chapter, if any person holds or has a 
financial interest in or controls more than one account, all such 
accounts shall be considered by the futures commission merchant, 
clearing member, or foreign broker as a single account for the purpose 
of determining special account status and for reporting purposes.
* * * * *

0
9. In Sec.  17.03, add paragraph (i) to read as follows:


Sec.  17.03   Delegation of authority to the Director of the Office of 
Data and Technology or the Director of the Division of Market 
Oversight.

* * * * *
    (i) Pursuant to Sec.  17.00(b), and as specifically provided in 
Sec.  150.4 of this chapter, the authority shall be designated to the 
Director of the Office of Data and Technology to instruct a futures 
commission merchant, clearing member, or foreign broker to consider 
otherwise than as a single account for the purpose of determining 
special account status and for reporting purposes all accounts one 
person holds or controls, or in which the person has a financial 
interest.

0
10. Revise part 19 to read as follows:

PART 19--REPORTS BY PERSONS HOLDING REPORTABLE POSITIONS IN EXCESS 
OF POSITION LIMITS, AND BY MERCHANTS AND DEALERS IN COTTON

Sec.
19.00 Who shall furnish information.
19.01 [Reserved]
19.02 Reports pertaining to cotton on call purchases and sales.
19.03 Delegation of authority to the Director of the Division of 
Enforcement.
19.04-19.10 [Reserved]
Appendix A to Part 19--Form 304

    Authority:  7 U.S.C. 6g, 6c(b), 6i, and 12a(5).


Sec.  19.00   Who shall furnish information.

    (a) Persons filing cotton-on-call reports. Merchants and dealers of 
cotton holding or controlling positions for future delivery in cotton 
that are reportable pursuant to Sec.  15.00(p)(1)(i) of this chapter 
shall file CFTC Form 304.
    (b) Persons responding to a special call. All persons: Exceeding 
speculative position limits under Sec.  150.2 of this chapter; or 
holding or controlling positions for future delivery that are 
reportable pursuant to Sec.  15.00(p)(1) of this chapter and who have 
received a special call from the Commission or its designee shall file 
any pertinent information as instructed in the special call. Filings in 
response to a special call shall be made within one business day of 
receipt of the special call unless otherwise specified in the call. 
Such filing shall be transmitted using the format, coding structure, 
and electronic data submission procedures approved in writing by the 
Commission.


Sec.  19.01   [Reserved]


Sec.  19.02   Reports pertaining to cotton on call purchases and sales.

    (a) Information required. Persons required to file CFTC Form 304 
reports under Sec.  19.00(a) shall file CFTC Form 304 reports showing 
the quantity of call cotton bought or sold on which the price has not 
been fixed, together with the respective futures on which the purchase 
or sale is based. As used herein, call cotton refers to spot cotton 
bought or sold, or contracted for purchase or sale at a price to be 
fixed later based upon a specified future.
    (b) Time and place of filing reports. Each CFTC Form 304 report 
shall be made weekly, dated as of the close of business on Friday, and 
filed not later than 9 a.m. Eastern Time on the third business day 
following that Friday using the format, coding structure, and 
electronic data transmission procedures approved in writing by the 
Commission.

[[Page 3456]]

Sec.  19.03   Delegation of authority to the Director of the Division 
of Enforcement.

    (a) The Commission hereby delegates, until it orders otherwise, the 
authority in Sec.  19.00(b) to issue special calls to the Director of 
the Division of Enforcement, or such other employee or employees as the 
Director may designate from time to time.
    (b) The Commission hereby delegates, until it orders otherwise, to 
the Director of the Division of Enforcement, or such other employee or 
employees as the Director may designate from time to time, the 
authority in Sec.  19.00(b) to provide instructions or to determine the 
format, coding structure, and electronic data transmission procedures 
for submitting data records and any other information required under 
this part.
    (c) The Director of the Division of Enforcement may submit to the 
Commission for its consideration any matter which has been delegated in 
this section.
    (d) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.


Sec.  Sec.  19.04--19.10  [Reserved]

Appendix A to Part 19--Form 304

BILLING CODE 6351-01-P

[[Page 3457]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.016


[[Page 3458]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.017


[[Page 3459]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.018


[[Page 3460]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.019


[[Page 3461]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.020


[[Page 3462]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.021


[[Page 3463]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.022

BILLING CODE 6351-01-C

PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

0
11. The authority citation for part 40 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and 12, as amended by 
Titles VII and VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Public Pub. L. 111-203, 124 Stat. 1376 
(2010).

0
12. In Sec.  40.1, revise paragraphs (j)(1)(vii) and (j)(2)(vii) to 
read as follows:


Sec.  40.1   Definitions.

* * * * *
    (j) * * *
    (1) * * *
    (vii) Speculative position limits, position accountability 
standards, and position reporting requirements, including an indication 
as to whether the contract meets the definition of a referenced 
contract as defined in Sec.  150.1 of this chapter, and, if so, the 
name of either the core referenced futures contract or other referenced 
contract upon which the new referenced contract submitted under this 
part 40 is based.
* * * * *
    (2) * * *
    (vii) Speculative position limits, position accountability 
standards, and position reporting requirements, including an indication 
as to whether the contract meets the definition of economically 
equivalent swap as defined in Sec.  150.1 of this chapter, and, if so, 
the name of either the core referenced futures contract or referenced 
contract, as applicable, to which the swap submitted under this part 40 
is economically equivalent.
* * * * *

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0
13. The authority citation for part 140 continues to read as follows:

    Authority:  7 U.S.C. 2(a) (12), 12a, 13(c), 13(d), 13(e), and 
16(b).


Sec.  140.97   [Removed and Reserved]

0
14. Remove and reserve Sec.  140.97.

PART 150--LIMITS ON POSITIONS

0
15. The authority citation for part 150 is revised to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, and 
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).


0
16. Revise Sec.  150.1 to read as follows:


Sec.  150.1   Definitions.

    As used in this part--
    Bona fide hedging transaction or position means a transaction or 
position in commodity derivative contracts in a physical commodity, 
where:
    (1) Such transaction or position:
    (i) Represents a substitute for transactions made or to be made, or 
positions taken or to be taken, at a later time in a physical marketing 
channel;
    (ii) Is economically appropriate to the reduction of price risks in 
the conduct and management of a commercial enterprise; and
    (iii) Arises from the potential change in the value of--
    (A) Assets which a person owns, produces, manufactures, processes, 
or merchandises or anticipates owning, producing, manufacturing, 
processing, or merchandising;
    (B) Liabilities which a person owes or anticipates incurring; or
    (C) Services that a person provides or purchases, or anticipates 
providing or purchasing; or
    (2) Such transaction or position qualifies as a:
    (i) Pass-through swap and pass-through swap offset pair. Paired 
positions of a pass-through swap and a pass-through swap offset, where:
    (A) The pass-through swap is a swap position entered into by one 
person for which the swap would qualify as a bona fide hedging 
transaction or position pursuant to paragraph (1) of this definition 
(the bona fide hedging swap counterparty) that is opposite another 
person (the pass-through swap counterparty);
    (B) The pass-through swap offset:

[[Page 3464]]

    (1) Is a futures contract position, option on a futures contract 
position, or swap position entered into by the pass-through swap 
counterparty; and
    (2) Reduces the pass-through swap counterparty's price risks 
attendant to the pass-through swap; and
    (C) With respect to the pass-through swap offset, the pass-through 
swap counterparty receives from the bona fide hedging swap counterparty 
a written representation that the pass-through swap qualifies as a bona 
fide hedging transaction or position pursuant to paragraph (1) of this 
definition, and the pass-through swap counterparty may rely in good 
faith on such written representation, unless the pass-through swap 
counterparty has information that would cause a reasonable person to 
question the accuracy of the representation; or
    (ii) Offset of a bona fide hedger's qualifying swap position. A 
futures contract position, option on a futures contract position, or 
swap position entered into by a bona fide hedging swap counterparty 
that reduces price risks attendant to a previously-entered-into swap 
position that qualified as a bona fide hedging transaction or position 
at the time it was entered into for that counterparty pursuant to 
paragraph (1) of this definition.
    Commodity derivative contract means any futures contract, option on 
a futures contract, or swap in a commodity (other than a security 
futures product as defined in section 1a(45) of the Act).
    Core referenced futures contract means a futures contract that is 
listed in Sec.  150.2(d).
    Economically equivalent swap means, with respect to a particular 
referenced contract, any swap that has identical material contractual 
specifications, terms, and conditions to such referenced contract.
    (1) Other than as provided in paragraph (2) of this definition, for 
the purpose of determining whether a swap is an economically equivalent 
swap with respect to a particular referenced contract, the swap shall 
not be deemed to lack identical material contractual specifications, 
terms, and conditions due to different lot size specifications or 
notional amounts, delivery dates diverging by less than one calendar 
day, or different post-trade risk management arrangements.
    (2) With respect to any natural gas referenced contract, for the 
purpose of determining whether a swap is an economically equivalent 
swap to such referenced contract, the swap shall not be deemed to lack 
identical material contractual specifications, terms, and conditions 
due to different lot size specifications or notional amounts, delivery 
dates diverging by less than two calendar days, or different post-trade 
risk management arrangements.
    (3) With respect to any referenced contract or class of referenced 
contracts, the Commission may make a determination that any swap or 
class of swaps satisfies, or does not satisfy, this economically 
equivalent swap definition.
    Eligible affiliate means an entity with respect to which another 
person:
    (1) Directly or indirectly holds either:
    (i) A majority of the equity securities of such entity, or
    (ii) The right to receive upon dissolution of, or the contribution 
of, a majority of the capital of such entity;
    (2) Reports its financial statements on a consolidated basis under 
Generally Accepted Accounting Principles or International Financial 
Reporting Standards, and such consolidated financial statements include 
the financial results of such entity; and
    (3) Is required to aggregate the positions of such entity under 
Sec.  150.4 and does not claim an exemption from aggregation for such 
entity.
    Eligible entity means a commodity pool operator; the operator of a 
trading vehicle which is excluded, or which itself has qualified for 
exclusion from the definition of the term ``pool'' or ``commodity pool 
operator,'' respectively, under Sec.  4.5 of this chapter; the limited 
partner, limited member or shareholder in a commodity pool the operator 
of which is exempt from registration under Sec.  4.13 of this chapter; 
a commodity trading advisor; a bank or trust company; a savings 
association; an insurance company; or the separately organized 
affiliates of any of the above entities:
    (1) Which authorizes an independent account controller 
independently to control all trading decisions with respect to the 
eligible entity's client positions and accounts that the independent 
account controller holds directly or indirectly, or on the eligible 
entity's behalf, but without the eligible entity's day-to-day 
direction; and
    (2) Which maintains:
    (i) Only such minimum control over the independent account 
controller as is consistent with its fiduciary responsibilities to the 
managed positions and accounts, and necessary to fulfill its duty to 
supervise diligently the trading done on its behalf; or
    (ii) If a limited partner, limited member or shareholder of a 
commodity pool the operator of which is exempt from registration under 
Sec.  4.13 of this chapter, only such limited control as is consistent 
with its status.
    Entity means a ``person'' as defined in section 1a of the Act.
    Excluded commodity means an ``excluded commodity'' as defined in 
section 1a of the Act.
    Futures-equivalent means:
    (1)(i) An option contract, whether an option on a futures contract 
or an option that is a swap, which has been:
    (A) Adjusted by an economically reasonable and analytically 
supported exposure to price changes of the underlying referenced 
contract that has been computed for that option contract as of the 
previous day's close or the current day's close or computed 
contemporaneously during the trading day, and
    (B) Converted to an economically equivalent amount of an open 
position in the underlying referenced contract.
    (ii) An entity is allowed one business day to liquidate an amount 
of the position that is in excess of speculative position limits 
without being considered in violation of the speculative position 
limits if such excess position results from:
    (A) A position that exceeds speculative position limits as a result 
of an option contract assignment; or
    (B) A position that includes an option contract that exceeds 
speculative position limits when the applicable option contract is 
adjusted by an economically reasonable and analytically supported 
exposure to price changes of the underlying referenced contract as of 
that business day's close of trading, as long as the applicable option 
contract does not exceed such speculative position limits when 
evaluated using the previous business day's exposure to the underlying 
referenced contract. This paragraph (B) shall not apply if such day 
would be the last trading day of the spot month for the corresponding 
core referenced futures contract.
    (2) A futures contract which has been converted to an economically 
equivalent amount of an open position in a core referenced futures 
contract; and
    (3) A swap which has been converted to an economically equivalent 
amount of an open position in a core referenced futures contract.
    Independent account controller means a person:
    (1) Who specifically is authorized by an eligible entity, as 
defined in this section, independently to control trading decisions on 
behalf of, but without the day-to-day direction of, the eligible 
entity;
    (2) Over whose trading the eligible entity maintains only such 
minimum control as is consistent with its fiduciary responsibilities 
for managed

[[Page 3465]]

positions and accounts to fulfill its duty to supervise diligently the 
trading done on its behalf or as is consistent with such other legal 
rights or obligations which may be incumbent upon the eligible entity 
to fulfill;
    (3) Who trades independently of the eligible entity and of any 
other independent account controller trading for the eligible entity;
    (4) Who has no knowledge of trading decisions by any other 
independent account controller; and
    (5) Who is:
    (i) Registered as a futures commission merchant, an introducing 
broker, a commodity trading advisor, or an associated person of any 
such registrant, or
    (ii) A general partner, managing member or manager of a commodity 
pool the operator of which is excluded from registration under Sec.  
4.5(a)(4) of this chapter or Sec.  4.13 of this chapter, provided that 
such general partner, managing member or manager complies with the 
requirements of Sec.  150.4(c).
    Long position means, on a futures-equivalent basis, a long call 
option, a short put option, a long underlying futures contract, or a 
swap position that is equivalent to a long futures contract.
    Physical commodity means any agricultural commodity as that term is 
defined in Sec.  1.3 of this chapter or any exempt commodity as that 
term is defined in section 1a of the Act.
    Position accountability means any bylaw, rule, regulation, or 
resolution that:
    (1) Is submitted to the Commission pursuant to part 40 of this 
chapter in lieu of, or along with, a speculative position limit, and
    (2) Requires an entity whose position exceeds the accountability 
level to consent to:
    (i) Provide information about its position to the designated 
contract market or swap execution facility; and
    (ii) Halt increasing further its position or reduce its position in 
an orderly manner, in each case as requested by the designated contract 
market or swap execution facility.
    Pre-enactment swap means any swap entered into prior to enactment 
of the Dodd-Frank Act of 2010 (July 21, 2010), the terms of which have 
not expired as of the date of enactment of that Act.
    Pre-existing position means any position in a commodity derivative 
contract acquired in good faith prior to the effective date of any 
bylaw, rule, regulation, or resolution that specifies a speculative 
position limit level or a subsequent change to that level.
    Referenced contract means:
    (1) A core referenced futures contract listed in Sec.  150.2(d) or, 
on a futures-equivalent basis with respect to a particular core 
referenced futures contract, a futures contract or an option on a 
futures contract, including a spread, that is either:
    (i) Directly or indirectly linked, including being partially or 
fully settled on, or priced at a fixed differential to, the price of 
that particular core referenced futures contract; or
    (ii) Directly or indirectly linked, including being partially or 
fully settled on, or priced at a fixed differential to, the price of 
the same commodity underlying that particular core referenced futures 
contract for delivery at the same location or locations as specified in 
that particular core referenced futures contract; or
    (2) On a futures-equivalent basis, an economically equivalent swap.
    (3) The definition of referenced contract does not include a 
location basis contract, a commodity index contract, any guarantee of a 
swap, a trade option that meets the requirements of Sec.  32.3 of this 
chapter, any outright price reporting agency index contract, or any 
monthly average pricing contract.
    Short position means, on a futures-equivalent basis, a short call 
option, a long put option, a short underlying futures contract, or a 
swap position that is equivalent to a short futures contract.
    Speculative position limit means the maximum position, either net 
long or net short, in a commodity derivative contract that may be held 
or controlled by one person absent an exemption, whether such limits 
are adopted for:
    (1) Combined positions in all commodity derivative contracts in a 
particular commodity, including the spot month futures contract and all 
single month futures contracts (the spot month and all single month 
futures contracts, cumulatively, ``all-months-combined'');
    (2) Positions in a single month of commodity derivative contracts 
in a particular commodity other than the spot month futures contract 
(``single month''); or
    (3) Positions in the spot month of commodity derivative contacts in 
a particular commodity. Such a limit may be established under Federal 
regulations or rules of a designated contract market or swap execution 
facility. For referenced contracts other than core referenced futures 
contracts, single month means the same period as that of the relevant 
core referenced futures contract.
    Spot month means:
    (1) For physical-delivery core referenced futures contracts, the 
period of time beginning at the earlier of:
    (i) The close of business on the trading day preceding the first 
day on which delivery notices can be issued by the clearing 
organization of a contract market or
    (ii) The close of business on the trading day preceding the third-
to-last trading day and ending when the contract expires, except as 
follows:
    (A) For the ICE Futures U.S. Sugar No. 11 (SB) core referenced 
futures contract, the spot month means the period of time beginning at 
the opening of trading on the second business day following the 
expiration of the regular option contract traded on the expiring 
futures contract and ending when the contract expires;
    (B) For the ICE Futures U.S. Sugar No. 16 (SF) core referenced 
futures contract, the spot month means the period of time beginning on 
the third-to-last trading day of the contract month and ending when the 
contract expires; and
    (C) For the Chicago Mercantile Exchange Live Cattle (LC) core 
referenced futures contract, the spot month means the period of time 
beginning at the close of trading on the first business day following 
the first Friday of the contract month and ending when the contract 
expires; and
    (2) For referenced contracts other than core referenced futures 
contracts, the spot month means the same period as that of the relevant 
core referenced futures contract.
    Spread transaction means an intra-market spread, inter-market 
spread, intra-commodity spread, or inter-commodity spread, including a 
calendar spread, quality differential spread, processing spread, 
product or by-product differential spread, or futures-option spread.
    Swap means ``swap'' as that term is defined in section 1a of the 
Act and as further defined in Sec.  1.3 of this chapter.
    Swap dealer means ``swap dealer'' as that term is defined in 
section 1a of the Act and as further defined in Sec.  1.3 of this 
chapter.
    Transition period swap means a swap entered into during the period 
commencing on the day of the enactment of the Dodd-Frank Act of 2010 
(July 21, 2010), and ending 60 days after the publication in the 
Federal Register of final amendments to this part implementing section 
737 of the Dodd-Frank Act of 2010, the terms of which have not expired 
as of 60 days after the publication date.

0
17. Revise Sec.  150.2 to read as follows:


Sec.  150.2   Federal speculative position limits.

    (a) Spot month speculative position limits. For physical-delivery 
referenced contracts and, separately, for cash-settled referenced 
contracts, no person

[[Page 3466]]

may hold or control positions in the spot month, net long or net short, 
in excess of the levels specified by the Commission.
    (b) Single month and all-months-combined speculative position 
limits. For any referenced contract, no person may hold or control 
positions in a single month or in all-months-combined (including the 
spot month), net long or net short, in excess of the levels specified 
by the Commission.
    (c) Relevant contract month. For purposes of this part, for 
referenced contracts other than core referenced futures contracts, the 
spot month and any single month shall be the same as those of the 
relevant core referenced futures contract.
    (d) Core referenced futures contracts. Federal speculative position 
limits apply to referenced contracts based on the following core 
referenced futures contracts:
BILLING CODE 6351-01-P
[GRAPHIC] [TIFF OMITTED] TR14JA21.023


[[Page 3467]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.024

BILLING CODE 6351-01-C
    (e) Establishment of speculative position limit levels. The levels 
of Federal speculative position limits are fixed by the Commission at 
the levels listed in appendix E to this part.
    (f) Designated contract market estimates of deliverable supply. 
Each designated contract market listing a core referenced futures 
contract shall supply to the Commission an estimated spot month 
deliverable supply upon request by the Commission, and may supply such 
estimates to the Commission at any other time. Each estimate shall be 
accompanied by a description of the methodology used to derive the 
estimate and any statistical data supporting the estimate, and shall be 
submitted using the format and procedures approved in writing by the 
Commission. A designated contract market should use the guidance 
regarding deliverable supply in appendix C to part 38 of this chapter.
    (g) Pre-existing positions--(1) Pre-existing positions in a spot 
month. A spot month speculative position limit established under this 
section shall apply to pre-existing positions, other than pre-enactment 
swaps and transition period swaps.

[[Page 3468]]

    (2) Pre-existing positions in a non-spot month. A single month or 
all-months-combined speculative position limit established under this 
section shall apply to pre-existing positions, other than pre-enactment 
swaps and transition period swaps.
    (h) Positions on foreign boards of trade. The speculative position 
limits established under this section shall apply to a person's 
combined positions in referenced contracts, including positions 
executed on, or pursuant to the rules of, a foreign board of trade, 
pursuant to section 4a(a)(6) of the Act, provided that:
    (1) Such referenced contracts settle against any price (including 
the daily or final settlement price) of one or more contracts listed 
for trading on a designated contract market or swap execution facility 
that is a trading facility; and
    (2) The foreign board of trade makes available such referenced 
contracts to its members or other participants located in the United 
States through direct access to its electronic trading and order 
matching system.
    (i) Anti-evasion provision. For the purposes of applying the 
speculative position limits in this section, if used to willfully 
circumvent or evade speculative position limits:
    (1) A commodity index contract, monthly average pricing contract, 
outright price reporting agency index contract, and/or a location basis 
contract shall be considered to be a referenced contract;
    (2) A bona fide hedging transaction or position recognition or 
spread exemption shall no longer apply; and
    (3) A swap shall be considered to be an economically equivalent 
swap.
    (j) Delegation of authority to the Director of the Division of 
Market Oversight. (1) The Commission hereby delegates, until it orders 
otherwise, to the Director of the Division of Market Oversight or such 
other employee or employees as the Director may designate from time to 
time, the authority in paragraph (f) of this section to request 
estimated spot month deliverable supply from a designated contract 
market and to provide the format and procedures for submitting such 
estimates.
    (2) The Director of the Division of Market Oversight may submit to 
the Commission for its consideration any matter which has been 
delegated in this section.
    (3) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.
    (k) Eligible affiliates and aggregation. For purposes of this part, 
if an eligible affiliate meets the conditions for any exemption from 
aggregation under Sec.  150.4, the eligible affiliate may choose to 
utilize that exemption, or it may opt to be aggregated with its 
affiliated entities.


0
18. Revise Sec.  150.3 to read as follows:


Sec.  150.3   Exemptions.

    (a) Positions which may exceed limits. A person may exceed the 
speculative position limits set forth in Sec.  150.2 to the extent that 
all applicable requirements in this part are met, provided that such 
person's transactions or positions each satisfy one of the following:
    (1) Bona fide hedging transactions or positions. Positions that 
comply with the bona fide hedging transaction or position definition in 
Sec.  150.1, and are:
    (i) Enumerated in appendix A to this part; or
    (ii) Approved as non-enumerated bona fide hedging transactions or 
positions in accordance with paragraph (b)(4) of this section or Sec.  
150.9.
    (2) Spread transactions. Transactions that:
    (i) Meet the spread transaction definition in Sec.  150.1; or
    (ii) Do not meet the spread transaction definition in Sec.  150.1, 
but have been approved by the Commission pursuant to paragraph (b)(4) 
of this section.
    (3) Financial distress positions. Positions of a person, or a 
related person or persons, under financial distress circumstances, when 
exempted by the Commission from any of the requirements of this part in 
response to a specific request made pursuant to Sec.  140.99(a)(1) of 
this chapter, where financial distress circumstances include, but are 
not limited to, situations involving the potential default or 
bankruptcy of a customer of the requesting person or persons, an 
affiliate of the requesting person or persons, or a potential 
acquisition target of the requesting person or persons.
    (4) Conditional spot month limit exemption positions in natural 
gas. Spot month positions in natural gas cash-settled referenced 
contracts that exceed the spot month speculative position limit set 
forth in Sec.  150.2, provided that:
    (i) Such positions do not exceed the futures-equivalent of 10,000 
NYMEX Henry Hub Natural Gas core referenced futures contracts per 
designated contract market that lists a cash-settled referenced 
contract in natural gas;
    (ii) Such positions do not exceed the futures-equivalent of 10,000 
NYMEX Henry Hub Natural Gas core referenced futures contracts in 
economically equivalent swaps in natural gas; and
    (iii) The person holding or controlling such positions does not 
hold or control positions in spot month physical-delivery referenced 
contracts in natural gas.
    (5) Pre-enactment and transition period swaps exemption. The 
speculative position limits set forth in Sec.  150.2 shall not apply to 
positions acquired in good faith in any pre-enactment swap or any 
transition period swap, provided however that a person may net such 
positions with post-effective date commodity derivative contracts for 
the purpose of complying with any non-spot month speculative position 
limit.
    (b) Application for relief. Any person with a position in a 
referenced contract seeking recognition of such position as a bona fide 
hedging transaction or position in accordance with paragraph (a)(1)(ii) 
of this section, or seeking an exemption for a spread position in 
accordance with paragraphs (a)(2)(ii) of this section, in each case for 
purposes of Federal speculative position limits set forth in Sec.  
150.2, may apply to the Commission in accordance with this section.
    (1) Required information. The application shall include the 
following information:
    (i) With respect to an application for recognition of a bona fide 
hedging transaction or position:
    (A) A description of the position in the commodity derivative 
contract for which the application is submitted, including but not 
necessarily limited to, the name of the underlying commodity and the 
derivative position size;
    (B) An explanation of the hedging strategy, including a statement 
that the position complies with the requirements of section 4a(c)(2) of 
the Act and the definition of bona fide hedging transaction or position 
in Sec.  150.1, and information to demonstrate why the position 
satisfies such requirements and definition;
    (C) A statement concerning the maximum size of all gross positions 
in commodity derivative contracts for which the application is 
submitted;
    (D) A description of the applicant's activity in the cash markets 
and swaps markets for the commodity underlying the position for which 
the application is submitted, including, but not necessarily limited 
to, information regarding the offsetting cash positions; and
    (E) Any other information that may help the Commission determine 
whether the position satisfies the requirements of section 4a(c)(2) of 
the Act and the definition of bona fide

[[Page 3469]]

hedging transaction or position in Sec.  150.1.
    (ii) With respect to an application for a spread exemption:
    (A) A description of the spread position for which the application 
is submitted;
    (B) A statement concerning the maximum size of all gross positions 
in commodity derivative contracts for which the application is 
submitted; and
    (C) Any other information that may help the Commission determine 
whether the position is consistent with section 4a(a)(3)(B) of the Act.
    (2) Additional information. If the Commission determines that it 
requires additional information in order to determine whether to 
recognize a position as a bona fide hedging transaction or position or 
to grant a spread exemption, the Commission shall:
    (i) Notify the applicant of any supplemental information required; 
and
    (ii) Provide the applicant with ten business days in which to 
provide the Commission with any supplemental information.
    (3) Timing of application. (i) Except as provided in paragraph 
(b)(3)(ii) of this section, a person seeking relief in accordance with 
this section must apply to the Commission and receive a notice of 
approval of such application prior to the date that the position for 
which the application was submitted would be in excess of the 
applicable Federal speculative position limit set forth in Sec.  150.2;
    (ii) Due to demonstrated sudden or unforeseen increases in its bona 
fide hedging needs, a person may apply for recognition of a bona fide 
hedging transaction or position within five business days after the 
person established the position that exceeded the applicable Federal 
speculative position limit.
    (A) Any application filed pursuant to paragraph (b)(3)(ii) of this 
section must include an explanation of the circumstances warranting the 
sudden or unforeseen increases in bona fide hedging needs.
    (B) If an application filed pursuant to paragraph (b)(3)(ii) of 
this section is denied, the person must bring its position within the 
Federal speculative position limits within a commercially reasonable 
time, as determined by the Commission in consultation with the 
applicant and the applicable designated contract market or swap 
execution facility.
    (C) If an application filed pursuant to paragraph (b)(3)(ii) of 
this section is denied, the Commission will not pursue an enforcement 
action for a position limits violation for the person holding the 
position during the period of the Commission's review nor once the 
Commission has issued its determination so long as the application was 
submitted in good faith and the person brings its position within the 
Federal speculative position limits within a commercially reasonable 
time in accordance with paragraph (b)(3)(ii)(B) of this section.
    (4) Commission determination. After a review of any application 
submitted under paragraph (b) of this section and any supplemental 
information provided by the applicant, the Commission will determine, 
with respect to the transaction or position for which the application 
is submitted, whether to recognize all or a specified portion of such 
transaction or position as a bona fide hedging transaction or position 
or whether to exempt all or a specified portion of such spread 
transaction, as applicable. The Commission shall notify the applicant 
of its determination, and an applicant may exceed Federal speculative 
position limits set forth in Sec.  150.2, or in the case of 
applications filed pursuant to paragraph (b)(3)(ii) of this section, 
the applicant may rely upon the Commission's determination, upon 
receiving a notice of approval.
    (5) Renewal of application. With respect to any application 
approved by the Commission pursuant to this section, a person shall 
renew such application if there are any material changes to the 
information provided in the original application pursuant to paragraph 
(b)(1) of this section or upon request by the Commission.
    (6) Commission revocation or modification. If the Commission 
determines, at any time, that a recognized bona fide hedging 
transaction or position is no longer consistent with section 4a(c)(2) 
of the Act or the definition of bona fide hedging transaction or 
position in Sec.  150.1, or that a spread exemption is no longer 
consistent with section 4a(a)(3)(B) of the Act, the Commission shall:
    (i) Notify the person holding such position;
    (ii) Provide an opportunity for the applicant to respond to such 
notification; and
    (iii) Issue a determination to revoke or modify the bona fide hedge 
recognition or spread exemption for purposes of Federal speculative 
position limits and, as applicable, require the person to reduce the 
derivative position within a commercially reasonable time, as 
determined by the Commission in consultation with the applicant and the 
applicable designated contract market or swap execution facility, or 
otherwise come into compliance. This notification shall briefly specify 
the nature of the issues raised and the specific provisions of the Act 
or the Commission's regulations with which the position or application 
is, or appears to be, inconsistent.
    (c) Previously-granted risk management exemptions. To the extent 
that exemptions previously granted under Sec.  1.47 of this chapter or 
by a designated contract market or a swap execution facility are for 
the risk management of positions in financial instruments, including 
but not limited to index funds, such exemptions shall no longer apply 
as of January 1, 2023.
    (d) Recordkeeping. (1) Persons who avail themselves of exemptions 
under this section shall keep and maintain complete books and records 
concerning all details of each of their exemptions, including relevant 
information about related cash, forward, futures contracts, option on 
futures contracts, and swap positions and transactions (including 
anticipated requirements, production, merchandising activities, 
royalties, contracts for services, cash commodity products and by-
products, cross-commodity hedges, and records of bona fide hedging swap 
counterparties) as applicable, and shall make such books and records 
available to the Commission upon request under paragraph (e) of this 
section.
    (2) Any person that relies on a written representation received 
from another person that a swap qualifies as a pass-through swap under 
paragraph (2) of the definition of bona fide hedging transaction or 
position in Sec.  150.1 shall keep and make available to the Commission 
upon request the relevant books and records of such written 
representation, including any books and records that the person intends 
to use to demonstrate that the pass-through swap is a bona fide hedging 
transaction or position, for a period of at least two years following 
the expiration of the swap.
    (3) All books and records required to be kept pursuant to this 
section shall be kept in accordance with the requirements of Sec.  1.31 
of this chapter.
    (e) Call for information. Upon call by the Commission, the Director 
of the Division of Enforcement, or the Director's delegate, any person 
claiming an exemption from speculative position limits under this 
section shall provide to the Commission such information as specified 
in the call relating to: the positions owned or controlled by that 
person; trading done pursuant to the claimed exemption; the commodity 
derivative contracts or cash-market

[[Page 3470]]

positions which support the claimed exemption; and the relevant 
business relationships supporting a claimed exemption.
    (f) Aggregation of accounts. Entities required to aggregate 
accounts or positions under Sec.  150.4 shall be considered the same 
person for the purpose of determining whether they are eligible for an 
exemption under paragraphs (a)(1) through (4) of this section with 
respect to such aggregated account or position.
    (g) Delegation of authority to the Director of the Division of 
Market Oversight. (1) The Commission hereby delegates, until it orders 
otherwise, to the Director of the Division of Market Oversight, or such 
other employee or employees as the Director may designate from time to 
time:
    (i) The authority in paragraph (a)(3) of this section to provide 
exemptions in circumstances of financial distress;
    (ii) The authority in paragraph (b)(2) of this section to request 
additional information with respect to a request for a bona fide 
hedging transaction or position recognition or spread exemption;
    (iii) The authority in paragraph (b)(3)(ii)(B) of this section to, 
if applicable, determine a commercially reasonable amount of time 
required for a person to bring its position within the Federal 
speculative position limits;
    (iv) The authority in paragraph (b)(4) of this section to determine 
whether to recognize a position as a bona fide hedging transaction or 
position or to grant a spread exemption; and
    (v) The authority in paragraph (b)(2) or (5) of this section to 
request that a person submit updated materials or renew their request 
with the Commission.
    (2) The Director of the Division of Market Oversight may submit to 
the Commission for its consideration any matter which has been 
delegated in this section.
    (3) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.


0
19. Revise Sec.  150.5 to read as follows:


Sec.  150.5   Exchange-set speculative position limits and exemptions 
therefrom.

    (a) Requirements for exchange-set limits on commodity derivative 
contracts subject to Federal speculative position limits set forth in 
Sec.  150.2--(1) Exchange-set limits. For any commodity derivative 
contract that is subject to a Federal speculative position limit under 
Sec.  150.2, a designated contract market or swap execution facility 
that is a trading facility shall set a speculative position limit no 
higher than the level specified in Sec.  150.2.
    (2) Exemptions to exchange-set limits. A designated contract market 
or swap execution facility that is a trading facility may grant 
exemptions from any speculative position limits it sets under paragraph 
(a)(1) of this section in accordance with the following:
    (i) Exemption levels. An exemption that conforms to an exemption 
the Commission identified in:
    (A) Sections 150.3(a)(1)(i), (a)(2)(i), (a)(4) and (a)(5) may be 
granted at a level that exceeds the level of the applicable Federal 
limit in Sec.  150.2;
    (B) Sections 150.3(a)(1)(ii) and (a)(2)(ii) may be granted at a 
level that exceeds the level of the applicable Federal limit in Sec.  
150.2, provided the exemption is first approved in accordance with 
Sec.  150.3(b) or 150.9, as applicable;
    (C) Section 150.3(a)(3) may be granted at a level that exceeds the 
level of the applicable Federal limit in Sec.  150.2, provided that, a 
division of the Commission has first approved such exemption pursuant 
to a request submitted under Sec.  140.99(a)(1) of this chapter; and
    (D) An exemption of the type that does not conform to any of the 
exemptions identified in Sec.  150.3(a) must be granted at a level that 
does not exceed the applicable Federal limit in Sec.  150.2 and that 
complies with paragraph (a)(2)(ii)(G) of this section, unless the 
Commission has first approved such exemption pursuant to Sec.  150.3(b) 
or pursuant to a request submitted under Sec.  140.99(a)(1).
    (ii) Application for exemption from exchange-set limits. With 
respect to a designated contract market or swap execution facility that 
is a trading facility that elects to grant exemptions under paragraph 
(a)(2)(i) of this section:
    (A) Except as provided in paragraph (a)(2)(ii)(B) of this section, 
the designated contract market or swap execution facility shall require 
an entity to file an application requesting such exemption in advance 
of the date that such position would be in excess of the limits then in 
effect. Such application shall include any information needed to enable 
the designated contract market or swap execution facility and the 
Commission to determine whether the facts and circumstances demonstrate 
that the designated contract market or swap execution facility may 
grant an exemption. Any application for a bona fide hedging transaction 
or position shall include a description of the applicant's activity in 
the cash markets and swaps markets for the commodity underlying the 
position for which the application is submitted, including, but not 
limited to, information regarding the offsetting cash positions.
    (B) The designated contract market or swap execution facility may 
adopt rules that allow a person, due to demonstrated sudden or 
unforeseen increases in its bona fide hedging needs, to file an 
application to request a recognition of a bona fide hedging transaction 
or position within five business days after the person established the 
position that exceeded the applicable exchange-set speculative position 
limit.
    (C) The designated contract market or swap execution facility must 
require that any application filed pursuant to paragraph (a)(2)(ii)(B) 
of this section include an explanation of the circumstances warranting 
the sudden or unforeseen increases in bona fide hedging needs.
    (D) If an application filed pursuant to paragraph (a)(2)(ii)(B) of 
this section is denied, the applicant must bring its position within 
the designated contract market or swap execution facility's speculative 
position limits within a commercially reasonable time as determined by 
the designated contract market or swap execution facility.
    (E) The Commission will not pursue an enforcement action for a 
position limits violation for the person holding the position during 
the period of the designated contract market or swap execution 
facility's review nor once the designated contract market or swap 
execution facility has issued its determination, so long as the 
application was submitted in good faith and the applicant brings its 
position within the designated contract market or swap execution 
facility's speculative position limits within a commercially reasonable 
time as determined by the designated contract market or swap execution 
facility.
    (F) The designated contract market or swap execution facility shall 
require, for any such exemption granted, that the entity re-apply for 
the exemption at least annually;
    (G) The designated contract market or swap execution facility:
    (1) May, in accordance with the designated contract market or swap 
execution facility's rules, deny any such application, or limit, 
condition, or revoke any such exemption, at any time after providing 
notice to the applicant, and
    (2) Shall consider whether the requested exemption would result in 
positions that would not be in accord with sound commercial practices 
in the relevant commodity derivative market and/or that would exceed an 
amount

[[Page 3471]]

that may be established and liquidated in an orderly fashion in that 
market; and
    (H) Notwithstanding paragraph (a)(2)(ii)(G) of this section, the 
designated contract market or swap execution facility may grant 
exemptions, subject to terms, conditions, or limitations, that require 
a person to exit any referenced contract positions in excess of 
position limits during the lesser of the last five days of trading or 
the time period for the spot month in such physical-delivery contract, 
or to otherwise limit the size of such position during that time 
period. Designated contract markets and swap execution facilities may 
refer to paragraph (b) of appendix B or appendix G to part 150, for 
guidance regarding the foregoing, as applicable.
    (3) Exchange-set limits on pre-existing positions--(i) Pre-existing 
positions in a spot month. A designated contract market or swap 
execution facility that is a trading facility shall require compliance 
with spot month exchange-set speculative position limits for pre-
existing positions in commodity derivative contracts other than pre-
enactment swaps and transition period swaps.
    (ii) Pre-existing positions in a non-spot month. A single month or 
all-months-combined speculative position limit established under 
paragraph (a)(1) of this section shall apply to any pre-existing 
positions in commodity derivative contracts, other than pre-enactment 
swaps and transition period swaps.
    (4) Monthly reports detailing the disposition of each exemption 
application. (i) For commodity derivative contracts subject to Federal 
speculative position limits, the designated contract market or swap 
execution facility shall submit to the Commission a report each month 
showing the disposition of any exemption application, including the 
recognition of any position as a bona fide hedging transaction or 
position, the exemption of any spread transaction or other position, 
the renewal, revocation, or modification of a previously granted 
recognition or exemption, and the rejection of any application, as well 
as the following details for each application:
    (A) The date of disposition;
    (B) The effective date of the disposition;
    (C) The expiration date of any recognition or exemption;
    (D) Any unique identifier(s) the designated contract market or swap 
execution facility may assign to track the application, or the specific 
type of recognition or exemption;
    (E) If the application is for an enumerated bona fide hedging 
transaction or position, the name of the enumerated bona fide hedging 
transaction or position listed in appendix A to this part;
    (F) If the application is for a spread transaction listed in the 
spread transaction definition in Sec.  150.1, the name of the spread 
transaction as it is listed in Sec.  150.1;
    (G) The identity of the applicant;
    (H) The listed commodity derivative contract or position(s) to 
which the application pertains;
    (I) The underlying cash commodity;
    (J) The maximum size of the commodity derivative position that is 
recognized by the designated contract market or swap execution facility 
as a bona fide hedging transaction or position, specified by contract 
month and by the type of limit as spot month, single month, or all-
months-combined, as applicable;
    (K) Any size limitations or conditions established for a spread 
exemption or other exemption; and
    (L) For a bona fide hedging transaction or position, a concise 
summary of the applicant's activity in the cash markets and swaps 
markets for the commodity underlying the commodity derivative position 
for which the application was submitted.
    (ii) The designated contract market or swap execution facility 
shall submit to the Commission the information required by paragraph 
(a)(4)(i) of this section:
    (A) As specified by the Commission on the Forms and Submissions 
page at www.cftc.gov; and
    (B) Using the format, coding structure, and electronic data 
transmission procedures approved in writing by the Commission.
    (b) Requirements for exchange-set limits on commodity derivative 
contracts in a physical commodity that are not subject to the limits 
set forth in Sec.  150.2--(1) Exchange-set spot-month limits. For any 
physical commodity derivative contract that is not subject to a Federal 
speculative position limit under Sec.  150.2, a designated contract 
market or swap execution facility that is a trading facility shall set 
a speculative position limit as follows:
    (i) Spot month speculative position limit levels. For any commodity 
derivative contract subject to paragraph (b) of this section, a 
designated contract market or swap execution facility that is a trading 
facility shall establish speculative position limits for the spot month 
no greater than 25 percent of the estimated spot month deliverable 
supply, calculated separately for each month to be listed.
    (ii) Additional sources for compliance. Alternatively, a designated 
contract market or swap execution facility that is a trading facility 
may submit rules to the Commission establishing spot month speculative 
position limits other than as provided in paragraph (b)(1)(i) of this 
section, provided that each limit is set at a level that is necessary 
and appropriate to reduce the potential threat of market manipulation 
or price distortion of the contract's or the underlying commodity's 
price or index.
    (2) Exchange-set limits or accountability outside of the spot 
month--(i) Non-spot month speculative position limit or accountability 
levels. For any commodity derivative contract subject to paragraph (b) 
of this section, a designated contract market or swap execution 
facility that is a trading facility shall adopt either speculative 
position limits or position accountability outside of the spot month at 
a level that is necessary and appropriate to reduce the potential 
threat of market manipulation or price distortion of the contract's or 
the underlying commodity's price or index.
    (ii) Additional sources for compliance. A designated contract 
market or swap execution facility that is a trading facility may refer 
to the non-exclusive acceptable practices in paragraph (b) of appendix 
F of this part to demonstrate to the Commission compliance with the 
requirements of paragraph (b)(2)(i) of this section.
    (3) Look-alike contracts. For any newly listed commodity derivative 
contract subject to paragraph (b) of this section that is substantially 
the same as an existing contract listed on a designated contract market 
or swap execution facility that is a trading facility, the designated 
contract market or swap execution facility that is a trading facility 
listing such newly listed contract shall adopt spot month, individual 
month, and all-months-combined speculative position limits comparable 
to those of the existing contract. Alternatively, if such designated 
contract market or swap execution facility seeks to adopt speculative 
position limits that are not comparable to those of the existing 
contract, such designated contract market or swap execution facility 
shall demonstrate to the Commission how the levels comply with 
paragraphs (b)(1) and/or (b)(2) of this section.
    (4) Exemptions to exchange-set limits. A designated contract market 
or swap execution facility that is a trading facility may grant 
exemptions from any

[[Page 3472]]

speculative position limits it sets under paragraph (b)(1) or (2) of 
this section in accordance with the following:
    (i) An entity seeking an exemption shall be required to apply to 
the designated contract market or swap execution facility for any such 
exemption from its speculative position limit rules; and
    (ii) A designated contract market or swap execution facility that 
is a trading facility may deny any such application, or limit, 
condition, or revoke any such exemption, at any time after providing 
notice to the applicant. Such designated contract market or swap 
execution facility shall consider whether the requested exemption would 
result in positions that would not be in accord with sound commercial 
practices in the relevant commodity derivative market and/or would 
exceed an amount that may be established and liquidated in an orderly 
fashion in that market.
    (c) Requirements for security futures products. For security 
futures products, speculative position limits and position 
accountability requirements are specified in Sec.  41.25 of this 
chapter.
    (d) Rules on aggregation. For commodity derivative contracts in a 
physical commodity, a designated contract market or swap execution 
facility that is a trading facility shall have aggregation rules that 
conform to Sec.  150.4.
    (e) Requirements for submissions to the Commission. In order for a 
designated contract market or swap execution facility that is a trading 
facility to adopt speculative position limits and/or position 
accountability pursuant to paragraph (a) or (b) of this section and/or 
to elect to offer exemptions from any such levels pursuant to such 
paragraphs, the designated contract market or swap execution facility 
shall submit to the Commission pursuant to part 40 of this chapter 
rules establishing such levels and/or exemptions. To the extent that a 
designated contract market or swap execution facility adopts 
speculative position limit levels, such part 40 submission shall also 
include the methodology by which such levels are calculated. The 
designated contract market or swap execution facility shall review such 
speculative position limit levels regularly for compliance with this 
section and update such speculative position limit levels as needed.
    (f) Delegation of authority to the Director of the Division of 
Market Oversight--(1) Commission delegations. The Commission hereby 
delegates, until it orders otherwise, to the Director of the Division 
of Market Oversight, or such other employee or employees as the 
Director may designate from time to time, the authority in paragraph 
(a)(4)(ii) of this section to provide instructions regarding the 
submission to the Commission of information required to be reported, 
pursuant to paragraph (a)(4)(i) of this section, by a designated 
contract market or swap execution facility, to specify the manner for 
submitting such information on the Forms and Submissions page at 
www.cftc.gov, and to determine the format, coding structure, and 
electronic data transmission procedures for submitting such 
information.
    (2) Commission consideration of delegated matter. The Director of 
the Division of Market Oversight may submit to the Commission for its 
consideration any matter which has been delegated in this section.
    (3) Commission authority. Nothing in this section prohibits the 
Commission, at its election, from exercising the authority delegated in 
this section.


0
20. Revise Sec.  150.6 to read as follows:


Sec.  150.6   Scope.

    This part shall only be construed as having an effect on 
speculative position limits set by the Commission or by a designated 
contract market or swap execution facility, including any associated 
recordkeeping and reporting regulations in this chapter. Nothing in 
this part shall be construed to relieve any designated contract market, 
swap execution facility, or its governing board from responsibility 
under section 5(d)(4) of the Act to prevent manipulation and corners. 
Further, nothing in this part shall be construed to affect any other 
provisions of the Act or Commission regulations, including, but not 
limited to, those relating to actual or attempted manipulation, 
corners, squeezes, fraudulent or deceptive conduct, or to prohibited 
transactions.


Sec.  150.7  [Reserved]

0
21. Add reserved Sec.  150.7.

0
22. Add Sec.  150.8 to read as follows:


Sec.  150.8   Severability.

    If any provision of this part, or the application thereof to any 
person or circumstances, is held invalid, such invalidity shall not 
affect the validity of other provisions or the application of such 
provision to other persons or circumstances that can be given effect 
without the invalid provision or application.

0
23. Add Sec.  150.9 to read as follows:


Sec.  150.9   Process for recognizing non-enumerated bona fide hedging 
transactions or positions with respect to Federal speculative position 
limits.

    For purposes of Federal speculative position limits, a person with 
a position in a referenced contract seeking recognition of such 
position as a non-enumerated bona fide hedging transaction or position, 
in accordance with Sec.  150.3(a)(1)(ii), shall apply to the 
Commission, pursuant to Sec.  150.3(b), or apply to a designated 
contract market or swap execution facility in accordance with this 
section. If such person submits an application to a designated contract 
market or swap execution facility in accordance with this section, and 
the designated contract market or swap execution facility, with respect 
to its own speculative position limits established pursuant to Sec.  
150.5(a), recognizes the person's position as a non-enumerated bona 
fide hedging transaction or position, then the person may also exceed 
the applicable Federal speculative position limit for such position in 
accordance with paragraph (e) of this section. The designated contract 
market or swap execution facility may approve such applications only if 
the designated contract market or swap execution facility complies with 
the conditions set forth in paragraphs (a) through (e) of this section.
    (a) Approval of rules. The designated contract market or swap 
execution facility must maintain rules that establish application 
processes and conditions for recognizing bona fide hedging transactions 
or positions consistent with the requirements of this section, and must 
seek approval of such rules from the Commission pursuant to Sec.  40.5 
of this chapter.
    (b) Prerequisites for a designated contract market or swap 
execution facility to recognize a bona fide hedging transaction or 
position in accordance with this section. (1) The designated contract 
market or swap execution facility lists the applicable referenced 
contract for trading;
    (2) The position meets the definition of bona fide hedging 
transaction or position in section 4a(c)(2) of the Act and the 
definition of bona fide hedging transaction or position in Sec.  150.1; 
and
    (3) The designated contract market or swap execution facility does 
not recognize as a bona fide hedging transaction or position any 
position involving a commodity index contract and one or more 
referenced contracts, including exemptions known as risk management 
exemptions.
    (c) Application process. The designated contract market or swap

[[Page 3473]]

execution facility's application process meets the following 
conditions:
    (1) Required application information. The designated contract 
market or swap execution facility requires the applicant to provide, 
and can obtain from the applicant, all information needed to enable the 
designated contract market or swap execution facility and the 
Commission to determine whether the facts and circumstances demonstrate 
that the designated contract market or swap execution facility may 
recognize a position as a bona fide hedging transaction or position, 
including the following:
    (i) A description of the position in the commodity derivative 
contract for which the application is submitted, including but not 
limited to, the name of the underlying commodity and the derivative 
position size;
    (ii) An explanation of the hedging strategy, including a statement 
that the position complies with the requirements of section 4a(c)(2) of 
the Act and the definition of bona fide hedging transaction or position 
in Sec.  150.1, and information to demonstrate why the position 
satisfies such requirements and definition;
    (iii) A statement concerning the maximum size of all gross 
positions in commodity derivative contracts for which the application 
is submitted;
    (iv) A description of the applicant's activity in the cash markets 
and the swaps markets for the commodity underlying the position for 
which the application is submitted, including, but not limited to, 
information regarding the offsetting cash positions; and
    (v) Any other information the designated contract market or swap 
execution facility requires, in its discretion, to determine that the 
position complies with paragraph (b)(2) of this section, as applicable.
    (2) Timing of application. (i) Except as provided in paragraph 
(c)(2)(ii) of this section, the designated contract market or swap 
execution facility requires the applicant to submit an application and 
receive a notice of approval of such application from the designated 
contract market or swap execution facility prior to the date that the 
position for which such application was submitted would be in excess of 
the applicable Federal speculative position limits.
    (ii) A designated contract market or swap execution facility may 
adopt rules that allow a person, due to demonstrated sudden or 
unforeseen increases in its bona fide hedging needs, to file an 
application with the designated contract market or swap execution 
facility to request a recognition of a bona fide hedging transaction or 
position within five business days after the person established the 
position that exceeded the applicable Federal speculative position 
limit.
    (A) The designated contract market or swap execution facility must 
require that any application filed pursuant to paragraph (c)(2)(ii) of 
this section include an explanation of the circumstances warranting the 
sudden or unforeseen increases in bona fide hedging needs.
    (B) If an application filed pursuant to paragraph (c)(2)(ii) of 
this section is denied by the designated contract market, swap 
execution facility, or Commission, the applicant must bring its 
position within the applicable Federal speculative position limits 
within a commercially reasonable time as determined by the Commission 
in consultation with the applicant and the applicable designated 
contract market or swap execution facility.
    (C) The Commission will not pursue an enforcement action for a 
position limits violation for the person holding the position during 
the period of the designated contract market, swap execution facility, 
or Commission's review nor once a determination has been issued, so 
long as the application was submitted in good faith and the person 
complies with paragraph (c)(2)(ii)(B) of this section.
    (3) Renewal of applications. The designated contract market or swap 
execution facility requires each applicant to reapply with the 
designated contract market or swap execution facility to maintain such 
recognition at least on an annual basis by updating the initial 
application, and to receive a notice of extension of the original 
approval from the designated contract market or swap execution facility 
to continue relying on such recognition for purposes of Federal 
speculative position limits. If the facts and circumstances underlying 
a renewal application are materially different than the initial 
application, the designated contract market or swap execution facility 
is required to treat such application as a new request submitted 
through the Sec.  150.9 process and subject to the Commission's 10/2-
day review process in paragraph (e) of this section.
    (4) Exchange revocation authority. The designated contract market 
or swap execution facility retains its authority to limit, condition, 
or revoke, at any time after providing notice to the applicant, any 
bona fide hedging transaction or position recognition for purposes of 
the designated contract market or swap execution facility's speculative 
position limits established under Sec.  150.5(a), for any reason as 
determined in the discretion of the designated contract market or swap 
execution facility, including if the designated contract market or swap 
execution facility determines that the position no longer meets the 
conditions set forth in paragraph (b) of this section, as applicable.
    (d) Recordkeeping. (1) The designated contract market or swap 
execution facility keeps full, complete, and systematic records, which 
include all pertinent data and memoranda, of all activities relating to 
the processing of such applications and the disposition thereof. Such 
records include:
    (i) Records of the designated contract market's or swap execution 
facility's recognition of any derivative position as a bona fide 
hedging transaction or position, revocation or modification of any such 
recognition, or the rejection of an application;
    (ii) All information and documents submitted by an applicant in 
connection with its application, including documentation and 
information that is submitted after the disposition of the application, 
and any withdrawal, supplementation, or update of any application;
    (iii) Records of oral and written communications between the 
designated contract market or swap execution facility and the applicant 
in connection with such application; and
    (iv) All information and documents in connection with the 
designated contract market or swap execution facility's analysis of, 
and action(s) taken with respect to, such application.
    (2) All books and records required to be kept pursuant to this 
section shall be kept in accordance with the requirements of Sec.  1.31 
of this chapter.
    (e) Process for a person to exceed Federal speculative position 
limits on a referenced contract--(1) Notification to the Commission. 
The designated contract market or swap execution facility must submit 
to the Commission a notification of each initial determination to 
recognize a bona fide hedging transaction or position in accordance 
with this section, concurrently with the notice of such determination 
the designated contract market or swap execution facility provides to 
the applicant.
    (2) Notification requirements. The notification in paragraph (e)(1) 
of this section shall include, at a minimum, the following information:
    (i) Name of the applicant;
    (ii) Brief description of the bona fide hedging transaction or 
position being recognized;

[[Page 3474]]

    (iii) Name of the contract(s) relevant to the recognition;
    (iv) The maximum size of the position that may exceed Federal 
speculative position limits;
    (v) The effective date and expiration date of the recognition;
    (vi) An indication regarding whether the position may be maintained 
during the last five days of trading during the spot month, or the time 
period for the spot month; and
    (vii) A copy of the application and any supporting materials.
    (3) Exceeding Federal speculative position limits on referenced 
contracts. A person may exceed Federal speculative position limits on a 
referenced contract after the designated contract market or swap 
execution facility issues the notification required pursuant to 
paragraph (e)(1) of this section, unless the Commission notifies the 
designated contract market or swap execution facility and the applicant 
otherwise, pursuant to paragraph (e)(5) or (6) of this section, before 
the ten business day period expires.
    (4) Exceeding Federal speculative position limits on referenced 
contracts due to sudden or unforeseen circumstances. If a person files 
an application for a recognition of a bona fide hedging transaction or 
position in accordance with paragraph (c)(2)(ii) of this section, then 
such person may rely on the designated contract market or swap 
execution facility's determination to grant such recognition for 
purposes of Federal speculative position limits two business days after 
the designated contract market or swap execution facility issues the 
notification required pursuant to paragraph (e)(1) of this section, 
unless the Commission notifies the designated contract market or swap 
execution facility and the applicant otherwise, pursuant to paragraph 
(e)(5) or (6) of this section, before the two business day period 
expires.
    (5) Commission stay of pending applications and requests for 
additional information. The Commission may stay an application that 
requires additional time to analyze, and/or may request additional 
information to determine whether the position for which the application 
is submitted meets the conditions set forth in paragraph (b) of this 
section. The Commission shall notify the applicable designated contract 
market or swap execution facility and the applicant of a Commission 
determination to stay the application and/or request any supplemental 
information, and shall provide an opportunity for the applicant to 
respond. The Commission will have an additional 45 days from the date 
of the stay notification to conduct the review and issue a 
determination with respect to the application. If the Commission stays 
an application and the applicant has not yet exceeded Federal 
speculative position limits, then the applicant may not exceed Federal 
speculative position limits unless the Commission approves the 
application. If the Commission stays an application and the applicant 
has already exceeded Federal speculative position limits, then the 
applicant may continue to maintain the position unless the Commission 
notifies the designated contract market or swap execution facility and 
the applicant otherwise, pursuant to paragraph (e)(6) of this section.
    (6) Commission determination for pending applications. If, during 
the Commission's ten or two business day review period in paragraphs 
(e)(3) and (4) of this section, the Commission determines that a 
position for which the application is submitted does not meet the 
conditions set forth in paragraph (b) of this section, the Commission 
shall:
    (i) Notify the designated contract market or swap execution 
facility and the applicant within ten or two business days, as 
applicable, after the designated contract market or swap execution 
facility issues the notification required pursuant to paragraph (e)(1) 
of this section;
    (ii) Provide an opportunity for the applicant to respond to such 
notification;
    (iii) Issue a determination to deny the application, or limit or 
condition the application approval for purposes of Federal speculative 
position limits and, as applicable, require the person to reduce the 
derivatives position within a commercially reasonable time, as 
determined by the Commission in consultation with the applicant and the 
applicable designated contract market or swap execution facility, or 
otherwise come into compliance; and
    (iv) The Commission will not pursue an enforcement action for a 
position limits violation for the person holding the position during 
the period of the Commission's review nor once the Commission has 
issued its determination, so long as the application was submitted in 
good faith and the person complies with any requirement to reduce the 
position pursuant to paragraph (e)(6)(iii) of this section, as 
applicable.
    (f) Commission revocation of applications previously approved. (1) 
If a designated contract market or a swap execution facility limits, 
conditions, or revokes any recognition of a bona fide hedging 
transaction or position for purposes of the respective designated 
contract market's or swap execution facility's speculative position 
limits established under Sec.  150.5(a), then such recognition will 
also be deemed limited, conditioned, or revoked for purposes of Federal 
speculative position limits.
    (2) If the Commission determines, at any time, that a position that 
has been recognized as a bona fide hedging transaction or position for 
purposes of Federal speculative position limits is no longer consistent 
with section 4a(c)(2) of the Act or the definition of bona fide hedging 
transaction or position in Sec.  150.1, the following applies:
    (i) The Commission shall notify the person holding the position and 
the relevant designated contract market or swap execution facility. 
After providing such person and such designated contract market or swap 
execution facility an opportunity to respond, the Commission may, in 
its discretion, limit, condition, or revoke its determination for 
purposes of Federal speculative position limits and require the person 
to reduce the derivatives position within a commercially reasonable 
time as determined by the Commission in consultation with such person 
and such designated contract market or swap execution facility, or 
otherwise come into compliance;
    (ii) The Commission shall include in its notification a brief 
explanation of the nature of the issues raised and the specific 
provisions of the Act or the Commission's regulations with which the 
position or application is, or appears to be, inconsistent; and
    (iii) The Commission will not pursue an enforcement action for a 
position limits violation for the person holding the position during 
the period of the Commission's review, nor once the Commission has 
issued its determination, provided the person submitted the application 
in good faith and reduces the position within a commercially reasonable 
time, as determined by the Commission in consultation with such person 
and the relevant designated contract market or swap execution facility, 
or otherwise comes into compliance.
    (g) Delegation of authority to the Director of the Division of 
Market Oversight--(1) Commission delegations. The Commission hereby 
delegates, until it orders otherwise, to the Director of the Division 
of Market Oversight, or such other employee or employees as the 
Director may designate from time to time, the authority to request 
additional information, pursuant to paragraph (e)(5) of this section, 
from the applicable designated contract market or swap execution 
facility and applicant.

[[Page 3475]]

    (2) Commission consideration of delegated matter. The Director of 
the Division of Market Oversight may submit to the Commission for its 
consideration any matter which has been delegated in this section.
    (3) Commission authority. Nothing in this section prohibits the 
Commission, at its election, from exercising the authority delegated in 
this section.

0
24. Add appendices A through G to read as follows:

Appendix A to Part 150--List of Enumerated Bona Fide Hedges

    Pursuant to Sec.  150.3(a)(1)(i), positions that comply with the 
bona fide hedging transaction or position definition in Sec.  150.1 
and that are enumerated in this appendix A may exceed Federal 
speculative position limits to the extent that all applicable 
requirements in this part are met. A person holding such positions 
enumerated in this appendix A may exceed Federal speculative 
position limits for such positions without requesting prior approval 
under Sec.  150.3 or Sec.  150.9. A person holding such positions 
that are not enumerated in this appendix A must request and obtain 
approval pursuant to Sec.  150.3 or Sec.  150.9 prior to exceeding 
the applicable Federal speculative position limits--unless such 
positions qualify for the retroactive approval process, and the 
person seeks retroactive approval in accordance with Sec.  150.3 or 
Sec.  150.9.
    The enumerated bona fide hedges do not state the exclusive means 
for establishing compliance with the bona fide hedging transaction 
or position definition in Sec.  150.1 or with the requirements of 
Sec.  150.3(a)(1).
    (a) Enumerated hedges--(1) Hedges of inventory and cash 
commodity fixed-price purchase contracts. Short positions in 
commodity derivative contracts that do not exceed in quantity the 
sum of the person's ownership of inventory and fixed-price purchase 
contracts in the commodity derivative contracts' underlying cash 
commodity.
    (2) Hedges of cash commodity fixed-price sales contracts. Long 
positions in commodity derivative contracts that do not exceed in 
quantity the sum of the person's fixed-price sales contracts in the 
commodity derivative contracts' underlying cash commodity and the 
quantity equivalent of fixed-price sales contracts of the cash 
products and by-products of such commodity.
    (3) Hedges of offsetting unfixed-price cash commodity sales and 
purchases. Both short and long positions in commodity derivative 
contracts that do not exceed in quantity the amount of the commodity 
derivative contracts' underlying cash commodity that has been both 
bought and sold by the same person at unfixed prices:
    (i) Basis different delivery months in the same commodity 
derivative contract; or
    (ii) Basis different commodity derivative contracts in the same 
commodity, regardless of whether the commodity derivative contracts 
are in the same calendar month.
    (4) Hedges of unsold anticipated production. Short positions in 
commodity derivative contracts that do not exceed in quantity the 
person's unsold anticipated production of the commodity derivative 
contracts' underlying cash commodity.
    (5) Hedges of unfilled anticipated requirements. Long positions 
in commodity derivative contracts that do not exceed in quantity the 
person's unfilled anticipated requirements for the commodity 
derivative contracts' underlying cash commodity, for processing, 
manufacturing, or use by that person, or for resale by a utility as 
it pertains to the utility's obligations to meet the unfilled 
anticipated demand of its customers for the customer's use.
    (6) Hedges of anticipated merchandising. Long or short positions 
in commodity derivative contracts that offset the anticipated change 
in value of the underlying commodity that a person anticipates 
purchasing or selling, provided that:
    (i) The positions in the commodity derivative contracts do not 
exceed in quantity twelve months' of current or anticipated purchase 
or sale requirements of the same cash commodity that is anticipated 
to be purchased or sold; and
    (ii) The person is a merchant handling the underlying commodity 
that is subject to the anticipatory merchandising hedge, and that 
such merchant is entering into the position solely for purposes 
related to its merchandising business and has a demonstrated history 
of buying and selling the underlying commodity for its merchandising 
business.
    (7) Hedges by agents. Long or short positions in commodity 
derivative contracts by an agent who does not own or has not 
contracted to sell or purchase the commodity derivative contracts' 
underlying cash commodity at a fixed price, provided that the agent 
is responsible for merchandising the cash positions that are being 
offset in commodity derivative contracts and the agent has a 
contractual arrangement with the person who owns the commodity or 
holds the cash-market commitment being offset.
    (8) Hedges of anticipated mineral royalties. Short positions in 
a person's commodity derivative contracts offset by the anticipated 
change in value of mineral royalty rights that are owned by that 
person, provided that the royalty rights arise out of the production 
of the commodity underlying the commodity derivative contracts.
    (9) Hedges of anticipated services. Short or long positions in a 
person's commodity derivative contracts offset by the anticipated 
change in value of receipts or payments due or expected to be due 
under an executed contract for services held by that person, 
provided that the contract for services arises out of the 
production, manufacturing, processing, use, or transportation of the 
commodity underlying the commodity derivative contracts.
    (10) Offsets of commodity trade options. Long or short positions 
in commodity derivative contracts that do not exceed in quantity, on 
a futures-equivalent basis, a position in a commodity trade option 
that meets the requirements of Sec.  32.3 of this chapter. Such 
commodity trade option transaction, if it meets the requirements of 
Sec.  32.3 of this chapter, may be deemed, for purposes of complying 
with this paragraph (a)(10) of this appendix A, as either a cash 
commodity purchase or sales contract as set forth in paragraph 
(a)(1) or (2) of this appendix A, as applicable.
    (11) Cross-commodity hedges. Positions in commodity derivative 
contracts described in paragraph (2) of the bona fide hedging 
transaction or position definition in Sec.  150.1 or in paragraphs 
(a)(1) through (10) of this appendix A may also be used to offset 
the risks arising from a commodity other than the cash commodity 
underlying the commodity derivative contracts, provided that the 
fluctuations in value of the cash commodity underlying the commodity 
derivative contracts, shall be substantially related to the 
fluctuations in value of the actual or anticipated cash commodity 
position or a pass-through swap.
    (b) [Reserved]

Appendix B to Part 150--Guidance on Gross Hedging Positions and 
Positions Held During the Spot Period

    (a) Guidance on gross hedging positions. (1) A person's gross 
hedging positions may be deemed in compliance with the bona fide 
hedging transaction or position definition in Sec.  150.1, whether 
enumerated or non-enumerated, provided that all applicable 
regulatory requirements are met, including that the position is 
economically appropriate to the reduction of risks in the conduct 
and management of a commercial enterprise and otherwise satisfies 
the bona fide hedging definition in Sec.  150.1, and provided 
further that:
    (i) The manner in which the person measures risk is consistent 
and follows historical practice for that person;
    (ii) The person is not measuring risk on a gross basis to evade 
the speculative position limits in Sec.  150.2 or the aggregation 
rules in Sec.  150.4; and
    (iii) The person is able to demonstrate compliance with 
paragraphs (a)(1)(i) and (ii) of this appendix, including by 
providing justifications for measuring risk on a gross basis, upon 
the request of the Commission and/or of a designated contract 
market, including by providing information regarding the entities 
with which the person aggregates positions.
    (b) Guidance regarding positions held during the spot period. 
The regulations governing exchange-set speculative position limits 
and exemptions therefrom under Sec.  150.5(a)(2)(ii)(D) provide that 
designated contract markets and swap execution facilities 
(``exchanges'') may impose restrictions on bona fide hedging 
transaction or position exemptions to require the person to exit any 
such positions in excess of limits during the lesser of the last 
five days of trading or the time period for the spot month in such 
physical-delivery contract, or otherwise limit the size of such 
position. This guidance is intended to provide factors the 
Commission believes exchanges should consider when determining 
whether to impose a five-day rule or similar restriction but is not 
intended to be used as a mandatory checklist. The exchanges may 
consider whether:

[[Page 3476]]

    (1) The position complies with the bona fide hedging transaction 
or position definition in Sec.  150.1, whether enumerated or non-
enumerated;
    (2) There is an economically appropriate need to maintain such 
position in excess of Federal speculative position limits during the 
spot period for such contract, and such need relates to the purchase 
or sale of a cash commodity; and
    (3) The person wishing to exceed Federal position limits during 
the spot period:
    (i) Intends to make or take delivery during that time period;
    (ii) Has the ability to take delivery for any long position at 
levels that are economically appropriate (i.e., the delivery 
comports with the person's demonstrated need for the commodity and 
the contract is the most economical source for that commodity);
    (iii) Has the ability to deliver against any short position 
(i.e., has inventory on hand in a deliverable location and in a 
condition in which the commodity can be used upon delivery and that 
delivery against futures contracts is economically appropriate, as 
it is the best sales option for that inventory).

Appendix C to Part 150--Guidance Regarding the Definition of Referenced 
Contract

    This appendix C provides guidance regarding the ``referenced 
contract'' definition in Sec.  150.1, which provides in paragraph 
(3) of the definition of referenced contract that the term 
referenced contract does not include a location basis contract, a 
commodity index contract, a swap guarantee, a trade option that 
meets the requirements of Sec.  32.3 of this chapter, a monthly 
average pricing contract, or an outright price reporting agency 
index contract. The term ``referenced contract'' is used throughout 
part 150 of the Commission's regulations to refer to contracts that 
are subject to Federal position limits. A position in a contract 
that is not a referenced contract is not subject to Federal position 
limits, and, as a consequence, cannot be netted with positions in 
referenced contracts for purposes of Federal position limits. This 
guidance is intended to clarify the types of contracts that would 
qualify as a location basis contract, commodity index contract, 
monthly average pricing contract, or outright price reporting agency 
index contract.
    Compliance with this guidance does not diminish or replace, in 
any event, the obligations and requirements of any person to comply 
with the regulations provided under this part, or any other part of 
the Commission's regulations. The guidance is for illustrative 
purposes only and does not state the exclusive means for a contract 
to qualify, or not qualify, as a referenced contract as defined in 
Sec.  150.1, or to comply with any other provision in this part.
    (a) Guidance. (1) As provided in paragraph (3) of the 
``referenced contract'' definition in Sec.  150.1, the following 
types of contracts are not deemed referenced contracts, meaning such 
contracts are not subject to Federal position limits and cannot be 
netted with positions in referenced contracts for purposes of 
Federal position limits: location basis contracts; commodity index 
contracts; swap guarantees; trade options that meet the requirements 
of Sec.  32.3 of this chapter; monthly average pricing contracts; 
and outright price reporting agency index contracts.
    (2) Location basis contract. For purposes of the referenced 
contract definition in Sec.  150.1, a location basis contract means 
a commodity derivative contract that is cash-settled based on the 
difference in:
    (i) The price, directly or indirectly, of:
    (A) A particular core referenced futures contract; or
    (B) A commodity deliverable on a particular core referenced 
futures contract, whether at par, a fixed discount to par, or a 
premium to par; and
    (ii) The price, at a different delivery location or pricing 
point than that of the same particular core referenced futures 
contract, directly or indirectly, of:
    (A) A commodity deliverable on the same particular core 
referenced futures contract, whether at par, a fixed discount to 
par, or a premium to par; or
    (B) A commodity that is listed in appendix D to this part as 
substantially the same as a commodity underlying the same core 
referenced futures contract.
    (3) Commodity index contract. For purposes of the referenced 
contract definition in Sec.  150.1, a commodity index contract means 
an agreement, contract, or transaction that is based on an index 
comprised of prices of commodities that are not the same or 
substantially the same, and that is not a location basis contract, a 
calendar spread contract, or an intercommodity spread contract as 
such terms are defined in this guidance, where:
    (i) A calendar spread contract means a cash-settled agreement, 
contract, or transaction that represents the difference between the 
settlement price in one or a series of contract months of an 
agreement, contract, or transaction and the settlement price of 
another contract month or another series of contract months' 
settlement prices for the same agreement, contract, or transaction; 
and
    (ii) An intercommodity spread contract means a cash-settled 
agreement, contract, or transaction that represents the difference 
between the settlement price of a referenced contract and the 
settlement price of another contract, agreement, or transaction that 
is based on a different commodity.
    (4) Monthly average pricing contract means a contract that 
satisfies one of the following:
    (i) The contract's price is calculated based on the equally-
weighted arithmetic average of the daily prices of the underlying 
referenced contract for the entire corresponding calendar month or 
trade month, as applicable; or
    (ii) In determining the price of such contract, the component 
daily prices, in the aggregate, during the spot month of the 
underlying referenced contract comprise no more than 40 percent of 
such contract's weighting.
    (5) Outright price reporting agency index contract means any 
outright commodity derivative contract whose settlement price is 
based solely on an index published by a price reporting agency that 
surveys cash-market transaction prices, provided, however, that this 
term does not include any commodity derivative contract that settles 
at a basis, or differential, between a referenced contract and a 
price reporting agency index.
    (b) [Reserved]

Appendix D to Part 150--Commodities Listed as Substantially the Same 
for Purposes of the Term ``Location Basis Contract'' as Used in the 
Referenced Contract Definition

    The following table lists each relevant core referenced futures 
contract and associated commodities that are treated as 
substantially the same as a commodity underlying a core referenced 
futures contract for purposes of the term ``location basis 
contract'' as such term is used in the referenced contract 
definition under Sec.  150.1, and as such term is discussed in 
appendix C to this part.
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Appendix E to Part 150--Speculative Position Limit Levels

     
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    \1\ Step-down spot month limits apply to positions net long or 
net short as follows: 600 contracts at the close of trading on the 
first business day following the first Friday of the contract month; 
300 contracts at the close of trading on the business day prior to 
the last five trading days of the contract month; and 200 contracts 
at the close of trading on the business day prior to the last two 
trading days of the contract month.
    \2\ For persons that are not availing themselves of the Sec.  
150.3(a)(4) conditional spot month limit exemption in natural gas, 
the 2,000 contract spot month speculative position limit level 
applies to: (1) the physically-settled NYMEX Henry Hub Natural Gas 
(NG) core referenced futures contract and any other physically-
settled contract that qualifies as a referenced contract to NYMEX 
Henry Hub Natural Gas (NG) under the definition of ``referenced 
contract'' under Sec.  150.1, in the aggregate across all exchanges 
listing a physically-settled NYMEX Henry Hub Natural Gas (NG) 
referenced contract and the OTC swaps market, net long or net short; 
and (2) the cash-settled NYMEX Henry Hub Natural Gas (NG) referenced 
contracts, net long or net short, on a per-exchange basis for each 
exchange that lists one or more cash-settled NYMEX Henry Hub Natural 
Gas (NG) referenced contract(s) rather than aggregated across such 
exchanges. Further, an additional 2,000 contract limit, net long or 
net short, applies across all cash-settled economically equivalent 
NYMEX Henry Hub Natural Gas (NG) OTC swaps.
    \3\ Step-down spot month limits apply to positions net long or 
net short as follows: 6,000 contracts at the close of trading three 
business days prior to the last trading day of the contract; 5,000 
contracts at the close of trading two business days prior to the 
last trading day of the contract; and 4,000 contracts at the close 
of trading one business day prior to the last trading day of the 
contract.

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BILLING CODE 6351-01-C

Appendix F to Part 150--Guidance on, and Acceptable Practices in, 
Compliance With the Requirements for Exchange-Set Limits and Position 
Accountability on Commodity Derivative Contracts

    The following are guidance and acceptable practices for 
compliance with Sec.  150.5. Compliance with the acceptable 
practices and guidance does not diminish or replace, in any event, 
the obligations and requirements of the person to comply with the 
other regulations provided under this part. The acceptable practices 
and guidance are for illustrative purposes only and do not state the 
exclusive means for establishing compliance with Sec.  150.5.
    (a) Acceptable practices for compliance with Sec.  
150.5(b)(2)(i) regarding exchange-set limits or accountability 
outside of the spot month. A designated contract market or swap 
execution facility that is a trading facility may satisfy Sec.  
150.5(b)(2)(i) by complying with either of the following acceptable 
practices:
    (1) Non-spot month speculative position limits. For any 
commodity derivative contract subject to Sec.  150.5(b), a 
designated contract market or swap execution facility that is a 
trading facility sets individual single month or all-months-combined 
levels no greater than any one of the following:
    (i) The average of historical position sizes held by speculative 
traders in the contract as a percentage of the average combined 
futures and delta-adjusted option month-end open interest for that 
contract for the most recent calendar year;
    (ii) The level of the spot month limit for the contract;
    (iii) 5,000 contracts (scaled-down proportionally to the 
notional quantity per contract relative to the typical cash-market 
transaction if the notional quantity per contract is larger than the 
typical cash-market transaction, and scaled up proportionally to the 
notional quantity per contract relative to the typical cash-market 
transaction if the notional quantity per contract is smaller than 
the typical cash-market transaction); or
    (iv) 10 percent of the average combined futures and delta-
adjusted option month-end open interest in the contract for the most 
recent calendar year up to 50,000 contracts, with a marginal 
increase of 2.5 percent of open interest thereafter.
    (2) Non-spot month position accountability. For any commodity 
derivative contract subject to Sec.  150.5(b), a designated contract 
market or swap execution facility that is a trading facility adopts 
position accountability, as defined in Sec.  150.1.
    (b) [Reserved]

[[Page 3482]]

Appendix G to Part 150--Guidance on Spread Transaction Exemptions 
Granted for Contracts that are Subject to Federal Speculative Position 
Limits

    Positions that comply with Sec.  150.3(a)(2)(i) or (ii) may 
exceed Federal speculative position limits, provided that the entity 
separately requests a spread transaction exemption from the relevant 
exchange's position limits established pursuant to proposed Sec.  
150.5(a). The following provides guidance to exchanges and market 
participants on the use of spread transaction exemptions granted 
pursuant to Sec.  150.5(a). Exchanges and market participants may 
also consider this guidance for purposes of spread transaction 
exemptions granted pursuant to Sec.  150.5(b). The following 
guidance includes recommendations for exchanges and market 
participants to consider when granting or relying on spread 
transaction exemptions for positions that include referenced 
contracts that are subject to Federal speculative position limits.
    (a) General guidance on spread transaction exemptions for 
referenced contracts. (1) When granting spread transaction 
exemptions pursuant to Sec.  150.5(a), an exchange should:
    (i) Collect sufficient information from the market participant 
to be able to:
    (A) Understand the spread strategy, consistent with Sec.  
150.5(a)(2)(ii)(A); and
    (B) Verify that there is a material economic relationship 
between the legs of the spread transaction, consistent with the 
requirement in Sec.  150.5(a)(2)(ii)(G) to grant exemptions in 
accordance with sound commercial practices;
    (ii) Consider whether granting the spread transaction exemption 
would, to the maximum extent practicable:
    (A) Ensure sufficient market liquidity for bona fide hedgers; 
and
    (B) Not unduly reduce the effectiveness of Federal speculative 
position limits to:
    (1) Diminish, eliminate, or prevent excessive speculation;
    (2) Deter and prevent market manipulations, squeezes, and 
corners; and
    (3) Ensure that the price discovery function of the underlying 
market is not disrupted;
    (iii) Consider implementing safeguards to ensure that when 
granting spread transaction exemptions, especially during the spot 
period, the exchange is able to comply with all statutory and 
regulatory obligations, including the requirements of:
    (A) DCM Core Principle 2 and SEF Core Principle 2, as 
applicable, to, among other things, prohibit abusive trading 
practices on its markets by members and market participants, and 
prohibit any other manipulative or disruptive trading practices 
prohibited by the Act or Commission regulations;
    (B) DCM Core Principle 4 and SEF Core Principle 4, as 
applicable, to prevent manipulation, price distortion, and 
disruptions of the delivery or cash-settlement process through 
market surveillance, compliance, and enforcement practices and 
procedures;
    (C) DCM Core Principle 5 and SEF Core Principle 6, as 
applicable, to implement exchange-set position limits in a manner 
that reduces the potential threat of market manipulation or 
congestion; and
    (D) DCM Core Principle 12, as applicable, to protect markets and 
market participants from abusive practices committed by any party, 
including abusive practices committed by a party acting as an agent 
for a participant; and to promote fair and equitable trading on the 
contract market;
    (iv) Ensure that any spread exemption transaction does not 
impede convergence or facilitate the formation of artificial prices; 
and
    (v) Provide a cap or limit on the maximum size of all gross 
positions permitted under the spread transaction exemption.
    (2) The Commission reminds market participants that when 
utilizing a spread transaction exemption, compliance with Federal 
speculative position limits or an exemption thereto does not confer 
any type of safe harbor or good faith defense to a claim that the 
participant has engaged in an attempted or perfected manipulation or 
willfully circumvented or evaded speculative position limits, 
consistent with the Commission's anti-evasion provision in Sec.  
150.2(i).
    (b) Guidance on transactions permitted under the spread 
transaction definition. (1) The Commission understands that market 
participants are generally familiar with the meaning of intra-market 
spreads, inter-market spreads, intra-commodity spreads, and inter-
commodity spreads, as those terms are used in the spread transaction 
definition in Sec.  150.1. However, for the avoidance of confusion, 
the Commission provides the following descriptions of such spread 
strategies to assist exchanges in their analysis of whether a spread 
position complies with the spread transaction definition. The 
Commission generally understands that the following spread 
strategies are typically defined as follows:
    (i) Intra-market spread means a long (short) position in one or 
more commodity derivative contracts in a particular commodity, or 
its products or by-products, and a short (long) position in one or 
more commodity derivative contracts in the same, or similar, 
commodity, or its products or by-products, on the same designated 
contract market or swap execution facility.
    (ii) Inter-market spread means a long (short) position in one or 
more commodity derivative contracts in a particular commodity, or 
its products or by-products, at a particular designated contract 
market or swap execution facility and a short (long) position in one 
or more commodity derivative contracts in that same, or similar, 
commodity, or its products or by-products, away from that particular 
designated contract market or swap execution facility.
    (iii) Intra-commodity spread means a long (short) position in 
one or more commodity derivatives contracts in a particular 
commodity, or its product or by-products, and a short (long) 
position in one or more commodity derivative contracts in the same, 
or similar, commodity, or its products or by-products.
    (iv) Inter-commodity spread means a long (short) position in one 
or more commodity derivatives contracts in a particular commodity, 
or its product or by-products, and a short (long) position in one or 
more commodity derivative contracts in a different commodity or its 
products or by-products.
    (2) The following is a non-exhaustive list of spread strategies 
that comply with the spread transaction definition in Sec.  150.1:
    (i) An inter-market spread transaction in which the legs of the 
transaction are futures contracts in the same, or similar commodity, 
or its products or its by-products, and same calendar month or 
expiration;
    (ii) A spread transaction in which one leg is a referenced 
contract, as defined in Sec.  150.1, and the other leg is a 
commodity derivative contract, as defined in Sec.  150.1, that is 
not a referenced contract (including over-the-counter commodity 
derivative contracts);
    (iii) A spread transaction between a physically-settled contract 
and a cash-settled contract;
    (iv) A spread transaction between two cash-settled contracts; 
and
    (v) Spread transactions that are ``legged in,'' that is, carried 
out in two steps, or alternatively are ``combination trades,'' that 
is, all components of the spread are executed simultaneously or 
contemporaneously.
    (3) A spread transaction exemption cannot be used to exceed the 
conditional spot month limit exemption, in Sec.  150.3(a)(4), for 
positions in natural gas.
    (4) The spread transaction definition does not include a single 
cash-settled agreement, contract or transaction that, by its terms 
and conditions:
    (i) Simply represents the difference (or basis) between the 
settlement price of a referenced contract and the settlement price 
of another contract, agreement, or transaction (whether or not a 
referenced contract), and
    (ii) Does not comprise separate long and short positions.
    (5) The spread transaction definition does not include a spread 
position involving a commodity index contract and one or more 
referenced contracts.
    (c) Guidance on cash-and-carry exemptions. The spread 
transaction definition in Sec.  150.1 would permit transactions 
commonly known as ``cash-and-carry'' trades whereby a market 
participant enters a long futures position in the spot month and an 
equivalent short futures position in the following month, in order 
to guarantee a return that, at minimum, covers the costs of its 
carrying charges, such as the cost of financing, insuring, and 
storing the physical inventory until the next expiration (including 
insurance, storage fees, and financing costs, as well as other costs 
such as aging discounts that are specific to individual 
commodities). With this exemption, the market participant is able to 
take physical delivery of the product in the nearby month and may 
redeliver the same product in a deferred month. When determining 
whether to grant, and when monitoring, cash-and-carry spread 
transaction exemptions, the exchange should consider:
    (1) Implementing safeguards to require a market participant 
relying on such an exemption to reduce its position below the 
speculative Federal position limit within a timely manner once 
market prices no longer permit entry into a full carry transaction;

[[Page 3483]]

    (2) Implementing safeguards that require market participants to 
liquidate all long positions in the nearby contract month before the 
price of the nearby contract month rises to a premium to the second 
(2nd) contract month; and
    (3) Requiring market participants that seek to rely on such 
exemption to:
    (i) Provide information about their expected cost of carrying 
the physical commodity, and the quantity of stocks currently owned 
in exchange-licensed warehouses or tank facilities; and
    (ii) Agree that before the price of the nearby contract month 
rises to a premium to the second (2nd) contract month, the market 
participant will liquidate all long positions in the nearby contract 
month.

PART 151 [REMOVED AND RESERVED]

0
27. Under the authority of section 8a(5) of the Commodity Exchange Act, 
7 U.S.C. 12a(5), remove and reserve part 151.

    Issued in Washington, DC, on November 12, 2020, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Position Limits for Derivatives--Commission Voting 
Summary, Chairman's Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz and 
Stump voted in the affirmative. Commissioners Behnam and Berkovitz 
voted in the negative.

Appendix 2--Statement of Support of Chairman Heath P. Tarbert

    I am very proud to bring to a final vote the Commission's rule 
on speculative position limits. Like my fellow Commissioners and so 
many who have held these seats before us, I promised during my 
confirmation hearing that I would work to finalize this rule. So to 
the Senate Committee on Agriculture, Nutrition, and Forestry, to the 
market participants who rely on futures markets, and to the American 
people, I am pleased to say--promise made, promise kept.
    Today, we are removing a cloud that has hung over both the CFTC 
and the derivatives markets for a decade. Market participants, 
particularly Americans who need these markets to hedge the risks 
inherent in their businesses, will finally have regulatory 
certainty.

Long Journey of Position Limits

    Ralph Waldo Emerson is quoted as saying ``Life is a journey, not 
a destination.'' Lucky for him, his journey did not involve position 
limits. This rule has been one of the most difficult undertakings in 
CFTC history.
    The Commission has issued five position limits proposals over 
the past 10 years. The first was adopted in 2011, but vacated by the 
U.S. District Court for the District of Columbia before it took 
effect. One proposal issued in 2013, and two more in 2016, were 
never finalized. All told, those four proposals received thousands 
of comments from the public--the vast majority of which objected to 
the proposals for good reason. Much ink was spilled, and many trees 
were felled over those proposals.
    Finally, the Commission issued its fifth position limits 
proposal in January of this year. Today we will finalize that rule. 
But it is important to note we are not completely rejecting prior 
attempts. Instead, we build on the good from previous proposals 
while recognizing and fixing their shortcomings.
    Any position limits rule involves a balancing act. To paraphrase 
a famous saying--You can please some of the people all the time, and 
all the people some of the time, but--as is certainly the case with 
position limits--you can't please all the people all the time.
    That is especially true given the three things the Commission is 
tasked with balancing for position limits:
    1. Whether position limits on a particular contract are more 
helpful than harmful;
    2. which positions should be subject to the limits and which 
should not; and
    3. at what levels position limits should be set to allow for 
liquid markets but not excessive speculation.

Recognizing Dead Ends

    Prior position limits proposals ultimately failed because they 
were unable to strike the correct balance on these three points.
    First, prior proposals were based on a plausible, but ultimately 
unsupportable, interpretation--``the mandate.'' The mandate would 
mean there is no balancing test; instead, all futures would be 
subject to Federal limits. Given the wide range of futures in our 
markets, this approach would require the CFTC to evaluate thousands 
of contracts. It also would necessitate limits on everything--
regardless of the benefits those limits would bring or the burdens 
they would impose.
    Second, prior proposals failed to recognize all the ways that 
participants use futures markets to hedge price risks. Agricultural, 
energy, and metal futures markets are a vital to American 
businesses, which is why Congress explicitly excluded bona fide 
hedging positions from position limits. Reading the term bona fide 
hedging too broadly risks inviting the wolf of speculative activity 
into the market wearing sheep's clothing. Reading it too narrowly 
creates the possibility of locking out the businesses that need 
these markets to manage their risks. And taking away that ability to 
manage risk jeopardizes economic growth.
    As a result, the Commission's prior proposals were too 
restrictive on what constitutes bona fide hedging. They threw up too 
many roadblocks for businesses to access futures markets. 
Ultimately, an overly rigid interpretation of bona fide hedging 
stood in the way of finalizing a position limits rule.
    Finally, prior proposals set limits that were both too low and 
too rigid. Those limits did not balance the need for liquidity and 
price discovery against the risks of excessive speculation, which is 
the real mandate of Congress. The proposed limits were frozen in 
time, not budging from limits last updated as far back as 1999.

Getting Back on the Right Path

    Recognizing the missteps of the past yields a path to success. 
Unlike prior position limits proposals that garnered a library of 
negative comment letters, this proposal is overwhelmingly supported 
by businesses and trade groups across many facets of our real 
economy.
    There are several differences that will let today's rule succeed 
where others failed.
    First, the rule recognizes the limits of limits. Position limits 
are one method to combat corners and squeezes, but that does not 
mean they are the singular tool that should always be deployed. 
Position limits are like a medicine that can help cure a disease, 
but also carries potential side effects. That is why Congress told 
us to use them only when ``necessary.'' The necessity finding is 
like a doctor's prescription--someone needs to evaluate the risks of 
the disease against the side effects.
    In addition, the rule takes into account market participants' 
needs. As I have always said, position limits is the rare case where 
the exception is as important as the rule. Today's rule lays out a 
robust set of enumerated bona fide hedge exemptions to ensure that 
participants in the physical commodity markets can access the 
futures markets. Building on the proposal, we have added clarity 
around unfixed price transactions and storage.
    The rule also acknowledges the different ways people access the 
markets. We have streamlined the process for pass-through swap 
exemptions, making it easier for dealers to provide liquidity to 
commercial users in the swaps market. And the rule clarifies that 
someone can take a position during the Commission's 10-day review 
period of an exchange-granted, non-enumerated exemption. In short, 
we have built a robust set of enumerated exemptions and a workable 
non-enumerated exemption process.
    The rule also strikes a balance with respect to the limits 
themselves. The January proposal included significant increases to 
spot and non-spot limits for the legacy agricultural products. Many 
commenters were concerned about these increases, particularly for 
non-spot limits.
    The level of the non-spot limits in the final rule are a 
function of the significant growth in the market and the long delay 
in making adjustments. Open interest in many of the legacy grains 
contracts has doubled or tripled since we last updated position 
limits, reflecting the usefulness of these contracts as a benchmark 
for cash market transactions and faith in CFTC-regulated markets. 
The non-spot limits we are adopting are the same percentage of 
today's open interest as the 2011 limits were compared to open 
interest back then. Our markets have grown tremendously, and we 
cannot expect them to be subject to the same limits they were 10 
years ago.
    It is important to remember that Federal position limits are a 
ceiling, not a floor.

[[Page 3484]]

Exchanges have their own limits, which can be no higher than what we 
specify. And exchanges can calibrate those limits quickly to account 
for issues with deliverable supply or other cash market issues. As 
we have seen play out over the past decade, the CFTC has a difficult 
time adjusting position limits. Therefore, exchange-set limits are a 
way to fine tune position limits on a particular market within the 
outer bounds of the Federal limits. Similar to the process for 
granting non-enumerated exemptions, we are leveraging the knowledge 
of the exchanges as well as their ability to act more nimbly to 
respond to market needs.

Arriving at the Destination

    Some of my colleagues may see these features of the final rule 
as a flaw. While there are significant departures from prior 
proposals, after four failed attempts, that departure is exactly 
what we need. The flexibility in the necessity finding, the 
exemption process, and the adjusted limits are what make this rule 
workable. Otherwise, we are just repeating past mistakes and hoping 
for a different result--the very definition of insanity.
    So let me conclude by saying that we have come a long way. Today 
we have reached the end of an arduous journey. We have learned from 
our mistakes and adjusted our approach. We have balanced the 
interests of all the participants in these markets--some of which 
are in diametric opposition to one another. Most importantly, we 
have crafted a workable and flexible system. The rule sets hard 
limits, but leverages the flexibility of exchanges to adjust for a 
particular market. The rule recognizes the variety of ways that 
businesses use these markets to hedge their risks, while recognizing 
how vital it is to have a method to address the unknown unknowns. 
And the rule acknowledges that position limits are not always 
necessary and sets out a solid methodology for determining when they 
are.
    I again want to thank the CFTC staff and my fellow Commissioners 
for their tireless commitment to finishing this journey. I look 
forward to voting in favor of this final rule.

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I am pleased to support the agency's revitalized approach to 
position limits. The rulemaking finalized today follows four 
proposals since the passage of the Dodd-Frank Act \1\ and is, by 
far, the strongest of them all. I commend Chairman Tarbert for his 
leadership in completing this rulemaking. I am very pleased that 
today's final rule echoes the key policy points I outlined in my 
remarks before the 2018 Commodity Markets Council State of the 
Industry Conference.\2\ The new position limits regime will provide 
commercial market participants with sufficient flexibility to hedge 
their risks efficiently and will promote liquidity and price 
discovery.
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    \1\ 76 FR 4752 (Jan. 26, 2011); 78 FR 75680 (Dec. 12, 2013); 81 
FR 38458 (June 13, 2016) (``supplemental proposal''); and 81 FR 
96704 (Dec. 30, 2016). The Commodity Exchange Act (CEA) addresses 
position limits in Section (Sec.) 4a (7 U.S.C. 6a).
    \2\ Remarks of Commissioner Brian Quintenz before the CMC State 
of the Industry 2018 Conference, https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz5.
---------------------------------------------------------------------------

    Today's rule promotes flexibility, certainty, and market 
integrity for end-users--farmers, ranchers, energy producers, 
transporters, processors, manufacturers, merchandisers, and all who 
use physically-settled derivatives to risk manage their exposure to 
physical goods. The rule includes an expansive list of enumerated 
and self-effectuating bona fide hedge exemptions and spread 
exemptions, and a streamlined, exchange-centered process to 
adjudicate non-enumerated bona fide hedge exemption requests. I am 
pleased that the rule seriously considered the usability of hedging 
exemptions, and I thank Commissioner Stump for her leadership on 
that point.
    In contrast to the Commission's failed proposed rulemakings in 
2011, 2013, and 2016, this rule is the most true to the CEA in many 
significant respects. It requires, as has long been the Commission's 
practice, a necessity finding before imposing limits. It includes 
economically equivalent swaps. And, perhaps most importantly, it 
balances the interests among promoting liquidity, deterring 
manipulation, and ensuring the price discovery function of the 
underlying market is not disrupted.\3\ The confluence of these 
factors occurs most acutely in the spot month for physically-settled 
contracts. In the spot month, price convergence is exceptionally 
vulnerable to potential manipulation or disruption due to outsized 
positions. By establishing position limits for non-legacy contracts 
only in the spot month, the rule elegantly balances the 
countervailing policy interests enumerated in the statute.
---------------------------------------------------------------------------

    \3\ Sec. 4a(a)(3).
---------------------------------------------------------------------------

Responding to the Public's Concerns

    Through staff's serious consideration of over 70 public 
comments, the final rule significantly improves on what appears in 
the proposal. Examples of modifications based on public comment 
include considerations of gross hedging, price risk, the pass-
through swap exemption, spot month limits for natural gas and 
cotton, a special non-spot single-month limit for cotton, spread 
exemptions, and the Commission's review of exchange-granted non-
enumerated hedge exemptions.
    With regard to enumerated bona fide hedges, the final rule took 
into account several suggestions from commenters. The proposed 
enumerated hedges were already a significant improvement upon 
previously proposed hedge exemptions (for example, eliminating a 
mandatory ``five-day rule'' \4\ and no longer conditioning cross-
commodity hedging on a needlessly rigid quantitative test). Now, 
under the final rule, the enumerated hedges will be even more 
practical. For example, the final rule makes clear that a hedger 
with only an unfixed-price cash commodity sale or purchase, but not 
an offsetting pair, may rely on one of the three anticipatory 
hedges, provided that the other elements of such hedge are also met, 
even though the hedger is ineligible to elect the hedge for a pair 
of unfixed-price sale and purchase transactions.\5\ The final rule 
also makes clear that the new anticipatory merchandising hedge can 
be used both by integrated energy firms and by firms that limit 
their business to merchandising. Furthermore, the final rule permits 
the anticipatory merchandising hedge to now be used in connection 
with storage hedges.
---------------------------------------------------------------------------

    \4\ Previous versions of enumerated hedges had required a hedger 
to eliminate positions in excess of position limits during the last 
five days of the spot month.
    \5\ Preamble discussion of Exemptions from Federal Position 
Limits. The hedge for a pair of offsetting unfixed-price 
transactions is described in Appendix B, paragraph (a)(3), and the 
anticipatory hedges are described in Appendix B, paragraphs (a)(4)-
(6).
---------------------------------------------------------------------------

    I support the final rule's determination to delay by two years 
two important elements that will require significant changes in the 
marketplace: The imposition of position limits on swaps economically 
equivalent to the referenced futures contracts and the required 
unwinding of previously elected risk management exemptions.\6\ It is 
prudent to allow for additional time for financial entities to 
adjust to these significant new policies.
---------------------------------------------------------------------------

    \6\ Whereas the general compliance date for the final rule is 
January 1, 2022, the compliance date for these two items is January 
1, 2023.
---------------------------------------------------------------------------

Necessity Finding

    Today's rule correctly premises new limits on a finding that 
they are necessary to diminish, eliminate, or prevent the burden on 
interstate commerce from extraordinary price movements caused by 
excessive speculation (``necessity finding'') in specific contracts, 
as Congress has long required in the CEA and its legislative 
precursors since 1936.\7\ I am pleased that the rule complies with 
the District Court's ruling in the ISDA-position limits litigation: 
That the Commission must decide whether Section 4a of the CEA 
mandates the CFTC set new limits or only permits the CFTC to set 
such limits pursuant to a necessity finding.\8\ As the District 
Court noted, ``the Dodd-Frank amendments do not constitute a clear 
and unambiguous mandate to set position limits.'' \9\ I agree with 
the rule's determination that, when read together, paragraphs (1) 
and (2) of Section 4a demand a necessity finding.
---------------------------------------------------------------------------

    \7\ Sec. 4a(1).
    \8\ ISDA et al. v. CFTC, 887 F. Supp. 2d 259, 278 and 283-84 
(D.D.C. Sept. 28, 2012).
    \9\ Id. at 280.
---------------------------------------------------------------------------

    Section 4a(a)(2)(A) states that the Commission shall establish 
limits ``in accordance with the standards set forth in paragraph (1) 
of this subsection.'' \10\ Paragraph (1) establishes the 
Commission's

[[Page 3485]]

authority to, ``proclaim and fix such limits on the amounts of 
trading . . . as the Commission finds are necessary to diminish, 
eliminate or prevent [the] burden'' on interstate commerce caused by 
unreasonable or unwarranted price moves associated with excessive 
speculation. This language dates back almost verbatim to legislation 
passed in 1936, in which Congress directed the CFTC's precursor to 
make a necessity finding before imposing position limits. The 
Congressional report accompanying the CEA from the 74th Congress 
includes the following directive, ``[Section 4a of the CEA] gives 
the Commodity Exchange Commission the power, after due notice and 
opportunity for hearing and a finding of a burden on interstate 
commerce caused by such speculation, to fix and proclaim limits on 
futures trading . . .'' \11\ In its ISDA opinion, the District Court 
noted the following: ``This text clearly indicated that Congress 
intended for the CFTC to make a `finding of a burden on interstate 
commerce caused by such speculation' prior to enacting position 
limits.'' \12\
---------------------------------------------------------------------------

    \10\ Sec. 4a(a)(2)(A) (``In accordance with the standards set 
forth in paragraph (1) of this subsection and consistent with the 
good faith exception cited in subsection (b)(2), with respect to 
physical commodities other than excluded commodities as defined by 
the Commission, the Commission shall by rule, regulation, or order 
establish limits on the amount of positions, as appropriate, other 
than bona fide hedge positions, that may be held by any person with 
respect to contracts of sale for future delivery or with respect to 
options on the contracts or commodities traded on or subject to the 
rules of a designated contract market.'')
    \11\ H.R. Rep. 74-421, at 5 (1935).
    \12\ 887 F. Supp. 2d 259, 269 (fn 4).
---------------------------------------------------------------------------

    I support the rule's view that the most natural reading of 
Section 4a(a)(2)(A)'s reference to paragraph (1)'s ``standards'' is 
that it logically includes the ``necessity'' standard. Paragraph 
(1)'s requirement to make a necessity finding, along with the 
aggregation requirement, provide substantive guidance to the 
Commission about when and how position limits should be implemented.
    If Congress intended to mandate that the Commission impose 
position limits on all physical commodity derivatives, there is 
little reason it would have referred to paragraph (1) and the 
Commission's long established practice of necessity findings. 
Instead, Congress intended to focus the Commission's attention on 
whether position limits should be considered for a broader set of 
contracts than the legacy agricultural contracts, but did not 
mandate those limits be imposed.

Setting New Limits ``As Appropriate''

    The rule determines that position limits are necessary to 
diminish, eliminate, or prevent the burden on interstate commerce 
posed by unreasonable or unwarranted prices moves that are 
attributable to excessive speculation in 25 referenced commodity 
markets that each play a crucial role in the U.S. economy. 
Conversely, the rule also finds that the contracts on which the 
referenced limits are placed are the only contracts which met the 
necessity finding. The rule explicitly states that no other 
contracts met this test.
    I am aware that there is significant skepticism in the 
marketplace and among academics as to whether position limits are an 
appropriate tool to guard against extraordinary price movements 
caused by extraordinarily large position size. Some argue there is 
no evidence that excessive speculation currently exists in U.S. 
derivatives markets.\13\ Others believe that large and sudden price 
fluctuations are not caused by hyper-speculation, but rather by 
market participants' interpretations of basic supply and demand 
fundamentals.\14\ In contrast, still others believe that outsized 
speculative positions, however defined, may aggravate price 
volatility, leading to price run-ups or declines that are not fully 
supported by market fundamentals.\15\
---------------------------------------------------------------------------

    \13\ Testimony of Erik Haas (Director, Market Regulation, ICE 
Futures U.S.) before the CFTC at 70 (Feb. 26, 2015) (``We point out 
the makeup of these markets, primarily to show that any regulations 
aimed at excessive speculation is a solution to a nonexistent 
problem in these contracts.''), available at: https://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript022615.pdf.
    \14\ BAHATTIN B[Uuml]Y[Uuml]K[Scedil]AHIN & JEFFREY HARRIS, 
CFTC, THE ROLE OF SPECULATORS IN THE CRUDE OIL FUTURES MARKET 1, 16-
19 (2009) (``Our results suggest that price changes leads the net 
position and net position changes of speculators and commodity swap 
dealers, with little or no feedback in the reverse direction. This 
uni-directional causality suggests that traditional speculators as 
well as commodity swap dealers are generally trend followers.''), 
available at https://www.cftc.gov/idc/groups/public/@swaps/documents/file/plstudy_19_cftc.pdf; Testimony of Philip K. Verleger, Jr. 
before the CFTC, Aug. 5, 2009 (``The increase in crude prices 
between 2007 and 2008 was caused by the incompatibility of 
environmental regulations with the then-current global crude supply. 
Speculation had nothing to do with the price rise.''), available at: 
https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/hearing080509_verleger.pdf.
    \15\ For a discussion of studies discussing supply and demand 
fundamentals and the role of speculation, see 81 FR 96704, 96727 
(Dec. 30, 2016). See, e.g., Hamilton, Causes and Consequences of the 
Oil Shock of 2007-2008, Brookings Paper on Economic Activity (2009); 
Chevallier, Price Relationships in Crude oil Futures: New Evidence 
from CFTC Disaggregated Data, Environmental Economics and Policy 
Studies (2012).
---------------------------------------------------------------------------

    In my opinion, one thing is predominately clear: position limits 
should not be viewed as a means to counteract long-term directional 
price moves. The CFTC is not a price setting agency and we should 
not impede the market from reflecting long term supply and demand 
fundamentals. A case in point is palladium, the physically-settled 
contract which has seen the largest sustained price increase 
recently,\16\ and which has also seen its exchange-set position 
limit decline four times since 2014 to what is now the smallest 
limit of any contract in the referenced contract set.\17\ 
Nevertheless, between the start of 2018 and the end of 2019, 
palladium futures prices rose 76%.\18\ Taking these conflicting 
views and facts into account, it is clear the Commission correctly 
stated in its 2013 proposal, ``there is a demonstrable lack of 
consensus in the [academic] studies'' as to the effectiveness of 
position limits.\19\
---------------------------------------------------------------------------

    \16\ Platinum, gold slide as dollar soars; palladium eases off 
record, Reuters (Sept. 30, 2019), available at: https://www.reuters.com/article/global-precious/precious-platinum-gold-slide-as-dollar-soars-palladium-eases-off-record-idUSL3N26L3UV.
    \17\ Between 2014 and 2017, the CME Group lowered the spot month 
position limit in the contract four times, from 650, to 500, to 400, 
to 100, to the current limit of 50 (NYMEX regulation 40.6(a) 
certifications, filed with the CFTC, 14-463 (Oct. 31, 2014), 15-145 
(Apr. 14, 2015), 15-377 (Aug. 27, 2015), and 17-227 (June 6, 2017)), 
available at: https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ProductTermsandConditions.
    \18\ Palladium futures were at $1,087.35 on Jan. 2, 2018 and at 
$1,909.30 on Dec. 31, 2019. Historical prices available at: https://futures.tradingcharts.com/historical/PA_/2009/0/continuous.html.
    \19\ 78 FR 75694 (Dec. 12, 2013).
---------------------------------------------------------------------------

    With that healthy dose of skepticism, and in strict accordance 
with the balance of factors which Dodd Frank added to the CEA for 
the Commission to consider, I think the rule appropriately focuses 
on the time period and contract type where position limits can have 
the most positive, and the least negative, impact--the spot month of 
physically settled contracts--while also calibrating those limits to 
function as just one of many tools in the Commission's regulatory 
toolbox that can be used to promote credible, well-functioning 
derivatives and cash commodity markets.
    Because of the significance of these 25 core referenced futures 
contracts to the underlying cash markets, the level of liquidity in 
the contracts, as well as the importance of these cash markets to 
the national economy, I think it is appropriate for the Commission 
to protect the physical delivery process and promote convergence in 
these critical commodity markets. Further, the limits issued today 
are higher than in the past, notably because the rule utilizes 
current estimates of deliverable supply--numbers which haven't been 
updated since 1999.\20\
---------------------------------------------------------------------------

    \20\ 64 FR 24038 (May 5, 1999).
---------------------------------------------------------------------------

Taking End-Users Into Account

    Perhaps more than any other area of the CFTC's regulations, 
position limits directly affect the participants in America's real 
economy: Farmers, ranchers, energy producers, manufacturers, 
merchandisers, transporters, and other commercial end-users that use 
the derivatives market as a risk management tool to support their 
businesses. I am pleased that today's rule takes into account many 
of the serious concerns that end-users voiced in response to this 
rulemaking's proposal, and in response to the CFTC's previous four 
unsuccessful position limits proposals.
    Importantly, and in response to many comments, this rule, for 
the first time, expands the possibility for enterprise-wide 
hedging,\21\ (including additional clarification provided in the 
proposal in response to comments), establishes an enumerated 
anticipated merchandising exemption,\22\ eliminates the ``five-day 
rule'' for enumerated hedges,\23\ and no longer requires the filing 
of certain cash market information with the Commission that the CFTC 
can obtain from exchanges.\24\ Regarding enterprise-wide hedging--
otherwise known as ``gross hedging''--the rule will provide an 
energy company, for example, with increased flexibility to hedge 
different units of its business separately if those units face 
different economic realities. The final rule eliminates the 
requirement that exchanges document their justifications when 
allowing

[[Page 3486]]

gross hedging; clarifies that market participants are not required 
to develop written policies or procedures that set forth when gross 
versus net hedging is appropriate; and clarifies that gross hedging 
is permissible for both enumerated and non-enumerated hedges.\25\
---------------------------------------------------------------------------

    \21\ Appendix B, paragraph (a).
    \22\ Appendix A, paragraph (a)(6).
    \23\ Preamble discussion of Exemptions from Federal Position 
Limits.
    \24\ Elimination of CFTC Form 204.
    \25\ Preamble discussion, Execution Summary, section 6. Legal 
Standards for Exemptions from Position Limits.
---------------------------------------------------------------------------

    With respect to cross-commodity hedging, today's rule completely 
rejects the arbitrary, unworkable, ill-informed, and frankly, 
ludicrous ``quantitative test'' from the 2013 proposal.\26\ That 
test would have required a correlation of at least 0.80 or greater 
in the spot markets prices of the two commodities for a time period 
of at least 36 months in order to qualify as a cross-hedge.\27\ 
Under this test, longstanding hedging practices in the electric 
power generation and transmission markets would have been 
prohibited. Today's rule not only shuns this Government-Knows-Best 
approach, it also establishes new flexibility for the cross-
commodity hedging exemption, allowing it to be used in conjunction 
with other enumerated hedges, such as hedges of anticipated 
merchandising transactions.\28\ For example, an energy marketer 
anticipating buying and selling jet fuel to supply airports will be 
eligible for a hedge exemption in connection with trading heating 
oil futures, a commonly-used cross-commodity hedge for jet fuel.
---------------------------------------------------------------------------

    \26\ 78 FR 75717 (Dec. 12, 2013).
    \27\ Id.
    \28\ Appendix A, paragraph (a)(11).
---------------------------------------------------------------------------

Bona Fide Hedges and Coordination With Exchanges

    For those market participants who employ non-enumerated bona 
fide hedging practices in the marketplace, the final rule creates a 
streamlined, exchange-focused process to approve those requests for 
purposes of both exchange-set and Federal limits. I am pleased that 
commenters were generally supportive of the proposed process. As the 
marketplaces for the core referenced futures contracts addressed by 
the proposal, the DCMs have significant experience in, and 
responsibility towards, a workable position limits regime. CEA core 
principles require DCMs and swap execution facilities to set 
position limits, or position accountability levels, for the 
contracts that they list in order to reduce the threat of market 
manipulation.\29\ DCMs have long administered position limits in 
futures contracts for which the CFTC has not set limits, including 
in certain agricultural, energy, and metals markets. In addition, 
the exchanges have been strong enforcers of their own rules: During 
2018 and 2019, CME Group and ICE Futures US concluded 32 enforcement 
matters regarding position limits.
---------------------------------------------------------------------------

    \29\ DCM Core Principle 5 (sec. 5 of the CEA, 7 U.S.C. 7) 
(implemented by CFTC regulation 38.300) and SEF Core Principle 6 
(sec. 5h of the CEA, 7 U.S.C. 7b-3) (implemented by CFTC regulation 
37.600).
---------------------------------------------------------------------------

    As part of their stewardship of their own position limits 
regimes, DCMs have long granted bona fide hedging exemptions in 
those markets where there are no Federal limits. Today's final rule 
provides what I believe is a workable framework to utilize 
exchanges' long standing expertise in granting exemptions that are 
not enumerated by CFTC rules.\30\ This rule also recognizes that the 
CEA does not provide the Commission with free rein to delegate all 
of the authorities granted to it under the statute.\31\ The 
Commission itself, through a majority vote of the five 
Commissioners, retains the ability to reject an exchange-granted 
non-enumerated hedge request within 10 days of the exchange's 
approval.\32\ The Commission has successfully and responsibly used a 
similar process for both new contract listings as well as exchange 
rule filings, and I am pleased to see the final rule expand that 
approach to non-enumerated hedge exemption requests that will limit 
the uncertainty for bone fide commercial market participants.
---------------------------------------------------------------------------

    \30\ Regulation 150.9.
    \31\ Preamble discussion of regulation 150.9, including 
references to cases pointing out the extent to which an agency can 
delegate to persons outside of the agency.
    \32\ Regulation 150.9(e)(6).
---------------------------------------------------------------------------

Limits on Swaps

    The CEA requires the Commission to consider limits not only on 
exchange-traded futures and options, but also on ``economically 
equivalent'' swaps.\33\ Today's final rule provides the market with 
far greater certainty on the universe of such swaps than the 
previous proposed rulemakings. Prior proposals failed to 
sufficiently explain what constituted an ``economically equivalent 
swap,'' thereby ensuring that compliance with position limits was 
essentially unworkable, given real-time aggregation requirements and 
ambiguity over in-scope contracts. In stark contrast, today's rule 
narrows the scope of ``economically equivalent'' swaps to those with 
material contractual specifications, terms, and conditions that are 
identical to exchange-traded contracts.\34\ For example, in order 
for a swap to be considered ``economically equivalent'' to a 
physically-settled core referenced futures contract, that swap would 
also have to be physically-settled, because settlement type is 
considered a material contractual term. I believe the narrowly-
tailored definition included in today's rule will provide market 
participants with clarity over those contracts subject to position 
limits. I think it is prudent that the final rule took commenters' 
concerns about updating compliance systems into account by delaying 
for an additional year, beyond the general compliance date of 
January 1, 2022, that is until January 1, 2023, the imposition of 
position limits on economically equivalent swaps.
---------------------------------------------------------------------------

    \33\ Sec. 4a(5).
    \34\ Regulation 150.1.
---------------------------------------------------------------------------

Conclusion

    During my confirmation hearing in front of the Senate Committee 
on Agriculture, Forestry and Nutrition on July 27, 2017, I was asked 
to directly commit to finalizing a position limits rule. My response 
was brief, but unquestionable: ``Yes, I commit to support finalizing 
a position limits rule.'' Making such a commitment to a committee of 
the U.S. Congress in sworn testimony is something I take very 
seriously, second only to taking my oath to defend the Constitution 
of the United States. With today's vote, I am very pleased to have 
made good on that commitment three years in the making and am even 
more proud of the product with which I was able to fulfill it.

Appendix 4--Dissenting Statement of Commissioner Rostin Behnam 
Introduction

    The last time we gathered as a Commission to discuss position 
limits I used some of my time to speak a bit about the award winning 
movie, Ford v. Ferrari.\1\ At that point, we were nearing the airing 
of the 92nd Academy Awards and this action-packed drama had earned 
four nominations--not to mention the distinction of being one of the 
few films I actually saw in a theater. For those of you who have not 
found it in one of your quarantine movie queues, Ford v. Ferrari 
tells the true story of American car designer Carroll Shelby and 
British-born driver Ken Miles who built a race car for Ford Motor 
Company--the GT40--and competed with Enzo Ferrari's dominating, 
iconic red racing cars at the 1966 24 Hours of Le Mans.\2\ I used 
the film and racing metaphors throughout my speaking and written 
statements to highlight serious concerns that the proposed 
amendments to the CFTC rules addressing position limits (the 
``Proposal'') signified yet one more instance where the Commission 
seemed to be comfortable with deferring core, congressionally 
mandated duties to others and calling it a victory.\3\
---------------------------------------------------------------------------

    \1\ Statement of Dissent by Commissioner Rostin Behnam Regarding 
Position Limits for Derivatives; Proposed Rule, https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement013020 (the 
``Dissent'').
    \2\ Ford v Ferrari, Fox Movies, https://www.foxmovies.com/movies/ford-v-ferrari (Last visited Oct. 13, 2020).
    \3\ Dissent.
---------------------------------------------------------------------------

    We are here today to finalize the Proposal.\4\ In just short of 
nine months, we have come to terms with life during a global 
pandemic complete with economic turmoil and pockets of historic 
market volatility. Amid the mere 60-day open comment period 
following the Proposal's publication in the Federal Register 
(graciously extended by 16 days to May 15th in light of the pandemic 
\5\), on April 20th, the price of the West Texas Intermediate crude 
oil futures contract (``WTI contract''), a key benchmark in the 
energy and financial markets, experienced an unprecedented collapse 
one day prior to the last day of trading and expiration for May 
delivery.\6\ Defying market mechanics, the

[[Page 3487]]

price of the contract fell from $17.73 per barrel at market open, to 
a closing settlement price of negative $37.63--with the price 
dropping approximately $40 in the last 20 minutes of trading.\7\ 
And, while we are still in recovery, with great fanfare after almost 
10 years, the Commission is going to establish the position limits 
regime required under the Dodd-Frank Act. I am reminded again of Ken 
who, at the 1966 24 Hours of Le Mans, went against his gut, giving 
way and leaving behind a milestone in car racing that to this day 
remains elusive.
---------------------------------------------------------------------------

    \4\ See Position Limits for Derivatives, 85 FR 11596 (Feb. 27, 
2020).
    \5\ See Press Release Number 8146-20, CFTC, CFTC Extends Certain 
Comment Periods in Response to COVID-19 (Apr. 10, 2020), https://www.cftc.gov/PressRoom/PressReleases/8146-20; Extension of Currently 
Open Comment Periods for Rulemakings in Response to the COVID-19 
Pandemic, 85 FR 22690, 22691 (Apr. 23, 2020).
    \6\ See Statement of Commissioner Dan M. Berkovitz on Recent 
Trading in the WTI Futures Contract before the Energy and 
Environmental Markets Advisory Committee Meeting (May 7, 2020), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement050720.
    \7\ See Bloomberg News, The 20 Minutes that Broke the U.S. Oil 
Market, Bloomberg (Apr. 25, 2020), https://www.bloomberg.com/news/articles/2020-04-25/the-20-minutes-that-broke-the-u-s-oil-market?sref=DzeLiNol.
---------------------------------------------------------------------------

    If you have not seen the movie, this is a spoiler alert: Ken did 
not win Le Mans in '66. While he was one and a half laps ahead of 
two other GT40s, he was given orders to slow down so that the three 
Fords in the lead would cross the finish line in a dead heat 
formation. Ken lost his well-deserved win because the 24 Hours of Le 
Mans awards the victory to the car that covers the greatest distance 
in 24 hours. In the event of a tie, the rules provided that the car 
that had started farther down the grid had traveled the greater 
distance. Ken's GT 40 had started in the grid roughly 60 feet ahead 
of the GT40 driven by Bruce McLaren and Chris Amon, who were the 
declared winners.\8\
---------------------------------------------------------------------------

    \8\ Press Release, Ford Division News Bureau, For Immediate 
Release at 8 (July 5, 1966), made available in PDF at Wikipedia, the 
Free Encyclopedia, 1966 24 Hours of Le Mans, at https://en.wikipedia.org/wiki/1966_24_Hours_of_Le_Mans.
---------------------------------------------------------------------------

    In the film, Ken seems to accept his loss with quiet dignity. 
However, in reality he was fully aware that in many respects, he had 
been robbed. From what I've read, Ken likely articulated his 
feelings a bit more colorfully.\9\
---------------------------------------------------------------------------

    \9\ Matthew Phelan, What's Fact and What's Fiction in Ford v. 
Ferrari, Slate (Nov. 18, 2019), https://slate.com/culture/2019/11/ford-v-ferrari-fact-vs-fiction-le-mans-ken-miles.html.
---------------------------------------------------------------------------

    The point is that bringing something across the finish line 
doesn't always equate to a success. As detailed in my questions 
today, I believe that by going against our Congressional mandate and 
clear statutory intent by overly deferring to the exchanges, we have 
relinquished a claim to victory in this final position limits rule 
which in many ways has itself felt like the CFTC's version of the 24 
hours of Le Mans. Therefore, I will go with my gut and not be part 
of the formation in supporting this final rule.

A Long Road, But a Fast Finish

    It has been nine years since the Commission first set out to 
establish the position limits regime required by amendments to 
section 4a of the Commodity Exchange Act (the ``Act'' or ``CEA'') 
\10\ under the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010.\11\ While today's final rule purports to respect 
Congressional intent and the purpose and language of CEA section 4a, 
in reality, it pushes the bounds of reasonable interpretation by 
overly deferring to the exchanges \12\ and allowing them to take the 
lead in administering a position limits regime.
---------------------------------------------------------------------------

    \10\ See Position Limits for Derivatives, 76 FR 4752 (proposed 
Jan. 26, 2011) (the ``2011 Proposal'').
    \11\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203 sec. 737, 124 Stat. 1376, 1722-25 (2010) 
(the ``Dodd-Frank Act'').
    \12\ Unless otherwise indicated, the use of the term 
``exchanges'' throughout this statement refers to designated 
contract markets (``DCMs'') and swap execution facilities 
(``SEFs'').
---------------------------------------------------------------------------

    In passing the Dodd-Frank Act, Congress understood that for the 
derivatives markets in physical commodities to perform optimally, 
there needed to be limits on the amount of control exerted by a 
single person (or persons acting in agreement). In fact, Congress 
has understood this need since at least 1936, when it first 
authorized the Commission's predecessor to impose limits on 
speculative positions in order to prevent the harms caused by 
excessive speculation. In tasking the Commission with establishing 
limits and the framework around their operation, Congress was aware 
of our relationship with the exchanges, but nevertheless opted for 
our experience and our expertise to meet the policy objectives of 
the Act.
    Last January, as the Commission voted on the Proposal that is 
being finalized today, I warned that we seemed to be pushing to go 
faster and just get to the finish line, making real-time adjustments 
without regard to even trying for that ``perfect lap.'' \13\ Just 
nine months later, nothing has changed. If anything, we seem to be 
further prioritizing just crossing the finish line over achieving a 
rule that actually follows Congressional intent and its first order 
priority: Protecting market participants from excessive speculation.
---------------------------------------------------------------------------

    \13\ Dissent.
---------------------------------------------------------------------------

Letting the Exchanges Make the Call

    As I argued in regard to the proposal, my principal disagreement 
is with the Commission's determination to in effect disregard the 
tenets supporting the statutorily created parallel Federal and 
exchange-set position limit regime, and take a back seat when it 
comes to administration and oversight.\14\ Like Ken Miles, the 
Commission is relinquishing a rightful lead in an act of deference. 
In doing so, the Commission claims victory for recognizing that the 
exchanges are better positioned in terms of resources, information, 
knowledge, and agility, and therefore ought to take the wheel. While 
this may seem like the logical move, it ignores that even if we 
operate as a team, our incentives and interests are not fully 
aligned. Based on consideration of the Commission's mission, and 
Congressional intent as evinced in the Dodd-Frank Act amendments to 
CEA section 4a and elsewhere in the Act, I continue to believe that 
(1) the Commission is required to establish position limits based on 
its reasoned and expert judgment within the parameters of the Act; 
(2) the Commission has not provided a rational basis for its 
determination not to establish Federal limits outside of the spot 
month for referenced contracts based on commodities other than the 
nine legacy agricultural commodities; and (3) the Commission's 
seemingly unlimited flexibility in deciding to (a) significantly 
broaden the bona fide hedging definition, (b) codify an expanded 
list of self-effectuating enumerated bona fide hedges, and (c) 
provide for exchange recognition of non-enumerated bona fide hedge 
exemptions with respect to Federal limits, is both inexplicably 
complicated to parse and inconsistent with Congressional intent.
---------------------------------------------------------------------------

    \14\ Id.
---------------------------------------------------------------------------

    Not only does the final version of the rule fail to address 
these deficiencies in the proposal, it actually goes and makes many 
of these issues worse.

Ignoring a Mandate

    Like the proposal, this final rule goes to great lengths to 
reconcile whether CEA section 4a(a)(2)(A) requires the Commission to 
make an antecedent necessity finding before establishing any 
position limit,\15\ with the implication that if a necessity finding 
is required, then the Commission could rationalize imposing no 
limits at all. Looking back at the record, what is necessary is that 
the Commission complies with the mandate in the Dodd-Frank Act.\16\ 
In the 2011 Proposal, the Commission provided a review of CEA 
section 4a(a)--interpreting the various provisions, giving effect to 
each paragraph, acknowledging the Commission's own informational and 
experiential limitations regarding the swaps markets at that time, 
and focusing on the Commission's primary mission of fostering fair, 
open and efficient functioning of the commodity derivatives 
markets.\17\ Of note, ``Critical to fulfilling this statutory 
mandate,'' the Commission pronounced, ``is protecting market users 
and the public from undue burdens that may result from `excessive 
speculation.' '' \18\ Federal position limits, as predetermined by 
Congress, are most certainly the only means towards addressing the 
burdens of excessive speculation when such limits must address a 
``proliferation of economically equivalent instruments trading in 
multiple trading venues.'' \19\ Exchange-set position limits or 
accountability levels simply cannot meet the mandate.
---------------------------------------------------------------------------

    \15\ See Final Rule at III.
    \16\ The Commission's analysis in support of its denial of a 
mandate misconstrues form over substance and assumes the answer it 
is looking for. The Commission seems to suggest that it is free to 
ignore a Congressional mandate if it determines that Congress is 
wrong about the underlying policy. See Final Rule at III.A.
    \17\ 76 FR at 4752-4754.
    \18\ Id. at 4753.
    \19\ Id. at 4754-4755.
---------------------------------------------------------------------------

    In exercising its authority, the Commission may evaluate whether 
exchange-set position limits, accountability provisions, or other 
tools for contracts listed on such exchanges are currently in place 
to protect against manipulation, congestion, and price 
distortions.\20\ Such an evaluation--while permissible--is just one 
factor for consideration. The existence of exchange-set limits or 
accountability levels, on their own, can neither predetermine 
deference nor be justified absent substantial consideration. As I 
argued in my dissenting statement regarding

[[Page 3488]]

the Proposal, the authority and jurisdiction of individual exchanges 
are necessarily different than that of the Commission. They do not 
always have congruent interests to the Commission in monitoring 
instruments that do not trade on or subject to the rules of their 
particular platform or the market participants that trade them. They 
do not have the attendant authority to determine key issues such as 
whether a swap performs or affects a significant price discovery 
function, or what instruments fit into the universe of economically 
equivalent swaps. They are not permitted to define bona fide hedging 
transactions or grant exemptions for purposes of Federal position 
limits. It is therefore clear that CEA section 4a, as amended by the 
Dodd-Frank Act ``warrants extension of Commission-set position 
limits beyond agricultural products to metals and energy 
commodities.'' \21\
---------------------------------------------------------------------------

    \20\ See 76 FR at 4755.
    \21\ Id.
---------------------------------------------------------------------------

``If it ain't broke, don't fix it''

    In spite of all of this--the foregoing mandate; the clear 
Congressional intent in CEA section 4a(a)(3)(A); and the 
Commission's real experience and expertise (including its unique 
data repository)--the Commission's final rule only maintains Federal 
non-spot month limits for the nine legacy agricultural contracts 
(with questionably appropriate modifications), ``because the 
Commission has observed no reason to eliminate them.'' \22\ 
Essentially, the Commission concludes: ``if it ain't broke, don't 
fix it.'' In keeping with this relatively riskless course of action, 
the Commission similarly concludes that Federal non-spot month 
limits are not necessary for the remaining 16 proposed core 
referenced futures contracts identified in the Final Rule.
---------------------------------------------------------------------------

    \22\ Final Rule at II.B.2.i.
---------------------------------------------------------------------------

    In so doing, the Commission ignores Congressional intent. The 
Commission never considers that Congress directed the Commission to 
establish limits--not accountability levels. The Commission's 
observation that exchange-set accountability levels have 
``functioned as-intended'' until this point in time ignores the 
wider purpose and function of aggregate position limits established 
by the Commission, and is shortsighted given the ever expanding 
universe of economically equivalent instruments trading across 
multiple trading venues. As I pointed out in my dissenting statement 
regarding the Proposal, it seems odd to conclude that Congress 
envisioned that its painstaking amendments to CEA section 4a were a 
directive for the Commission to check the box that the current 
system is working perfectly.

Hedging on Bona Fide Hedging

    Today's Final Rule provides for significantly broader bona fide 
hedging opportunities that will be largely self-effectuating, and 
the Commission defers to the exchanges in recognizing non-enumerated 
bona fide hedging. While I support enhancing the cooperation between 
the Commission and the exchanges, the Commission here is cooperating 
by dropping back. The Commission's decision to essentially give up 
primary authority to recognize non-enumerated bona fide hedges seems 
both careless and inconsistent with Congressional intent.
    I raised these concerns last January when we voted on the 
Position Limits Proposal. Unfortunately, rather than retaking the 
lead, the Commission further cedes authority to the exchanges. The 
Proposal provided the Commission with the authority to reject an 
exchange's grant of non-enumerated bona fide hedge recognition, and 
provided a window of ten business days (or two in the case of sudden 
or unforeseen circumstances) for the Commission to make this 
determination. I pointed out in my dissent that this did not give 
the Commission nearly enough time or guidance to properly make a 
determination. In today's Final Rule, the Commission actually 
further reduces its ability to make an independent determination. 
Now, market participants will be able to establish positions based 
upon an exchange's non-enumerated bona fide hedge recognition during 
the Commission's 10-day review period, and the Commission cannot 
determine that the person holding the position has committed a 
position limits violation during the Commission's ongoing review or 
upon issuing its determination. This reduces the Commission's review 
to an ineffectual afterthought.

Trust the Process

    A clear theme in my statements regarding our many rules over the 
last few years is this: Process matters. Sharing our viewpoints with 
the public matters. Following the Administrative Procedure Act,\23\ 
and giving the public an opportunity for meaningful comment on our 
proposals, matters. We are at our best when we involve all five 
Commissioners and our many stakeholders in the process.
---------------------------------------------------------------------------

    \23\ 5 U.S.C. 553(b).
---------------------------------------------------------------------------

    I want to thank the Chairman for consistently providing the 
Commissioners with drafts of proposed and final rules 30 days in 
advance of an open meeting. I believe there have only been two major 
exceptions over the course of our many laps in the last year: The 
position limits proposal, and the position limits final rule. In the 
case of the final rule, we did not receive a full draft until last 
Friday--six days before the open meeting. This simply is not enough 
time for the Commission to engage in a fulsome discussion of the 
merits of the rule, and makes the final rule more or less a fait 
accompli. Perhaps most perplexing is that we did not receive a draft 
of the cost benefit considerations until two weeks ago. This is 
literally a rule where a prior iteration resulted in a court 
challenge--one that the Commission lost.\24\ If ever a rule required 
more consideration by the Commission itself, this would seem to be 
it. Instead, the Commissioners actually had less time to review and 
consider the rule than we normally do.
---------------------------------------------------------------------------

    \24\ Int'l Swaps & Derivatives Ass'n v. U.S. Commodity Futures 
Trading Comm'n, 887 F. Supp. 2d 259 (D.D.C. 2012).
---------------------------------------------------------------------------

    When we focus on just getting to the finish line, and do not 
take the time for meaningful consideration and dialogue, we risk 
failing to take into account everything that we should in our 
rulemakings. Subsequent to the issuance of the Position Limits 
Proposal, there was a major market event resulting from the ongoing 
pandemic that may have important implications for our position 
limits regime. As the NYMEX Light Sweet Crude Oil (CL) contract, 
also known as the WTI contract, neared expiration in April 2020, the 
contract experienced extreme volatility, with the market trading 
below zero for the first time. The Commission received at least 
eight comments that addressed this event; a number of commenters 
noted that the extreme volatility was driven by speculators. The 
speculators, unable to physically deliver upon expiration for 
various reasons, had no choice but to exit the contract at whatever 
price was available. Commission staff continues to review and 
analyze this event, and the rule today recognizes that the analysis 
may impact the rule itself. Today's preamble states: ``The 
Commission will continue to analyze the events of April 20 to 
evaluate whether any changes to the position limits regulations may 
be warranted in light of the circumstances surrounding the 
volatility in the WTI contract.''\25\ This begs the question--if the 
Commission is currently in the midst of this analysis, why not wait 
to finalize position limits until the analysis is complete?
---------------------------------------------------------------------------

    \25\ Final Rule at I.G.
---------------------------------------------------------------------------

Conclusion

    Before concluding, I want to acknowledge and thank the 
Commission staff who worked on the Proposal, today's final rule, and 
every related study, matter, and undertaking to support it for the 
better part of 10 years. You were the design team, the engineers, 
the production team and the pit crew. You kept us on course at a 
pace set by our Chairman, and you have performed at the top of your 
field.
    Back in '66, by holding back, Ken Miles lost the win at Le Mans, 
which denied him the ``Triple Crown'' of endurance racing: The 24 
Hours of Daytona, the 12 Hours of Sebring, and the 24 Hours of Le 
Mans. No driver has won all three races in the same year,\26\ and 
Ken missed out because he was part of a team and Ford had been good 
to him.\27\ He committed and moved forward without the victory that 
should have been his because he was the best driver that day. I am 
committed to vote and move forward, even if it means giving up the 
triple crown of the day. But I will not go against my gut.
---------------------------------------------------------------------------

    \26\ Martin Raffauf, Porsche and the Triple Crown of endurance 
racing, Porsche Road & Race (Dec. 7, 2018), https://www.porscheroadandrace.com/porsche-and-the-triple-crown-of-endurance-racing/.
    \27\ Phelan, supra note 9.
---------------------------------------------------------------------------

Appendix 5--Statement of Commissioner Dawn D. Stump Overview

    With all that has transpired in our country and in our lives 
this year, it feels like ages ago that we gathered together in 
person to consider proposing amendments to update the Commission's 
rules regarding position limits back at the end of January. At the 
time,

[[Page 3489]]

I said that there were three guideposts by which I would evaluate 
that proposal: First, is it reasonable in design? Second, is it 
balanced in approach? And third, is it workable in practice for both 
market participants and for the Commission?
    Since I believed the answer to each of these questions was yes, 
I supported issuing the proposal. And by and large, my belief has 
been confirmed by the comments we received from those who trade in 
this country's derivatives markets. In the months since January, we 
have heard from all corners of the marketplace--agricultural 
interests, energy interests, managed fund advisors, and dealers that 
provide liquidity, to name a few--that have voiced support for the 
fundamental architecture of the position limits framework that we 
proposed. Their support stands in stark contrast to the serious 
concerns they had expressed about the several previous position 
limit proposals put forward by the Commission during the past 
decade.
    Of course, each interest had its issues with one aspect or 
another in the proposal. That is to be expected, given the varied 
and sometimes divergent objectives for our position limit rules set 
out in the Commodity Exchange Act (``CEA'').\1\ Congress has tasked 
us with adopting position limits that: (1) On the one hand, 
diminish, eliminate or prevent excessive speculation in derivatives 
and deter and prevent market manipulation, squeezes, and corners; 
while on the other hand, and simultaneously (2) ensuring sufficient 
market liquidity for bona fide hedgers and ensuring that the price 
discovery function of the underlying market is not disrupted and 
does not shift to foreign competitors.
---------------------------------------------------------------------------

    \1\ CEA Section 4a(a), 7 U.S.C. 6a(a).
---------------------------------------------------------------------------

    Reasonable minds will always differ as to exactly where to draw 
the line among these statutory objectives. But while we must always 
strive for perfection, we cannot permit that aspiration to paralyze 
us from acting to improve our rule sets. The final position limit 
rules before us smooth some of the rough edges in the proposal, and 
they address the areas in which I expressed some misgivings at the 
time. They incorporate valuable input we have received from the 
exchanges that operate the markets and the businesses that trade in 
those markets.
    And above all, the final rulemaking is reasonable in design, 
balanced in approach, and workable in practice. For these reasons, I 
am pleased to support it.

Bona Fide Hedging and Spread Transactions: Policy and Process

    In commenting on the proposal in January, I noted two areas that 
I felt could be improved: (1) The list of enumerated bona fide 
hedging transactions and positions; and (2) the process for 
reviewing hedging transactions outside of that list. I want to 
briefly address each of these concerns, in turn.

Enumerated Bona Fide Hedges

    The CEA prohibits the Commission from adopting position limit 
rules that apply to bona fide hedging transactions or positions, as 
such terms are defined by the Commission. It gives the Commission 
the authority to define the term ``bona fide hedging transactions 
and positions'' to ``permit producers, purchasers, sellers, 
middlemen, and users of a commodity or a product derived therefrom 
to hedge their legitimate anticipated business needs . . .'' \2\ 
Congress thereby recognized the critical function of our derivatives 
markets in enabling those whom we all depend upon to deliver goods 
and services to hedge their risks--both risks they currently bear as 
well as those they reasonably anticipate.\3\
---------------------------------------------------------------------------

    \2\ CEA Section 4a(c)(1), 7 U.S.C. 6a(c)(1).
    \3\ The CEA provides that a bona fide hedging transaction or 
position is one that, among other things, ``is economically 
appropriate to the reduction of risks in the conduct and management 
of a commercial enterprise.'' CEA Section 4a(c)(2)(A)(ii), 7 U.S.C. 
6a(c)(2)(A)(ii). The Commission's policy in administering Federal 
position limits in the agricultural sector over the years has been 
to limit this economically appropriate test to the hedging of price 
risk. However, as set forth in the final rulemaking release, the 
Commission acknowledges, consistent with that historical policy, 
that price risk can be impacted by various non-price risks.
---------------------------------------------------------------------------

    The Commission's proposal recognized this as well, as it 
expanded the list of ``enumerated'' bona fide hedging transactions 
that are identified in our current rules. Positions taken as a 
result of these enumerated hedging transactions constitute bona fide 
hedging, and therefore are not subject to Federal speculative 
position limits. This expansion of the list of enumerated bona fide 
hedges is entirely appropriate (indeed, it is long overdue). Hedging 
practices at companies that produce, process, trade, and use 
agricultural, energy, and metals commodities have become far more 
sophisticated, complex, and global over time, and the Commission's 
list of enumerated hedging practices to which its position limit 
rules do not apply has failed to keep pace with these realities.
    And given Congress' recognition of the appropriateness of 
hedging legitimate anticipated business needs,\4\ the proposal also 
added, at my request, anticipatory merchandising as an enumerated 
bona fide hedge. There is no policy basis for distinguishing hedging 
risks of anticipated merchandising from hedging risks of other 
activities in the physical supply chain.
---------------------------------------------------------------------------

    \4\ CEA Section 4a(c)(1), 7 U.S.C. 6a(c)(1). See also CEA 
Section 4a(c)(2)(A)(iii)(I), 7 U.S.C. 6a(c)(2)(A)(iii)(I) (bona fide 
hedging transaction or position is a transaction or position that, 
among other things, ``arises from the potential change in the value 
of . . . assets that a person owns, produces, manufactures, 
processes, or merchandises or anticipates owning, producing, 
manufacturing, processing, or merchandising . . .'' (emphasis 
added)).
---------------------------------------------------------------------------

    Yet, I was concerned in January that our proposed list of 
enumerated bona fide hedges still might not be as robust as it 
should be. We needed input on this question from market 
participants--especially those in the energy and metals sectors 
where we are applying Federal position limits for the first time. 
And that input was nearly unanimous in recommending that hedging the 
risk of unfixed-price forward transactions be added to the list of 
enumerated bona fide hedges.
    Hedges of offsetting unfixed-price cash commodity sales and 
purchases have historically been recognized as an enumerated bona 
fide hedge under our rules, and that was carried over in the 
proposal, too. These are hedges of risk incurred where a market 
participant has both bought and sold the underlying cash commodity 
at unfixed prices. We received many comments, though, urging us to 
include as an enumerated bona fide hedge those situations in which 
the purchase or sale, but not both, is an unfixed-price forward 
transaction. Some commenters asked that the historical enumerated 
hedge for offsetting unfixed-price cash commodity sales and 
purchases be expanded to cover unfixed-price cash commodity sales or 
purchases; others asked the Commission to create a new, stand-alone 
enumerated bona fide hedge category for these unfixed-price 
transactions. The final rulemaking concludes that neither step is 
necessary because, as suggested by still other commenters, 
commercial market participants may qualify for one of the enumerated 
anticipatory bona fide hedges that will be available, to the extent 
of their demonstrated anticipated need.\5\
---------------------------------------------------------------------------

    \5\ These enumerated anticipatory bona fide hedges include: (1) 
The existing enumerated bona fide hedge for unsold anticipated 
production; (2) the existing enumerated bona fide hedge for 
anticipated requirements; and (3) the new enumerated bona fide hedge 
established in this rulemaking for anticipated merchandising.
---------------------------------------------------------------------------

Spread Transactions

    Although the treatment of spread transactions for purposes of 
Federal position limits is distinct from the treatment of bona fide 
hedging transactions, I would like to take a short detour to note an 
important similarity between the two. That is, we also received 
numerous comments suggesting that the proposed definition of a 
spread transaction, which would be exempt from Federal position 
limits, was too narrow.
    At the suggestion of commenters, the final rulemaking adds the 
well-established categories of intra-market, inter-market, and 
intra-commodity spreads to the list of defined spreads that fall 
outside the Federal position limits regime. The release notes that 
as a result, the spread transaction definition captures most, if not 
all, spread exemptions currently granted by exchanges and used by 
market participants. The rulemaking appropriately recognizes that 
these spread positions simply do not raise the type of concerns that 
position limits are intended to address.

The Non-Enumerated Bona Fide Hedge Recognition Process

    Getting the list of enumerated bona fide hedges right is 
important because they are ``self-effectuating'' for purposes of 
Federal position limits. In other words, a trader need not count 
positions that result from enumerated bona fide hedging transactions 
towards the Federal position limits, and does not need to apply to 
the Commission for approval (although the trader still must receive 
approval from the relevant exchange to exceed exchange-set limits).
    Other hedging practices, generally referred to as ``non-
enumerated'' hedges, can still be

[[Page 3490]]

recognized as bona fide hedging, but only after a review process. A 
trader can either ask the exchange and the Commission to separately 
review and approve the proposed non-enumerated hedging activity for 
purposes of exchange and Federal limits, respectively, or it can 
follow what the rulemaking calls a ``streamlined'' process. Under 
that process, if an exchange recognizes a non-enumerated transaction 
as a bona fide hedge for purposes of the exchange's position limits, 
the Commission would then review the exchange's bona fide hedge 
recognition for application to Federal limits as well. The 
Commission must notify the exchange and market participant of any 
denial within 10 business days, or 2 business days in the case of an 
application based on a sudden or unforeseen increase in the trader's 
bona fide hedging needs (although that timeline can be extended if 
the Commission issues a stay or requests additional information).
    In January, I expressed reservations about whether this 10/2-day 
process would be workable in practice for either market participants 
or the Commission because it appeared to be both too long and too 
short: (1) Too long to be workable for market participants that may 
need to take a hedge position quickly; and (2) too short for the 
Commission to meaningfully review the relevant circumstances related 
to the exchange's recognition of the hedge as bona fide. But while 
some commenters took the ``too long'' view and others took the ``too 
short'' view, the majority of commenters were generally supportive 
of this process.
    The final rulemaking adopts the 10/2-day process, with an 
adjustment recommended by several commenters as well as participants 
in a meeting of the Commission's Energy and Environmental Markets 
Advisory Committee (``EEMAC'') \6\ that discussed the position 
limits proposal. That is, the final rulemaking now provides that a 
trader can exceed Federal limits based on the exchange's approval of 
the non-enumerated hedge while the Commission is conducting its 
assessment. This is not a delegation of authority to the exchange, 
since the Commission will still make the final determination whether 
positions resulting from the non-enumerated hedging transaction 
should count towards Federal position limits. Thus, a trader that 
exceeds Federal limits in reliance on the initial exchange 
determination runs the risk that the Commission will later deny the 
requested non-enumerated hedge. In that event, the trader will have 
to reduce the position to come into compliance with limits within a 
commercially reasonable period of time.
---------------------------------------------------------------------------

    \6\ See, e.g., Transcript of CFTC Energy and Environmental 
Markets Advisory Committee Meeting at 103:14-17, Comment by Thomas 
LaSala, CME Group (May 7, 2020) (``the Commission should permit a 
participant to exceed Federal position limits during the 10-day/2-
day Commission review period of an exchange-granted exemption''), 
available at https://www.cftc.gov/sites/default/files/2020/06/1591218221/eemactranscript050720.pdf.
---------------------------------------------------------------------------

    Is it a perfect process? It is not. My preference would have 
been that recognition of non-enumerated hedges be the responsibility 
of the exchanges, which are most familiar with both their own 
markets and the hedging practices of participants in those markets. 
The Commission, in turn, has the tools it needs to monitor this 
process through its routine, ongoing review of the exchanges. But 
those who participate in the markets have generally expressed the 
view that this is a reasonable, balanced, and workable process. And 
so, I support it.

Response to Commenter Objections

    Before concluding, I would like to briefly respond to a couple 
of points raised by commenters that were critical of the proposed 
position limit rules. Some commenters argued that: (1) The 
amendments to the CEA's position limit provisions that were enacted 
as part of the Dodd-Frank Act \7\ constitute a mandate for the 
Commission to establish Federal position limits without having to 
make an antecedent finding that such limits are necessary to achieve 
the CEA's objectives; and (2) the rules we are adopting improperly 
abdicate Commission responsibilities with respect to Federal 
position limits to the exchanges.
---------------------------------------------------------------------------

    \7\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203 (2010) (``Dodd-Frank Act'').
---------------------------------------------------------------------------

The Commission's Mandate To Impose Position Limits it Finds Are 
Necessary

    As I read the statute, the CEA's position limit provisions, as 
amended by the Dodd-Frank Act, mandate the Commission to impose 
position limits that it finds are necessary. The basis for my view 
is set out in detail in my Statement in support of the proposal last 
January, which included an explanatory graphic. Both of these 
documents are available on the Commission's website for those who 
are interested,\8\ and so I will not repeat that analysis here. 
Suffice it to say, though, that I have not seen anything in the 
comment letters we received that changes my view.
---------------------------------------------------------------------------

    \8\ See Statement of Commissioner Dawn D. Stump Regarding 
Proposed Rule: Position Limits for Derivatives (January 30, 2020), 
and Commodity Exchange Act Sec.  4a(a): Finding Position Limits 
Necessary is a Prerequisite to the Mandate for Establishing Such 
(January 30, 2020), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement013020.
---------------------------------------------------------------------------

The Role of the Exchanges

    I fundamentally disagree with the suggestion that the amended 
position limit rules that we are adopting in any way reflect an 
inappropriate reliance by the Commission on the exchanges. My 
disagreement is rooted in several considerations.
    First, the CEA itself states without limitation that it is the 
purpose of the CEA to serve the public interests described in the 
statute ``through a system of effective self-regulation of trading 
facilities, clearing systems, market participants and market 
professionals under the oversight of the Commission.'' \9\ This is 
an overarching statement of purpose by Congress, and is the lens 
through which all other provisions of the CEA--including its 
position limit provisions--must be interpreted. And nothing in the 
amendments to those position limit provisions enacted as part of the 
Dodd-Frank Act indicate otherwise.
---------------------------------------------------------------------------

    \9\ CEA Section 3(b), 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    Second, the rules we are adopting do not delegate any authority 
of the Commission to the exchanges. With respect to applications for 
non-enumerated bona fide hedges in particular, the Commission will 
be informed by an exchange's determination whether to recognize the 
hedge for purposes of exchange-set limits. But the determination 
whether to do so with respect to Federal limits is the Commission's 
alone to make, and a trader who trades in reliance on an exchange 
determination risks having to reduce the position if the Commission 
subsequently disagrees with the exchange's determination.
    Third, the exchanges know their markets.\10\ They have a 
comprehensive understanding of the traders that participate in those 
markets as well as current hedging practices in agricultural, 
energy, and metals commodities. Indeed, the expertise of the 
exchanges makes them uniquely well-suited to make the initial 
determination on requests for non-enumerated bona fide hedges in 
real-time.
---------------------------------------------------------------------------

    \10\ It is notable that, due to certain trading dynamics unique 
to natural gas contracts, including the existence of liquid cash-
settled contracts trading on three different exchanges, the final 
rulemaking for the Federal conditional spot-month limit is derived 
from the existing exchange framework that has been in place for 
approximately a decade.
---------------------------------------------------------------------------

    Finally, I return once again to my foundational principles: 
Reasonable, balanced, and workable. A system in which a business 
must put its economic needs and risk management efforts on hold 
while the Commission undertakes to learn about its operations and 
hedging activities in order to pass upon a request for a non-
enumerated bona fide hedge violates all three principles.

Conclusion

    After nearly a decade of trying, we stand on the cusp of 
amending the Commission's position limit rules, which are sorely in 
need of updating. Before us is a thorough and well-reasoned final 
rulemaking release that considers the extensive comments we 
received, and clearly presents the Commission's rationale in 
addressing those comments and adopting the rules in the form that we 
are adopting them. The fact that this release is before us less than 
nine months after we issued the proposal--in the midst of a 
pandemic, no less--is a tribute to the dedication, perseverance, and 
analytical capabilities of the professionals in the Commission's 
Division of Market Oversight, Office of General Counsel, and Chief 
Economist's Office. Their work on this rulemaking has been nothing 
short of amazing.
    My fellow Commissioners and I have each publicly committed that 
we would work to finish a position limits rulemaking. The time has 
come to fulfill that commitment. The release that staff has 
presented is reasonable in design, balanced in approach, and 
workable for both market participants and the Commission. I am 
pleased to support it.

[[Page 3491]]

Appendix 6--Dissenting Statement of Commissioner Dan M. Berkovitz

I. Introduction

    I dissent from today's position limits final rule (``Final 
Rule''). The Final Rule fails to achieve the most fundamental 
objective of position limits: To prevent the harms arising from 
excessive speculation. It is another disappointing chapter in the 
Commission's 10-year saga to implement Congress's mandate in the 
Dodd-Frank Act to impose speculative position limits in the energy, 
metals, and agricultural markets. In a number of instances, the 
Final Rule appears more intent on limiting the actions and 
discretion of the Commission than it does on actually limiting such 
speculation.
    As I previously observed, the proposed rule demoted the 
Commission from head coach to Monday-morning quarterback. The Final 
Rule declares that the players on the field are the referees. In 
this arena, the public interest loses.
    I support effective position limits to restrain excessive 
speculation in physical commodity markets, coupled with legitimate 
bona fide hedge exemptions for commercial market participants. The 
Final Rule, however, fails to address excessive speculation in 
several key respects:
    First, the Final Rule impermissibly permits private entities to 
devise new bona fide hedge exemptions, while simultaneously 
constricting the Commission's review and enforcement of such 
privately-created exemptions.
    Second, the Final Rule fails to address trading at settlement 
(``TAS'') transactions. The potential for market manipulation 
through the use of TAS is well documented. The Final Rule was a 
valuable but wasted opportunity to address an important type of 
transaction in many commodity markets that, if abused, can present 
risks to orderly trading and price discovery.
    Third, while the Final Rule eliminates the risk management 
exemptions that had been granted to a limited number of index funds, 
it also increases the non-spot month limits to accommodate the 
speculative positions of these funds in the futures markets. 
Cumulatively, index funds can have a substantial price impact and 
exacerbate volatility. Their monthly position rolls can also distort 
inter-month spreads. Yet the Commission performed no assessment of 
the impact of potential increases in this type of speculation that 
these higher limits would permit.\1\
---------------------------------------------------------------------------

    \1\ For detailed comments on the effects of large speculative 
positions of index funds, see Better Markets Comments Letter, at 8-
12 (May 15, 2020).
---------------------------------------------------------------------------

    Fourth, the Final Rule misinterprets the Dodd-Frank Act and 
reverses decades of precedent by declaring, for the first time, that 
the Commission must make antecedent necessity findings on a 
commodity-by-commodity basis prior to imposing Federal speculative 
position limits.

II. Physical Commodity Markets Benefit From Position Limits and 
Appropriate Bona Fide Hedge Exemptions

    Position limits help prevent market manipulation and price 
distortion arising from excessively large speculative positions in 
futures, options, and swaps tied to physical commodities. Section 4a 
of the CEA reflects Congress's long-standing determination that 
excessive speculation in a commodity can cause ``sudden,'' 
``unreasonable,'' or ``unwarranted'' fluctuations and changes in 
commodity prices.\2\ Section 4a directs the Commission to establish 
speculative position limits to address these harms, while also 
providing that such limits shall not apply to ``transactions or 
positions which are shown to be bona fide hedging transactions or 
positions, as those terms are defined by the Commission . . . .'' 
\3\
---------------------------------------------------------------------------

    \2\ 7 U.S.C. 6a.
    \3\ 7 U.S.C. 6a(c)(1) (emphasis added).
---------------------------------------------------------------------------

    Experience from decades of limits in agricultural commodities 
teaches that a properly crafted position limits regime is an 
``effective prophylactic measure'' to protect American businesses, 
consumers, and market participants that rely on physical commodity 
derivatives markets.\4\ The parameters of an effective position 
limits regime are well established. They include: (1) Meaningful 
limits on excessive speculation to help prevent market manipulation 
and price distortion; (2) recognition of bona fide hedging 
activities and exemptions to permit producers, end-users, merchants, 
and others to manage their commercial risks; and (3) clear divisions 
of responsibility, consistent with the CEA, that recognize the 
complimentary but distinct roles of exchanges, the Commission, and 
market participants in administering a position limits regime.
---------------------------------------------------------------------------

    \4\ Establishment of Speculative Position Limits, 46 FR 50938 
(Oct. 16, 1981).
---------------------------------------------------------------------------

    Federal speculative position limits have been in place to 
protect derivatives markets since the 1930s. The Commission or its 
predecessors adopted position limits for grains in 1938, cotton in 
1940, and soybeans in 1951. In 1981, the Commission adopted rules 
requiring exchange limits for all commodities for which there were 
no Federal limits--a rule which notably did not require an 
antecedent, commodity-by-commodity necessity finding. The Commission 
has also consistently relied on exchanges to help administer the 
position limits regime, including position accountability and 
enumerated bona fide hedge exemptions.
    These efforts, spanning over 80 years, have helped prevent 
manipulation and price distortion through a complementary system 
that relies on the respective expertise of Commission, exchange, and 
market participant stakeholders. The Final Rule discards this 
balance. The Final Rule relies excessively on exchanges and market 
participants to permit positions as bona fide hedges, and in so 
doing impermissibly delegates the Commission's statutory 
responsibility to determine what constitutes a bona fide hedge.\5\
---------------------------------------------------------------------------

    \5\ ``[W]hile Federal agency officials may sub-delegate their 
decision-making authority to subordinates absent evidence of 
contrary congressional intent, they may not sub-delegate to outside 
entities--private or sovereign--absent affirmative evidence of 
authority to do so.'' U.S. Telecom Ass'n v. FCC, 359 F.3d 554, 565-
68 (D.C. Cir. 2004) (citations omitted).
---------------------------------------------------------------------------

III. Significant Flaws in the Final Rule

A. The Final Rule Permits Market Participants To Violate Federal 
Speculative Position Limits With No Prior Commission Recognition of 
a Bona Fide Hedge Exemption

    The Final Rule explicitly permits market participants to violate 
Federal speculative position limits with no bona fide hedge 
exemption from the Commission. It impermissibly delegates the 
Commission's statutory responsibility to define bona fide hedging to 
the very market participants with large speculative positions that 
section 4a is intended to restrain, as well as to the exchanges, who 
have no authority to determine what is a hedge under Federal law.
    First, the Final Rule authorizes market participants to create 
their own bona fide hedge exemptions and exceed speculative position 
limits for ``sudden or unforeseen increases in their bona fide 
hedging needs.'' No prior approval from the Commission or an 
exchange is required to exceed the limits established by the 
Commission, and market participants may file their hedge 
applications up to five days after violating the applicable position 
limit. The Final Rule offers no guardrails on what can be considered 
a ``sudden or unforeseen'' circumstance. In an efficient market, all 
future price movements are inherently unforeseeable; that is the 
reason for hedging to begin with.\6\ Further, in today's 
interconnected markets, where the speed of light is the limiting 
factor on the transmission of information, sudden and unforeseen 
circumstances arise virtually every millisecond. This provision may 
swallow the Final Rule.
---------------------------------------------------------------------------

    \6\ ``The basic efficient market hypothesis positions that the 
market cannot be beaten because it incorporates all important 
determining information into current share prices. Therefore, stocks 
trade at the fairest value, meaning that they can't be purchased 
undervalued or sold overvalued. The theory determines that the only 
opportunity investors have to gain higher returns on their 
investments is through purely speculative investments that pose a 
substantial risk.'' J. B. Maverick, The Weak, Strong, and Semi-
Strong Efficient Market Hypotheses, Investopedia, available at 
https://www.investopedia.com/ask/answers/032615/what-are-differences-between-weak-strong-and-semistrong-versions-efficient-market-hypothesis.asp (updated Sept. 30, 2020). The unpredictability 
of the market has long been recognized. ``If you can look into the 
seeds of time, and say which grain will grow and which will not, 
speak then unto me.'' William Shakespeare, Macbeth, Act 1, Scene 3 
(1623).
---------------------------------------------------------------------------

    Second, the Final Rule authorizes a market participant to exceed 
Federal speculative positon limits if an exchange permits it to 
exceed the exchange's position limits. In other words, an exchange 
determination can enable a market participant to violate Federal 
limits even in the absence of a Commission determination. Here 
again, the Final Rule ignores the Commission's statutory 
responsibility to define bona fide hedging. Exchanges have a 
critical role in any properly balanced position limits regime, but 
they are not authorized by the CEA to define Federal hedge 
exemptions, nor are they authorized to green-light violations of 
Federal position limits.
    This process for market participants to ``self-recognize'' non-
enumerated hedges that

[[Page 3492]]

they wish had been enumerated under Federal law undoes the existing, 
Commission-led procedures that have worked well for decades.
    The Final Rule reflects a multi-year, iterative process of 
notice and comment rulemaking to comprehensively determine which 
practices should constitute bona fide hedging. Members of the public 
and industry participants have enjoyed multiple opportunities to 
inform the Commission on this topic, including through additional 
proposed position limits rules in 2013 and twice in 2016. The Final 
Rule's enumerated hedges reflect the Commission's extensive dialogue 
and reasoned deliberations, and they recognize a wide array of 
hedging practices identified by commenters. To my knowledge, the 
Commission is not aware of any novel hedging practices that were not 
addressed during this rulemaking process.
    Commission regulations currently allow for the recognition of 
non-enumerated bona fide hedges through a 30-day, Commission-led 
review process. The Commission must recognize the requested hedge as 
bona fide before a market participant can put the hedge on the 
exchange and exceed position limits. This process has worked well 
for decades. The Final Rule replaces it with a new system that 
allows market participants to make their own bona fide hedge 
determinations and exceed Federal position limits in advance of any 
reasoned, considered evaluation by the Commission.

1. The 10 and 2 Day Review Periods Are Inadequate for the Commission To 
Consider Applications for Exemptions After an Exchange Determination

    The Final Rule attempts to cure the impermissible statutory 
delegation described above through crammed, after-the-fact reviews 
of market participants' hedge applications and violations of 
position limits rules.
    Market participants who request prospective non-enumerated bona 
fide hedge exemptions from an exchange may violate Federal 
speculative position limits upon being granted the exemption. The 
exchange must then forward the application and other materials to 
the Commission for the beginning of a constricted 10-day review 
period.
    The Commission, for its part, must complete the difficult task 
of evaluating the law, facts, and circumstances with respect to cash 
market risks that have already been incurred and commodity positions 
that have already been posted on an exchange. Commission 
determinations regarding the validity of positions that have already 
been entered into will be complicated by the commercial implications 
involved in unwinding such positions. Further, in the event that the 
Commission determines to deny the application, the Commission must 
provide the applicant with notice and opportunity to respond. In the 
case of positions established due to ``sudden or unforeseen'' 
events, the Final Rule calls for a two-day review. This is an 
unrealistic and unworkable timeframe. This fig leaf of a ``review'' 
cannot provide legal cover for the impermissible delegation.

2. The Final Rule Adopts a Policy of Non-Enforcement for Position Limit 
Violations

    Both the rule text and the preamble to the Final Rule leave no 
doubt that any person who puts on a position in excess of a position 
limit prior to receiving Commission approval of the exemption is in 
violation of the speculative position limits. However, where an 
application for a non-enumerated bona fide hedge is submitted 
retroactively to either an exchange or the Commission due to 
``sudden or unforeseen circumstances,'' or where an exchange has 
approved an application for an exemption from the exchange limit, 
the Commission limits its ability to prosecute such violations by 
declaring that, ``as a matter of policy,'' it will not pursue an 
enforcement action as long as the application was submitted in 
``good faith.''
    The Final Rule does not define ``good faith.'' Perhaps this is 
because the concept of good faith traditionally is used as a safe 
harbor to protect persons who reasonably believe they are acting in 
compliance with the law. For example, when exercising its 
prosecutorial discretion for violations of the swap dealer business 
conduct standards, the Commission considers whether the swap dealer 
attempted in ``good faith'' to follow policies and procedures 
reasonably designed to comply with the CEA and Commission 
Regulations.\7\ This application of the good faith doctrine is 
consistent with the long-established understanding of the term.\8\ 
In the Final Rule, however, the Commission turns this doctrine on 
its head and mandates prosecutorial discretion where a market 
participant knowingly acts in violation of the law by putting on a 
position in excess of the legal limit.
---------------------------------------------------------------------------

    \7\ See Business Conduct Standards for Swap Dealers and Major 
Swap Participants With Counterparties, 77 FR 9734, 9744, 9746, 9750 
(Feb. 17, 2012).
    \8\ See, e.g., CFTC v. Monex Credit Co., No. SACV-171868, 2020 
WL 1625808, at *4-5 (C.D. Cal. Feb. 12, 2020) (finding that 
controlling persons did not establish good faith defense to 
liability under 7 U.S.C. 13b where they knowingly or recklessly 
violated the CEA or were aware or should have been aware that 
employees were violating the CEA, or did not reasonably enforce 
system designed to promote legal compliance) (citing Monieson v. 
CFTC, 996 F.2d 852, 860-861 (7th Cir. 1993)); U.S. v. Leon, 468 U.S. 
897 (1984) and Massachusetts v. Sheppard, 468 U.S. 981 (1984) 
(establishing good faith doctrine as exemption to Fourth Amendment 
exclusionary rule when police officer reasonably believed conduct to 
be legal).
---------------------------------------------------------------------------

    Notably, the Commission describes its position not to enforce 
these violations as ``a matter of policy.'' So although this non-
enforcement policy is adopted as part of this rulemaking, it is 
nonetheless just that--a statement of policy. As the Supreme Court 
has recognized, ``general statements of policy,'' or ``statements 
issued by an agency to advise the public prospectively of the manner 
in which the agency proposes to exercise a discretionary power,'' 
are not subject to the notice-and-comment procedures of the 
Administrative Procedure Act.\9\ Accordingly, the Commission may 
change this enforcement policy at any time without engaging in a 
notice-and-comment rulemaking.
---------------------------------------------------------------------------

    \9\ Nor are blanket statements of policy that abandon an 
agency's responsibility to enforce the law constitutionally 
permissible. Crowley Caribbean Transp., Inc. v. Pe[ntilde]a, 37 F.3d 
671, 677 (DC Cir. 1994) (``[A]n agency's pronouncement of a broad 
policy against enforcement poses special risks that it `has 
consciously and expressly adopted a general policy that is so 
extreme as to amount to an abdication of its statutory 
responsibilities.''') (citing Heckler v. Chaney, 470 U.S. 821, 833 
n.4 (1985)).
---------------------------------------------------------------------------

    Significantly, in its comment letter, the entity with the most 
experience in retroactive applications for hedge exemptions, the CME 
Group, pointed out to the Commission the importance of being able to 
take enforcement action for position limit violations that have 
occurred when retroactive applications are denied. It stated:

    Today at the exchange level, CME Group considers firms to be in 
violation of a position limit if they exceed a limit and the 
exemption application is denied. We believe the Commission should 
implement this standard rather than permitting the proposed grace 
period for denial of an exemption application. Otherwise, market 
participants with excessively large speculative positions could 
exploit the grace period accompanying an application for an 
exemption and intentionally go over the applicable limit without 
consequences--all the while disrupting orderly market operations. In 
our experience, the prospect of having an application denied and 
being found in violation of position limits has worked to deter 
market participants from attempting to exploit the retroactive 
exemption process.\10\
---------------------------------------------------------------------------

    \10\ CME Comment Letter (May 14, 2020).

    Although the Final Rule is replete with deference to the 
experience of the exchanges in implementing the position limits 
regime, and creates a process specifically reliant upon the 
exchange's expertise in granting hedge exemptions, here in the 
context of enforcing violations and deterring abuse, the Commission 
oddly rejects that expertise.

B. The Final Rule Fails To Address TAS Transactions or the Historic 
Collapse of WTI Crude Oil Futures

    On April 20, 2020, the price of the May futures contract for 
West Texas Intermediate (``WTI'') crude oil traded on the New York 
Mercantile Exchange collapsed from $17.73 per barrel at the market 
open to a closing price of negative $37.63. This single-day fall in 
prices of approximately $55 per barrel is unprecedented, and was 
accompanied by a massive disconnect between May crude oil futures 
and the price of crude oil in the physical market.
    WTI crude oil futures are a key benchmark in global energy 
markets and can impact the overall U.S. economy. Following the WTI 
event, I called upon the Commission to determine the causes of this 
unprecedented price movement and divergence from physical markets, 
and to work with CME to ``take whatever measures may be appropriate 
to ensure that trading in the WTI futures contract is orderly and 
supports convergence of the futures and physical markets.'' \11\

[[Page 3493]]

Almost six months later, the Commission has yet to complete its 
investigation or issue even preliminary results. It should not take 
this long for the world's leading derivatives regulator to 
understand the historic collapse of a benchmark contract that it has 
overseen for decades.
---------------------------------------------------------------------------

    \11\ Statement of Commissioner Dan M. Berkovitz on Recent 
Trading in the WTI Futures Contract before the Energy and 
Environmental Markets Advisory Committee Meeting (May 7, 2020), 
available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement050720.
---------------------------------------------------------------------------

    Independently of the Commission's investigation, public 
commentary following the WTI event focused on TAS transactions and 
the well-known integrity concerns regarding TAS under certain market 
conditions.\12\ TAS transactions represent the purchase or sale of 
an underlying exchange commodity at the closing price for that 
commodity or at a specified differential. Notably, exchange rules 
may permit TAS transactions to be netted intraday against futures 
positions in that commodity established via outright purchases and 
sales. Such netting could permit a trader to establish very large 
long or short positions in the outright futures contracts, while 
remaining below speculative position limits on a net basis.
---------------------------------------------------------------------------

    \12\ See, e.g., Matt Levine, It's a Good Time to Cut Dividends, 
Money Stuff (Apr. 29, 2020), available at https://www.bloomberg.com/news/articles/2020-08-04/oil-s-plunge-below-zero-was-500-million-jackpot-for-a-few-london-traders?sref=DzeLiNol (``If you combine 
these two facts--a lot of TAS contracts and not much volume around 
the settlement time--you get a well-known theoretical problem. . . . 
The basic pattern--agree in advance to buy (sell) stuff at the 
official settlement price at some fixed future time, and then sell 
(buy) a bunch of that stuff in the minutes leading up to the 
official settlement time with the effect of pushing down (up) the 
price at which you are buying (selling)--is incredibly common . . . 
.''); Craig Pirrong, Streetwise Professor Blog, WTI-WTF? Part 3: Did 
CLK20 Get TAS-ed? (Apr. 30, 2020), available at https://streetwiseprofessor.com/2020/04/.
---------------------------------------------------------------------------

    The Final Rule recognizes the importance of netting practices 
and rules in several regards. For example, it prohibits the spot-
month netting of physically settled contracts with linked cash 
settled contracts. The Final Rule explains that allowing such 
netting during the spot month ``could lead to disruptions in the 
price discovery function of the core referenced futures contract or 
allow a market participant to manipulate the price of the core 
referenced futures contract.'' The Final Rule is silent, however, 
with respect to any limitations on the netting of TAS with outright 
futures.
    One commenter on the Final Rule reminded the Commission in 
significant detail of the market integrity issues associated with 
TAS orders.\13\ But even apart from the comment letters on the 
proposed rule, and apart from the WTI event, the potential for 
manipulation through the use of offsetting TAS contracts has been 
well-known.\14\ Further, the CFTC has direct experience with this 
issue: it has brought two manipulation cases where WTI TAS orders 
were an integral part of the manipulative scheme.\15\ Given the 
Commission's familiarity with the potential for manipulation and 
disruption of the price discovery process arising from an abuse of 
the TAS order type, the failure of the Final Rule to address in any 
manner these well-known dangers to market integrity is inexcusable.
---------------------------------------------------------------------------

    \13\ Better Markets Comment Letter, at 13-14 (May 15, 2020).
    \14\ See, e.g., Craig Pirrong, Derived Pricing: Fragmentation, 
Efficiency, and Manipulation, Bauer College of Business, University 
of Houston, at 10 (Jan. 14, 2019), available at https://streetwiseprofessor.com/2020/04/ (``The analysis in Section 2 
demonstrates that TAS contracts create trading opportunities with 
asymmetric price impacts. This suggests that TAS may therefore also 
create opportunities for profitable trade-based manipulation, and 
this is indeed the case.''); see also Paul Peterson, Trading at 
Settlement for Agricultural Futures: Results from the First Month, 
farmdoc daily (July 29, 2015), available at https://farmdocdaily.illinois.edu/2015/07/trading-at-settlement-for-agricultural-futures.html (``Over the years TAS has been associated 
with several efforts to artificially influence the daily settlement 
price through `banging the close' and other forms of manipulation 
[citations omitted].'').
    \15\ See In re Optiver US LLC, CFTC No. 08 Civ 6560, 2012 WL 
1632613 (Apr. 19, 2012); In re Shak, CFTC No. 14-03, 2013 WL 
11069360 (Nov. 25, 2013) (consent order).
---------------------------------------------------------------------------

C. The Final Rule Misconstrues the CEA by Requiring Antecedent, 
Commodity-by-Commodity Necessity Findings Prior to Imposing Federal 
Position Limits

    The Final Rule misinterprets the Dodd-Frank Act and reverses 
decades of Commission interpretation and finds that an antecedent, 
commodity-by-commodity necessity finding is required prior to 
imposing Federal speculative position limits. The Final Rule further 
states that this ``is the best interpretation'' of CEA section 
4a(a)(2), and that the Commission's prior interpretations are ``not 
compelling.''
    I addressed this issue extensively in my dissenting opinion on 
the proposed position limits rule, and I reiterate those views 
now.\16\ Neither the statutory language of CEA section 4a(a)(2), nor 
the district court's decision in ISDA v. CFTC, require an antecedent 
necessity finding prior to imposing position limits. The Final 
Rule's new interpretation, which the Commission concedes is a 
``change'' from prior interpretations, is mistaken.\17\
---------------------------------------------------------------------------

    \16\ See Dissenting Statement of Commissioner Dan M. Berkovitz 
Regarding Proposed Rule on Position Limits for Derivatives (Jan. 30, 
2020), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement013020.
    \17\ Significantly, however, at the Commission's meeting on the 
proposal rule, the Commission's Office of General Counsel clarified 
that a necessity finding is required only with respect to the 
Commission's establishment of Federal position limits. The Office of 
General Counsel stated that a necessity finding was neither a 
prerequisite for a Commission directive to the exchanges to 
establish limits, nor prior to establishing the standards for such 
limits. The Commission's legal interpretation in the Final Rule is 
identical to the interpretation in the proposed rule in this regard 
as well.
---------------------------------------------------------------------------

    As articulated in my prior dissent, the Final Rule's 
interpretation of CEA section 4a(a)(2) ``defies history and common 
sense.'' \18\ Following hard on the heels of the 2008 financial 
crisis and the collapse of the Amaranth hedge fund in 2006, it is 
implausible that the drafters of the Dodd-Frank Act intended what 
the Commission has now adopted. The Final Rule requires the 
Commission to believe that a Congress in the midst of the financial 
crisis, aware the CEA had never been interpreted to require 
predicate necessity findings for position limits, and engaged in a 
historic effort to regulate financial markets, would nonetheless 
make it harder for the Commission to impose Federal speculative 
position limits. The Commission's revisionist legislative history is 
neither accurate nor credible.
---------------------------------------------------------------------------

    \18\ For a detailed discussion of how the Commission's necessity 
finding misconstrues the CEA as amended by the Dodd-Frank Act, see 
Dissenting Statement of Commissioner Dan M. Berkovitz Regarding 
Proposed Rule on Position Limits for Derivatives (Jan. 30, 2020), 
available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement013020b.
---------------------------------------------------------------------------

IV. Conclusion

    The Final Rule departs from both legal interpretations and 
policy frameworks that have served commodity markets well for 
decades.
    Most significantly, the Final Rule impermissibly delegates the 
authority to recognize non-enumerated hedge exemptions; provides 
farcically short review periods for private-entity hedge 
determinations; attempts to enshrine a policy of non-enforcement for 
position limits violations; fails to address the well-known risks of 
TAS transactions; and reinterprets the CEA to require antecedent 
necessity findings prior to imposing Federal position limits.
    I cannot support such a flawed rule.

[FR Doc. 2020-25332 Filed 1-5-21; 11:15 am]
 BILLING CODE 6351-01-P

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