Position Limits for Derivatives

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1

17 CFR 145.9.

2

7 U.S.C. 1 et seq.

3

17 CFR part 150. Part 150 of the Commission’s

regulations establishes federal position limits (that

is, position limits established by the Commission,

as opposed to exchange-set limits) on nine

agricultural contracts. Agricultural contracts refers

to the list of commodities contained in the

definition of ‘‘commodity’’ in CEA section 1a; 7

U.S.C. 1a. This list of agricultural contracts

currently includes nine 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 Hard Red Spring Wheat

(MWE), CBOT KC Hard Red Winter Wheat (KW),

and ICE Cotton No. 2 (CT). See 17 CFR 150.2. The

position limits on these agricultural contracts are

referred to as ‘‘legacy’’ limits because these

contracts have been subject to federal position

limits for decades.

4

See 17 CFR 150.2.

5

See 17 CFR 150.3.

6

See 17 CFR 150.4.

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

: Proposed rule.

SUMMARY

: The Commodity Futures

Trading Commission (‘‘Commission’’ or

‘‘CFTC’’) is proposing amendments to

regulations concerning speculative

position limits to conform to the Wall

Street Transparency and Accountability

Act of 2010 (‘‘Dodd-Frank Act’’)

amendments to the Commodity

Exchange Act (‘‘CEA’’ or ‘‘Act’’). Among

other amendments, the Commission

proposes 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 limits; new and

amended definitions for use throughout

the position limits regulations,

including a revised definition of ‘‘bona

fide hedging transactions or positions’’

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 limits; new enumerated hedges;

and amendments to certain regulatory

provisions that would eliminate Form

204, enabling the Commission to

leverage cash-market reporting

submitted directly to the exchanges.

DATES

: Comments must be received on

or before April 29, 2020.

ADDRESSES

: You may submit comments,

identified by ‘‘Position Limits for

Derivatives’’ and RIN 3038–AD99, by

any of the following methods:

•CFTC Comments Portal: https://

comments.cftc.gov. Select the ‘‘Submit

Comments’’ link for this rulemaking and

follow the instructions on the Public

Comment Form.

•Mail: Send to Christopher

Kirkpatrick, Secretary of the

Commission, Commodity Futures

Trading Commission, Three Lafayette

Centre, 1155 21st Street NW,

Washington, DC 20581.

•Hand Delivery/Courier: Follow the

same instructions as for Mail, above.

Please submit your comments using

only one of these methods. To avoid

possible delays with mail or in-person

deliveries, submissions through the

CFTC Comments Portal are encouraged.

All comments must be submitted in

English, or if not, be accompanied by an

English translation. Comments will be

posted as received to https://

comments.cftc.gov. You should submit

only information that you wish to make

available publicly. If you wish the

Commission to consider information

that you believe is exempt from

disclosure under the Freedom of

Information Act (‘‘FOIA’’), a petition for

confidential treatment of the exempt

information may be submitted according

to the procedures established in § 145.9

of the Commission’s regulations.

1

The Commission reserves the right,

but shall have no obligation, to review,

pre-screen, filter, redact, refuse, or

remove any or all submissions from

https://www.comments.cftc.gov that it

may deem to be inappropriate for

publication, such as obscene language.

All submissions that have been redacted

or removed that contain comments on

the merits of the rulemaking will be

retained in the public comment file and

will be considered as required under the

Administrative Procedure Act and other

applicable laws, and may be accessible

under FOIA.

FOR FURTHER INFORMATION CONTACT

:

Aaron Brodsky, Senior Special Counsel,

(202) 418–5349, abrodsky@cftc.gov;

Steven Benton, Industry Economist,

(202) 418–5617, sbenton@cftc.gov;

Jeanette Curtis, Special Counsel, (202)

418–5669, jcurtis@cftc.gov; Steven

Haidar, Special Counsel, (202) 418–

5611, shaidar@cftc.gov; Harold Hild,

Policy Advisor, 202–418–5376, hhild@

cftc.gov; or Lillian Cardona, Special

Counsel, (202) 418–5012, lcardona@

cftc.gov; Division of Market Oversight,

in each case at the Commodity Futures

Trading Commission, Three Lafayette

Centre, 1155 21st Street NW,

Washington, DC 20581.

SUPPLEMENTARY INFORMATION

:

Table of Contents

I. Background

A. Introduction

B. Executive Summary

C. Summary of Proposed Amendments

D. The Commission Preliminarily

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

II. Proposed Rules

A. § 150.1—Definitions

B. § 150.2—Federal 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 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. Introduction

B. Key Statutory Provisions

C. Ambiguity of Section 4a With Respect

to Necessity Finding

D. Resolution of Ambiguity

E. Evaluation of Considerations Relied

Upon by the Commission in Previous

Interpretation of Paragraph 4a(a)(2)

F. Necessity Finding

G. Request for Comment

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 and options on futures

contracts on various agricultural

commodities as authorized by the CEA.

2

The existing part 150 position limits

regulations

3

include three components:

(1) The level of the limits, which

currently apply to nine agricultural

commodity derivatives contracts and set

a maximum that restricts the number of

speculative positions that a person may

hold in the spot month, individual

month, and all-months-combined;

4

(2)

exemptions for positions that constitute

bona fide hedges and for certain other

types of transactions;

5

and (3)

regulations to determine which

accounts and positions a person must

aggregate for the purpose of determining

compliance with the position limit

levels.

6

The existing federal speculative

position limits function in parallel to

exchange-set limits required by

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7 U.S.C. 7(d)(5); 17 CFR 38.300.

8

7 U.S.C. 6a(a)(1); see infra Section III.F.

(discussion of the necessity finding).

9

7 U.S.C. 6a(a)(5).

10

Position Limits for Derivatives, 76 FR 4752

(Jan. 26, 2011); Position Limits for Futures and

Swaps, 76 FR 71626 (Nov. 18, 2011) (‘‘2011 Final

Rulemaking’’).

11

Int’l Swaps & Derivatives Ass’n v. U.S.

Commodity Futures Trading Comm’n, 887 F. Supp.

2d 259 (D.D.C. 2012) (‘‘ISDA’’).

12

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).

13

Unless indicated otherwise, the use of the term

‘‘exchanges’’ throughout this proposal refers to

DCMs and Swap Execution Facilities.

14

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 percent 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.

15

Because the earlier proposals are withdrawn,

comments on them will not be part of the

administrative record with respect to the current

proposal, except where expressly referenced herein.

Commenters 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.

16

The specific proposed new regulations are

discussed in detail later in this release.

designated contract market (‘‘DCM’’)

Core Principle 5.

7

Certain contracts are

thus subject to both federal and DCM-

set limits, whereas others 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

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’’ ‘‘[e]xcessive speculation

. . . causing sudden or unreasonable

fluctuations or unwarranted changes in

. . . price . . .’’

8

The Commission also

interprets these amendments as tasking

the Commission with establishing

position limits on any ‘‘economically

equivalent’’ swaps.

9

The Commission previously issued

proposed and final rules in 2011 to

implement the provisions of the Dodd-

Frank Act regarding position limits and

the bona fide hedge definition.

10

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.

11

Subsequently, the Commission

proposed position limits regulations in

2013 (‘‘2013 Proposal’’), June of 2016

(‘‘2016 Supplemental Proposal’’), and

again in December of 2016 (‘‘2016

Reproposal’’).

12

The 2016 Reproposal

would have amended part 150 to,

among other things: establish federal

position limits for 25 physical

commodity futures contracts and for

‘‘economically equivalent’’ futures,

options on futures, and swaps; revise

the existing exemptions from such

limits, including for bona fide hedges;

and establish a framework for

exchanges

13

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 those

prior rulemakings. In a companion

proposed rulemaking, the CFTC also

proposed, and later adopted in 2016,

amendments to rules governing

aggregation of positions for purposes of

compliance with federal position

limits.

14

These aggregation rules

currently apply only to the nine

agricultural contracts subject to existing

federal limits, and going forward would

apply to the commodities that would be

subject to federal limits under this

release.

After reconsidering the prior

proposals, including reviewing the

comments responding thereto, the

Commission is withdrawing from

further consideration the 2013 Proposal,

the 2016 Supplemental Proposal, and

the 2016 Reproposal.

15

Instead, the Commission is now

issuing a new proposal (‘‘2020

Proposal’’). The 2020 Proposal is

intended to (1) recognize differences

across commodities and contracts,

including differences in commercial

hedging and cash-market reporting

practices; (2) focus on derivatives

contracts that are critical to price

discovery and distribution of the

underlying commodity such that the

burden of excessive speculation in the

derivatives contract may have a

particularly acute impact on interstate

commerce for that commodity; and (3)

reduce duplication and inefficiency by

leveraging existing expertise and

processes at DCMs. For these general

reasons, discussed in turn below, the

Commission proposes new regulations,

rather than finalizing the 2016

Reproposal.

16

First, the Commission preliminarily

believes that any position limits regime

must take into account differences

across commodity and contract types.

The existing federal position limits

regulations apply only to nine contracts,

all of which are physically-settled

futures on agricultural commodities.

Limits on these commodities have been

in place for decades, as have the federal

program for exemptions from these

limits and the federal rules governing

DCM-set limits on such commodities.

The existing framework is largely a

historical remnant of an approach that

predates cash-settled futures contracts,

let alone swaps, institutional-investor

interest in commodity indexes, and

highly liquid energy markets. 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 price; and

establishing limits on swaps that are

‘‘economically equivalent’’ to certain

futures contracts. The Commission has

preliminarily determined that an

approach that is flexible enough to

accommodate potential future,

unpredictable developments in

commercial hedging practices would be

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 proposes to build

this flexibility into several parts of the

proposed regulations, including:

Exchange-set limits and/or

accountability, rather than federal

limits, outside of the spot month for

referenced contracts based on

commodities other than the nine legacy

agricultural commodities; the ability for

exchanges to use more than one formula

when setting their own limit levels; an

updated formula for federal non-spot

month levels on the nine legacy

agricultural contracts that is calibrated

to recently observed trading activity; a

bona fide hedging definition that is

broad enough to accommodate common

commercial hedging practices,

including anticipatory hedging practices

such as anticipatory merchandising; a

broader range of exchange-granted

recognitions for purposes of federal and

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See infra Section III.F.

18

See infra Section III.F.1.

19

While the Commission is proposing federal

non-spot month limits only for the nine legacy

agricultural core referenced futures contracts,

exchanges would be required to establish,

consistent with Commission standards set forth in

this proposal, exchange-set position limits and/or

position accountability levels in the non-spot

months for the non-legacy agricultural, metals, and

energy core referenced futures contracts.

exchange-set limits that are in line with

common commercial hedging practices;

the elimination of a restriction for

purposes of federal limits on holding

positions during the last trading days of

the spot month; and broader discretion

for market participants to measure risk

in the manner most suitable for their

business.

Second, the proposal establishes

limits on a limited set of commodities

for which the Commission preliminarily

finds that speculative position limits are

necessary.

17

As described below, this

necessity finding is based on a

combination of factors including: The

particular importance of these contracts

in the price discovery process for their

respective underlying commodities, the

fact that they require physical delivery

of the underlying commodity, and, in

some cases, the commodities’ particular

importance to the national economy and

especially acute economic burdens on

interstate commerce that would arise

from excessive speculation causing

sudden or unreasonable fluctuations or

unwarranted changes in the price of the

commodities underlying these

contracts.

18

Third, the Commission preliminarily

believes that 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’ self-regulatory

responsibilities, resources, deep

knowledge of their markets and trading

practices, close interactions with market

participants, existing programs for

addressing exemption requests, and

ability to generally act more quickly

than the Commission, the Commission

preliminarily believes that cooperation

between the Commission and the

exchanges on position limits should not

only be continued, but enhanced. For

example, exchanges are particularly

well-positioned to provide the

Commission with estimates of

deliverable supply, to recommend limit

levels for the Commission’s

consideration, and to help administer

the program for recognizing bona fide

hedges. Further, given that the

Commission is proposing to require

exchanges to collect, and provide to the

Commission upon request, cash-market

information from market participants

requesting bona fide hedges, the

Commission also proposes to eliminate

Form 204, which market participants

with bona fide hedging positions in

excess of limits currently file each

month with the Commission to

demonstrate cash-market positions

justifying such overages. The

Commission preliminarily believes that

enhanced collaboration will maintain

the Commission’s access to information

and result in a more efficient

administrative process, in part by

reducing duplication of efforts. The

Commission invites comments on all

aspects of this rulemaking.

B. Executive Summary

This executive summary provides an

overview of the key components of this

proposal. The summary only highlights

certain aspects of the proposed

regulations and generally uses

shorthand to summarize complex

topics. The executive summary is

neither intended to be a comprehensive

recitation of the proposal 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

proposed regulations, and Section V

includes the actual regulations.

1. Contracts Subject to Federal

Speculative Position Limits

Federal speculative position limits

would apply to ‘‘referenced contracts,’’

which include: (a) 25 ‘‘core referenced

futures contracts;’’ (b) futures and

options directly or indirectly linked to

a core referenced futures contract; and

(c) ‘‘economically equivalent swaps.’’

a. Core Referenced Futures Contracts

Federal speculative position limits

would apply to the following 25

physically-settled core referenced

futures contracts:

Legacy agricultural

(federal limits during and outside the spot

month)

Non-legacy agricultural

(federal limits only during the spot month)

19

Metals

(federal limits only during the spot month)

CBOT Corn (C) ................................................... CBOT Rough Rice (RR) .................................. COMEX Gold (GC).

CBOT Oats (O) .................................................. ICE Cocoa (CC) ............................................... COMEX Silver (SI)

CBOT Soybeans (S) .......................................... ICE Coffee C (KC) ........................................... COMEX Copper (HG).

CBOT Wheat (W) ............................................... ICE FCOJ–A (OJ) ............................................ NYMEX Platinum (PL).

CBOT Soybean Oil (SO) .................................... ICE U.S. Sugar No. 11 (SB) ............................ NYMEX Palladium (PA).

CBOT Soybean Meal (SM) ................................ ICE U.S. Sugar No. 16 (SF) ............................ Energy

(federal limits only during the spot month)

MGEX Hard Red Spring Wheat (MWE) ............. CME Live Cattle (LC) ....................................... NYMEX Henry Hub Natural Gas (NG).

ICE Cotton No. 2 (CT) ........................................ NYMEX Light Sweet Crude Oil (CL).

CBOT KC Hard Red Winter Wheat (KW) .......... NYMEX New York Harbor ULSD Heating Oil

(HO).

NYMEX New York Harbor RBOB Gasoline

(RB).

b. Futures and Options on Futures

Linked to a Core Referenced Futures

Contract

Referenced contracts would also

include futures and options on futures

that are directly or indirectly linked to

the price of a core referenced futures

contract or to the same commodity

underlying the applicable core

referenced futures contract for delivery

at the same location as specified in that

core referenced futures contract.

Referenced contracts, however, would

not include location basis contracts,

commodity index contracts, swap

guarantees, and trade options that meet

certain requirements.

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The proposed federal spot month limit for Live

Cattle would feature a step-down limit similar to

the CME’s existing Live Cattle step-down exchange

set limit. The proposed 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.

21

The proposed federal spot month limit for Light

Sweet Crude Oil would feature 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.

c. Economically Equivalent Swaps

Referenced contracts would also

include economically equivalent swaps,

which would be defined as swaps with

‘‘identical material’’ contractual

specifications, terms, and conditions to

a referenced contract. Swaps in

commodities other than natural gas that

have identical material specifications,

terms, and conditions to a referenced

contract, but differences in lot size

specifications, notional amounts, or

delivery dates diverging by less than

one calendar day, would still be deemed

economically equivalent swaps. Natural

gas swaps that have identical material

specifications, terms, and conditions to

a referenced contract, but differences in

lot size specifications, notional

amounts, or delivery dates diverging by

less than two calendar days, would still

be deemed economically equivalent

swaps.

2. Federal Limit Levels During the Spot

Month

Federal spot month limits would

apply to referenced contracts on all 25

core referenced futures contracts. The

following proposed spot month limit

levels, summarized in the table below,

are set at or below 25 percent of

deliverable supply, as estimated using

recent data provided by the DCM listing

the core referenced futures contract, and

verified by the Commission. The

proposed spot month limits would

apply on a futures-equivalent basis

based on the size of the unit of trading

of the relevant core referenced futures

contract, and would apply ‘‘separately’’

to physically-settled and cash-settled

referenced contracts. Therefore, a

market participant could net positions

across physically-settled referenced

contracts, and separately could net

positions across cash-settled referenced

contracts, but would not be permitted to

net cash-settled referenced contracts

with physically-settled referenced

contracts.

Core referenced futures contract 2020 Proposed

spot month limit Existing federal

spot month limit

Existing

exchange-set

spot month limit

Legacy Agricultural Contracts

CBOT Corn (C) .............................................................................................. 1,200 600 600

CBOT Oats (O) .............................................................................................. 600 600 600

CBOT Soybeans (S) ...................................................................................... 1,200 600 600

CBOT Soybean Meal (SM) ............................................................................ 1,500 720 720

CBOT Soybean Oil (SO) ............................................................................... 1,100 540 540

CBOT Wheat (W) .......................................................................................... 1,200 600 600/500/400/300/220

CBOT KC Hard Red Winter Wheat (KW) ..................................................... 1,200 600 600

MGEX Hard Red Spring Wheat (MWE) ........................................................ 1,200 600 600

ICE Cotton No. 2 (CT) ................................................................................... 1,800 300 300

Other Agricultural Contracts

CME Live Cattle (LC) ....................................................................................

20

600/300/200 n/a 450/300/200

CBOT Rough Rice (RR) ................................................................................ 800 n/a 600/200/250

ICE Cocoa (CC) ............................................................................................. 4,900 n/a 1,000

ICE Coffee C (KC) ......................................................................................... 1,700 n/a 500

ICE FCOJ–A (OJ) .......................................................................................... 2,200 n/a 300

ICE U.S. Sugar No. 11 (SB) .......................................................................... 25,800 n/a 5,000

ICE U.S. Sugar No. 16 (SF) .......................................................................... 6,400 n/a n/a

Metals Contracts

COMEX Gold (GC) ........................................................................................ 6,000 n/a 3,000

COMEX Silver (SI) ......................................................................................... 3,000 n/a 1,500

COMEX Copper (HG) .................................................................................... 1,000 n/a 1,500

NYMEX Platinum (PL) ................................................................................... 500 n/a 500

NYMEX Palladium (PA) ................................................................................. 50 n/a 50

Energy Contracts

NYMEX Henry Hub Natural Gas (NG) .......................................................... 2,000 n/a 1,000

NYMEX Light Sweet Crude Oil (CL) .............................................................

21

6,000/5,000/4,000 n/a 3,000

NYMEX New York Harbor ULSD Heating Oil (HO) ...................................... 2,000 n/a 1,000

NYMEX New York Harbor RBOB Gasoline (RB) .......................................... 2,000 n/a 1,000

3. Federal Limit Levels Outside of the

Spot Month

Federal limits outside of the spot

month would apply only to referenced

contracts based on the nine legacy

agricultural commodities subject to

existing federal limits. All other

referenced contracts subject to federal

limits would be subject to federal limits

only during the spot month, as specified

above, and otherwise would only be

subject to exchange-set limits and/or

position accountability levels outside of

the spot month.

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In addition, as explained further below,

exchanges may choose to participate in the

Commission’s new proposed streamlined process

for reviewing bona fide hedge exemption

applications for purposes of federal limits.

23

The existing definition of ‘‘bona fide hedging

transactions and positions’’ enumerates the

following hedging transactions: (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

contracts under 1.3(z)(2)(ii)(A); (4) certain cross-

commodity hedges under 1.3(z)(2)(ii)(B); (5) hedges

of unfilled anticipated requirements under

1.3(z)(2)(ii)(C) and (6) hedges of offsetting unfixed

price cash commodity sales and purchases under

1.3(z)(2)(iii). The following additional hedging

practices are not enumerated in the existing

regulation, but are included as enumerated hedges

in the 2020 Proposal: (1) Hedges by agents; (2)

hedges of anticipated royalties; (3) hedges of

services; (4) offsets of commodity trade options; and

(5) hedges of anticipated merchandising.

The following proposed non-spot

month limit levels, summarized in the

table below, are set at 10 percent of

open interest for the first 50,000

contracts, with an incremental increase

of 2.5 percent of open interest thereafter,

and would apply on a futures-

equivalent basis based on the size of the

unit of trading of the relevant core

referenced futures contract:

Core referenced futures contract

2020 Proposed

single month

and all-months

combined limit

Existing federal

single month

and all-months-

combined limit

Existing

exchange-set

single month

and all-months-

combined limit

CBOT Corn (C) .......................................................................................................... 57,800 33,000 33,000

CBOT Oats (O) .......................................................................................................... 2,000 2,000 2,000

CBOT Soybean (S) .................................................................................................... 27,300 15,000 15,000

CBOT Soybean Meal (SM) ........................................................................................ 16,900 6,500 6,500

CBOT Soybean Oil (SO) ........................................................................................... 17,400 8,000 8,000

CBOT Wheat (W) ...................................................................................................... 19,300 12,000 12,000

CBOT KC HRW Wheat (KW) .................................................................................... 12,000 12,000 12,000

MGEX HRS Wheat (MWE) ........................................................................................ 12,000 12,000 12,000

ICE Cotton No. 2 (CT) ............................................................................................... 11,900 5,000 5,000

4. Exchange-Set Limits and Exemptions

Therefrom

a. Contracts Subject to Federal Limits

An exchange that lists a contract

subject to federal limits, as specified

above, would be required to set its own

limits for such contracts at a level that

is no higher than the federal level.

Exchanges would be allowed to grant

exemptions from their own limits,

provided the exemption does not

subvert the federal limits framework.

22

b. Physical Commodity Contracts Not

Subject to Federal Limits

For physical commodity contracts not

subject to federal limits, an exchange

would generally be required to set spot

month limits no greater than 25 percent

of deliverable supply, but would have

flexibility to submit other approaches

for review by the Commission, provided

the approach results in spot month

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, such an

exchange would have 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 would provide several

examples of formulas that the

Commission has determined would

meet this standard, but an exchange

would have the flexibility to develop

other approaches.

Exchanges would be provided

flexibility to grant a variety of

exemption types, provided that the

exchange must take into account

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.’’

5. Limits on ‘‘Pre-Existing Positions’’

Certain ‘‘Pre-Existing Positions’’ that

were entered into prior to the effective

date of final position limits rules would

not be subject to federal limits. 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 60 days after

the publication of final position limits

rules, would not be subject to federal

limits. All other ‘‘Pre-Existing

Positions’’ that are acquired in good

faith prior to the effective date of final

position limits rules would be subject to

federal limits during, but not outside,

the spot month.

6. Substantive Standards for Exemptions

From Federal Limits

a. Bona Fide Hedge Recognition

Hedging transactions or positions may

continue to exceed federal limits if they

satisfy all three elements of the

‘‘general’’ bona fide hedging definition:

(1) The hedge represents a substitute for

transactions or positions made at a later

time in a physical marketing channel

(‘‘temporary substitute test’’); (2) the

hedge is economically appropriate to

the reduction of risks in the conduct

and management of a commercial

enterprise (‘‘economically appropriate

test’’); and (3) the hedge arises from the

potential change in value of actual or

anticipated assets, liabilities, or services

(‘‘change in value requirement’’). The

Commission proposes several changes

to the existing bona fide hedging

definition, including those described

immediately below, and also proposes a

streamlined process for granting bona

fide hedge recognitions, described

further below.

First, for referenced contracts based

on the 25 core referenced futures

contracts listed in § 150.2(d), the

Commission would expand the current

list of enumerated bona fide hedges to

cover additional hedging practices

included in the 2016 Reproposal, as

well as hedges of anticipated

merchandising.

23

Persons who hold a

bona fide hedging transaction or

position in accordance with § 150.1 in

referenced contracts based on one of the

25 core referenced futures contracts and

whose hedging practice is included in

the list of enumerated hedges in

Appendix A of part 150 would not be

required to request prior approval from

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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.

the Commission to hold such bona fide

hedge position. That is, such

exemptions would be self-effectuating

for purposes of federal speculative

position limits, so a person would only

be required to request the bona fide

hedge exemption from the relevant

exchange for purposes of exchange-set

limits. Transactions or positions that do

not fit within one of the enumerated

hedges could still be recognized as a

bona fide hedge, provided the

Commission, or an exchange subject to

Commission oversight, recognizes the

position as such using one of the

processes described below. The

Commission would be open to adopting

additional enumerated hedges as it

becomes more comfortable with

evolving hedging practices, particularly

in the energy space, and provided the

practices comply with the general bona

fide hedging definition.

Second, the Commission is clarifying

its position on whether and when

market participants may measure risk

on a gross basis rather than on a net

basis in order to provide market

participants with greater flexibility.

Instead of only being permitted to hedge

on a ‘‘net basis’’ except in a narrow set

of circumstances, market participants

would also now be able to hedge

positions on a ‘‘gross basis’’ in certain

circumstances, provided that the

participant has done so over time in a

consistent manner and is not doing so

to evade the federal limits.

Third, market participants would

have additional leeway to hold bona

fide hedging positions in excess of

limits during the last five days of the

spot period (or during the time period

for the spot month if less than five

days). The proposal would not include

such a restriction for purposes of federal

limits, and would make clear that

exchanges continue to have the

discretion to adopt such restrictions for

purposes of exchange-set limits. The

proposal would also include flexible

guidance on the circumstances under

which exchanges may waive any such

limitation for purposes of their own

limits.

Finally, the proposal would modify

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 would generally no

longer be allowed to treat positions

entered into for ‘‘risk management

purposes’’

24

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

a 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.

b. Spread Exemption

Transactions or positions may also

continue to exceed federal limits if they

qualify as a ‘‘spread transaction,’’ which

includes the following common types of

spreads: Calendar spreads, inter-

commodity spreads, quality differential

spreads, processing spreads (such as

energy ‘‘crack’’ or soybean ‘‘crush’’

spreads), product or by-product

differential spreads, or futures-option

spreads. Spread exemptions may be

granted using the process described

below.

c. Financial Distress Exemption

This exemption would allow a market

participant to exceed federal limits if

necessary to take on the positions and

associated risk of another market

participant during a potential default or

bankruptcy situation. This exemption

would be available on a case-by-case

basis, depending on the facts and

circumstances involved.

d. Conditional Spot Month Limit

Exemption in Natural Gas

The rules would allow market

participants with cash-settled positions

in natural gas to exceed the proposed

2,000 contract spot month limit,

provided that the participant exits its

spot month positions in the New York

Mercantile Exchange (‘‘NYMEX’’) Henry

Hub (NG) physically-settled natural gas

contracts, and provided further that the

participant’s position in cash-settled

natural gas contracts does not exceed

10,000 NYMEX Henry Hub Natural Gas

(NG) equivalent-size natural gas

contracts per DCM that lists a natural

gas referenced contract. Such market

participants would be permitted to hold

an additional 10,000 contracts in cash-

settled natural gas economically

equivalent swaps.

7. Process for Requesting Bona Fide

Hedge Recognitions and Spread

Exemptions

a. Self-Effectuating Enumerated Bona

Fide Hedges

For referenced contracts based on any

core referenced futures contract listed in

§ 150.2(d), bona fide hedge recognitions

for positions that fall within one of the

proposed enumerated hedges, including

the proposed anticipatory enumerated

hedges, would be self-effectuating for

purposes of federal limits, provided the

market participant separately applies to

the relevant exchange for an exemption

from exchange-set limits. Such market

participants would no longer be

required to file Form 204/304 with the

Commission on a monthly basis to

demonstrate cash-market positions

justifying position limit overages.

Instead, the Commission would have

access to cash-market information such

market participants submit as part of

their application to an exchange for an

exemption from exchanges-set limits,

typically filed on an annual basis.

b. Bona Fide Hedges That Are Not Self-

Effectuating

The Commission will consider adding

to the proposed list of enumerated

hedges at a later time once the

Commission becomes more familiar

with common commercial hedging

practices for referenced contracts

subject to federal position limits. Until

that time, all bona fide hedging

recognitions that are not enumerated in

Appendix A of part 150 would be

granted pursuant to one of the proposed

processes for requesting a non-

enumerated bona fide hedge

recognition, as explained below.

A market participant seeking to

exceed federal limits for a non-

enumerated bona fide hedging

transaction or position would be able to

choose whether to apply directly to the

Commission or, alternatively, apply to

the applicable exchange using a new

proposed streamlined process. If

applying directly to the Commission,

the market participant would also have

to separately apply to the relevant

exchange for relief from exchange-set

position limits. If applying to an

exchange using the new proposed

streamlined process, a market

participant would be able to file an

application with an exchange, generally

at least annually, which would be valid

both for purposes of federal and

exchange-set limits. Under this

streamlined process, if the exchange

determines to grant a non-enumerated

bona fide hedge recognition for

purposes of its exchange-set limits, the

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The categories are: 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-option spreads.

26

This 2020 Proposal does not propose to amend

current §150.4 dealing with aggregation of

positions for purposes of compliance with federal

position limits. Section 150.4 was amended in 2016

in a prior rulemaking. See Final Aggregation

Rulemaking, 81 FR at 91454.

27

The seven additional agricultural contracts that

would be 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 U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No.

16 (SF). The four energy contracts that would be

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 would be 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 proposing federal

limits only during the spot month would be subject

to exchange-set limits and/or accountability outside

of the spot month.

28

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.

exchange must notify the Commission

and the applicant simultaneously. Then,

10 business days (or two business days

in the case of sudden or unforeseen

bona fide hedging needs) after the

exchange issues such a determination,

the market participant could rely on the

exchange’s determination for purposes

of federal limits unless the Commission

(and not staff) notifies the market

participant otherwise. After the 10

business days expire, the bona fide

hedge exemption would be valid both

for purposes of federal and exchange

position limits and the market

participant would be able to take on a

position that exceeds federal position

limits. Under this streamlined process,

during the 10 business day review

period, any rejection of an exchange

determination would require

Commission action. Further, if, for

purposes of federal position limits, the

Commission determines to reject an

application for exemption, the applicant

would not be subject to any position

limits violation during the period of the

Commission’s review nor once the

Commission has issued its rejection,

provided the person reduces the

position within a commercially

reasonable amount of time, as

applicable.

Under the proposal, positions that do

not fall within one of the enumerated

hedges could thus still be recognized as

bona fide hedges, provided the

exchange deems the position to comply

with the general bona fide hedging

definition, and provided that the

Commission does not object to such a

hedge within the ten-day (or two-day, as

appropriate) window.

Requests and approvals to exceed

limits would generally have to be

obtained in advance of taking on the

position, but the proposed rule would

allow market participants with sudden

or unforeseen hedging needs to file a

request for a bona fide hedge exemption

within five business days of exceeding

the limit. If the Commission rejects the

application, the market participant

would not be subject to a position limit

violation, provided the participant

reduces its position within a

commercially reasonable amount of

time.

Among other changes, market

participants would also no longer be

required to file Form 204/304 with the

Commission on a monthly basis to

demonstrate cash-market positions

justifying position limit overages.

c. Spread Exemptions

For referenced contracts on any

commodity, spread exemptions would

be self-effectuating for purposes of

federal limits, provided that the

position: Falls within one of the

categories set forth in the proposed

‘‘spread transaction’’ definition,

25

and

provided further that the market

participant separately applies to the

applicable exchange for an exemption

from exchange-set limits.

Market participants with a spread

position that does not fit within the

‘‘spread transaction’’ definition with

respect to any of the commodities

subject to the proposed federal limits

may apply directly to the Commission,

and must also separately apply to the

applicable exchange.

8. Comment Period and Compliance

Date

The public may comment on these

rules during a 90-day period that starts

after this proposal has been approved by

the Commission. Market participants

and exchanges would be required to

comply with any position limit rules

finalized from herein no later than 365

days after publication in the Federal

Register.

C. Summary of Proposed Amendments

The Commission is proposing

revisions to §§ 150.1, 150.2, 150.3,

150.5, and 150.6 and to parts 1, 15, 17,

19, 40, and 140, as well as the addition

of §§ 150.8, 150.9, and Appendices A–

F to part 150.

26

Most noteworthy, the

Commission proposes the following

amendments to the foregoing rule

sections, each of which, along with all

other proposed changes, is discussed in

greater detail in Section II of this

release. The following summary is not

intended to provide a substantive

overview of this proposal, but rather is

intended to provide a guide to the rule

sections that address each topic. Please

see the executive summary above for an

overview of this proposal organized by

topic, rather than by section number.

•The Commission preliminarily

finds that federal speculative position

limits are necessary for 25 core

referenced futures contracts and

proposes federal limits on physically-

settled and linked cash-settled futures,

options on futures, and ‘‘economically

equivalent’’ swaps for such

commodities. The 25 core referenced

futures contracts would include the

nine ‘‘legacy’’ agricultural contracts

currently subject to federal limits and 16

additional non-legacy contracts, which

would include: seven additional

agricultural contracts, four energy

contracts, and five metals contracts.

27

Federal spot and non-spot month limits

would apply to the nine ‘‘legacy’’

agricultural contracts currently subject

to federal limits,

28

and only federal spot

month limits would apply to the

additional 16 non-legacy contracts.

Outside of the spot month, these 16

non-legacy contracts would be subject to

exchange-set limits and/or

accountability levels if listed on an

exchange.

•Amendments to § 150.1 would 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

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 limits; a ‘‘spread transaction’’

definition; and a definition of ‘‘bona

fide hedging transactions or positions’’

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 would list

the 25 core referenced futures contracts

which, along with any associated

referenced contracts, would be subject

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Proposed §150.5 addresses exchange-set

position limits and exemptions therefrom, whereas

proposed §150.3 addresses exemptions from federal

limits, and proposed §150.9 addresses federal

limits and acceptance of exchange-granted bona

fide hedging recognitions for purposes of federal

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.

30

ISDA, 887 F.Supp.2d at 259, 281.

31

7 U.S.C. 6a(a)(2)(A).

32

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

33

2011 Final Rulemaking, 76 FR at 71626, 71627.

34

ISDA, 887 F.Supp.2d at 279–280.

35

Id. at 281.

36

See infra Section III.F.

37

17 CFR 1.3 and 150.1, respectively.

38

In addition to the amendments described

below, the Commission proposes 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,

Continued

to federal limits; and specify the

proposed federal spot and non-spot

month limit levels. Federal spot month

limit levels would be set at or below 25

percent of deliverable supply, whereas

federal non-spot month limit levels

would be set at 10 percent of open

interest for the first 50,000 contracts of

open interest, with an incremental

increase of 2.5 percent of open interest

thereafter.

•Amendments to § 150.3 would

specify the types of positions for which

exemptions from federal position limit

requirements may be granted, and

would 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

limits, bona fide hedge exemptions

listed in Appendix A to part 150 as an

enumerated bona fide hedge would be

self-effectuating for purposes of federal

limits. For non-enumerated hedges,

market participants must request

approval in advance of taking a position

that exceeds the federal position limit,

except in the case of sudden or

unforeseen hedging needs.

•Amendments to § 150.5 would

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 limits and physical commodity

derivatives not subject to federal

limits.

29

While the Commission will

oversee compliance with federal

position limits on swaps, amended

§ 150.5 would not apply to exchanges

with respect to swaps until a later time

once exchanges have access to sufficient

data to monitor compliance with limits

on swaps across exchanges.

•New § 150.9 would establish a

streamlined process for addressing

requests for bona fide hedging

recognitions for purposes of federal

limits, leveraging off exchange expertise

and resources while affording the

Commission an opportunity to intervene

as-needed. This process would be used

by market participants with non-

enumerated positions. Under the

proposed rule, market participants

could provide one application for a

bona fide hedge to a designated contract

market or swap execution facility, as

applicable, and receive approval of such

request for purposes of both exchange-

set limits and federal limits.

•New Appendix A to part 150 would

contain enumerated hedges, some of

which appear in the definition of bona

fide hedging transactions and positions

in current § 1.3, which would be

examples of positions that would

comply with the proposed bona fide

hedging definition. As the enumerated

hedges would be examples of bona fide

hedging positions, positions that do not

fall within any of the enumerated

hedges could still potentially be

recognized as bona fide hedging

positions, provided the position

otherwise complies with the proposed

bona fide hedging definition and all

other applicable requirements.

•Amendments to part 19 and related

provisions would eliminate Form 204,

enabling the Commission to leverage

cash-market reporting submitted

directly to the exchanges under §§ 150.5

and 150.9.

D. The Commission Preliminarily

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.’’

30

The

provision states in relevant part that

‘‘the Commission shall’’ establish

position limits ‘‘as appropriate’’ for

contracts in physical commodities other

than excluded commodities ‘‘[i]n

accordance with the standards set forth

in’’ the preexisting section 4a(a)(1).

31

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.

32

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.

33

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.

34

The court vacated

the 2011 Final Rulemaking and directed

the Commission to apply its experience

and expertise to resolve that

ambiguity.

35

The Commission has done

so and preliminarily 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.

36

A

full legal analysis is set forth infra at

Section III.F.

The Commission preliminarily finds

that position limits are necessary for the

25 core referenced futures contracts, and

any associated referenced contracts.

This preliminary finding is based on a

combination of factors including: The

particular importance of these contracts

in the price discovery process for their

respective underlying commodities, the

fact that they require physical delivery

of the underlying commodity, and, in

some cases, the commodities’ particular

importance to the national economy and

especially acute economic burdens that

would arise from excessive speculation

causing sudden or unreasonable

fluctuations or unwarranted changes in

the price of the commodities underlying

these contracts.

II. Proposed Rules

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.

37

The

Commission proposes to update and

supplement the definitions in § 150.1,

including by moving a revised

definition of ‘‘bona fide hedging

transactions and positions’’ from § 1.3

into § 150.1. The proposed changes are

intended, among other things, to

conform the definitions to the Dodd-

Frank Act amendments to the CEA.

38

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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.’’).

39

7 U.S.C. 6a(c)(1). While portions of the CEA

and proposed §150.1 respectively refer, and would

refer, to the phrase ‘‘bona fide hedging transactions

or positions,’’ the Commission may use the phrases

‘‘bona fide hedging position,’’ ‘‘bona fide hedging

definition,’’ and ‘‘bona fide hedge’’ throughout this

section of the release as shorthand to refer to the

same.

40

7 U.S.C. 6a(c)(2).

41

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.

42

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

current 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 proposes to

address the need to formally remove the incorrect

version of the bona fide hedging definition as part

of this rulemaking.

43

See infra Section II.C.2. (discussion of

proposed §150.3) and Section II.G.3. (discussion of

proposed §150.9).

44

17 CFR 1.3.

45

17 CFR part 19.

46

17 CFR 1.3.

47

Id.

48

See Revision of Federal Speculative Position

Limits, 52 FR 38914 (Oct. 20, 1987).

49

Commodity Futures Modernization Act of

2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21,

2000).

50

See 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6).

Each proposed defined term is

discussed in alphabetical order below.

1. ‘‘Bona Fide Hedging Transactions or

Positions’’

a. Background

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 . . . .’’

39

The Dodd-Frank

Act directed the Commission, for

purposes of implementing CEA section

4a(a)(2), to adopt a definition consistent

with CEA section 4a(c)(2).

40

The current

definition of ‘‘bona fide hedging

transactions and positions,’’ which first

appeared in § 1.3 of the Commission’s

regulations in the 1970s,

41

is

inconsistent, in certain ways described

below, with the revised statutory

definition in CEA section 4a(c)(2).

Accordingly, and for the reasons

outlined below, the Commission

proposes to remove the current bona

fide hedging definition from § 1.3 and

replace it with an updated bona fide

hedging definition that would appear

alongside all of the other position limits

related definitions in proposed

§ 150.1.

42

This definition would be

applied in determining whether a

position is a bona fide hedge that may

exceed the proposed federal limits set

forth in § 150.2. The Commission’s

current bona fide hedging definition is

described immediately below, followed

by a discussion of the proposed new

definition. This section of the release

describes the substantive standards for

bona fide hedges. The process for

granting bona fide hedge recognitions is

discussed later in this release in

connection with proposed §§ 150.3 and

150.9.

43

b. The Commission’s Existing Bona Fide

Hedging Definition in § 1.3

Paragraph (1) of the current bona fide

hedging definition in § 1.3 contains

what is currently labeled the ‘‘general’’

bona fide hedging definition, which has

five key elements and requires that the

position must: (1) ‘‘normally’’ represent

a substitute for transactions or positions

made at a later time in a physical

marketing channel (‘‘temporary

substitute test’’); (2) be economically

appropriate to the reduction of risks in

the conduct and management of a

commercial enterprise (‘‘economically

appropriate test’’); (3) arise from the

potential change in value of actual or

anticipated assets, liabilities, or services

(‘‘change in value requirement’’); (4)

have a purpose to offset price risks

incidental to commercial cash or spot

operations (‘‘incidental test’’); and (5) be

established and liquidated in an orderly

manner (‘‘orderly trading

requirement’’).

44

Additionally, paragraph (2) currently

sets forth a non-exclusive list of four

categories of ‘‘enumerated’’ hedging

transactions that are included in the

general bona fide hedging definition in

paragraph (1). Market participants thus

need not seek recognition 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, as required by part 19 of the

Commission’s regulations.

45

The four

existing categories of enumerated

hedges are: (1) Hedges of ownership or

fixed-price cash commodity purchases

and hedges of unsold anticipated

production; (2) hedges of fixed-price

cash commodity sales and hedges of

unfilled anticipated requirements; (3)

hedges of offsetting unfixed-price cash

commodity sales and purchases; and (4)

cross-commodity hedges.

46

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 § 1.47 of

the Commission’s regulations.

47

c. Proposed Replacement of the Bona

Fide Hedging Definition in § 1.3 With a

New Bona Fide Hedging Definition in

§ 150.1

i. Background

The list of enumerated hedges found

in paragraph (2) of the current bona fide

hedging definition in § 1.3 was

developed at a time when only

agricultural commodities were subject

to federal limits, has not been updated

since 1987,

48

and is likely too narrow to

reflect common commercial hedging

practices, including for metal and

energy contracts. Numerous market and

regulatory developments have taken

place since then, 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

CFMA

49

and Dodd-Frank Act

introduced various regulatory reforms,

including the enactment of position

limits core principles.

50

The

Commission is thus proposing to update

its bona fide hedging definition to better

conform to the current state of the law

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51

In this rulemaking, the Commission proposes to

allow qualifying exchanges to process requests for

non-enumerated bona fide hedge recognitions for

purposes of federal limits. See infra Section II.G.3.

(discussion of proposed §150.9).

52

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.

53

7 U.S.C. 6a(c)(2)(A)(i).

54

17 CFR 1.3.

55

7 U.S.C. 6a(c)(2)(A)(i).

56

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 necessarily

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

27195, 27196 (July 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.

57

7 U.S.C. 6a(c)(2)(B). 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 §1.47

to allow swap dealers and others to hold

agricultural futures positions outside of the spot

month in excess of federal limits in order to offset

commodity index swap or related exposure,

typically opposite an institutional investor for

which the swap was not a bona fide hedge. 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.c.v.

(discussion of proposed pass-through language).

58

7 U.S.C. 6a(c)(2)(B). See infra Section II.A.1.c.v.

(discussion of 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

Continued

and to better reflect market

developments over time.

While one option for doing so could

be to expand the list of enumerated

hedges to encompass a larger array of

hedging strategies, the Commission does

not view this alone to be a practical

solution. It would be difficult to

maintain a list that captures all hedging

activity across commodity types, and

any list would inherently fail to take

into account future changes in industry

practices and other developments. The

Commission proposes to create a new

bona fide hedging definition in

proposed § 150.1 that would work in

connection with limits on a variety of

commodity types and accommodate

changing hedging practices over time.

The Commission proposes to couple

this updated definition with an

expanded list of enumerated hedges.

While positions that fall within the

proposed enumerated hedges, discussed

below, would be examples of positions

that comply with the bona fide hedging

definition, they would certainly not be

the only types of positions that could be

bona fide hedges. The proposed

enumerated hedges are intended to

ensure that the framework proposed

herein does not reduce any clarity

inherent in the existing framework; the

proposed enumerated hedges are in no

way intended to limit the universe of

hedging practices that could otherwise

be recognized as bona fide.

The Commission anticipates these

proposed modifications would provide

a significant degree of flexibility to

market participants in terms of how

they hedge, and to exchanges in terms

of how they evaluate transactions and

positions for purposes of their position

limit programs, without sacrificing any

of the clarity provided by the existing

bona fide hedging definition. Further, as

described in detail in connection with

the discussion of proposed § 150.9 later

in this release, the Commission

anticipates that allowing the exchanges

to process applications for bona fide

hedges for purposes of federal limits

would be significantly more efficient

than the existing processes for

exchanges and the Commission.

51

The

Commission discusses each element of

the proposed bona fide hedging

definition below, followed by a

discussion of the proposed enumerated

hedges. The Commission’s intent with

this proposal is to acknowledge to the

greatest extent possible, consistent with

the statutory language, existing bona

fide hedging exemptions provided by

exchanges.

ii. Proposed Bona Fide Hedging

Definition for Physical Commodities

The Commission proposes to

maintain the 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), and

proposes to eliminate the elements that

do not. In particular, the Commission

proposes to include the updated

versions of the temporary substitute test,

economically appropriate test, and

change in value requirements that are

described below, and eliminate the

incidental test and orderly trading

requirement, which are not included in

the revised statutory text. Each of these

proposed changes is described below.

52

(1) Temporary Substitute Test

The language of the temporary

substitute test that appears in the

Commission’s existing bona fide

hedging definition is inconsistent in

some ways with the language of the

temporary substitute test that currently

appears in the statute. In particular, the

bona fide hedging definition in section

4a(c)(2)(A)(i) of the CEA currently

provides, among other things, that a

bona fide hedging position ‘‘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.’’

53

The

Commission’s definition currently

provides that a bona fide hedging

position ‘‘normally represent[s] a

substitute for transactions to be made or

positions to be taken at a later time in

a physical marketing channel’’

(emphasis added).

54

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....’’

55

The Commission preliminarily

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.

56

Accordingly, the Commission

preliminarily interprets this change to

signal that the Commission should cease

to recognize ‘‘risk management’’

positions as bona fide hedges for

physical commodities, unless the

position satisfies the pass-through

swap/swap offset requirements in

section 4a(c)(2)(B) of the CEA, discussed

further below.

57

In order to implement

that statutory change, the Commission

proposes a narrower bona fide hedging

definition for physical commodities in

proposed § 150.1 that does not include

the word ‘‘normally’’ currently found in

the temporary substitute language in

paragraph (1) of the existing § 1.3 bona

fide hedging definition.

The practical effect of conforming the

temporary substitute test in the

regulation to the amended statutory

provision would be to prevent market

participants from treating positions

entered into for risk management

purposes as bona fide hedges for

contracts subject to federal limits,

unless the position qualifies under the

pass-through swap provision in CEA

section 4a(c)(2)(B).

58

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restrictions on risk management exemptions that

apply to physical commodities subject to federal

limits do not apply to excluded commodities.

59

See infra Section II.C.2.g. (discussion of

revoking existing risk management exemptions).

60

See 7 U.S.C. 6a(c)(2)(B)(i). The pass-through

swap offset language in the proposed bona fide

hedging definition is discussed in greater detail

below.

61

See infra Section II.B.2.d. (discussion of non-

spot month limit levels).

62

The proposed non-spot month levels for the

nine legacy agricultural contracts were calculated

using a methodology that, with the exception of

CBOT Oats (O), CBOT KC HRW Wheat (KW), and

MGEX HRS Wheat (MWE), would result in higher

levels than under existing rules and prior proposals.

See infra Section II.B.2.d (discussion of proposed

non-spot month limit levels).

63

See infra Section II.A.1.c.v. (discussion of

proposed pass-through language).

64

7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3.

65

See, e.g., 2013 Proposal, 78 FR at 75709, 75710.

66

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 cash

market value of the assets, liabilities or services

being hedged.’’ Bona Fide Hedging Transactions or

Positions, 42 FR 14832, 14833 (Mar. 16, 1977).

‘‘Value’’ is generally understood to mean price

times quantity. Dodd-Frank added CEA section

4a(c)(2), which copied the economically

appropriate test from the Commission’s definition

in §1.3. See also 2013 Proposal, 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’’).

67

See, e.g., 2016 Reproposal, 81 FR at 96847.

68

The Commission proposes to replace the phrase

‘‘liabilities which a person owns,’’ which appears

in the statute erroneously, with ‘‘liabilities which

the Commission previously viewed

positions in physical commodities,

entered into for risk management

purposes to offset the risk of swaps and

other financial instruments and not as

substitutes for transactions or positions

to be taken in a physical marketing

channel, as bona fide hedges. However,

given the statutory change, positions

that reduce the risk of such swaps and

financial instruments would no longer

meet the requirements for a bona fide

hedging position under CEA section

4a(c)(2) and under proposed § 150.1. As

discussed below, any such previously-

granted risk management exemptions

would generally no longer apply after

the effective date of the speculative

position limits proposed herein.

59

Further, retaining such exemptions for

swap intermediaries, without regard to

the purpose of their counterparty’s

swap, would be inconsistent with the

statutory restrictions on pass-through

swap offsets, which require that the

swap position being offset qualify as a

bona fide hedging position.

60

Aside

from this change, the Commission is not

proposing any other modifications to its

existing temporary substitute test.

While the Commission preliminarily

interprets the Dodd-Frank amendments

to the CEA as constraining the

Commission from recognizing as bona

fide hedges risk management positions

involving physical commodities, the

Commission has in part addressed the

hedging needs of persons seeking to

offset the risk from swap books by

proposing the pass-through swap and

pass-through swap offset provisions

discussed below.

The Commission observes that while

‘‘risk management’’ positions would not

qualify as bona fide hedges, some other

provisions in this proposal may provide

flexibility for existing and prospective

risk management exemption holders in

a manner that comports with the statute.

In particular, the Commission

anticipates that the proposal to limit the

applicability of federal non-spot month

limits to the nine legacy agricultural

contracts,

61

coupled with the proposed

adjustment to non-spot limit levels

based on updated open interest numbers

for the nine legacy agricultural contracts

currently subject to federal limits,

62

may

accommodate risk management activity

that remains below the proposed levels

in a manner that comports with the

CEA. Further, to the extent that such

activity would be opposite a

counterparty for whom the swap is a

bona fide hedge, the Commission would

encourage intermediaries to consider

whether they would qualify under the

bona fide hedging position definition for

the proposed pass-through swap

treatment, which is explicitly

authorized by the CEA and discussed in

greater detail below.

63

Moreover, while

positions entered into for risk

management purposes may no longer

qualify as bona fide hedges, some may

satisfy the proposed requirements for

spread exemptions. Finally, consistent

with existing industry practice,

exchanges may continue to recognize

risk management positions for contracts

that are not subject to federal limits,

including for excluded commodities.

(2) Economically Appropriate Test

The 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

appropriate to the reduction of risks in

the conduct and management of a

commercial enterprise.’’

64

The

Commission proposes to replicate this

standard in the new definition in

§ 150.1, 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

limits,

65

the Commission proposes to

make explicit that the word ‘‘risks’’

refers to, and is limited to, ‘‘price risk.’’

This proposed clarification does not

reflect any change in policy, as the

Commission has, when defining bona

fide hedging, historically focused on

transactions that offset price risk.

66

Commenters have previously

requested flexibility for hedges of non-

price risk.

67

However, re-interpreting

‘‘risk’’ to mean something other than

‘‘price risk’’ would make determining

whether a particular position is

economically appropriate to the

reduction of risk too subjective to

effectively evaluate. While 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. For example, for any

given non-price risk, such as political

risk, there could be multiple

commodities, directions, and contract

months which a particular market

participant may view as an

economically appropriate offset for that

risk, and multiple market participants

might take different views on which

offset is the most effective. Re-

interpreting ‘‘risk’’ to mean something

other than ‘‘price risk’’ would introduce

an element of subjectivity that would

make a federal position limit framework

difficult, if not impossible, to

administer.

The Commission remains open to

receiving new product submissions, and

should those submissions include

contracts or strategies that are used to

hedge something other than price risk,

the Commission could at that point

evaluate whether to propose regulations

that would recognize hedges of risks

other than price risk as bona fide

hedges.

(3) Change in Value Requirement

The Commission proposes 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.

68

Aside

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a person owes,’’ which the Commission believes

was the intended wording. The Commission

interprets 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

proposes several other non-substantive

modifications in sentence structure to improve

clarity.

69

7 U.S.C. 6a(c)(2)(A)(iii).

70

17 CFR 1.3.

71

7 U.S.C. 6a(c)(2).

72

The orderly trading requirement has been a part

of the regulatory definition of bona fide hedging

since 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).

73

7 U.S.C. 6c(a)(5).

74

17 CFR 1.3.

75

See infra Section II.C.2. (discussion of

proposed §150.3) and Section II.G.3. (discussion of

proposed §150.9).

76

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.

77

Bona Fide Hedging Transactions or Positions,

42 FR 14832 (Mar. 16, 1977).

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).

69

(4) Incidental Test and Orderly Trading

Requirement

While the Commission proposes to

maintain the substance of the three core

elements of the existing bona fide

hedging definition described above,

with some modifications, the

Commission also proposes 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.

70

Notably, Congress eliminated the

incidental test from the statutory bona

fide hedging definition in CEA section

4a(c)(2).

71

Further, the Commission

views the incidental test as redundant

because the Commission is proposing to

maintain the change in value

requirement (value is generally

understood to mean price per unit times

quantity of units), and 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.

The Commission does not view the

proposed elimination of the incidental

test in the definition that appears in the

regulations as a change in policy. The

proposed elimination would not result

in any changes to the Commission’s

interpretation of the bona fide hedging

definition for physical commodities.

The Commission also preliminarily

believes that the orderly trading

requirement should be deleted from the

definition in the Commission’s

regulations because the statutory bona

fide hedging definition does not include

an orderly trading requirement,

72

and

because the meaning of ‘‘orderly

trading’’ is unclear in the context of the

over-the counter (‘‘OTC’’) swap market

and in the context of permitted off-

exchange transactions, such as exchange

for physicals. The proposed elimination

of the orderly trading requirement

would also have no bearing on an

exchange’s ability to impose its own

orderly trading requirement. Further, in

proposing to eliminate the orderly

trading requirement from the definition

in the regulations, the Commission is

not proposing any amendments or

modified interpretations to any other

related requirements, including to any

of the anti-disruptive trading

prohibitions in CEA section 4c(a)(5),

73

or to any other statutory or regulatory

provisions.

Taken together, the proposed

retention of the updated temporary

substitute test, economically

appropriate test, and change in value

requirement, coupled with the proposed

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.

iii. Proposed Enumerated Bona Fide

Hedges for Physical Commodities

Federal position limits currently only

apply to referenced contracts based on

nine legacy agricultural commodities,

and, as mentioned above, the bona fide

hedging definition in existing § 1.3

includes a list of four categories of

enumerated hedges that may be exempt

from federal position limits.

74

So as not

to reduce any of the clarity provided by

the current list of enumerated hedges,

the Commission proposes to maintain

the existing enumerated hedges, some

with modification, and, for the reasons

described below, to expand this list.

Such enumerated bona fide hedges

would be self-effectuating for purposes

of federal limits.

75

The Commission also

proposes to move the expanded list to

proposed Appendix A to part 150 of the

Commission’s regulations. The

Commission preliminarily believes that

the list of enumerated hedges should

appear in an appendix, rather than be

included in the definition, because each

enumerated hedge represents just one

way, but not the only way, to satisfy the

proposed bona fide hedging definition

and § 150.3(a)(1).

76

In some places, as

described below, the Commission

proposes to modify and/or re-organize

the language of the current enumerated

hedges; such proposed changes are

intended only to provide clarifications,

and, unless indicated otherwise, are not

intended to substantively modify the

types of practices currently listed as

enumerated hedges. In other places,

however, the Commission proposes

substantive changes to the existing

enumerated hedges, including the

elimination of the five-day rule for

purposes of federal limits, while

allowing exchanges to impose a five-day

rule, or similar restrictions, for purposes

of exchange-set limits. With the

exception of risk management positions

previously recognized as bona fide

hedges, and assuming all regulatory

requirements continue to be satisfied,

bona fide hedging recognitions that are

currently in effect under the

Commission’s existing rules, either by

virtue of § 1.47 or one of the enumerated

hedges currently listed in § 1.3, would

be grandfathered once the rules

proposed herein are adopted.

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.’’

77

Similarly, the

proposed enumerated hedges would

reflect fact patterns for which the

Commission has preliminarily

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

proposal would in no way foreclose the

recognition of other hedging practices as

bona fide hedges.

The Commission would be open, on

a case-by-case basis, to recognizing as

bona fide hedges positions or

transactions that may fall outside the

bounds of these enumerated hedges, but

that nevertheless satisfy the proposed

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See infra Section II.G.3. (discussion of

proposed §150.9).

79

See, e.g., 2016 Reproposal, 81 FR at 96752.

80

The Commission stated when it proposed this

enumerated hedge, ‘‘[i]n 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).

81

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.’’

82

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.

83

In 2013, the Commission provided an example

regarding this enumerated hedge: ‘‘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.’’ 2013 Proposal, 78 FR at 75715.

84

See 2011 Final Rulemaking, 76 FR at 71646. As

noted above, part 151 was subsequently vacated.

bona fide hedging definition and section

4a(c)(2) of the CEA.

78

The Commission does not anticipate

that moving the list of enumerated

hedges from the bona fide hedging

definition to an appendix per se would

have a substantial impact on market

participants who seek clarity regarding

bona fide hedges. However, the

Commission is open to feedback on this

point.

Positions in referenced contracts

subject to position limits that meet any

of the proposed enumerated hedges

would, for purposes of federal limits,

meet the bona fide hedging definition in

CEA section 4a(c)(2)(A), as well as the

Commission’s proposed bona fide

hedging definition in § 150.1. Any such

recognitions would be self-effectuating

for purposes of federal limits, provided

the market participant separately

requests an exemption from the

applicable exchange-set limit

established pursuant to proposed

§ 150.5(a). The proposed enumerated

hedges are each described below,

followed by a discussion of the

proposal’s treatment of the five-day rule.

(1) Hedges of Unsold Anticipated

Production

This hedge is currently enumerated in

paragraph (2)(i)(B) of the bona fide

hedging definition in § 1.3, and is

subject to the five-day rule. The

Commission proposes to maintain it as

an enumerated hedge, with the

modification described below. This

enumerated hedge would allow a

market participant who anticipates

production, but who has not yet

produced anything, to enter into a short

derivatives position in excess of limits

to hedge the anticipated production.

While existing paragraph (2)(i)(B)

limits this enumerated hedge to twelve-

months’ unsold anticipated production,

the Commission proposes to remove the

twelve-month limitation. The twelve-

month limitation may be unsuitable in

connection with additional contracts

based on agricultural and energy

commodities covered by this release,

which may have longer growth and/or

production cycles than the nine legacy

agricultural commodities. Commenters

have also previously recommended

removing the twelve-month limitation

on agricultural production, stating that

it is unnecessarily short in comparison

to the expected life of investment in

production facilities.

79

The Commission

preliminarily agrees.

(2) Hedges of Offsetting Unfixed Price

Cash Commodity Sales and Purchases

This hedge is currently enumerated in

paragraph (2)(iii) of the bona fide

hedging definition in § 1.3 and is subject

to the five-day rule. The Commission

proposes to maintain it as an

enumerated hedge, with one proposed

modification described below. This

enumerated hedge allows a market

participant to use commodity

derivatives in excess of limits to offset

an unfixed price cash commodity

purchase coupled with an unfixed price

cash commodity sale.

Currently, under paragraph (2)(iii),

the cash commodity must be bought and

sold at unfixed prices at a basis to

different delivery months, meaning the

offsetting derivatives transaction would

be used to reduce the risk arising from

a time differential in the unfixed-price

purchase and sale contracts.

80

The

Commission proposes to expand this

provision to also 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 are in

the same calendar month. The

Commission is proposing 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

81

or a time differential in

unfixed-price purchase and sale

contracts in the same cash commodity.

Both an unfixed-price cash

commodity purchase and an offsetting

unfixed-price cash commodity sale must

be in hand in order to be eligible for this

enumerated hedge, because having both

the unfixed-price sale and purchase in

hand would allow for an objective

evaluation of the hedge.

82

Absent either

the unfixed-price purchase or the

unfixed-price sale (or absent both), it

would be less clear how the transaction

could be classified as a bona fide hedge,

that is, a transaction that reduces price

risk.

83

This is not to say that an unfixed-

price cash commodity purchase alone,

or an unfixed-price cash commodity

sale alone, could never be recognized as

a bona fide hedge. Rather, an additional

facts and circumstances analysis would

be warranted in such cases.

Further, upon fixing the price of, or

taking delivery on, the purchase

contract, the owner of the cash

commodity may hold the short

derivative leg of the spread as a hedge

against a fixed-price purchase or

inventory. However, the long derivative

leg of the spread would no longer

qualify as a bona fide hedging position,

since the commercial entity has fixed

the price or taken delivery on the

purchase contract. Similarly, if the

commercial entity first fixed the price of

the sales contract, the long derivative

leg of the spread may be held as a hedge

against a fixed-price sale, but the short

derivative leg of the spread would no

longer qualify as a bona fide hedging

position. Commercial entities in these

circumstances thus may have to

consider reducing certain positions in

order to comply with the regulations

proposed herein.

(3) Short Hedges of Anticipated Mineral

Royalties

The Commission is proposing a new

acceptable practice that is not currently

enumerated in § 1.3 for short hedges of

anticipated mineral royalties. The

Commission previously adopted a

similar provision as an enumerated

hedge in part 151 in response to a

request from commenters.

84

The

proposed provision would permit an

owner of rights to a future royalty to

lock in the price of anticipated mineral

production by entering into a short

position in excess of limits in a

commodity derivative contract to offset

the anticipated change in value of

mineral royalty rights that are owned by

that person and arise out of the

production of a mineral commodity

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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.

86

See 2011 Final Rulemaking, 76 FR at 71646. As

noted above, part 151 was subsequently vacated.

87

As the Commission previously stated,

regarding a proposed hedge for services, ‘‘crop

insurance providers and other agents that provide

services in the physical marketing channel could

qualify for a bona fide hedge of their contracts for

services arising out of the production of the

commodity underlying a [commodity derivative

contract].’’ 2013 Proposal, 78 FR at 75716.

88

For example, existing paragraph (2)(iv) of the

bona fide hedging definition recognizes as an

enumerated hedge the offset of a cash-market

position in one commodity, such as soybeans,

through a derivatives position in a different

commodity, such as soybean oil or soybean meal.

89

Specifically, for: (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, a cross-

commodity hedge could be used to offset risks

arising from a commodity other than the cash

commodity underlying the commodity derivatives

contract.

90

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 §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 §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).

91

See proposed Appendix A to part 150.

92

Id.

93

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.

(e.g., oil and gas).

85

The Commission

preliminarily believes that this remains

a common hedging practice, and that

positions that satisfy the requirements

of this acceptable practice would

conform to the general definition of

bona fide hedging without further

consideration as to the particulars of the

case.

The Commission proposes to limit

this acceptable practice to mineral

royalties; the Commission preliminarily

believes that while royalties have been

paid for use of land in agricultural

production, the Commission has not

received any evidence of a need for a

bona fide hedge recognition from

owners of agricultural production

royalties. The Commission requests

comment on whether and why such an

exemption might be needed for owners

of agricultural production or other

royalties.

(4) Hedges of Anticipated Services

The Commission is proposing a new

enumerated hedge that is not currently

enumerated in the § 1.3 bona fide

hedging definition for hedges of

anticipated services. The Commission

previously adopted a similar provision

as an enumerated hedge in part 151 in

response to a request from

commenters.

86

This enumerated hedge

would recognize as a bona fide hedge a

long or short derivatives 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.

87

The Commission

preliminarily believes that this remains

a common hedging practice, and that

positions that satisfy the requirements

of this acceptable practice would

conform to the general definition of

bona fide hedging without further

consideration as to the particulars of the

case.

(5) Cross-Commodity Hedges

Paragraph (2)(iv) of the existing § 1.3

bona fide hedge definition enumerates

the offset of cash purchases, sales, or

purchases and sales with a commodity

derivative other than the commodity

that comprised the cash position(s).

88

The Commission proposes to include

this hedge in the enumerated hedges

and expand its application such that

cross-commodity hedges could be used

to establish compliance with: Each of

the proposed enumerated hedges listed

in Appendix A to part 150;

89

and

hedges in 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 satisfies

each element of the relevant acceptable

practice.

90

This enumerated hedge is conditioned

on the fluctuations in value of the

position in the commodity derivative

contract or of the underlying cash

commodity being ‘‘substantially

related’’

91

to the fluctuations in value of

the actual or anticipated cash position

or pass-through swap. To be

‘‘substantially related,’’ the derivative

and cash market position, which may be

in different commodities, should have a

reasonable commercial relationship.

92

For example, there is a reasonable

commercial relationship between grain

sorghum, used as a food grain for

humans or as animal feedstock, with

corn underlying a derivative. There

currently is not a futures contract for

grain sorghum grown in the United

States listed on a U.S. DCM, so corn

represents a substantially related

commodity to grain sorghum in the

United States.

93

In contrast, there does

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 are not reasonable

substitutes for each other in that they

have very different pricing drivers. 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.

(6) Hedges of Inventory and Cash

Commodity Fixed-Price Purchase

Contracts

Hedges of inventory and cash-

commodity fixed-price purchase

contracts are included in paragraph

(2)(i)(A) of the existing § 1.3 bona fide

hedge definition, and the Commission

proposes to include them as an

enumerated hedge with minor

modifications. This proposed

enumerated hedge acknowledges that a

commercial enterprise is exposed to

price risk (e.g., that the market price of

the inventory could decrease) 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.

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. To

satisfy the requirements of this

particular enumerated hedge, a bona

fide hedge would be to establish a short

position in a commodity derivative

contract to offset such price risk. An

exchange may require such short

position holders to demonstrate the

ability to deliver against the short

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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.

95

For example, the Commission proposes 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.

96

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.

97

17 CFR 32.3.

98

It may not be possible to compute a futures-

equivalent basis for a trade option that does not

have a fixed strike price. Thus, under this

enumerated hedge, a market participant may not

use a trade option as a basis for a bona fide hedging

position until a fixed strike price reasonably may

be determined. 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.

99

The proposed inclusion of unfilled anticipated

requirements for resale by a utility to its customers

does not appear in the existing §1.3 bona fide

hedging definition. This provision is analogous to

the unfilled anticipated requirements provision of

existing paragraph (2)(ii)(C) of the existing bona fide

hedging definition, except the commodity is not for

use by the same person (that is, the utility), but

rather for anticipated use by the utility’s customers.

This would recognize a bona fide hedging position

where a utility is required or encouraged by its

public utility commission to hedge.

100

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.

101

See, e.g., 2016 Reproposal, 81 FR at 96751.

position in order to demonstrate a

legitimate purpose for holding a

position deep into the spot month.

94

(7) Hedges of Cash Commodity Fixed-

Price Sales Contracts

This hedge is enumerated in

paragraphs (2)(ii)(A) and (B) of the

existing § 1.3 bona fide hedge definition,

and the Commission proposes to

maintain it as an enumerated hedge.

This enumerated hedge acknowledges

that a commercial enterprise is exposed

to price risk (i.e., that the market price

of a commodity might be higher than

the price of a fixed-price sales contract

for that commodity) 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. To satisfy the

requirements of this particular

enumerated hedge, a bona fide hedge

would be to establish a long position in

a commodity derivative contract to

offset such price risk.

(8) Hedges by Agents

This proposed enumerated hedge is

included in paragraph (3) of the existing

§ 1.3 bona fide hedge definition as an

example of a potential non-enumerated

bona fide hedge. The Commission

proposes to include this example as an

enumerated hedge, with non-

substantive modifications,

95

because the

Commission preliminarily believes that

this is a common hedging practice, and

that positions which satisfy the

requirements of this enumerated hedge

would conform to the general definition

of bona fide hedging without further

consideration as to the particulars of the

case. This proposed provision would

allow an agent who has the

responsibility to trade cash commodities

on behalf of another entity for which

such positions would qualify as bona

fide hedging positions to hedge those

cash positions on a long or short basis.

For example, an agent may trade on

behalf of a farmer or a producer, or a

government may wish to contract with

a commercial firm to manage the

government’s cash wheat inventory; in

such circumstances, the agent or the

commercial firm would not take

ownership of the commodity it trades

on behalf of the farmer, producer, or

government, but would be an agent

eligible for an exemption to hedge the

risks associated with such cash

positions.

(9) Offsets of Commodity Trade Options

The Commission is proposing a new

enumerated hedge to recognize certain

offsets of commodity trade options as a

bona fide hedge. Under this proposed

enumerated hedge, a commodity trade

option meeting the requirements of

§ 32.3

96

of the Commission’s

regulations

97

may be deemed a cash

commodity fixed-price purchase or cash

commodity fixed-price sales contract, as

the case may be, provided that such

option is adjusted on a futures-

equivalent basis.

98

Because the

Commission proposes to include hedges

of cash commodity fixed-price purchase

contracts and hedges of cash commodity

fixed-price sales contracts as

enumerated hedges, the Commission

also proposes to include hedges of

commodity trade options as an

enumerated hedge.

(10) Hedges of Unfilled Anticipated

Requirements

This proposed enumerated hedge

appears in paragraph (2)(ii)(C) of the

existing § 1.3 bona fide hedge definition.

The Commission proposes to include it

as an enumerated hedge, with

modification. To satisfy the

requirements of this particular

enumerated hedge, a bona fide hedge

would be to establish a long position in

a commodity derivative contract to

offset the expected price risks associated

with the anticipated future purchase of

the cash-market commodity underlying

the commodity derivative contract.

Such unfilled anticipated requirements

could include requirements for

processing, manufacturing, use by that

person, or resale by a utility to its

customers.

99

Consistent with the

existing provision, for purposes of

exchange-set limits, exchanges may

wish to consider adopting rules

providing 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.

100

Any such quantity limitation

may help prevent the use of long futures

to source large quantities of the

underlying cash commodity. The

Commission preliminarily believes that

the two-month limitation would allow

for an amount of activity that is in line

with common commercial hedging

practices, without jeopardizing any

statutory objectives.

Although existing paragraph (2)(ii)(C)

limits this enumerated hedge to twelve-

months’ unfilled anticipated

requirements outside of the spot period,

the Commission proposes to remove the

twelve-month limitation because

commenters have previously stated, and

the Commission preliminarily believes,

that there is a commercial need to hedge

unfilled anticipated requirements for a

time period longer than twelve

months.

101

(11) Hedges of Anticipated

Merchandising

The Commission is proposing a new

enumerated hedge to recognize certain

offsets of anticipated purchases or sales

as a bona fide hedge. Under this

proposed enumerated hedge, a merchant

may establish a long or short position in

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See infra Section II.D.4. (discussion of

proposed §150.5).

103

CEA section 6(c)(2), 7 U.S.C. 9(2); CEA section

9(a)(3), 7 U.S.C. 13(a)(3); CEA section 9(a)(4), 7

U.S.C. 13(a)(4); 18 U.S.C. 1001.

104

The Working Group BFH Petition is available

at http://www.cftc.gov/stellent/groups/public/@

rulesandproducts/documents/ifdocs/wgbfhpetition

012012.pdf.

a commodity derivative contract to

offset the anticipated change in value of

the underlying commodity that the

merchant anticipates purchasing or

selling in the future. To safeguard

against misuse, the enumerated hedge

would be subject to certain conditions.

First, the commodity derivative position

must not exceed in quantity twelve

months’ of purchase or sale

requirements of the same commodity

that is anticipated to be merchandised.

This requirement is intended to ensure

that merchants are hedging their

anticipated merchandising exposure to

the value change of the underlying

commodity, while calibrating the

anticipated need within a reasonable

timeframe and the limitations in

physical commodity markets, such as

annual production or processing

capacity. Unlike in the enumerated

hedge for unsold anticipated

production, where the Commission is

proposing to eliminate the twelve-

month limitation, the Commission has

preliminarily determined that a twelve-

month limitation for anticipatory

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.

Second, the Commission is proposing

to limit this enumerated hedge to

merchants who are in the business of

purchasing and selling the underlying

commodity that is anticipated to be

merchandised, and who can

demonstrate that it is their historical

practice to do so. Such demonstrated

history should include a history of

making and taking delivery of the

underlying commodity, and a

demonstration of an ability to store and

move the underlying commodity. The

Commission has a longstanding practice

of providing exemptive relief to

commercial market participants to

enable physical commodity markets to

continue to be well-functioning markets.

The proposed anticipatory

merchandising hedge requires that the

person be a merchant handling the

underlying commodity that is subject to

the anticipatory merchandising hedge

and that such merchant is entering into

the anticipatory merchandising hedge

solely for purposes related to its

merchandising business. A

merchandiser that lacks the requisite

history of anticipatory merchandising

activity could still potentially receive

bona fide hedge recognition under the

proposed non-enumerated process, so

long as the merchandiser can otherwise

show activities in the physical

marketing channel, including, for

example, arrangements to take or make

delivery of the underlying commodity.

The Commission preliminarily

believes 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. Positions which satisfy the

requirements of this acceptable practice

would thus conform to the general

definition of bona fide hedging.

While each of the proposed

enumerated hedges described above

would be self-effectuating for purposes

of federal limits, the Commission and

the exchanges would 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 limits would

also be subject to exchange-set limits, all

traders seeking to exceed federal

position limits would have to request an

exemption from the relevant exchange

for purposes of the exchange limit,

regardless of whether the position falls

within one of the enumerated hedges. In

other words, enumerated bona fide

hedge recognitions that are self-

effectuating for purposes of federal

limits would not be self-effectuating for

purposes of exchange 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

limits. As discussed in greater detail

below, proposed § 150.5

102

would

ensure that such programs require,

among other things, that: Exemption

applications filed with an exchange

include sufficient information to enable

the exchange to determine, and the

Commission to verify, 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 that

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 expects exchanges will

be thoughtful and deliberate in granting

exemptions, including anticipatory

exemptions.

The Commission and the exchanges

also have a variety of other tools

designed to help prevent misuse of self-

effectuating exemptions. For example,

market participants who submit an

application to an exchange as required

under § 150.5 would be subject to the

Commission’s false statements authority

that carries with it substantial penalties

under both the CEA and federal

criminal statutes.

103

Similarly, the

Commission can use 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 hedging needs and

speculative trading masquerading as a

bona fide hedge.

In the 2013 Proposal, the Commission

previously addressed a petition for

exemptive relief for 10 transactions

described as bona fide hedging

transactions by the Working Group of

Commercial Energy Firms (which has

since reconstituted itself as the

‘‘Commercial Energy Working Group’’)

(‘‘BFH Petition’’).

104

In the 2013

Proposal, the Commission included

examples Nos. 1, 2, 6, 7 (scenario 1),

and 8 as being permitted under the

proposed definition of bona fide

hedging.

With respect to the rules proposed

herein, the Commission has

preliminarily determined that example

#4 (binding, irrevocable bids or offers)

and #5 (timing of hedging physical

transactions) from the BFH Petition

potentially fit within the proposed

Appendix A paragraph (a)(11)

enumerated hedge of anticipatory

merchandising, so long as the

transaction complies with each

condition of that proposed enumerated

hedge.

In addition, as discussed further

below, because the Commission is also

proposing to eliminate the five-day rule

from the enumerated hedges to which

the five-day rule currently applies, the

Commission has preliminarily

determined that example #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

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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.

106

Paragraphs (2)(i)(B), (ii)(C), (iii), and (iv) of the

existing §1.3 bona fide hedging definition are

subject to some form of the five-day rule.

107

Definition of Bona Fide Hedging and Related

Reporting Requirements, 42 FR 42748, 42750 (Aug.

24, 1977).

108

Id.

109

See, e.g., 42 FR at 42749.

110

Energy contracts typically have a three-day

spot period, whereas the spot period for agricultural

contracts is typically two weeks.

111

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.

requirements) from the BFH Petition

potentially fit within the proposed

Appendix A paragraph (a)(5)

enumerated hedge, so long as the

transaction otherwise complies with the

additional conditions of all applicable

enumerated hedges and other

requirements.

Regarding 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), while the

Commission has preliminarily

determined that the positions described

within those examples do not fit within

any of the proposed enumerated hedges,

market participants seeking bona fide

hedge recognition for such positions

may apply for a non-enumerated

recognition under proposed §§ 150.3 or

150.9, and a facts and circumstances

decision would be made.

105

As included

in the request for comment on this

section, the Commission requests

additional information on the scenarios

listed above, particularly for the

positions that the Commission

preliminarily views as falling outside

the proposed list of enumerated hedges.

iv. Elimination of a Federal Five Day

Rule

Under the existing bona fide hedging

definition in § 1.3, to help protect

orderly trading and the integrity of the

physical-delivery process, certain

enumerated hedging positions in

physical-delivery contracts are not

recognized as bona fide hedges that may

exceed limits when the position is held

during the last five days of trading

during the spot month. The goal of the

five-day rule is to help ensure that only

those participants who actually intend

to make or take delivery maintain

positions toward the end of the spot

period.

106

When the Commission

adopted the five-day rule, it believed

that, as a general matter, there is little

commercial need to maintain such

positions in the last five days.

107

However, persons wishing to exceed

position limits during the five last

trading days could submit materials

supporting a classification of the

position as a bona fide hedge, based on

the particular facts and

circumstances.

108

The Commission has viewed the five-

day rule as an important way to help

ensure that futures and cash-market

prices converge and to prevent

excessive speculation as a physical-

delivery contract nears expiration,

thereby protecting the integrity of the

delivery process and the price discovery

function of the market, and deterring or

preventing types of market

manipulations such as corners and

squeezes. The enumerated hedges

currently subject to the five-day rule are

either: (i) Anticipatory in nature; or (ii)

involve a situation where there is no

need to make or take delivery. The

Commission has historically questioned

the need for such positions in excess of

limits to be held into the spot period if

the participant has no immediate plans

and/or need to make or take delivery in

the few remaining days of the spot

period.

109

While the Commission continues to

believe that the justifications described

above for the existing five-day rule

remain valid, the Commission has

preliminarily determined that for

contracts subject to federal limits, the

exchanges, subject to Commission

oversight, are better positioned to

decide whether to apply the five-day

rule in connection with their own

exchange-set limits, or whether to apply

other tools that may be equally effective.

Accordingly, consistent with this

proposal’s focus on leveraging existing

exchange practices and expertise when

appropriate, the Commission proposes

to eliminate the five-day rule from the

enumerated hedges to which the five-

day rule currently applies, and instead

to afford exchanges with the discretion

to apply, and when appropriate, waive

the five-day rule (or similar restrictions)

for purposes of their own limits.

Allowing for such discretion 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,

110

the flexible approach

allowed for 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. The proposed approach

would allow 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. As

proposed § 150.5(a) would require that

any exchange-set limits for contracts

subject to federal 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.

The Commission expects that

exchanges would closely scrutinize any

participant who requests a recognition

during the last five days of the spot

period or in the time period for the spot

month.

To assist exchanges that wish to

establish a five-day rule, or a similar

provision, the Commission proposes

guidance in paragraph (b) of Appendix

B that would set forth circumstances

when a position held during the spot

period may still qualify as a bona fide

hedge. The guidance would provide that

a position held during the spot period

may still qualify as a bona fide hedging

position, provided that, among other

things: (1) The position complies with

the bona fide hedging 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.

111

In addition, the guidance would

provide that the person wishing to

exceed federal position limits during the

spot period: (1) Intends to make or take

delivery during that period; (2) provides

materials to the exchange supporting the

waiver of the five-day rule; (3)

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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.

113

That is, the delivery comports with the

person’s demonstrated need for the commodity, and

the contract is the cheapest source for that

commodity.

114

Id. at 96747.

115

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.

116

See 2016 Reproposal, 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).

117

This proposed guidance on measuring risk is

consistent in many ways with the manner in which

the 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. The Commission preliminarily

believes that such consistency is a strong indicator

that the participant is not measuring risk on a gross

basis simply to evade regulatory requirements.

118

See, e.g., Bona Fide Hedging Transactions or

Positions, 42 FR at 14834.

119

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

120

CEA section 4a(c)(2)(B)(i) recognizes as a bona

fide hedging position a position that reduces risk

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 bona fide positions 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).

demonstrates supporting cash-market

exposure in-hand that is verified by the

exchange; (4) demonstrates that, for

short positions, the delivery is feasible,

meaning that the person has the ability

to deliver against the short position;

112

and (5) demonstrates that, for long

positions, the delivery is feasible,

meaning that the person has the ability

to take delivery at levels that are

economically appropriate.

113

This

proposed guidance is intended to

include a non-exclusive list of

considerations for determining whether

to waive a five-day rule established at

the discretion of an exchange.

v. Guidance on Measuring Risk

In prior proposals involving position

limits, the Commission discussed the

issue of whether the Commission may

recognize as bona fide both ‘‘gross

hedging’’ and ‘‘net hedging.’’

114

Such

attempts reflected the Commission’s

longstanding preference for net hedging,

which, 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.

115

In an effort to clarify its current view

on this issue, the Commission proposes

guidance in paragraph (a) to Appendix

B. The Commission is of the preliminary

view 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

would be subject to federal limits for the

first time under this proposal.

Accordingly, the Commission does not

propose a one-size-fits-all approach to

the manner in which risk is measured

across an organization.

The proposed guidance reflects the

Commission’s historical practice of

recognizing positions hedged on a net

basis as bona fide;

116

however, as the

Commission has also previously

allowed, the proposed guidance also

may in certain circumstances allow for

the recognition of gross hedging as bona

fide, provided that: (1) The manner in

which the person measures risk is

consistent over time and follows a

person’s regular, historical practice

117

(meaning the person is not switching

between net hedging and gross hedging

on a selective basis simply to justify an

increase in the size of his/her

derivatives positions); (2) 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; (3) the

person is able to demonstrate (1) and (2)

to the Commission and/or an exchange

upon request; and (4) 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).

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.

118

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 as it considers applications

under § 150.9, subject to Commission

review and oversight.

The Commission believes that

permitting market participants with

bona fide hedges to use either or both

gross or net hedging will help ensure

that market participants are able to

hedge efficiently. Large, complex

entities may have hedging needs that

cannot be efficiently and effectively met

with either gross or net hedging. For

instance, some firms may hedge on a

global basis while others may hedge by

trading desk or business line. Some

risks that appear offsetting may in fact

need to be treated separately where a

difference in delivery location or date

makes net hedging of those positions

inappropriate.

To prevent ‘‘cherry-picking’’ when

determining whether to gross or net

hedge certain risks, hedging entities

should have policies and procedures

setting out when gross and net hedging

is appropriate. Consistent usage of

appropriate gross and/or net hedging in

line with such policies and procedures

can demonstrate compliance with the

Commission’s regulations. On the other

hand, usage of gross or net hedging that

is inconsistent with an entity’s policies

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.

vi. Pass-Through Provisions

As the Commission has noted above,

CEA section 4a(c)(2)(B)

119

further

contemplates bona fide hedges that by

themselves do not meet the criteria of

CEA section 4a(c)(2)(A), but that are

executed by a pass-through swap

counterparty opposite a bona fide

hedging swap counterparty, or used by

a bona fide hedging swap counterparty

to offset its swap exposure that does

satisfy CEA section 4a(c)(2)(A).

120

The

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As described above, the Commission has

preliminarily interpreted the revised statutory

temporary substitute test as limiting its 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.

122

While proposed paragraph (2)(i) of the bona

fide hedging definition in §150.1 would require the

pass-through swap counterparty to be able to

demonstrate the bona fides of the pass-through

swap upon request, the proposed rule would not

prescribe the manner by which the pass-through

swap counterparty obtains the information needed

to support such a demonstration. 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. 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.

123

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.

124

See supra Section II.A.1.c.ii.(1) (discussion of

the temporary substitute test).

125

The selection of the proposed core referenced

futures contracts is explained below in the

discussion of proposed §150.2.

126

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 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

Commission preliminarily believes that,

in affording bona fide hedging

recognition to positions used to offset

exposure opposite a bona fide hedging

swap counterparty, Congress in CEA

section 4a(c)(2)(B) intended: (1) To

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; but also (2) to

prohibit risk management positions that

are not opposite a bona fide hedging

swap counterparty from being

recognized as bona fide hedges.

121

The Commission proposes to

implement this pass-through swap

language in paragraph (2) of the bona

fide hedging definition for physical

commodities in proposed § 150.1. Each

component of the proposed pass-

through swap provision is described in

turn below.

Proposed paragraph (2)(i) of the bona

fide hedging definition would address a

situation where a particular swap

qualifies as a bona fide hedge by

satisfying the temporary substitute test,

economically appropriate test, and

change in value requirement under

proposed paragraph (1) for one of the

counterparties (the ‘‘bona fide hedging

swap counterparty’’), but not for the

other counterparty, and where those

bona fides ‘‘pass 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

such as a swap dealer, for example, that

provides liquidity to the bona fide

hedging swap counterparty.

Under the proposed rule, the pass-

through of the bona fides from the bona

fide hedging swap counterparty to the

pass-through swap counterparty would

be contingent on: (1) The pass-through

swap counterparty’s ability to

demonstrate that the pass-through swap

is a bona fide hedge upon request from

the Commission and/or from an

exchange;

122

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.

If the two conditions above are

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,

options on futures, or swap position

entered into by the pass-through swap

counterparty to offset the pass-through

swap (i.e. to offset the swap opposite the

bona fide hedging swap counterparty).

The pass-through swap counterparty

could thus exceed federal limits for the

bona fide hedge swap opposite the bona

fide hedging swap counterparty and for

any offsetting futures, options on

futures, or swap position in the same

physical commodity, even though any

such position on its own would not

qualify as a bona fide hedge for the pass-

through swap counterparty under

proposed paragraph (1).

Proposed paragraph (2)(ii) of the bona

fide hedging definition would address a

situation where a 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 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 futures, options on

futures, or swaps in excess of 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.

123

Proposed paragraph

(2)(ii) would allow such a bona fide

hedging swap counterparty to use

futures, options on futures, or swaps in

excess of federal 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) 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

offsets would not be eligible for a pass-

through exemption under (2) unless the

offsets themselves meet the bona fide

hedging definition. 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.

As discussed more fully above, 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.

124

2. ‘‘Commodity Derivative Contract’’

The Commission proposes 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)).

3. ‘‘Core Referenced Futures Contract’’

The Commission proposes to provide

a list of 25 futures contracts in proposed

§ 150.2(d) to which proposed position

limit rules would apply. The

Commission proposes the term ‘‘core

referenced futures contract’’ as a short-

hand phrase to denote such contracts.

125

As per the ‘‘referenced contract’’

definition described below, position

limits would also apply to any contract

that is directly/indirectly linked to, or

that has certain pricing relationships

with, a core referenced futures contract.

4. ‘‘Economically Equivalent Swap’’

CEA section 4a(a)(5) requires that

when the Commission imposes limits

on futures and options on futures

pursuant to CEA section 4a(a)(2), the

Commission also establish limits

simultaneously for ‘‘economically

equivalent’’ swaps ‘‘as appropriate.’’

126

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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 2016

Reproposal, 81 FR at 96736 (the Commission noting

that certain commenters may have been confusing

the two definitions).

127

The proposed ‘‘economically equivalent’’

language is distinct from the terms ‘‘futures

equivalent,’’ ‘‘economically appropriate,’’ and other

similar terms used in the Commission’s regulations.

For the avoidance of doubt, the Commission’s

proposed definition of ‘‘economically equivalent

swap’’ for the purposes of CEA section 4a(a)(5) does

not impact the application of any such other terms

as they appear in part 20 of the Commission’s

regulations, in the Commission’s proposed bona

fide hedge definition, or elsewhere.

128

The proposed definition of ‘‘referenced

contract’’ would 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 proposed definition of

‘‘economically equivalent swap’’ would be included

as a type of ‘‘referenced contract,’’ but, as discussed

herein, would include a relatively narrower class of

swaps compared to look-alike futures and options

contracts, for the reasons discussed below.

129

See infra Section II.B.2.k. (discussion of

netting).

130

See infra Section III.F. (necessity finding).

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).

Under the Commission’s proposed

definition of an ‘‘economically

equivalent swap,’’ a swap on any

referenced contract (including core

referenced futures contracts), except for

natural gas referenced contracts, would

qualify as ‘‘economically equivalent’’

with respect to that referenced contract

so long as the swap shares identical

‘‘material’’ contractual specifications,

terms, and conditions with the

referenced contract, disregarding any

differences with respect to: (i) Lot size

or notional amount, (ii) delivery dates

diverging by less than one calendar day

(if the swap and referenced contract are

physically-settled), or (iii) post-trade

risk management arrangements.

127

For

reasons described further below, natural

gas swaps would qualify as

economically equivalent with respect to

a particular referenced contract under

the same circumstances, except that

physically-settled swaps with delivery

dates diverging by less than two

calendar days, rather than one calendar

day, could qualify as economically

equivalent.

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 federal

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 limits to shift to trading on a

foreign exchange.

Accordingly, any definition of

‘‘economically equivalent swap’’ must

consider these statutory objectives. The

Commission also recognizes that

physical commodity swaps are largely

bilaterally negotiated, traded off-

exchange (i.e., OTC), and potentially

include customized (i.e., ‘‘bespoke’’)

terms, while futures contracts are

exchange traded with standardized

terms. As explained further below, due

to these differences between swaps and

exchange-traded futures and options,

the Commission has preliminarily

determined that Congress’s underlying

policy goals in CEA section 4a(a)(2)(C)

and (3) are best achieved by proposing

a narrow definition of ‘‘economically

equivalent swaps,’’ compared to the

broader definition of ‘‘referenced

contract’’ the Commission is proposing

to apply to look-alike futures and

related options.

128

The Commission’s proposed

‘‘referenced contract’’ definition in

§ 150.1 would include ‘‘economically

equivalent swaps,’’ meaning any

economically equivalent swap would be

subject to federal limits, and thus would

be required to be added to, and could

be netted against, as applicable, other

referenced contracts in the same

commodity for the purpose of

determining one’s aggregate positions

for federal position limit levels.

129

Any

swap that is not deemed economically

equivalent would not be a referenced

contract, and thus could not be netted

with referenced contracts nor would be

required to be aggregated with any

referenced contract for federal position

limits purposes. The proposed

definition is based on a number of

considerations.

First, the proposed definition would

support the statutory objectives in CEA

section 4a(a)(3)(i) and (ii) by helping to

prevent excessive speculation and

market manipulation, including corners

and squeezes, by: (1) Focusing on swaps

that are the most economically

equivalent in every significant way to

futures or options on futures for which

the Commission deems position limits

to be necessary;

130

and (2)

simultaneously limiting the ability of

speculators to obtain excessive positions

through netting. Any swap that meets

the proposed definition would offer

identical risk sensitivity to its associated

referenced futures or options on futures

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 or

options on futures contract.

Because OTC swaps are bilaterally

negotiated and customizable, the

Commission has preliminarily

determined not to propose a more

inclusive ‘‘economically equivalent

swap’’ definition that would encompass

additional swaps because such

definition could make it easier for

market participants to inappropriately

net down against their core referenced

futures contracts by allowing market

participants to structure swaps that do

not necessarily offer identical risk or

economic exposure or sensitivity. In

contrast, the Commission preliminarily

believes that this is less of a concern

with exchange-traded futures and

related options since these instruments

have standardized terms and are subject

to exchange rules and oversight. As a

result, the proposal would generally

allow market participants to net certain

positions in referenced contracts in the

same commodity across economically

equivalent swaps, futures, and options

on futures, but the proposed

economically equivalent swap

definition would focus on swaps with

identical material terms and conditions

in order to reduce the ability of market

participants to accumulate large,

speculative positions in excess of

federal limits by using tangentially-

related (i.e., non-identical) swaps to net

down such positions.

Second, the proposed definition

would address statutory objectives by

focusing federal limits on those swaps

that pose the greatest threat for

facilitating corners and squeezes—that

is, those swaps with similar delivery

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131

See EU Commission Delegated Regulation

(EU) 2017/591, 2017 O.J. (L 87). 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 proposed definition is similar, the

Commission’s proposed definition requires

‘‘identical material’’ terms rather than ‘‘identical’’

terms. Further, the Commission’s proposed

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.’’

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.

132

7 U.S.C. 6a(a)(2)(C).

133

When developing its definition of an

‘‘economically equivalent swap,’’ the Commission,

based on its experience, preliminarily has

determined that for a swap to be ‘‘economically

equivalent’’ to a futures contract, the material

contractual specifications, terms, and conditions

would need to 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.

134

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, could be deemed

to be economically equivalent to the referenced

contract.

135

The Commission preliminarily 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 but 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.

dates and identical material economic

terms to futures and options on futures

subject to federal limits—while also

minimizing market impact and liquidity

for bona fide hedgers by not

unnecessarily subjecting other swaps to

the new federal framework. For

example, if the Commission were to

adopt an alternative definition of

economically equivalent swap that

encompassed a broader range of swaps

by including delivery dates that diverge

by one or more calendar days—perhaps

by several days or weeks—a speculator

with a large portfolio of swaps may be

more likely to be constrained by the

applicable position limits and therefore

may have an incentive either to

minimize its swaps activity, or move its

swaps activity to foreign jurisdictions. If

there were many similarly situated

speculators, 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 preliminarily determined that the

proposed definition’s relatively narrow

scope of swaps 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 as

discussed above.

Third, the proposed definition would

help prevent regulatory arbitrage and

would strengthen international comity.

If the Commission proposed a definition

that captured a broader range of swaps,

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 proposed 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.

131

The

proposed definition of economically

equivalent swaps thus furthers statutory

goals, including those 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.

132

Further, market

participants trading in both U.S. and EU

markets should find the proposed

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.

Each element of the proposed

definition, as well as the proposed

exclusions from the definition, is

described below.

a. Scope of Identical Material Terms

Only ‘‘material’’ contractual

specifications, terms, and conditions

would be relevant to the analysis of

whether a particular swap would

qualify as an economically equivalent

swap. The proposed definition would

thus not require that a swap be identical

in all respects to a referenced contract

in order to be deemed ‘‘economically

equivalent.’’ ‘‘Material’’ specifications,

terms, and conditions would be limited

to those provisions that drive the

economic value of a swap, including

with respect to pricing and risk.

Examples of ‘‘material’’ provisions

would include, for example: The

underlying commodity, including

commodity reference price and grade

differentials; maturity or termination

dates; settlement type (e.g., cash- versus

physically-settled); and, as applicable

for physically-delivered swaps, delivery

specifications, including commodity

quality standards or delivery

locations.

133

Because settlement type

would be considered to be a material

‘‘contractual specification, term, or

condition,’’ a cash-settled swap could

only be deemed economically

equivalent to a cash-settled referenced

contract, and a physically-settled swap

could only be deemed 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.

In addition, a swap that either

references another referenced contract,

or incorporates its terms by reference,

would be deemed to share identical

terms with the referenced contract and

therefore would qualify as an

economically equivalent swap.

134

Any

change in the material terms of such a

swap, however, would render the swap

no longer economically equivalent for

position limits purposes.

135

In contrast, the Commission generally

would consider those swap contractual

terms, provisions, or terminology (e.g.,

ISDA terms and definitions) that are

unique to swaps (whether standardized

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136

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 may not find such differences to

be material for purposes of determining the swap

to be economically equivalent for federal position

limits purposes.

137

As noted below, the Commission reserves the

authority under this proposal 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.d. (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 differs from the market participant’s.

138

As discussed under Section II.A.16. (definition

of ‘‘referenced contract’’), the Commission proposes

to include a list of futures and related options 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.

139

This aspect of the proposed definition would

be irrelevant for cash-settled swaps since ‘‘delivery

date’’ applies only to physically-settled swaps.

140

A swap as so described that is not

‘‘economically equivalent’’ would not be subject to

a federal speculative position limit under this

proposal.

141

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.

or bespoke) not to be material for

purposes of determining whether a

swap is economically equivalent to a

particular referenced contract. For

example, swap provisions or terms

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 are

generally unique to swaps and/or

otherwise not material, and therefore

would not be dispositive for

determining whether a swap is

economically equivalent.

136

The Commission is unable to publish

a list of swaps it would deem to be

economically equivalent swaps because

any such determination would involve

a facts and circumstances analysis, and

because most 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 preliminarily

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

would demonstrate whether the swap

qualifies as ‘‘economically equivalent’’

with respect to a referenced contract.

The Commission emphasizes that

under this proposal, market participants

would have the discretion to make such

determination as long as they make a

reasonable, good faith effort in reaching

their determination, and that the

Commission would not bring any

enforcement action for violating the

Commission’s speculative position

limits against such market participants

as long as the market participant

performed the necessary due diligence

and is able to provide sufficient

evidence, if requested, to support its

reasonable, good faith effort.

137

Because

market participants would be provided

with discretion in making any

‘‘economically equivalent’’ swap

determination, the Commission

preliminarily anticipates that this

flexibility should provide 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.

138

b. Exclusions From the Definition of

‘‘Economically Equivalent Swap’’

As noted above, the Commission’s

proposed definition would expressly

provide 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 would not

disqualify a swap from being deemed to

be ‘‘economically equivalent’’ to a

particular referenced contract.

i. Delivery Dates Diverging by Less Than

One Calendar Day

The proposed definition as it applies

to commodities other than natural gas

would encompass swaps with delivery

dates that diverge by less than one

calendar day from that of a referenced

contract.

139

As a result, a swap with a

delivery date that differs from that of a

referenced contract by one calendar day

or more would not be deemed to be

economically equivalent under the

Commission proposal, and such swaps

would not be required to be added to,

nor permitted to be netted against, any

referenced contract when calculating

one’s compliance with federal position

limit levels.

140

The Commission

recognizes that while a penultimate

contract may be significantly correlated

to its corresponding spot-month

contract, it 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. Accordingly,

the Commission has preliminarily

determined that it would not be

appropriate to permit market

participants to net such penultimate

positions against their core referenced

futures contract positions since such

positions do not necessarily reflect

equivalent economic or risk exposure.

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.

141

Moreover, since the core referenced

futures contracts, along with futures

contracts and options on futures in

general, are traded on DCMs with

vertically integrated clearing houses, as

a practical matter, it is impossible for

OTC commodity swaps, which

historically have been uncleared, to

share identical post-trade clearing house

or other post-trade risk management

arrangements with their associated core

referenced futures contracts.

Therefore, if differences in post-trade

risk management arrangements were

sufficient to exclude a swap from

economic equivalence to a core

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142

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 proposes later in this

release to 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).

143

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).

144

As noted above, the Commission is proposing

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

preliminarily 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 occurring. First, there may be

basis risk between the penultimate swap and the

core referenced futures contract. Second, compared

to most 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.

Since the constraints described above do not

necessarily apply to the natural gas futures markets,

the Commission preliminarily believes that

liquidity may be incentivized to shift from NG to

penultimate natural gas swaps in order to avoid

federal position limits in the absence of the

Commission’s proposed exception for natural gas in

the ‘‘economically equivalent swap’’ definition.

145

See supra II.A.4.a. (discussing market

participants’ discretion in determining whether a

swap is economically equivalent).

146

See 17 CFR 150.1(d).

147

7 U.S.C. 1a(38).

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 preliminarily

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.

iii. Lot Size or Notional Amount

The last exclusion would clarify that

differences in lot size or notional

amount would not prevent a swap from

being deemed to be economically

equivalent to its corresponding

referenced contract. The Commission’s

use of ‘‘lot size’’ and ‘‘notional amount’’

refer to the same general concept—

while futures terminology usually

employs ‘‘lot size,’’ swap terminology

usually employs ‘‘notional amount.’’

Accordingly, the Commission proposes

to use both terms to convey the same

general meaning, and in this context

does not mean to suggest a substantive

difference between the two terms.

c. 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 core referenced futures contract

(‘‘NG’’), which is physically settled, to

an ICE contract, which is cash settled.

This trend reflects certain market

participants’ desire for exposure to

natural gas prices without having to

make or take delivery.

142

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.

143

In order to recognize the

existing natural gas markets, which

include active and vibrant markets in

penultimate natural gas contracts, the

Commission thus proposes a slightly

broader economically equivalent swap

definition for natural gas so that 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 limits.

The Commission intends for this change

to prevent and disincentivize

manipulation and regulatory arbitrage

and to prevent volume from shifting

away from NG to penultimate natural

gas contract futures and/or penultimate

swap markets in order to avoid federal

position limits.

144

d. Commission Determination of

Economic Equivalence

While the Commission would

primarily rely on market participants to

determine whether their swaps meet the

proposed ‘‘economically equivalent

swap’’ definition, the Commission is

proposing paragraph (3) to the

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

may 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 the proposed federal

position limits framework. 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 also would be able to

serve as a backstop in case market

participants fail to properly treat

economically equivalent swaps as such.

As noted above, the Commission would

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.

145

5. ‘‘Eligible Affiliate’’

The Commission proposes to create

the new defined term ‘‘eligible affiliate,’’

which would be used in proposed

§ 150.2(k), discussed in connection with

proposed § 150.2 below. As discussed

further in that section of the release, 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).

6. ‘‘Eligible Entity’’

The Commission adopted a revised

‘‘eligible entity’’ definition in the 2016

Final Aggregation Rulemaking.

146

The

Commission is not proposing any

further amendments to this definition,

but is including that revised definition

in this document so that all defined

terms are included. As noted above, the

Commission is also proposing a non-

substantive 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’’

The Commission proposes defining

‘‘entity’’ to mean ‘‘a ‘person’ as defined

in section 1a of the Act.’’

147

The term,

not defined in existing § 150.1, is used

throughout proposed part 150 of the

Commission’s regulations.

8. ‘‘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

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7 U.S.C. 1a(19).

149

Under CEA sections 4a(a)(2) and 4a(a)(5),

speculative position limits apply to agricultural and

exempt commodity swaps that are ‘‘economically

equivalent’’ to DCM futures and options on futures

contracts. 7 U.S.C. 6a(a)(2) and (5).

150

See 17 CFR 150.1(e).

151

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

152

17 CFR 150.2.

153

A more detailed discussion of when netting is

permitted appears below. See infra Section II.B.2.k.

(discussion of netting).

154

For example, ICE’s Henry Penultimate Fixed

Price Future, which cash-settles directly to

Continued

Commission proposes including a

definition of ‘‘excluded commodity’’ in

part 150 that references that term as

defined in CEA section 1a(19).

148

9. ‘‘Futures-Equivalent’’

This phrase 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 Dodd-Frank Act

amendments to CEA section 4a,

149

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 on which

the Commission has established limits.

In order to aggregate positions in

futures, options on futures, and swaps,

it is necessary to adjust the position

sizes, since such contracts may have

varying units of trading (e.g., the

amount of a commodity underlying a

particular swap contract could be larger

than the amount of a commodity

underlying a core referenced futures

contract). The Commission thus

proposes to adjust position sizes to an

equivalent position based on the size of

the unit of trading of the core referenced

futures contract. The phrase ‘‘futures-

equivalent’’ is used for that purpose

throughout the proposed rules,

including in connection with the

‘‘referenced contract’’ definition in

proposed § 150.1. The Commission also

proposes broadening this definition to

include references to the proposed term

‘‘core referenced futures contracts.’’

10. ‘‘Independent Account Controller’’

The Commission adopted a revised

‘‘independent account controller’’

definition in the 2016 Final Aggregation

Rule.

150

The Commission is not

proposing any further amendments to

this definition, but is including that

revised definition in this document so

that all defined terms appear together.

11. ‘‘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 proposes 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.

12. ‘‘Physical Commodity’’

The Commission proposes 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.’’

151

The proposed

definition of ‘‘physical commodity’’

thus would include both exempt and

agricultural commodities, but not

excluded commodities.

13. ‘‘Position Accountability’’

Existing § 150.5 permits position

accountability in lieu of 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 proposes a definition

of ‘‘position accountability’’ for use

throughout proposed § 150.5 as

discussed in greater detail in connection

with proposed § 150.5 below.

14. ‘‘Pre-Enactment Swap’’

The Commission proposes 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

have not expired as of the date of

enactment of that 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 speculative position limits,

although such swaps could not be

netted with post-effective date swaps for

purposes of complying with spot month

speculative position limits.

15. ‘‘Pre-Existing Position’’

The Commission proposes 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

position limits would apply to such

positions.

16. ‘‘Referenced Contract’’

The nine contracts currently subject

to federal limits, which are all

physically-settled futures, are all listed

in existing § 150.2.

152

As the

Commission is proposing to expand the

position limits framework to cover

certain cash-settled futures and options

on futures contracts and certain

economically equivalent swaps, the

Commission proposes a new defined

term, ‘‘referenced contract,’’ for use

throughout proposed part 150 to refer to

contracts that would be subject to

federal limits.

The referenced contract definition

would thus include: (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 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 would include look-alike

futures and options on futures contracts

(as well as options or economically

equivalent swaps with respect to such

look-alike contracts) and contracts of the

same commodity but different sizes

(e.g., mini contracts). Positions in

referenced contracts may in certain

circumstances be netted with positions

in other referenced contracts. However,

to avoid evasion and undermining of the

position limits framework, non-

referenced contracts on the same

commodity could not be used to net

down positions in referenced

contracts.

153

a. Cash-Settled Referenced Contracts

Under these proposed provisions,

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, and to any cash settled swaps

that are deemed ‘‘economically

equivalent swaps’’ with respect to a

particular cash-settled referenced

contract.

154

While the Commission

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NYMEX’s Henry Hub Natural Gas core referenced

futures contract, would be considered a referenced

contract under the rules proposed herein.

155

The Commission has previously found that

traders with positions in look-alike cash-settled

contracts may have an incentive to manipulate and

undermine price discovery in the physical-delivery

contracts to which the cash-settled contract is

linked. The practice known as ‘‘banging the close’’

or ‘‘marking the close’’ is one such manipulative

practice that the Commission prosecutes and that

this proposal seeks to prevent.

156

As discussed above, the Commission is

proposing a definition of ‘‘economically equivalent

swap’’ that is narrower than the class of futures and

options on futures that would be included as

referenced contracts. See supra Section II.A.4.

(discussion of economically equivalent swaps).

157

See infra Section II.B.2.k. (discussion of

netting).

158

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 limits. The Commission would be

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

they would be more costly to try to use in a

manipulation.

159

7 U.S.C. 6a(c)(2)(B). While 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 limits. The

Commission would be comfortable with this

outcome because the commodities 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.

acknowledges previous comments to the

effect that cash-settled contracts are less

susceptible to manipulation and thus

should not be subject to federal limits,

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 limits. This view is informed

by the Commission’s experience

overseeing derivatives markets, where it

has observed that it is common for the

same market participant to arbitrage

linked cash- and physically-settled

contracts, and where it has also

observed instances where linked cash-

settled and physically-settled contracts

have been used together as part of a

manipulation.

155

In the Commission’s

view, cash-settled contracts are

generally economically equivalent to

physical-delivery contracts in the same

commodity. In the absence of position

limits, a trader with positions in both

the physically-delivered and cash-

settled contracts may have increased

ability and incentive to manipulate one

contract to benefit positions in the

other.

The proposal to include futures

contracts and options on futures that are

‘‘indirectly linked’’ to the core

referenced futures contract under the

definition of ‘‘referenced contract’’ is

intended to prevent the evasion of

position limits through the creation of

an economically equivalent futures

contract or option on a future, 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.

156

On the other hand, an outright

derivative contract whose settlement

price 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) would

not be directly or indirectly linked to

the core referenced futures contract.

Similarly, a physical-delivery derivative

contract whose settlement price was

based on the same underlying

commodity at a different delivery

location (e.g., a hypothetical physical-

delivery futures contract on ultra-low

sulfur diesel delivered at L.A. Harbor

instead of the NYMEX ultra-low sulfur

diesel futures contract delivered in New

York Harbor core referenced futures

contract) would not be linked, directly

or indirectly, to the core referenced

futures contract because the price of the

physically-delivered L.A. Harbor

contract would reflect the L.A. Harbor

market price for ultra-low sulfur diesel.

b. Exclusions From the Referenced

Contract Definition

While the proposed referenced

contract definition would include

linked contracts, it would also explicitly

exclude certain other types of contracts.

Paragraph (3) of the proposed referenced

contract definition would explicitly

exclude from that definition a location

basis contract, a commodity index

contract, a swap guarantee, or a trade

option that meets the requirements of

§ 32.3 of this chapter.

First, failing to exclude location basis

contracts from the referenced contract

definition could enable speculators to

net portions of the location basis

contract with outright positions in one

of the locations comprising the basis

contract, which would permit

extraordinarily large speculative

positions in the outright contract.

157

For

example, under the proposed rules, a

large outright position in Henry Hub

Natural Gas futures could not be netted

down against a location basis contract

that cash-settles to the difference in

price between Gulf Coast Natural Gas

and Henry Hub Natural Gas. Absent the

proposed exclusion, a market

participant could otherwise increase its

exposure in the outright contract by

using the location basis contract to net

down, and then increase further, an

outright contract position that would

otherwise be restricted by position

limits.

158

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.

Similarly, the proposed exclusion of

commodity index contracts from the

referenced contract definition would

help ensure that market participants

could not use a position in a commodity

index contract to net down an outright

position that was a component of the

commodity index contract. If the

Commission did not exclude

commodity index contracts, then

speculators would be allowed to take on

massive outright positions in referenced

contracts, which could lead to excessive

speculation.

As noted above, 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. This

would have the effect of subverting the

statutory pass-through swap language 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.

159

In order to clarify the types of

contracts that would qualify as location

basis contracts and commodity index

contracts, and thus would be excluded

from the referenced contract definition,

the Commission proposes guidance in

Appendix C to part 150 of the

Commission’s regulations. The

proposed guidance would include

information which would help define

the parameters of the terms ‘‘location

basis contract’’ and ‘‘commodity index

contract.’’ To the extent a particular

contract fits within the proposed

guidance, such contract would not be a

referenced contract, would not be

subject to federal limits, and could not

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See infra Section II.B.2.k. (discussion of

netting).

161

See generally Further Definition of ‘‘Swap,’’

‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap

Agreement’’; Mixed Swaps; Security-Based Swap

Agreement Recordkeeping, 77 FR 48207 (Aug. 13,

2012) (‘‘Product Definitions Adopting Release’’).

162

See id. at 48226.

163

To the extent that swap guarantees may lower

costs for uncleared OTC swaps in particular by

incentivizing counterparties to agree to the swap,

excluding swap guarantees arguably 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.

164

In the trade options final rule, the Commission

stated its belief that federal 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 14966, 14971 (Mar. 21, 2016).

165

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. See supra Section II.A.4.

(discussion of economically equivalent swaps).

be used to net down positions in

referenced contracts.

160

Second, swap guarantees are

explicitly excluded from the proposed

referenced contract definition. In

connection with further defining the

term ‘‘swap’’ jointly with the Securities

and Exchange Commission in

connection with the ‘‘Product Definition

Adopting Release,’’

161

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.

162

Excluding guarantees of

swaps from the definition of referenced

contract should 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

preliminarily believes that swap

guarantees neither contribute to

excessive speculation, market

manipulation, squeezes, or corners nor

were contemplated by Congress when

Congress articulated its policy goals in

CEA sections 4a(a)(1)–(3).

163

Third, trade options that meet the

requirements of § 32.3 would also be

excluded from the proposed referenced

contract definition. The Commission

has traditionally exempted trade options

from a number of Commission

requirements because they are typically

used 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.

164

c. List of Referenced Contracts

In an effort to provide clarity to

market participants regarding which

exchange-traded contracts are subject to

federal limits, the Commission

anticipates publishing, and regularly

updating, a list of such contracts on its

website.

165

The Commission thus

proposes to publish a CFTC Staff

Workbook of Commodity Derivative

Contracts under the Regulations

Regarding Position Limits for

Derivatives along with this release,

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. As always, market

participants may request clarification

from the Commission.

In order to ensure that the list remains

up-to-date and accurate, the

Commission is proposing 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 submissions. In particular,

under existing rules, including §§ 40.2,

40.3, and 40.4, DCMs and SEFs are

required to comply with certain

submission requirements related to the

listing of certain products. Many of the

required submissions must include the

product’s ‘‘terms and conditions,’’

which is defined in § 40.1(j) and which

includes, under § 40.1(j)(1)(vii),

‘‘Position limits, position accountability

standards, and position reporting

requirements.’’ The Commission

proposes to expand § 40.1(j)(1)(vii),

which addresses futures and options on

futures, to also include an indication as

to whether the contract meets the

definition of a referenced contract as

defined in § 150.1, and, if so, the name

of the core referenced futures contract

on which the referenced contract is

based. The Commission proposes to also

expand § 40.1(j)(2)(vii), which addresses

swaps, to include an indication as to

whether the contract meets the

definition of economically equivalent

swap as defined in § 150.1 of this

chapter, and, if so, the name of the

referenced contract to which the swap is

economically equivalent. This

information would enable the

Commission to maintain on its website,

www.cftc.gov, an up-to-date list of DCM

and SEF contracts subject to federal

limits.

17. ‘‘Short Position’’

The Commission proposes 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.

18. ‘‘Speculative Position Limit’’

The Commission proposes 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 is 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.

19. ‘‘Spot Month,’’ ‘‘Single Month,’’ and

‘‘All-Months’’

The Commission proposes to expand

the existing definition of ‘‘spot month’’

to account for the fact that the proposed

limits would apply to both physically-

settled and certain cash-settled

contracts, to clarify that the spot month

for referenced contracts would be the

same period as that of the relevant core

referenced futures contract, and to

account for variations in spot month

conventions that differ by commodity.

In particular, for the ICE U.S. 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 until the contract

expires. For the ICE U.S. 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 until

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 fifth business day of

the contract month until the contract

expires.

The Commission also proposes to

eliminate the existing definitions of

‘‘single month’’ and ‘‘all-months’’

because the definitions for those terms

would be built into the proposed

definition of ‘‘speculative position

limits’’ described above.

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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.

167

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.’’

168

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

20. ‘‘Spread Transaction’’

The Commission proposes to

incorporate a definition for transactions

normally known to the trade as

‘‘spreads,’’ which would list the types of

transactions that could qualify for

spread exemptions for purposes of

federal position limits. The proposed

list would cover common types of inter-

commodity and intra-commodity

spreads such as: 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.

166

Separately,

under proposed § 150.3(a)(2)(ii), the

Commission could determine to exempt

any other spread transaction that is not

included in the spread transaction

definition, but that the Commission has

determined is consistent with CEA

section 4a(a)(3)(B),

167

and exempted,

pursuant to proposed § 150.3(b).

21. ‘‘Swap’’ and ‘‘Swap Dealer’’

The Commission proposes 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.

168

22. ‘‘Transition Period Swap’’

The Commission proposes to create

the defined term ‘‘transition period

swap’’ to mean any swap entered into

during the period commencing July 22,

2010 and ending 60 days after the

publication of a final federal position

limits rulemaking in the Federal

Register, the terms of which have not

expired as of that date. As discussed in

connection with proposed § 150.3 later

in this release, if acquired in good faith,

such swaps would be exempt from

federal speculative position limits,

although such swaps could not be

netted with post-effective date swaps for

purposes of complying with spot month

speculative position limits.

Finally, the Commission proposes to

eliminate existing § 150.1(i), which

includes a chart 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 months

combined limits were different. Now

that the current and proposed single

month and all months combined limits

are the same, and now that the

Commission is proposing a new process

for granting spread exemptions in

§ 150.3, this provision is no longer

needed.

23. Request for Comment

The Commission requests comment

on all aspects of the proposed

amendments and additions to the

definitions in § 150.1. The Commission

also invites comments on the following:

(1) Should the Commission include

the enumerated hedges in regulations,

rather than in an appendix of acceptable

practices? Why or why not?

(2) Should the Commission list any

additional common commercial hedging

practices as enumerated hedges?

(3) The Commission proposes to

eliminate the five day rule on federal

position limits, instead allowing

exchanges discretion on whether to

apply or waive any five day rule or

equivalent on their exchange position

limits. The Commission believes that

the five day rule can be an important

way to help ensure that futures and cash

market prices converge. As such, should

the Commission require that exchanges

apply the five day rule to some or all

bona fide hedging positions and/or

spread exemptions? If so, to which bona

fide hedging positions? Should the

exchanges retain the ability to waive

such five day rule?

(4) The Commission requests

comment on the nature of anticipated

merchandising exemptions that have

been granted by DCMs in connection

with the 16 non-legacy commodities or

in connection with exemptions from

exchange limits in 9 legacy

commodities.

(5) To what extent do the enumerated

hedges proposed in this release

encompass the types of positions

discussed in the BFH Petition? Should

additional types of positions identified

in the BFH Petition, including examples

nos. 3 (unpriced physical purchase and

sale commitments) and 7 (scenario 2)

(use of physical delivery referenced

contracts to hedge physical transactions

using calendar month averaging

pricing), be enumerated as bona fide

hedges, after notice and comment?

(6) The Commission requests

comment as to 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.

(7) While an ‘‘economically

equivalent swap’’ qualifies as a

referenced contract under paragraph (2)

of the ‘‘referenced contract’’ definition,

paragraph (1) of the ‘‘referenced

contract’’ definition applies a broader

test to determine whether futures

contracts or options on a futures

contract would qualify as a referenced

contract. Instead of a separate definition

for ‘‘economically equivalent swaps,’’

should the same test (e.g., paragraph (1)

of the ‘‘referenced contract’’ definition)

that applies to futures and options on

futures for determining status as

‘‘referenced contracts’’ also apply to

determine whether a swap is an

‘‘economically equivalent swap,’’ and

therefore a ‘‘referenced contract’’? Why

or why not?

(8) The Commission is proposing to

define ‘‘economically equivalent swap’’

in a manner that is generally consistent

with the EU’s definition, with the

exception that a swap must have

‘‘identical material’’ terms, disregarding

differences in lot size or notional

amount, delivery dates diverging by less

than one calendar day (or for natural

gas, by less than two calendar days), or

post-trade risk management

arrangements. Is this approach either

too narrow or too broad? Why or why

not?

(9) The Commission requests

comment how a market participant

subject to both the CFTC’s and EU’s

position limits regimes expects to

comply with both regimes for contracts

subject to both regimes.

(10) With respect to economically

equivalent swaps, the Commission

proposes an exception that would

capture penultimate swaps only for

natural gas contracts, including

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See 2016 Reproposal, 81 FR at 96966.

170

Position Limits for Derivatives, U.S.

Commodity Futures Trading Commission website,

available at https://www.cftc.gov/LawRegulation/

DoddFrankAct/Rulemakings/PositionLimitsfor

Derivatives/index.htm.

171

See, e.g., National Gas Supply Association

Comment Letter at 4 (Feb. 28, 2017) in response to

2016 Reproposal (listing operational risk, liquidity

risk, credit risk, locational risk, and seasonal risk).

172

17 CFR 150.2.

penultimate swaps on the NYMEX NG

core referenced futures contract. Is this

exception for such penultimate natural

gas swaps appropriate, or should

economically equivalent natural gas

swaps be treated the same as other

economically equivalent swaps? Why or

why not?

(11) Should the Commission broaden

the definition of ‘‘economically

equivalent swap’’ to include

penultimate referenced contracts for all

(or at least a subset of) commodities

subject to federal position limits? Why

or why not?

(12) The Commission is proposing

that a physically-settled swap may

qualify as economically equivalent even

if its delivery date diverges by less than

one calendar day from its corresponding

physically-settled referenced contract.

Should the Commission include a

similar provision for cash-settled swaps

where cash-settled swaps could qualify

as economically equivalent if their cash

settlement price determination diverged

from their corresponding cash-settled

referenced contract by less than one

calendar day?

(13) Under the proposed definition of

‘‘economically equivalent swaps,’’ a

cash-settled swap that otherwise shares

identical material terms with a

physically-settled referenced contract

(and vice-versa) would not be deemed to

be economically equivalent due to the

difference in settlement type. Should

the Commission consider treating swaps

that share identical material terms, other

than settlement type (i.e., cash-settled

versus physically-settled swaps), to be

economically equivalent? Why or why

not?

(14) Consistent with the 2016

Reproposal, the Commission is

proposing to explicitly exclude swap

guarantees from the referenced contract

definition.

169

Should the Commission

again propose to exclude swap

guarantees from the referenced contract

definition? Why or why not? If the

Commission does exclude swap

guarantees, should such exclusion be

limited to guarantees for affiliated

entities only? Why or why not?

(15) Please indicate if any updates or

other modifications are needed to: (1)

The proposed list of referenced

contracts that would appear in the CFTC

Staff Workbook of Commodity

Derivative Contracts Under the

Regulations Regarding Position Limits

for Derivatives posted on the

Commission’s website;

170

or (2) the

proposed Appendix D to part 150 list of

commodities deemed ‘‘substantially the

same’’ for purposes of the term

‘‘location basis contract’’ as used in the

proposed ‘‘referenced contract’’

definition.

(16) Should the Commission require

exchanges to maintain a list of

referenced contracts and location basis

contracts listed on their platforms?

(17) The Commission has previously

requested, and commenters have

previously provided, a list of risks other

than price risk for which commercial

enterprises commonly need to hedge.

171

Please explain which hedges of non-

price risks could be objectively and

systematically verified as bona fide

hedges by the Commission, and how the

Commission would verify that such

positions are bona fide hedges,

including how the Commission would

consistently and definitively quantify

and assess whether any such hedges of

non-price risks are bona fide hedges that

comply with the proposed bona fide

hedging definition.

(18) The Commission proposes to

define spread transactions to include:

Either a calendar spread,

intercommodity spread, quality

differential spread, processing spread

(such as energy ‘‘crack’’ or soybean

‘‘crush’’ spreads), product or by-product

differential spread, or futures-option

spread. Are there other types of

transactions commonly known to the

trade as ‘‘spreads’’ that the Commission

should include in its spread transaction

definition? Please provide any examples

or descriptions that will help the

Commission determine whether such

transactions would be consistent with

CEA section 4a(a)(3)(B) and should be

included in the definition of spread

transaction.

(19) Should the Commission require

market participants that trade

economically equivalent swaps OTC,

rather than on a SEF or DCM, to self-

identify and report to the Commission

that in their view, such swaps meet the

Commission’s proposed economically

equivalent swap definition?

B. § 150.2—Federal Limit Levels

1. Existing § 150.2

Federal spot month, single month,

and all-months-combined position

limits currently apply to nine

physically-settled futures contracts on

agricultural commodities listed in

existing § 150.2, and, on a futures-

equivalent basis, to options contracts

thereon. Existing federal limit levels set

forth in § 150.2

172

apply net long or net

short and are as follows:

E

XISTING

L

EGACY

A

GRICULTURAL

C

ONTRACT

F

EDERAL

S

POT

M

ONTH

, S

INGLE

M

ONTH

,

AND

A

LL

-M

ONTHS

-C

OMBINED

L

IMIT

L

EVELS

Contract Spot month limit Single month

and all-months-

combined limit

Chicago Board of Trade (‘‘CBOT’’) Corn (C) .............................................................................................. 600 33,000

CBOT Oats (O) ............................................................................................................................................ 600 2,000

CBOT Soybeans (S) .................................................................................................................................... 600 15,000

CBOT Soybean Meal (SM) .......................................................................................................................... 720 6,500

CBOT Soybean Oil (SO) ............................................................................................................................. 540 8,000

CBOT Kansas City Hard Red Winter Wheat (KW) ..................................................................................... 600 12,000

CBOT Wheat (W) ........................................................................................................................................ 600 12,000

ICE Futures U.S. (‘‘ICE’’) Cotton No. 2 (CT) .............................................................................................. 300 5,000

Minneapolis Grain Exchange (‘‘MGEX’’) Hard Red Spring Wheat (MWE) ................................................. 600 12,000

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This portion of the release is organized by

subject matter, rather than by lettered provision,

and will proceed in the following order: (1)

Contracts subject to federal limits; (2) proposed spot

month limit levels; (3) proposed methodology for

setting spot month limit levels; (4) proposed non-

spot month limit levels; (5) proposed methodology

for setting non-spot month limit levels; (6)

subsequent levels; (7) relevant contract month for

purposes of referenced contracts; (8) limits on pre-

existing positions; (9) limits for positions on foreign

boards of trade; (10) anti-evasion provision; (11)

netting of positions; (12) eligible affiliates and

aggregation; and (13) request for comment.

174

Proposed §150.2(d) provides that each core

referenced futures contract includes any

‘‘successor’’ contracts. An example of a successor

contract would be the RBOB Gasoline contract that

was listed due to a change in gasoline specifications

and that ultimately replaced the Unleaded Gasoline

contract. For some time, both contracts were listed

for trading to allow open interest to migrate to the

new RBOB contract; once trading migrated, the

Unleaded Gasoline contract was delisted.

175

As described above, the proposed term

‘‘referenced contract’’ includes: (1) Futures and

options on futures contracts that, with respect to a

particular core referenced futures contract, are

directly or indirectly linked to the price of that core

referenced futures contract, or directly or indirectly

linked to the price of the same commodity

underlying the core referenced futures contract for

delivery at the same location; and (2) ‘‘economically

equivalent swaps.’’ See proposed ‘‘referenced

contract’’ and ‘‘economically equivalent swap’’

definitions in 150.1.

176

CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5).

177

See infra Section II.A.4. (definition of

‘‘economically equivalent swap’’).

178

As described below, federal non-spot month

limit levels would only apply to the nine legacy

agricultural commodities. The 16 non-legacy

commodities would be subject to federal limits

during the spot month, and exchange-set limits

and/or accountability outside of the spot month.

See infra Section II.B.2.d. (discussion of proposed

non-spot month limit levels).

179

See infra Section III. (Legal Matters).

180

CBOT’s existing exchange-set limit for Wheat

(W) is 600 contracts. However, for its May contract

month, CBOT has a variable spot limit 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 position limit 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.

181

The proposed federal spot month limit for

CME Live Cattle (LC) would feature a step-down

limit similar to the CME’s existing Live Cattle (LC)

step-down exchange set limit. The proposed 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.

182

CME’s existing exchange-set limit for Live

Cattle (LC) has a step-down spot month limit: (1)

450 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.

183

CBOT’s existing exchange-set spot month limit

for Rough Rice (RR) is 600 contracts for all contract

months. However, for July and September, there is

a step-down limit from 600 contracts. In the last

five trading days of the expiring futures month, the

speculative 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.

184

NYMEX recommends implementing a step-

down federal spot position limit for its Light Sweet

Crude Oil (CL) 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.

While not explicit in § 150.2, the

Commission’s practice has been to set

spot month limit levels at or below 25

percent of deliverable supply based on

DCM estimates of deliverable supply

verified by the Commission, and to set

limit levels outside of the spot month at

10 percent of open interest for the first

25,000 contracts of open interest, with

a marginal increase of 2.5 percent of

open interest thereafter.

2. Proposed § 150.2

173

a. Contracts Subject to Federal Limits

The Commission proposes to establish

federal limits on the 25 core referenced

futures contracts listed in proposed

§ 150.2(d),

174

and on their associated

referenced contracts, which would

include swaps that qualify as

‘‘economically equivalent swaps.’’

175

The Commission proposes to establish

position limits on futures and options

on these 25 commodities on the basis

that position limits on such contracts

are ‘‘necessary.’’ A discussion of the

necessity finding and the characteristics

of the 25 core referenced futures

contracts is in Section III.F.

In order to comply with CEA section

4a(a)(5), the Commission also proposes

to establish limits on swaps that are

‘‘economically equivalent’’ to the

above.

176

As discussed above, under the

Commission’s proposed definition of

‘‘economically equivalent swap’’ set

forth in § 150.1, a swap would generally

qualify 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,

disregarding any differences with

respect to lot size or notional amount,

delivery dates diverging by less than

one calendar day, (or for natural gas, by

less than two calendar days) or post-

trade risk-management arrangements.

177

As described in greater detail below,

the proposed federal limits would apply

during all contract months for the nine

legacy agricultural commodity contracts

and only during the spot month for the

16 other commodity contracts.

Proposed § 150.2(e) would provide

that the levels set forth below for the 25

contracts are listed in Appendix E to

part 150 of the Commission’s

regulations and would set the

compliance date for such levels at 365

days after publication of final position

limits regulations in the Federal

Register.

b. Proposed Federal Spot Month Limit

Levels

Under the rules proposed herein,

federal spot month limit levels would

apply to all 25 core referenced futures

contracts, and any associated referenced

contracts.

178

Federal spot month limits

for referenced contracts on all 25

commodities are essential for deterring

and preventing excessive speculation,

manipulation, corners and squeezes.

179

Proposed § 150.2(e) provides that

federal spot month levels are set forth in

proposed Appendix E to part 150 and

are as follows:

Core referenced futures contract 2020 Proposed spot

month limit Existing federal spot

month limit Existing exchange-set

spot month limit

Legacy Agricultural Contracts

CBOT Corn (C) ............................................................................ 1,200 600 600

CBOT Oats (O) ............................................................................ 600 600 600

CBOT Soybeans (S) .................................................................... 1,200 600 600

CBOT Soybean Meal (SM) .......................................................... 1,500 720 720

CBOT Soybean Oil (SO) ............................................................. 1,100 540 540

CBOT Wheat (W) ........................................................................ 1,200 600

180

600/500/400/300/220

CBOT KC HRW Wheat (KW) ...................................................... 1,200 600 600

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See ICE Comment Letter at 8 (May 14, 2019);

MGEX Comment Letter at 2, 4–8 (Aug. 31, 2018);

and Summary DSE Proposed Limits, CME Group

Comment Letter (Nov. 26, 2019), available at

https://comments.cftc.gov (comment file for RIN

3038–AD99).

186

7 U.S.C. 6a(a)(3)(B).

187

7 U.S.C. 6a(a)(3)(B).

188

The recommended levels range from

approximately 7 percent of deliverable supply to 25

percent of deliverable supply.

189

See, e.g., Revision of Federal Speculative

Position Limits and Associated Rules, 64 FR 24038

(May 5, 1999).

Core referenced futures contract 2020 Proposed spot

month limit Existing federal spot

month limit Existing exchange-set

spot month limit

MGEX HRS Wheat (MWE) .......................................................... 1,200 600 600

ICE Cotton No. 2 (CT) ................................................................. 1,800 300 300

Other Agricultural Contracts

CME Live Cattle (LC) ..................................................................

181

600/300/200 n/a

182

450/300/200

CBOT Rough Rice (RR) .............................................................. 800 n/a

183

600/200/250

ICE Cocoa (CC) ........................................................................... 4,900 n/a 1,000

ICE Coffee C (KC) ....................................................................... 1,700 n/a 500

ICE FCOJ–A (OJ) ........................................................................ 2,200 n/a 300

ICE U.S. Sugar No. 11 (SB) ........................................................ 25,800 n/a 5,000

ICE U.S. Sugar No. 16 (SF) ........................................................ 6,400 n/a n/a

Metals Contracts

COMEX Gold (GC) ...................................................................... 6,000 n/a 3,000

COMEX Silver (SI) ....................................................................... 3,000 n/a 1,500

COMEX Copper (HG) .................................................................. 1,000 n/a 1,500

NYMEX Platinum (PL) ................................................................. 500 n/a 500

NYMEX Palladium (PA) ............................................................... 50 n/a 50

Energy Contracts

NYMEX Light Sweet Crude Oil (CL) ...........................................

184

6,000/5,000/4,000 n/a 3,000

NYMEX NYH ULSD Heating Oil (HO) ........................................ 2,000 n/a 1,000

NYMEX NYH RBOB Gasoline (RB) ............................................ 2,000 n/a 1,000

NYMEX Henry Hub Natural Gas (NG) ........................................ 2,000 n/a 1,000

Limits for any contract with a

proposed limit above 100 contracts

would be rounded up to the nearest 100

contracts from the exchange-

recommended level and/or from 25

percent of deliverable supply.

c. Process for Calculating Federal Spot

Month Limit Levels

The existing federal spot month limit

levels on the nine legacy agricultural

contracts have remained constant for

decades, yet the markets have changed

significantly during that time period,

including the advent of electronic

trading and the implementation of

extended trading hours. Further, open

interest and trading volume have since

reached record levels, and some of the

deliverable supply estimates on which

the existing federal spot month limits

were originally based are now decades

out of date. In light of these and other

factors, CME Group, ICE, and MGEX

recommended federal spot month limit

levels for each of their respective core

referenced futures contracts, including

contracts that would be subject to

federal limits for the first time under

this proposal.

185

Commission staff

reviewed these recommendations and

conducted its own analysis of them,

including by requesting additional

information and by independently

assessing the recommended levels using

its own experience, observations, and

knowledge. The Commission proposes

to adopt each of the exchange-

recommended levels as federal spot

month limit levels.

In setting federal limits, the

Commission considers the four policy

objectives in CEA section 4a(a)(3)(B).

That is, to set limits, to the maximum

extent practicable, in its discretion, to:

(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.

186

In setting federal position

limit levels, the Commission endeavors

to maximize these objectives by setting

limits that are low enough to prevent

excessive speculation, manipulation,

squeezes, and corners that could disrupt

price discovery, but high enough so as

not to restrict liquidity for bona fide

hedgers.

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 its regulations, the Commission has

analyzed and evaluated the information

provided by CME Group, ICE, and

MGEX, and preliminarily finds that

none of the recommended levels

considered in preparing this release

appear 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. For these reasons,

discussed in turn below, the

Commission preliminarily believes that

the DCMs’ recommended spot month

limit levels all further the statutory

objectives set forth in CEA section

4a(a)(3)(B).

187

i. The Proposed Spot Month Limit

Levels Are Low Enough To Prevent

Excessive Speculation and Protect Price

Discovery

All 25 of the exchange-recommended

levels are at or below 25 percent of

deliverable supply.

188

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.

189

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 because, among other things, any

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Id.

191

See ICE Comment Letter at 8 (May 14, 2019);

MGEX Comment Letter at 2, 4–8 (Aug. 31, 2018);

and Summary DSE Proposed Limits, CME Group

Comment Letter (Nov. 26, 2019), available at

https://comments.cftc.gov (comment file for RIN

3038–AD99).CME Group submitted updated

estimates of deliverable supply and recommended

federal spot month limit levels for CBOT Corn (C),

CBOT Oats (O), CBOT Rough Rice (RR), CBOT

Soybeans (S), CBOT Soybean Meal (SM), CBOT

Soybean Oil (SO), CBOT Wheat (W), and CBOT KC

HRW Wheat (KW); COMEX Gold (GC), COMEX

Silver (SI), NYMEX Platinum (PL), NYMEX

Palladium (PA), and COMEX Copper (HG); and

NYMEX Henry Hub Natural Gas (NG), NYMEX

Light Sweet Crude Oil (CL), NYMEX NY Harbor

ULSD Heating Oil (HO), and NYMEX NY Harbor

RBOB Gasoline (RB). ICE submitted updated

estimates of deliverable supply and recommended

federal spot month limit levels for ICE Cocoa (CC),

ICE Coffee C (KC), ICE Cotton No. 2 (CT), ICE FCOJ–

A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S.

Sugar No. 16 (SF). MGEX submitted an updated

deliverable supply estimate and indicated that if the

Commission adopted a specific spot month position

limit, MGEX believes the federal spot month limit

level for MGEX Hard Red Spring Wheat (MWE)

should be no less than 1,000 contracts. Commission

staff reviewed the exchange submissions and

conducted its own research. Commission staff

reviewed the data submitted, confirmed that the

data submitted accurately reflected the source data,

and considered whether the data sources were

authoritative. Commission staff considered whether

the assumptions made by the exchanges in the

submissions were acceptable, or whether alternative

assumptions would lead to similar results. In some

cases, Commission staff conducted trade source

interviews. Commission staff replicated the

calculations included in the submissions.

192

See CME Group Comment Letter (Apr. 15,

2016); CME Group Comment Letter (addressing

natural gas) (Sept. 15, 2016); CME Group Comment

Letter (addressing ULSD) (Sept. 15, 2016); ICE

Comment Letter (Apr. 20, 2016); and MGEX

Comment Letter (Jul. 13, 2016), available at https://

comments.cftc.gov/PublicComments/

CommentList.aspx?id=1772&ctl00_ctl00_

cphContentMain_MainContent_

gvCommentListChangePage=8_50. At that time, the

Commission reviewed the methodologies that the

DCMs used to prepare the estimates, among other

things, and verified the deliverable supply

estimates as reasonable. See 2016 Reproposal, 81 FR

at 96754.

193

17 CFR part 38, Appendix C.

194

CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1).

195

See infra Section III.F.

196

With the exception of CBOT Oats (O), open

interest for the legacy agricultural commodities has

increased dramatically over the past several

decades, some by a factor of four.

197

While the proposed spot month limit levels

are generally higher than the existing federal or

exchange-set levels, the proposed federal level for

COMEX Copper (HG) is below the existing

exchange-set level, the proposed federal level for

CBOT Oats (O) is the same as the existing federal

and exchange-set level, and the proposed federal

levels for NYMEX Platinum (PL) and NYMEX

Palladium (PA) are the same as the existing

exchange-set levels.

198

For the following core referenced futures

contracts, CME Group recommended spot month

levels below 25 percent of deliverable supply:

CBOT Corn (C) (9.22% of deliverable supply),

CBOT Oats (O) (19.29%), CBOT Soybeans (S)

(15.86%), CBOT Soybean Meal (SM) (16.77%),

Soybean Oil (SO) (8.31%), CBOT Wheat (W)

(9.24%), CBOT KC HRW Wheat (KW) (9.24%), CME

Live Cattle (LC) (step-down limits 15.86%–7.93%–

5.29%), CBOT Rough Rice (RR) (8.94%), COMEX

Gold (GC) (12.72%), COMEX Silver (SI) (12.62%),

COMEX Copper (HG) (9.66%), NYMEX Platinum

(PL) (13.60%), NYMEX Palladium (PA) (17.18%),

NYMEX Light Sweet Crude Oil (CL) (step-down

limits 11.16%–9.30%–7.44%), NYMEX NYH ULSD

Heating Oil (HO) (10.85%), and NYMEX NYH

RBOB Gasoline (RB) (7.41%). CME Group

recommended spot month levels at 25 percent of

estimated deliverable supply for NYMEX Henry

Hub Natural Gas (NG). ICE and MGEX

recommended limit levels at 25 percent of

estimated deliverable supply for each of their core

referenced futures contracts: Cocoa (CC), Coffee C

(KC), FCOJ–A (OJ), Cotton No. 2 (CT), U.S. Sugar

No. 11 (SB), and U.S. Sugar No. 16 (SF) on ICE, and

Hard Red Spring Wheat (MWE) on MGEX. See ICE

Comment Letter at 1–7 (May 14, 2019); MGEX

Comment Letter at 2, 4–8 (Aug. 31, 2018); and

Summary DSE Proposed Limits, CME Group

Comment Letter (Nov. 26, 2019), available at

https://comments.cftc.gov (comment file for RIN

3038–AD99).

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.

By restricting positions to a

proportion of the deliverable supply of

the commodity, the spot month position

limits require that no one speculator can

hold a position larger than 25 percent 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.

190

Further, by

proposing levels that are sufficiently

low to prevent market manipulation,

including corners and squeezes, the

proposed 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.

Each of the exchange-recommended

levels is based on a percentage of

deliverable supply estimated by the

relevant exchange and submitted to the

Commission for review.

191

The

Commission has closely assessed the

estimates, which CME Group, ICE, and

MGEX updated with recent data using

the methodologies they used during the

2016 Reproposal.

192

The Commission

hereby verifies that the estimates

submitted by the exchanges are

reasonable.

In verifying the DCMs’ estimates of

deliverable supply, the Commission is

not endorsing any particular

methodology for estimating deliverable

supply beyond what is already set forth

in Appendix C to part 38 of the

Commission’s regulations.

193

As

circumstances change over time, such

DCMs may need to adjust the

methodology, assumptions, and

allowances that they use to estimate

deliverable supply to reflect then

current market conditions and other

relevant factors.

ii. The Proposed Spot Month Limit

Levels are High Enough To Ensure

Sufficient Market Liquidity for Bona

Fide Hedgers

Section 4a(a)(1) of the CEA addresses

‘‘excessive speculation. . .causing

sudden or unreasonable fluctuations or

unwarranted [price] changes . . .’’

194

Speculative activity that is not

‘‘excessive’’ in this manner is not a

focus of section 4a(a)(1). Rather,

speculative activity may generate

liquidity 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. The Commission has

not observed, or received any

complaints about, a lack of liquidity for

bona fide hedgers in the markets for the

25 core referenced futures contracts. In

fact, as described later in this release,

the 25 core referenced futures contracts

represent some of the most liquid

markets overseen by the Commission.

195

Market developments that have taken

place since federal spot month limits

were last amended decades ago, such as

electronic trading and expanded trading

hours, have likely only contributed to

these already liquid markets.

196

Market

participants have more opportunities

than ever to enter, trade, or exit a

position. By proposing to generally

increase the existing federal spot month

limit levels, and by proposing federal

spot month limit levels that are

generally equal to or higher than

existing exchange-set levels,

197

yet in all

cases still low enough to prevent

excessive speculation, manipulation,

corners and squeezes, the Commission

does not expect the proposed limits to

result in a reduction in liquidity for

bona fide hedgers.

iii. The Proposed Spot Month Limit

Levels Fall Within a Range of

Acceptable Levels

ICE and MGEX recommended federal

spot month limit levels at 25 percent of

deliverable supply, while CME Group

generally recommended levels below 25

percent of deliverable supply.

198

These

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CME Group has indicated that for its own

exchange-set limits, it historically has not typically

set the limit at the full 25 percent of deliverable

supply when launching a new product, regardless

of asset class or commodity. CME Group’s

recommended spot month limit levels are based on

observations regarding the orderliness of

liquidations and monitoring for appropriate price

convergence. CME Group indicated that the

recommended levels reflect a measured approach

calibrated to avoid the risk of disruption to its

markets, and stated that upon analyzing a

reasonable body of data relating to the expirations

with the recommended spot month limit levels,

CME Group would consider in the future making

any recommendations for increases in limits if any

additional increases were appropriate. Summary

DSE Proposed Limits, CME Group Comment Letter

(Nov. 26, 2019), available at https://

comments.cftc.gov (comment file for RIN 3038–

AD99).

200

See, e.g., Revision of Federal Speculative

Position Limits, 57 FR at 12766, 12770 (Apr. 13,

1992).

201

Commenters, including those responding to

the 2016 Reproposal, have previously requested

that limit levels should be set on a commodity-by-

commodity basis to recognize differences among

commodities, including differences in liquidity,

seasonality, and other economic factors. See, e.g.,

AQR Capital Management Comment Letter at 12

(Feb. 28, 2017); Copperwood Asset Management

Comment Letter at 3 (Feb. 28, 2017); Managed

Funds Association, Asset Management Group of the

Securities Industry and Financial Markets

Association, and the Alternative Investment

Management Association Comment Letter at 9–12

(Feb. 28, 2017); and National Grain and Feed

Association Comment Letter at 2 (Feb. 28, 2017).

202

As noted above, CME Group’s recommended

federal level of 1,000 for COMEX Copper (HG) is

below the existing exchange-set level of 1,500, and

CME Group’s recommended federal levels for

NYMEX Platinum (PL) and NYMEX Palladium (PA)

are equal to the existing exchange-set levels of 500

and 50, respectively. CME Group recommended

federal levels of 6,000 for COMEX Gold (GC) and

3,000 for COMEX Silver (SI), which would

represent an increase over the existing exchange-set

levels of 3,000 and 1,500, respectively. While CME

Group’s recommended federal COMEX Gold (GC)

and COMEX Silver (SI) levels are higher than the

existing exchange-set levels, the recommended

levels still represent only approximately 13 percent

of deliverable supply each. Summary DSE Proposed

Limits, CME Group Comment Letter (Nov. 26, 2019),

available at https://comments.cftc.gov (comment

file for RIN 3038–AD99).

203

The volatility was based on factors such as the

bust in the housing market in 2008, the severe

recession in the United States in 2009, and high

demand for copper exports to China, which has

grown continually over the past 20 years.

distinctions reflect philosophical and

other differences among the exchanges

and differences between the core

referenced futures contracts and their

underlying commodities, including a

preference on the part of CME Group

not to increase existing limit levels

applicable to its core referenced futures

contracts too drastically.

199

The

Commission has previously stated that

‘‘there is a range of acceptable limit

levels,’’

200

and continues to believe this

is true, both for spot and non-spot

month limits. There is no single

‘‘correct’’ spot month limit level for a

given contract, and it is likely that a

number of limit levels within a certain

range could effectively address the

4a(a)(3) factors. While the CME Group,

ICE, and MGEX recommended levels all

fall at different ends of the deliverable

supply range, the levels all fall at or

below 25 percent of deliverable supply,

which is critical for protecting the spot

month from excessive speculation,

manipulation, corners and squeezes.

iv. The Proposed Spot Month Limit

Levels Account for Differences Between

Markets

In addition to being high enough to

ensure sufficient liquidity, and low

enough to prevent excessive speculation

and manipulation, the proposed spot

month limit levels are also calibrated to

further address CEA section 4a(a)(3) by

accounting for differences between

markets for the core referenced futures

contracts and for their underlying

commodities.

201

For the agricultural commodities, the

Commission considered a variety of

factors in evaluating the exchange-

recommended spot month levels,

including concentration and

composition of market participants, the

historical price volatility of the

commodity, convergence between the

futures and cash market prices at the

expiration of the contract, and the

Commission’s experience observing

how the supplies of agricultural

commodities are affected by weather

(drought, flooding, or optimal growing

conditions), storage costs, and delivery

mechanisms. In the Commission’s view,

the exchanges’ recommended spot

month levels for each of the agricultural

contracts would allow for speculators to

be present in the market while

preventing speculative positions from

being so large as to harm convergence

and otherwise hinder statutory

objectives.

The Commission also considered the

delivery mechanisms for the agricultural

commodities in assessing the exchange-

recommended spot month levels. For

example, for the CME Live Cattle (LC)

contract, the Commission considered

the physical limitation that exists on

how many cattle can be processed

(inspected, graded, and weighed) at the

delivery facilities. CME Group currently

has an exchange-set step-down spot

month limit, and recommended a

federal step-down limit for CME Live

Cattle (LC) of 600/300/200 contracts in

order to avoid congestion and to foster

convergence by gradually reducing the

limit levels in a manner that meets the

processing capacity of the delivery

facilities. The Commission proposes to

adopt this step-down limit due to the

unique attributes of the CME Live Cattle

(LC) contract.

For the metals contracts, which are all

listed on NYMEX, the Commission took

delivery mechanisms, among other

factors, into account in assessing the

recommended spot month limit levels.

Upon expiration, the long for each

metals contract receives the ownership

certificate (warrant) for the metal

already in the warehouse/depository

and can continue to store the metal

where it is, load-out the metal, or short

a futures contract to sell the ownership

certificate. This delivery mechanism,

which allows for the resale of the

warrant while the metal remains in the

warehouse, provides for relatively

inexpensive and simple delivery when

compared to the delivery mechanisms

for other commodity types. Further,

metals tend not to spoil and are cheap

to store on a per dollar basis compared

to other commodities. As metals are

generally easier to obtain, store, and sell

than other commodity types, it is also

potentially cheaper to accomplish a

corner or squeeze in metals than in

other commodity types. The

Commission has previously observed

manipulative activity in metals as

evidenced by the Hunt Brother silver

and Sumitomo copper events. The

Commission kept this history in mind in

accepting CME Group’s

recommendation to take a fairly

cautious approach with respect to the

recommended levels for each metal

contract, which are each well below 25

percent of deliverable supply.

202

Commission staff has, however,

reviewed each of the metals contracts

previously and confirms that these

contracts satisfy all regulatory

requirements, including the DCM Core

Principle 3 requirement that the

contracts are not readily susceptible to

manipulation.

Additionally, the Commission

considered the volatility in the

estimated deliverable supply for metals.

For the COMEX Copper (HG) contract,

the estimated deliverable supply for

copper (measured by copper stocks in

COMEX-approved warehouses) has

experienced considerable volatility

during the past decade, resulting in

COMEX amending its exchange-set spot

month position limit multiple times,

decreasing or increasing the limit level

to reflect the amount of copper in its

approved warehouses.

203

Similarly,

volatility in deliverable supplies has

been observed for the NYMEX

Palladium (PA) contract, where

production of palladium from major

producers has been declining while

demand for palladium by the auto

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See, e.g., NYMEX Submissions Nos. 14–463

(Oct. 31, 2014), 15–145 (Apr. 14, 2015), and 15–377

(Aug. 27, 2015).

205

See U.S. Oil and Gas Pipeline Mileage, Bureau

of Transportation Statistics website, available at

www.bts.gov/content/us-oil-and-gas-pipeline-

mileage.

206

Market Resources, ICE Futures website,

available at https://www.theice.com/futures-us/

market-resources (ICE exchange-set position limits);

Position Limits, CME Group website, available at

https://www.cmegroup.com/market-regulation/

position-limits.html; Rules and Regulations of the

Minneapolis Grain Exchange, Inc., MGEX, available

at http://www.mgex.com/documents/Rulebook_

051.pdf (MGEX exchange-set position limits).

207

See infra Section II.B.2.e.

industry for catalytic converters has

increased. This trend in palladium

stocks in exchange-approved

depositories has been observed since

2014. In a series of amendments,

NYMEX reduced its exchange-set spot

month limit from 650 contracts to below

200 contracts over time.

204

The Commission has not observed

similar volatility in the deliverable

supply estimates for agricultural or

energy commodities. Given this history

of volatility in deliverable supply

estimates for metals, if the Commission

were to set limit levels at, rather than

below, 25 percent of deliverable supply,

and if deliverable supply were to

subsequently change drastically, the

spot month limit level could end up

being well above (or below) 25 percent

of deliverable supply, and thus

potentially too high (or too low) to

further statutory objectives.

For the energy complex, the

Commission considered factors such as

the underlying infrastructure and

connectivity. For example, as of 2017,

generally, out of commodities

underlying the core referenced futures

contracts in energy, natural gas had the

most robust infrastructure for moving

the commodity, with over 1,600,000

miles of pipeline (including distribution

mains, transmission pipelines, and

gathering lines) in the United States,

compared to only 215,000 miles of

pipeline for oil (including crude and

product lines).

205

The robust

infrastructure for moving natural gas

supports CME Group’s recommended

spot month limit level at 25 percent of

estimated deliverable supply for the

NYMEX Henry Hub Natural Gas (NG)

contract, while comparatively smaller

crude oil and crude product pipeline

infrastructure support CME Group’s

recommended spot month limit levels

below 25 percent of estimated

deliverable supply for the NYMEX Light

Sweet Crude Oil (CL) and NYMEX NYH

RBOB Gasoline (RB) contracts.

The Commission also considered

factors such as the large amounts of

liquidity in the cash-settled natural gas

referenced contracts relative to the

physically settled NYMEX Henry Hub

Natural Gas (NG) core referenced futures

contract. For that contract, CME Group

recommended setting the spot month

limit at 25 percent of estimated

deliverable supply (2,000 contract spot

month limit) with a conditional limit

exemption of 10,000 contracts net long

or net short conditioned on the

participant not holding or controlling

any positions during the spot month in

the physically-settled NYMEX Henry

Hub Natural Gas (NG) core referenced

futures contract. Speculators who desire

price exposure to natural gas will likely

trade in the cash-settled contracts

because, generally, they do not have the

ability to make or take delivery; trading

in the cash-settled contract removes the

chance that they may be unable to exit

the physically-settled NYMEX Henry

Hub Natural Gas (NG) contract and be

selected to make or take delivery of

natural gas. Thus, speculators are likely

to remain out of the NYMEX Henry Hub

Natural Gas (NG) contract during the

spot month. Since corners and squeezes

cannot be effected using cash settled

contracts, the Commission proposes a

spot month limit set at 25 percent of

deliverable supply for the NYMEX

Henry Hub Natural Gas (NG) core

referenced futures contract.

Further, for certain energy

commodities, CME Group

recommended step-down limits,

including for commodities where

delivery constraints could hinder

convergence or where market

participants otherwise provided

feedback that such limits would help

maintain orderly markets. In the case of

NYMEX Light Sweet Crude Oil (CL),

CME Group currently has a single spot-

month limit of 3,000 contracts, but is

recommending a step down limit that

would end at 4,000 contracts (step-

down limits of 6,000/5,000/4,000).

Historically, as liquidity decreases in

the contract, the exchange would have

a step down mechanism in its

exemptions that it had granted to force

market participants to lower their

positions to the current 3,000 contract

spot month limit. Given the

recommended increase to a final step-

down limit of 4,000 contracts, the

exchange, through feedback from market

participants, recommended a step-down

spot month limit that would in effect

provide the same diminishing effect on

positions.

d. Proposed Federal Single Month and

All-Months Combined (‘‘Non-Spot

Month’’) Limit Levels

Under the rules proposed herein,

federal non-spot month limits would

only apply to the nine agricultural

commodities currently subject to federal

limits. The 16 additional contracts

covered by this proposal would be

subject to federal limits only during the

spot month, and exchange-set limits

and/or accountability requirements

outside of the spot month.

206

The Commission proposes to

maintain federal non-spot month limits

for the nine legacy agricultural

contracts, with the modifications set

forth below, because the Commission

has observed no reason to eliminate

them. These non-spot month limits have

been in place for decades, and while the

Commission is proposing to modify the

limit levels,

207

removing the levels

entirely could potentially result in

market disruption. In fact, commercial

market participants trading the nine

legacy agricultural contracts have

requested that the Commission maintain

federal limits outside the spot month in

order to promote market integrity. For

the following reasons, however, the

Commission is not proposing limits

outside the spot month for the other 16

contracts.

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In the case of certain commodities where open

interest in the deferred month contracts may be

much larger, it may become difficult to exert market

power via concentrated futures positions. 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 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.

209

See infra Section II.D.4. (discussion of

proposed §150.5).

210

Id.

211

Under the proposed ‘‘position accountability’’

definition in §150.1, DCM accountability rules

would have to require a trader whose position

exceeds the accountability level to consent to: (1)

Provide information about its position to the DCM;

and (2) halt increasing further its position or reduce

its position in an orderly manner, in each case as

requested by the DCM.

212

See, e.g., 56 FR 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).

First, corners and squeezes cannot

occur outside the spot month when

there is no threat of delivery, and there

are tools other than federal position

limits for deterring and preventing

manipulation outside of the spot

month.

208

Surveillance at both the

exchange and federal level, coupled

with exchange-set limits and/or

accountability, would continue to offer

strong deterrence and protection against

manipulation outside of the spot month.

In particular, under this proposal, for

the 16 contracts that would be subject

to federal limits only during the spot

month, exchanges would be required to

establish either position limit levels or

position accountability levels outside of

the spot month.

209

Any such

accountability and limit levels would be

subject to standards established by the

Commission 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.’’

210

Exchanges would also be required to

submit any rules adopting or modifying

such position limit and/or

accountability levels to the Commission

pursuant to part 40 of the Commission’s

regulations.

211

Exchange position accountability

establishes a level at which an exchange

will ask traders additional questions,

including regarding the trader’s purpose

for the position, and will evaluate

existing market conditions. If the

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

not to increase the position further, or

to reduce the position. Accountability is

a particularly flexible and effective tool

because it provides the exchanges with

an opportunity to intervene once a

position hits a relatively low level,

while still affording market participants

with the flexibility to establish a large

position when warranted by the nature

of the position and the condition of the

market.

The Commission has decades of

experience overseeing accountability

levels implemented by exchanges,

212

including for all 16 contracts that would

not be subject to federal limits outside

of the spot month under this proposal.

Such accountability levels apply to all

participants on the exchange, whether

commercial or non-commercial, and

regardless of whether the participant

would qualify for an exemption. In the

Commission’s experience, these levels

have functioned as-intended, and the

Commission views exchange

accountability outside of the spot month

as an equally robust, yet more flexible,

alternative to federal non-spot month

speculative position limits.

Second, applying federal limits

during the spot month to referenced

contracts based on all 25 core referenced

futures contracts, and outside of the

spot month only to referenced contracts

based on the nine legacy agricultural

commodities, furthers statutory goals

while minimizing the impact on

existing industry practice and

leveraging existing exchange-set limits

and accountability levels that appear to

have functioned well. The Commission

thus endeavors to minimize market

disruption that could result from

eliminating existing federal non-spot

month limits on certain agricultural

commodities and from adding new non-

spot limits on certain metals and energy

commodities that have never been

subject to federal limits. Layering

federal non-spot month limits for the 16

additional contracts on top of existing

exchange-set limit/accountability levels

may only provide minimal benefits, if

any, and would forego the benefits

associated with flexible accountability

levels, which provide many of the same

protections as hard limits but with

significantly more flexibility for market

participants to exceed the accountability

level in cases where the position would

not harm the market.

As set forth in proposed § 150.2(e),

proposed federal non-spot month levels

applicable to referenced contracts based

on the nine legacy agricultural contracts

are listed in proposed Appendix E and

are as follows:

Core referenced futures contract

2020 Pro-

posed single

month and

all-months

combined limit

based on new

10/2.5 formula

for first 50,000

OI

Existing

federal

single month

and

all-months-

combined limit

Existing

exchange-set

single month

and

all-months-

combined limit

CBOT Corn (C) ............................................................................................................................ 57,800 33,000 33,000

CBOT Oats (O) ............................................................................................................................ 2,000 2,000 2,000

CBOT Soybeans (S) .................................................................................................................... 27,300 15,000 15,000

CBOT Soybean Meal (SM) .......................................................................................................... 16,900 6,500 6,500

CBOT Soybean Oil (SO) ............................................................................................................. 17,400 8,000 8,000

CBOT Wheat (W) ........................................................................................................................ 19,300 12,000 12,000

KC HRW Wheat (KW) ................................................................................................................. 12,000 12,000 12,000

MGEX HRS Wheat (MWE) .......................................................................................................... 12,000 12,000 12,000

ICE Cotton No. 2 (CT) ................................................................................................................. 11,900 5,000 5,000

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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

percent formula to an aggregate open interest of

200,000 contracts would yield a non-spot month

limit of 6,875 contracts. That is, 10 percent of the

first 25,000 contracts would equal 2,500 contracts

(25,000 contracts × 0.10 = 2,500 contracts). Then

add 2.5 percent 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 limit of 6,875 contracts (2,500 contracts

+ 4,375 contracts = 6,875 contracts).

214

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 percent of open interest up

to an open interest of 25,000 contracts, with a

marginal increase of 2.5 percent thereafter). Prior to

1999, the Commission had given little weight 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).

215

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.’’).

216

Revision of Federal Speculative Position

Limits, 57 FR 12766, 12770 (Apr. 13, 1992). The

Commission also stated that providing for a

marginal increase was ‘‘based upon the universal

observation that the size of the largest individual

positions in a market do not continue to grow in

proportion with increases in the overall open

interest of the market.’’ Id.

217

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.

e. Methodology for Setting Proposed

Non-Spot Month Limit Levels

The Commission’s practice has been

to set non-spot month limit levels for

the nine legacy agricultural contracts at

10 percent of the open interest for the

first 25,000 contracts and 2.5 percent of

the open interest thereafter (the ‘‘10, 2.5

percent formula’’).

213

The existing non-

spot month limit levels have not been

updated to reflect changes in open

interest data in over a decade, and the

10, 2.5 percent formula has been used

since the 1990s, and was based on the

Commission’s experience up until that

time.

214

The Commission’s adoption of

the 10, 2.5 percent formula was based

on two primary factors: growth in open

interest and the size of large traders’

positions.

215

The Commission proposes to

maintain the 10, 2.5 percent formula for

non-spot limits, with the limited change

that the 2.5 percent calculation will be

applied to open interest above 50,000

contracts rather than to the current level

of 25,000 contracts. The Commission

believes that this change is warranted

due to the significant overall increase in

open interest in these markets, which

has roughly doubled since federal limits

were set on these markets. The

Commission would apply the modified

formula to recent open interest data for

the periods from July 2017–June 2018

and July 2018–June 2019 of the

applicable futures and delta adjusted

futures options. The resulting proposed

limit levels, set forth in the second

column in the table above, would

generally be higher than existing limit

levels, with the exception of CBOT Oats

(O), CBOT KC HRW Wheat (KW), and

MGEX HRS Wheat (MWE), where

proposed levels would remain at the

existing levels.

The Commission continues to believe

that a formula based on a percentage of

open interest is an appropriate tool for

establishing limits outside the spot

month. As the Commission stated when

it initially proposed to use an open

interest formula, taking open interest

into account ‘‘will permit speculative

position limits to reflect better the

changing needs and composition of the

futures markets . . .’’

216

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. Relative to contracts

with smaller open interest, contracts

with larger open interest may be better

able to mitigate the disruptive impact of

excessive speculation because there may

be more activity to oppose, diffuse, or

otherwise counter a potential pricing

disruption. 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 hedgers; and (3) allows for

increases in position limits and position

sizes as markets expand and become

more active.

While the Commission continues to

prefer a formula based on a percentage

of open interest, market and potential

regulatory changes counsel in favor of

proposing a slight modification to the

existing formula. In particular, as

discussed in detail below, open interest

has grown, and market composition has

changed, significantly since the 1990s.

The proposed increase in the open

interest portion of the non-spot month

limit formula from 25,000 to 50,000

contracts would provide a modest

increase in the non-spot month limit of

1,875 contracts (over what the limit

would be if the 10, 2.5 percent formula

were applied at 25,000 contracts),

assuming the underlying commodity

futures market has open interest of at

least 50,000 contracts. The Commission

believes that the amended non-spot

month formula would provide a

conservative increase in the non-spot

month limits for most contracts to better

reflect the general increase observed in

open interest across futures markets

since the late 1990s, as discussed below.

i. Increases in Open Interest

The table below provides data that

describes the market environment

during the period prior to, and

subsequent to, the adoption of the 10,

2.5 percent formula by the Commission

in 1999. The data includes futures

contracts and the delta-adjusted options

on futures open interest.

217

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 maximum

open interest of approximately 463,000

contracts, and the CBOT Soybeans (S)

contract had maximum open interest 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 percent 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.

T

ABLE

—M

AXIMUM

F

UTURES AND

O

PTIONS ON

F

UTURES

O

PEN

I

NTEREST

, 1994–2018

1994–1999 2000–2004 2005–2009 2010–2014 2015–2018

CBOT Corn (C) .................................................................... 463,386 828,176 1,897,484 2,052,678 2,201,990

ICE Cotton No. 2 (CT) ......................................................... 122,989 140,240 388,336 296,596 344,302

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See infra Section II.B.2.e.iii. (discussion of

proposed non-spot month limit level for CBOT Oats

(O)).

219

Stewart, Blair, An Analysis of Speculative

Trading in Grain Futures, Technical Bulletin No.

1001, U.S. Department of Agriculture (Oct. 1949).

220

Bank Participation Reports, U.S. Commodity

Futures Trading Commission website, available at

https://www.cftc.gov/MarketReports/

BankParticipationReports/index.htm .

221

The term ‘‘reportable position’’ is defined in

§15.00(p) of the Commission’s regulations. 17 CFR

15.00(p).

222

Commitments of Traders, U.S. Commodity

Futures Trading Commission website, available at

www.cftc.gov/MarketReports/

CommitmentsofTraders/index.htm. There are

generally still as many large commercial traders in

the markets today as there were in the 1990s.

223

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.

T

ABLE

—M

AXIMUM

F

UTURES AND

O

PTIONS ON

F

UTURES

O

PEN

I

NTEREST

, 1994–2018—Continued

1994–1999 2000–2004 2005–2009 2010–2014 2015–2018

CBOT Oats (O) .................................................................... 18,879 17,939 16,860 15,375 11,313

CBOT Soybeans (S) ............................................................ 227,379 327,276 672,061 991,258 997,881

CBOT Soybean Meal (SM) .................................................. 155,658 183,255 241,917 392,265 544,363

CBOT Soybean Oil (SO) ..................................................... 172,424 191,337 328,050 395,743 547,784

CBOT Wheat (W) ................................................................. 163,193 187,181 507,401 576,333 621,750

CBOT Wheat: Kansas City Hard Red Winter (KW) ............ 76,435 87,611 159,332 189,972 311,592

MGEX Wheat: Minneapolis Hard Red Spring (MWE) ......... 24,999 36,155 57,765 68,409 80,635

The table also displays the maximum

open interest figures for subsequent

periods up to, and including, 2018. The

maximum open interest for all of these

contracts, except for oats, generally

increased over the period.

218

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. 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 during the

1994–1999 period leading up to the

Commission’s adoption of the 10, 2.5

percent formula in 1999.

ii. Changes in Market Composition

As open interest has increased, the

current non-spot limits have become

significantly more restrictive over time.

In particular, because the 2.5 percent

incremental increase applies after the

first 25,000 contracts of open interest,

limits on commodities with open

interest above 25,000 contracts (i.e., all

commodities other than oats) continue

to increase at a much slower rate of 2.5

percent rather than 10 percent, as for the

first 25,000 contracts. This gradual

increase 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 contracts. The 10,

2.5 percent formula has thus become

more restrictive for market participants,

including those entities with positions

that may not be eligible for a bona fide

hedging exemption, but who might

otherwise provide valuable liquidity to

commercial firms.

This problem has become worse 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 percent 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.

219

Several years

after the Commission adopted the 10,

2.5 percent formula, the composition of

futures market participants changed, as

dealers began to enter the physical

commodity futures market in larger size.

The table below presents data from the

Commission’s publicly available ‘‘Bank

Participation Report’’ (‘‘BPR’’), as of the

December report for 2002–2018.

220

The

table displays the number of banks

holding reportable positions for the

seven futures contracts for which

federal limits apply and that were

reported in the BPR.

221

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.

222

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. As described in the

Commission’s 2008 Staff Report on

Commodity Swap Dealers & Index

Traders, major changes in the

composition of futures markets

developed over the 20 years prior to

2008, including an influx of swap

dealers (‘‘SDs’’), affiliated with banks or

other large financial institutions, acting

as aggregators or market makers and

providing swaps to commercial hedgers

and to other market participants.

223

The

dealers functioned in the swaps market

and also used the futures markets to

hedge their exposures. When the

Commission adopted the 10, 2.5 percent

formula in 1999, it had limited

experience with physical commodity

derivatives markets in which such

banks were significant participants.

T

ABLE

—N

UMBER OF

R

EPORTING

C

OMMERCIAL

B

ANKS

W

ITH

L

ONG

F

UTURES

P

OSITIONS

Year Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT

2002 ............................. NR NR NR NR NR NR NR

2003 ............................. 5 6 7 NR NR 5 NR

2004 ............................. 5 10 7 NR NR 7 NR

2005 ............................. 10 8 6 NR 5 9 9

2006 ............................. 11 11 9 NR 7 14 7

2007 ............................. 13 8 12 NR 6 14 6

2008 ............................. 17 13 16 NR 6 14 9

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Applying the proposed modified 10, 2.5

percent formula to recent open interest data for

these two contracts would result in limit levels of

11,900 and 5,700, respectively.

225

Wheat Sector at a Glance, USDA Economic

Research Service, available at https://

www.ers.usda.gov/topics/crops/wheat/wheat-sector-

at-a-glance.

226

Estimated Areas, Yield, Production, Average

Farm Price and Total Farm Value of Principal Field

Crops, In Metric and Imperial Units, Statistics

Canada website, available at https://

www150.statcan.gc.ca/t1/tbl1/en/tv.action?

pid=3210035901.

T

ABLE

—N

UMBER OF

R

EPORTING

C

OMMERCIAL

B

ANKS

W

ITH

L

ONG

F

UTURES

P

OSITIONS

—Continued

Year Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT

2009 ............................. 8 8 8 NR NR 13 NR

2010 ............................. 7 7 7 NR NR 11 NR

2011 ............................. 10 11 9 5 5 10 NR

2012 ............................. 8 10 11 6 6 13 5

2013 ............................. 11 11 13 10 6 11 5

2014 ............................. 15 12 15 10 9 15 6

2015 ............................. 12 13 13 12 9 16 9

2016 ............................. 15 14 15 12 10 15 6

2017 ............................. 16 13 12 11 9 16 8

2018 ............................. 16 15 18 15 13 18 12

NR = ‘‘Not Reported’’.

For 2003, 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 percent of futures

long open interest for wheat 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 fraction

of the long open interest.

T

ABLE

—P

ERCENT OF

F

UTURES

L

ONG

O

PEN

I

NTEREST

H

ELD BY

C

OMMERCIAL

B

ANKS

Year

(Dec.) Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT

2002 .. NR NR NR NR NR NR NR

2003 .. 1.5% 1.4% 0.8% NR NR 3.4% NR

2004 .. 7.0 6.5 3.6 NR NR 14.5 NR

2005 .. 12.5 13.8 8.3 NR 6.8 20.2 5.2

2006 .. 9.4 14.2 7.7 NR 6.7 17.0 6.9

2007 .. 9.2 9.7 6.7 NR 6.5 13.5 5.5

2008 .. 8.9 18.2 10.0 NR 6.4 18.7 7.1

2009 .. 4.3 6.5 3.6 NR NR 9.3 NR

2010 .. 3.7 2.5 4.7 NR NR 6.9 NR

2011 .. 4.1 3.3 4.9 1.9 4.4 7.7 NR

2012 .. 4.7 9.9 3.7 5.8 5.5 7.4 3.5

2013 .. 5.3 9.1 4.4 7.0 4.1 6.2 6.4

2014 .. 9.7 10.0 6.3 6.7 6.5 7.7 10.1

2015 .. 8.1 10.1 5.0 5.9 6.4 7.8 4.3

2016 .. 8.1 8.5 7.1 10.7 6.6 7.3 5.2

2017 .. 5.5 9.5 4.3 9.1 7.3 7.7 4.8

2018 .. 5.8 8.3 5.9 9.2 7.6 10.2 7.0

NR = ‘‘Not Reported’’.

iii. Proposed Non-Spot Month Limits for

Hard Red Wheat and Oats

The Commission proposes partial

wheat parity outside of the spot month:

limits for CBOT KC HRW Wheat (KW)

and MGEX HRS Wheat (MWE) would be

set at 12,000 contracts, while limits for

CBOT Wheat (W) would be set at 19,300

contracts. Based on the Commission’s

experience since 2011 with non-spot

month speculative position limit levels

at 12,000 for the CBOT KC HRW Wheat

(KW) and MGEX HRS Wheat (MWE)

core referenced futures contracts, the

Commission is proposing to maintain

the current non-spot month limit levels

for those two contracts, rather than

reducing the existing levels to the lower

levels that would result from applying

the proposed modified 10, 2.5 percent

formula.

224

The current 12,000 contract

level appears to have functioned well

for these contracts, and the Commission

sees no market-based reason to reduce

the levels.

CBOT KC HRW Wheat (KW) and

MGEX HRS Wheat (MWE) are both hard

red wheats representing about 60

percent of the wheat grown in the

United States

225

and about 80 percent

of the wheat grown in Canada.

226

Although the CBOT Wheat (W) contract

allows for delivery of hard red wheat, it

typically sees deliveries of soft white

wheat varieties, which comprises a

smaller percentage of the wheat grown

in North America. Even though the

CBOT Wheat (W) contract has the

majority of liquidity among the three

wheat contracts as measured by open

interest and trading volume, it is the

hard red wheats that make up the bulk

of wheat crops in North America. Thus,

the Commission proposes to maintain

the non-spot month limit for the CBOT

KC HRW Wheat (KW) contract and

MGEX HRS Wheat (MWE) contract at

the 12,000 contract level even though

both contracts would have a lower non-

spot month limit based solely on the

open interest formula. The Commission

preliminarily believes that maintaining

partial parity and the existing non-spot

month limits in this manner will benefit

the MWE and KW markets since the two

species of wheat are similar (i.e., hard

red wheat) to one another relative to

CBOT Wheat (W), which is soft white

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See Statement of Layne Carlson, CFTC

Agricultural Advisory Committee meeting, Sept. 22,

2015, at 38–44.

228

See supra Section II.A.20. (definition of spread

transaction).

229

Applying the proposed modified 10, 2.5

percent formula to recent open interest data for oats

would result in a 700 contract limit level.

230

Revision of Speculative Position Limits, 57 FR

12770, 12766 (Apr. 13, 1992). See also Revision of

Speculative Position Limits and Associated Rules,

63 FR at 38525, 38527 (July 17, 1998). Cf. 2013

Proposal, 78 FR at 75729 (there may be range of

spot month limits that maximize policy objectives).

231

64 FR 24038, 24039 (May 5, 1999).

232

7 U.S.C. 6a(a)(3)(B).

233

For example, under DCM Core Principle 4,

DCMs are required to ‘‘have the capacity and

responsibility to prevent manipulation, price

distortion, and disruptions of the delivery or cash-

settlement process through market surveillance,

compliance, and enforcement practices and

procedures,’’ including ‘‘methods for conducting

real-time monitoring of trading’’ and

‘‘comprehensive and accurate trade

reconstructions.’’ 7 U.S.C. 7(d)(4).

234

See infra Section II.D.4.g. (discussion of

Commission enforcement of exchange-set limits).

wheat; and as a result, the Commission

has preliminarily determined that

decreasing the non-spot month 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

related KW market.

However, the Commission has

determined not to raise the proposed

limit levels for CBOT KC HRW Wheat

(KW) and MGEX HRS Wheat (MWE) to

the proposed 19,300 contract limit level

for CBOT Wheat (W) because 19,300

contracts appears to be extraordinarily

large in comparison to open interest in

the CBOT KC HRW Wheat (KW) and

MGEX HRS Wheat (MWE) markets, and

the limit levels for both contracts are

already larger than a limit level based

on the 10, 2.5 percent formula. The

Commission is concerned that

substantially raising non-spot limits on

the KW or MWE contracts could create

a greater likelihood of excessive

speculation given their smaller overall

trading relative to the CBOT Wheat (W)

contract. In response to prior proposals,

which would have resulted in lower

non-spot limits for MWE, MGEX had

requested parity among all wheat

contracts. In part, MGEX reasoned that

intermarket spread trading among the

three contracts is vital to their price

discovery function.

227

The Commission

notes that intermarket spreading is

permitted under this proposal.

228

The

intermarket spread exemption should

address any concerns over the loss of

liquidity in spread trades among the

three wheat contracts.

Likewise, based on the Commission’s

experience since 2011 with the current

non-spot month speculative position

limit of 2,000 contracts for CBOT Oats

(O), the Commission is proposing to

maintain the current 2,000 contract

level rather than reducing it to the lower

levels that would result from applying

the updated 10, 2.5 formula.

229

The

existing 2,000 contract limit for CBOT

Oats (O) appears to have functioned

well, and the Commission sees no

reason to reduce it.

While retaining the existing non-spot

month limits for the MWE and KW

contracts and for CBOT Oats (O) does

break with the proposed non-spot

month formula, the Commission has

confidence that the existing contract

limits should continue to be appropriate

for these contracts. Furthermore, even

when relying on a single criterion, such

as percentage of open interest, the

Commission has historically recognized

that there can ‘‘result . . . a range of

acceptable position limit levels.’’

230

For all of the core referenced

contracts, based on decades of

experience overseeing exchange-set

position limits and administering its

own federal position limits regime, the

Commission is of the view that the

proposed non-spot month limit levels

are also low enough to diminish,

eliminate, or prevent excessive

speculation, and to deter and prevent

market manipulation, squeezes, and

corners. The Commission has

previously studied prior increases in

federal non-spot month limits 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.

231

The Commission has since

gained further 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

proposal to amend the 10, 2.5 percent

formula will adequately address each of

the policy objectives set forth in CEA

section 4a(a)(3).

232

iv. Conclusion

With the exception of the CBOT KC

HRW Wheat (KW), MGEX HRS Wheat

(MWE), and CBOT Oats (O) contracts, as

noted above, the proposed formula

would result in higher non-spot month

limit levels than those currently in

place. Furthermore, as noted above,

under the rules proposed herein, the

nine legacy agricultural contracts would

be the only contracts subject to limits

outside of the spot month. Aside from

the CBOT Oats (O) contract, these

contracts all have high open interest,

and thus their pricing may be less likely

to be affected by the trading of large

position holders in non-spot months.

Further, consistent with the approach

proposed herein to leverage existing

exchange-level programs and expertise,

the proposed federal non-spot month

limit levels would serve simply as

ceilings—exchanges would remain free

to set exchange levels below the federal

limit. The exchanges currently have

systems and processes in place to

monitor and surveil their markets in real

time, and have the ability, and

regulatory responsibility, to act quickly

in the event of a disturbance.

233

Additionally, exchanges have tools

other than position limits for protecting

markets. For instance, exchanges can

establish position accountability levels

well below a position limit level, and

can impose liquidity and concentration

surcharges to initial margin if they are

vertically integrated with a derivatives

clearing organization. One reason that

the Commission is proposing to update

the formula for calculating non-spot

month limit levels is that the exchanges

may be able in certain circumstances to

act much more quickly than the

Commission, including quickly altering

their own limits and accountability

levels based on changing market

conditions. Any decrease in an

exchange-set limit would effectively

lower the federal limit for that contract,

as market participants would be

required to comply with both federal

and exchange-set limits, and as the

Commission has the authority to enforce

violations of both federal and exchange-

set limits.

234

f. Subsequent Spot and Non-Spot Month

Limit Levels

Prior to amending any of the proposed

spot or non-spot month levels, if

adopted, the Commission would

provide for public notice and comment

by publishing the proposed levels in the

Federal Register. Under proposed

§ 150.2(f), should the Commission wish

to rely on exchange estimates of

deliverable supply to update spot month

speculative limit levels, DCMs would be

required to supply to the Commission

deliverable supply estimates upon

request. Proposed § 150.2(j) would

delegate the authority to make such

requests to the Director of the Division

of Market Oversight.

Recognizing that estimating

deliverable supply can be a time and

resource consuming process for DCMs

and for the Commission, the

Commission is not proposing to require

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For example, if a contract has problems with

pricing convergence between the futures and the

cash market, it could be a symptom of a deliverable

supply issue in the market. In such a situation, the

Commission may request an updated deliverable

supply estimate from the relevant DCM to help

identify the possible cause of the pricing anomaly.

236

17 CFR part 38, Appendix C.

237

7 U.S.C. 6a(a)(6).

238

Commission regulation §48.2(c) defines

‘‘direct access’’ to mean an explicit grant of

authority by a foreign board of trade to an identified

member or other participant located in the United

States to enter trades directly into the trade

matching system of the foreign board of trade. 17

CFR 48.2(c).

239

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). CEA section 4(b)(1)(B) provides

that the Commission may not permit a foreign board

of trade to provide to the members of the foreign

board of trade or other participants located in the

United States direct access to the electronic trading

and order-matching system of the foreign board of

trade with respect to an agreement, contract, or

transaction that settles against any price (including

the daily or final settlement price) of 1 or more

contracts listed for trading on a registered entity,

unless the Commission determines that the foreign

board of trade (or the foreign futures authority that

oversees the foreign board of trade) adopts position

limits (including related hedge exemption

provisions) for the agreement, contract, or

transaction that are comparable to the position

limits (including related hedge exemption

provisions) adopted by the registered entity for the

1 or more contracts against which the agreement,

contract, or transaction traded on the foreign board

of trade settles.

240

7 U.S.C. 12a(5).

DCMs to submit such estimates on a

regular basis; instead, DCMs would be

required to submit estimates of

deliverable supply if requested by the

Commission.

235

DCMs would also have

the option of submitting estimates of

deliverable supply and/or

recommended speculative position limit

levels if they wanted the Commission to

consider them when setting/adjusting

federal limit levels. Any such

information would be included in a

Commission action proposing changes

to the levels. The Commission

encourages exchanges to submit such

estimates and recommendations

voluntarily, as the exchanges are

uniquely situated to recommend

updated levels due to their knowledge

of individual contract markets. When

submitting estimates, DCMs would be

required under proposed § 150.2(f) to

provide a description of the

methodology used to derive the

estimate, as well as any statistical data

supporting the estimate, so that the

Commission can verify that the estimate

is reasonable. DCMs should consult the

guidance regarding estimating

deliverable supply set forth in

Appendix C to part 38.

236

g. Relevant Contract Month

Proposed § 150.2(c) clarifies 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.

This 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) futures 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.

h. Limits on ‘‘Pre-Existing Positions’’

Under proposed § 150.2(g)(1), other

than pre-enactment swaps and

transition period swaps as defined in

proposed § 150.1, ‘‘pre-existing

positions,’’ defined in proposed § 150.1

as positions established in good faith

prior to the effective date of a final

federal position limits rulemaking,

would be subject to federal spot month

limit levels. This clarification is

intended to avoid rendering spot month

limits ineffective—failing to apply spot

month limits to such pre-existing

positions 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. The

Commission is particularly concerned

about protecting the spot month in

physical-delivery futures from price

distortions or manipulation that would

disrupt the hedging and price discovery

utility of the futures contract.

Proposed § 150.2(g)(2) would provide

that the proposed non-spot month limit

levels would not apply to positions

acquired in good faith prior to the

effective date of such limit, recognizing

that pre-existing large positions may

have a relatively less disruptive effect

outside of the spot month than during

the spot month given that physical

delivery occurs only during the spot

month. 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.

i. Positions on Foreign Boards of Trade

CEA section 4a(a)(6) directs the

Commission to, among other things,

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

listed by DCMs, certain contracts traded

on a foreign board of trade (‘‘FBOT’’)

with linkages to a contract traded on a

registered entity, and swap contracts

that perform or affect a significant price

discovery function with respect to

regulated entities.

237

Pursuant to that

directive, proposed § 150.2(h) would

apply the proposed limits to a market

participant’s aggregate positions in

referenced contracts executed on a DCM

and on, or pursuant to the rules of, an

FBOT, provided that the referenced

contracts settle against a price of a

contract listed for trading on a DCM or

SEF, and that the FBOT makes such

contract available in the United States

through ‘‘direct access.’’

238

In other

words, a market participant’s positions

in referenced contracts listed on a DCM

and on an FBOT registered to provide

direct access would collectively have to

stay below the federal limit level for the

relevant core referenced futures

contract. The Commission preliminarily

believes that, as proposed, § 150.2(h)

would 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.

239

j. Anti-Evasion

Pursuant to the Commission’s

rulemaking authority in section 8a(5) of

the CEA,

240

the Commission proposes

§ 150.2(i), which is intended to deter

and prevent a number of potential

methods of evading the position limits

proposed herein. The proposed anti-

evasion provision is not intended to

capture a trading strategy merely

because it may result in smaller position

size for purposes of position limits, but

rather is intended to deter and prevent

cases of willful evasion of federal

position limits, the specifics of which

the Commission may be unable to

anticipate. The proposed federal

position limit requirements would

apply during the spot month for all

referenced contracts subject to federal

limits and non-spot position limit

requirements would only apply for the

nine legacy agricultural contracts.

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See supra Section II.A.16.b. (explanation of

proposed exclusions from the ‘‘referenced contract’’

definition).

242

See Further Definition of ‘‘Swap,’’ ‘‘Security-

Based Swap,’’ and ‘‘Security-Based Swap

Agreement’’; Mixed Swaps; Security-Based Swap

Agreement Recordkeeping, 77 FR 48207, 48297–

48303 (Aug. 13, 2012); Clearing Requirement

Determination Under Section 2(h) of the CEA, 77

FR 74284, 74317–74319 (Dec. 13, 2012).

243

See Clearing Requirements Determination

Under Section 2(h) of the CEA, 77 FR at 74319.

244

See Further Definition of ‘‘Swap,’’ ‘‘Security-

Based Swap,’’ and ‘‘Security-Based Swap

Agreement’’; Mixed Swaps; Security-Based Swap

Agreement Recordkeeping, 77 FR 48207, 48297–

48303 and Clearing Requirement Determination

Under Section 2(h) of the CEA, 77 FR 74284,

74317–74319.

245

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)).

Under this proposed framework, and

because the threat of corners and

squeezes is the greatest in the spot

month, the Commission preliminarily

anticipates that it may focus its

attention on anti-evasion activity during

the spot month.

First, the proposed rule would

consider a commodity index contract

and/or location basis contract used to

willfully circumvent position limits to

be a referenced contract subject to

federal limits. Because commodity

index contracts and location basis

contracts are excluded from the

proposed ‘‘referenced contract’’

definition and thus not subject to

federal limits,

241

the Commission

intends that proposed § 150.2(i) would

close a potential loophole whereby a

market participant who has reached its

limits 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 proposed rule would close

a similar potential loophole with respect

to location basis contracts.

Second, proposed § 150.2(i) would

provide that a bona fide hedge

recognition or spread exemption would

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 a bona fide

hedge recognition or spread exemption

does not become an avenue for market

participants to inappropriately exceed

speculative position limits.

Third, 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. This provision is

intended to deter and prevent the

structuring of a swap in order to

willfully evade speculative position

limits.

The determination of whether

particular conduct is intended to

circumvent or evade requires a facts and

circumstances analysis. In preliminarily

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.

242

Generally, consistent with those

interpretations, in evaluating whether

conduct constitutes evasion, the

Commission would 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 persons

crafted derivatives transactions,

structured entities, or conducted

themselves in a manner without a

legitimate business purpose and with

the intent to willfully evade position

limits by structuring a swap such that it

would not meet the proposed

‘‘economically equivalent swap’’

definition. 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.

243

The

Commission will view legitimate

business purpose considerations on a

case-by-case basis in conjunction with

all other relevant facts and

circumstances.

Further, as part of its facts and

circumstances analysis, the Commission

would look at factors such as the

historical practices behind the market

participant and transaction in question.

For example, with respect to

§ 150.2(i)(3), the Commission would

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,

244

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

does not believe that these factors are a

prerequisite to an evasion finding

because 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 proposed anti-evasion provision

does require willfulness, i.e. ‘‘scienter.’’

The Commission will interpret ‘‘willful’’

consistent with how the Commission

has in the past, that acting either

intentionally or with reckless disregard

constitutes acting ‘‘willfully.’’

245

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, proposed § 150.2(i) would apply to

the party who willfully structured the

transaction to evade.

Finally, entering into transactions that

qualify for the forward exclusion from

the swap definition 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.

k. Netting

For the reasons discussed above, the

referenced contract definition in

proposed § 150.1 includes, among other

things, cash-settled contracts that are

linked, either directly or indirectly, to a

core referenced futures contract; and

any ‘‘economically equivalent

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See supra Section II.A.16. (discussion of the

proposed referenced contract definition).

247

In practice, the only physically-settled

referenced contracts under this proposal would 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.

248

Consistent with CEA section 4a(a)(6), this

would include positions across exchanges.

249

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

limits and cannot be netted with positions in

referenced contracts for purposes of federal limits:

Location basis contracts; commodity index

contracts; and trade options that meet the

requirements of 17 CFR 32.3.

250

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.

251

See, e.g., Elimination of Daily Speculative

Trading Limits, 44 FR 7124, 7125 (Feb. 6, 1979).

swaps.’’

246

Under proposed § 150.2(a),

federal spot month limits would 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. Specifically, all of a

trader’s positions (long or short) in a

given physically-settled referenced

contract (across all exchanges and OTC

as applicable)

247

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.

248

A position in a

commodity contract that is not a

referenced contract is therefore not

subject to federal limits, and, as a

consequence, cannot be netted with

positions in referenced contracts for

purposes of federal limits.

249

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.

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

limits for physically-settled and cash-

settled contracts, the spot month 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.

250

Proposed § 150.2(b), which would

establish limits outside the spot month,

does not use the ‘‘separately’’ language.

Accordingly, outside of the spot month,

participants may net positions in linked

physically-settled and cash-settled

referenced contracts, because there is no

immediate threat of delivery.

Finally, proposed § 150.2(a) and (b)

also provide that spot and non-spot

limits apply ‘‘net long or net short.’’

Consistent with existing § 150.2, this

language requires that, both during and

outside the spot month, and subject to

the provisions governing netting

described above, a given participant’s

long positions in a particular contract be

aggregated (including across exchanges

and OTC as applicable), and a

participant’s short positions be

aggregated (including across exchanges

and OTC as applicable), and those

aggregate long and short positons be

netted—in other words, it is the net

value that is subject to federal limits.

Consistent with current and historical

practice, the speculative position limits

proposed herein would apply to

positions throughout each trading

session, including as of the close of each

trading session.

251

l. ‘‘Eligible Affiliates’’ and Aggregation

Proposed § 150.2(k) addresses entities

that qualify as an ‘‘eligible affiliate’’ as

defined in proposed § 150.1. Under the

proposed definition, an ‘‘eligible

affiliate’’ includes 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 are eligible for an

exemption from aggregation but that

prefer to aggregate rather than

disaggregate their positions; for

example, when aggregation would result

in advantageous netting of positions

with affiliated entities. Proposed

§ 150.2(k) is 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.

m. Request for Comment

The Commission requests comment

on all aspects of proposed § 150.2. The

Commission also invites comments on

the following:

(20) Are there legitimate strategies on

which the Commission should offer

guidance with respect to the anti-

evasion provision?

(21) Should the Commission list by

regulation specific factors/

circumstances in which it may set spot

month limits with other than the at or

below 25 percent of deliverable supply

formula, and non-spot month limits

with other than the modified 10, 2.5

percent formula proposed herein? If so,

please provide examples of any such

factors, including an explanation of

whether and why different formulas

make sense for different commodities.

(22) Is the proposed compliance date

of twelve months after publication of a

final federal position limits rulemaking

in the Federal Register an appropriate

amount of time for compliance? If not,

please provide reasons supporting a

different timeline. Do market

participants support delaying

compliance until one year after a DCM

has had its new § 150.9 rules approved

by the Commission under § 40.5?

(23) The Commission understands

that it may be possible for a market

participant trading options to start a

trading day below the delta-adjusted

federal speculative position limit for

that option, but end up above such limit

as the option becomes in-the-money

during the spot month. Should the

Commission allow for a one-day grace

period with respect to federal position

limits for market participants who have

exercised options that were out-of-the

money on the previous trading day but

that become in-the-money during the

trading day in the spot month?

(24) Given that the contracts in corn

and soybean complex are more liquid

than CBOT Oats (O) and the MGEX HRS

(MWE) wheat contract, should the

Commission employ a higher open

interest formula for corn and the

soybean complex?

(25) Should the Commission phase-in

the proposed increased federal non-spot

month limits incrementally over a

period of time, rather than

implementing the entire increase upon

the effective date? Please explain why or

why not. If so, please comment on an

appropriate phase-in schedule,

including whether different

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17 CFR 150.3(a).

253

17 CFR 150.3(b).

254

17 CFR 1.47.

255

17 CFR 1.47(a).

256

17 CFR 1.47(b).

257

17 CFR 1.48.

258

Id.

259

Since 1938, the Commission (known as the

Commodity Exchange Commission in 1938) has

recognized the use of spread positions to facilitate

liquidity and hedging. 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).

260

See 7 U.S.C. 6a(a)(1) and 17 CFR 150.3(a)(3)

(providing that the position limits set in §150.2

may be exceeded to the extent such positions are:

Spread or arbitrage positions 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.). Although existing § 150.3(a)(3)

does not specify a formal process for granting

spread exemptions, the Commission is able to

monitor traders’ gross and net positions using part

17 data, the monthly Form 204, and information

from the applicable DCMs to identify any such

spread positions.

261

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 91489–90.

262

See infra Section II.D.4.a. See also proposed

§150.5(a)(2)(ii)(A)(1).

commodities should be subject to

different schedules.

(26) The Commission is aware that the

non-spot month open interest is skewed

to the first new crop (usually December

or November) for the nine legacy

agricultural contracts. The Commission

understands that cotton may be unique

because it has an extended harvest

period starting in July in the south and

working its way north until November.

There may be some concern with

positions being rolled from the prompt

month into deferred contract months

causing disruption to the price

discovery function of the Cotton futures.

Should the Commission consider

lowering the single month limit to a

percentage of the all months limits for

Cotton? If so, what percentage of the all

month limit should be used for the

single month limit? Please provide a

rationale for your percentage.

(27) Should the Commission allow

market participants who qualify for the

conditional spot month limit in natural

gas to net cash-settled natural gas

referenced contracts across DCMs? Why

or why not?

C. § 150.3—Exemptions From Federal

Position Limits

1. Existing §§ 150.3, 1.47, and 1.48

Existing § 150.3(a), which pre-dates

the Dodd-Frank Act, lists positions that

may, under certain circumstances,

exceed federal limits: (1) Bona fide

hedging transactions, as defined in the

current bona fide hedging definition in

§ 1.3; and (2) certain spread or arbitrage

positions.

252

So that the Commission

can effectively oversee the use of such

exemptions, existing § 150.3(b) provides

that the Commission or certain

Commission staff may make special

calls to demand certain information

from exemption holders, including

information regarding positions owned

or controlled by that person, trading

done pursuant to that exemption, and

positions that support the claimed

exemption.

253

Existing § 150.3(a) allows

for bona fide hedging transactions to

exceed federal limits, and the current

process for a person to request such

recognitions for non-enumerated hedges

appears in § 1.47.

254

Under that

provision, persons seeking recognition

by the Commission of a non-enumerated

bona fide hedging transaction or

position must file statements with the

Commission.

255

Initial statements must

be filed with the Commission at least 30

days in advance of exceeding the

limit.

256

Similarly, existing § 1.48 sets

forth the process for market participants

to file an application with the

Commission to recognize certain

enumerated anticipatory positions as

bona fide hedging positions.

257

Under

that provision, such recognitions must

be requested 10 days in advance of

exceeding the limit.

258

Further, the Commission provides

self-effectuating spread exemptions for

the nine legacy agricultural contracts

currently subject to federal limits, but

does not specify a formal process for

granting such spread exemptions.

259

The Commission’s authority and

existing regulation for exempting certain

spread positions can be found in section

4a(a)(1) of the Act and existing

§ 150.3(a)(3) of the Commission’s

regulations, respectively.

260

In

particular, 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.’ ’’

2. Proposed § 150.3

As described elsewhere in this

release, the Commission is proposing a

new bona fide hedging definition in

§ 150.1 (described above) and a new

streamlined process in proposed § 150.9

for recognizing non-enumerated bona

fide hedging positions (described

further below). The Commission thus

proposes to update § 150.3 to conform to

those new proposed provisions.

Proposed § 150.3 also includes 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 cash-

settled natural gas contracts; and (iii)

exemptions for pre-enactment swaps

and transition period swaps.

261

Proposed § 150.3(b)–(g) respectively

address: Requests for relief from

position limits submitted directly to the

Commission or Commission staff (rather

than to an exchange under proposed

§ 150.9, as discussed further below);

previously-granted risk management

exemptions to position limits;

exemption-related recordkeeping and

special-call requirements; the

aggregation of accounts; and the

delegation of certain authorities to the

Director of the Division of Market

Oversight.

a. Bona Fide Hedging Positions and

Spread Exemptions

The Commission has years of

experience granting and monitoring

spread exemptions, and enumerated and

non-enumerated bona fide hedges, as

well as overseeing exchange processes

for administering exemptions from

exchange-set limits on such contracts.

As a result of this experience, the

Commission has determined to continue

to allow self-effectuating enumerated

bona fide hedges and certain spread

exemptions for all contracts that would

be subject to federal position limits, as

explained further below.

i. Bona Fide Hedging Positions

First, under proposed § 150.3(a)(1)(i),

bona fide hedge recognitions for

positions in referenced contracts that

fall 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. Market participants

would thus not be required to request

Commission approval prior to exceeding

federal position limits in such cases, but

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 cash-

market information to the exchange as

part of such request.

262

The Commission

has also determined to allow the

proposed enumerated anticipatory bona

fide hedges (some of which are not

currently self-effectuating and thus are

required to be approved by the

Commission under existing § 1.48) to be

self-effectuating for purposes of federal

limits (and thus would not require prior

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See infra Section II.D.4. (discussion of

proposed §150.5).

264

See infra Section II.G.3. (discussion of

proposed §150.9).

265

See infra Section II.H.2. (discussion of the

proposed elimination of Form 204).

266

See supra Section II.A.20. (proposed

definition of ‘‘spread transaction’’ in §150.1, which

would cover: 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.)

267

Id.

268

17 CFR 140.97.

269

The Commission would expect that applicants

would provide cash market data for at least the

prior year.

270

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 derivatives contracts could

include other futures, options, and swaps

(including over-the-counter swaps) positions held

by the applicant.

Commission approval for such

enumerated anticipatory hedges). The

Commission may consider expanding

the proposed list of enumerated hedges

at a later time, after notice and

comment, as it gains experience with

the new federal position limits

framework proposed herein.

Second, under proposed

§ 150.3(a)(1)(ii), for positions in

referenced contracts that do not fit

within one of the proposed enumerated

hedges in Appendix A, (i.e., non-

enumerated bona fide hedges), market

participants must request approval from

the Commission, or from an exchange,

prior to exceeding federal limits. Such

exemptions thus would not be self-

effectuating and market participants in

such cases would have two options for

requesting such a non-enumerated bona

fide hedge recognition: (1) Apply

directly to the Commission in

accordance with proposed § 150.3(b)

(described below), and separately also

apply to an exchange pursuant to

exchange rules established under

proposed § 150.5(a);

263

or, alternatively

(2) apply to an exchange pursuant to

proposed § 150.9 for a non-enumerated

bona fide hedge recognition that could

be valid both for purposes of federal and

exchange-set position limit

requirements, unless the Commission

(and not staff) objects to the exchange’s

determination within a limited period of

time.

264

As discussed elsewhere in this

release, 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.

265

ii. Spread Exemptions

Under proposed § 150.3(a)(2)(i),

spread exemptions for positions in

referenced contracts would be self-

effectuating, provided that the position

fits within one of the types of spreads

listed in the spread transaction

definition in proposed § 150.1,

266

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).

The Commission anticipates that such

spread exemptions might include

spreads 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 near simultaneously.

The list of spread transactions in

proposed § 150.1 reflects the most

common types of spread strategies for

which the Commission and/or

exchanges have previously granted

spread exemptions.

Under proposed § 150.3(a)(2)(ii), for

all contracts subject to federal limits, if

the spread position does not fit within

one of the spreads listed in the spread

transaction definition in proposed

§ 150.1, market participants must apply

for the spread exemption relief directly

from the Commission in accordance

with proposed § 150.3(b). The market

participant must receive 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 may consider expanding

the proposed spread transactions

definition at a later time, after notice

and comment, as it gains experience

with the new federal position limits

framework proposed herein.

iii. Removal of Existing §§ 1.47, 1.48,

and 140.97

Given the proposal set forth in

§ 150.9, as described in detail below, to

allow for a streamlined process for

recognizing bona fide hedges for

purposes of federal limits,

267

the

Commission also proposes to delete

existing §§ 1.47 and 1.48. The

Commission preliminarily believes that

overall, the proposed approach would

lead to a more efficient bona fide hedge

recognition process. As the Commission

proposes to delete §§ 1.47 and 1.48, the

Commission also proposes to delete

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.

268

The Commission does 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,

positions that were previously

recognized as bona fide hedges under

§§ 1.47 or 1.48 would continue to be

recognized, provided they continue to

meet the statutory bona fide hedging

definition and all other existing and

proposed requirements.

b. Process for Requesting Commission-

Provided Relief for Non-Enumerated

Bona Fide Hedges and Spread

Exemptions

Under the proposed rules, non-

enumerated bona fide hedging

recognitions may only be granted by the

Commission as proposed in § 150.3(b),

or under the streamlined process

proposed in § 150.9. Further, spread

exemptions that do not meet the

proposed spread transaction definition

may only be granted by the Commission

as proposed in § 150.3(b). Under the

Commission process in § 150.3(b), a

person seeking a bona fide hedge

recognition or spread exemption may

submit a request to the Commission.

With respect to bona fide hedge

recognitions, such request 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 section 4a(c)(2) of the

Act 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;

269

and (v) any other information that may

help the Commission determine

whether the position meets the

requirements of section 4a(c)(2) of the

Act and the definition of bona fide

hedging transaction or position in

§ 150.1.

270

With respect to spread exemptions,

such request must include: (i) A

description of the spread transaction for

which the exemption application is

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The nature of such description would depend

on the facts and circumstances, and different details

may be required depending on the particular

spread.

272

Where a person requests a bona fide hedge

recognition within five business days after they

exceed 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 will 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 their 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 will 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.

273

See proposed §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

§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.

274

This proposed authority to revoke or modify

a bona fide hedge recognition or spread exemption

would not be delegated to Commission staff.

275

See, e.g., 2016 Reproposal, 81 FR 96704 at

96833.

276

See, e.g., CFTC Press Release No. 5551–08,

CFTC Update on Efforts Underway to Oversee

Markets, (Sept. 19, 2008), available at http://

www.cftc.gov/PressRoom/PressReleases/pr5551-08.

277

See 7 U.S.C. 6a(a)(3).

submitted;

271

(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

section 4a(a)(3)(B) of the Act.

Under proposed § 150.3(b)(2), the

Commission, or Commission staff

pursuant to delegated authority

proposed in § 150.3(g), may request

additional information from the

requestor and must provide the

requestor with ten business days to

respond. Under proposed § 150.3(b)(3)

and (4), the requestor, however, may 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); provided

however, that, due to demonstrated

sudden or unforeseen increases in its

bona fide hedging needs, a person may

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.

272

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, all approved bona fide hedge

recognitions and spread exemptions

must 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.

273

Finally, the Commission (and not staff)

may 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.

274

The Commission anticipates that most

market participants would utilize the

streamlined process set forth in

proposed § 150.9 and described below,

rather than the process as proposed in

§ 150.3(b), because exchanges would

generally be able to make such

determinations more efficiently than

Commission staff, and because market

participants are likely already familiar

with the proposed processes set forth in

§ 150.9, which is intended to leverage

the processes currently in place at the

exchanges for addressing requests for

exemptions from exchange-set limits.

Nevertheless, proposed § 150.3(a)(1) and

(2) clarify that market participants may

seek relief from federal position limits

for non-enumerated bona fide hedges

and spread transactions that do not meet

the proposed spread transactions

definition directly from the

Commission. After receiving any

approval of a bona fide hedge or spread

exemption from the Commission, 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).

c. Request for Comment

The Commission requests comments

on all aspects of proposed § 150.3(a)(1)

and (2). The Commission also invites

comment on the following:

(28) Out of concern that large demand

for delivery against long nearby futures

positions may outpace demand on spot

cash values, the Commission has

previously discussed allowing cash and

carry exemptions as spreads on the

condition that the exchange ensures that

exit points in cash and carry spread

exemptions would facilitate an orderly

liquidation.

275

Should the Commission

allow the granting of cash and carry

exemptions under such conditions? If

so, please explain why, including how

such exemptions would be consistent

with the Act and the Commission’s

regulations. If not, please explain why

not, and if other circumstances would

be better, including better for preserving

convergence, which is essential to

properly functioning markets and price

discovery. If cash and carry exemptions

were allowed, how could an exchange

ensure that exit points in cash and carry

exemptions facilitate convergence of

cash and futures?

d. 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 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 §§ 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.

276

Such

sudden liquidations could otherwise

potentially hinder statutory objectives,

including by reducing liquidity,

disrupting price discovery, and/or

increasing systemic risk.

277

The proposed exemption would be

available to 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

related to 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

pursuant to § 140.99, and would be

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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); and Nasdaq Futures,

Inc.’s (‘‘NFX’’) Henry Hub Natural Gas Financial

Futures (HHQ), and Henry Hub Natural Gas

Penultimate Financial Futures (NPQ).

279

Under the referenced contract definition

proposed in §150.1, cash-settled natural gas

referenced contracts are those futures or options

contracts, including spreads, that are:

(1) Directly or indirectly linked, including being

partially or fully settled on, or priced at a fixed

differential to, the price of the physically-settled

NYMEX NG core referenced futures contract; or

(2) 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 the physically-settled NYMEX NG core

referenced futures contract for delivery at the same

location or locations as specified in the NYMEX NG

core referenced futures contract. As proposed, the

referenced contract definition does not include a

location basis contract, a commodity index contract,

or a trade option that meets the requirements of

§32.3 of this chapter. See proposed § 150.1.

280

On November 12, 2019, Nodal announced that

it had reached an agreement to acquire the core

assets of NFX. See Nodal Exchange Acquires U.S.

Commodities Business of Nasdaq Futures, Inc.

(NFX), Nodal Exchange website (Nov. 12, 2019),

available at https://www.nodalexchange.com/wp-

content/uploads/20191112-Nodal-NFX-release-

Final.pdf (press release). The acquisition includes

all of NFX’s energy complex of futures and options

contracts, including NFX’s Henry Hub Natural Gas

Financial Futures contract. Because that contract

will become part of Nodal’s offerings, that contract,

as well as Nodal’s existing Henry Hub Monthly

Natural Gas contract, would continue to qualify as

referenced contracts under the proposed definition

herein, and thus would be subject to federal limits

by virtue of being cash-settled to the physically-

settled NYMEX NG core referenced futures contract.

According to the November 12, 2019 press release,

‘‘Nodal Exchange and Nodal Clear plan to complete

the integration of U.S. Power contracts by December

2019. U.S. Natural Gas, Crude Oil and Ferrous

Metals contracts could transfer to Nodal as soon as

spring 2020.’’ Id.

281

While the NYMEX NG is the only natural gas

contract included as a core referenced futures

contract in this release, the conditional spot month

exemption proposed herein would also apply to any

other physically-settled natural gas contract that the

Commission may in the future designate as a core

referenced futures contract, as well as to any

physically-delivered contract that is substantially

identical to the NYMEX NG and that qualifies as a

referenced contract, or that qualifies as an

economically equivalent swap.

282

As noted above, current exchange rules

establish a spot month limit of 1,000 NYMEX

equivalent sized contracts. The Commission

proposes a federal spot month limit of 2,000

NYMEX equivalent sized contracts based on

updated deliverable supply estimates. See supra

Section II.B.2.b. (2020 proposed spot month limit

chart). The proposed conditional spot month limit

exemption of 10,000 contracts per exchange is thus

five times the proposed federal spot month limit.

283

See ICE Rule 6.20(c), NYMEX Rule 559.F, NFX

Rule Chapter V, Section 13(a), and Nodal Rule

6.5.2. 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, ICE Futures

website, available at https://www.theice.com/

futures-us/market-resources (ICE position limits

spreadsheet). NYMEX rules establish an exchange-

set spot month limit of 1,000 contracts for its

physically-settled NYMEX NG 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. As the ICE natural gas

contract is one quarter the size of the NYMEX

contract, ICE’s exchange-set natural gas limits are

shown in NYMEX equivalents throughout this

section of the release. ICE thus has rules in place

establishing an exchange-set spot month limit of

4,000 contracts (equivalent to 1,000 NYMEX

contracts) for its cash-settled Henry Hub LD1 Fixed

Price Futures contract.

evaluated based on the specific facts

and circumstances of a particular person

or related 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 §§ 150.1, 150.3, and 150.9, as

applicable.

e. Conditional Spot Month Exemption

in Natural Gas

Certain natural gas contracts are

currently subject to exchange-set limits,

but not federal limits.

278

This proposal

would apply federal 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).

As set forth in proposed Appendix E to

part 150, that physically-settled

contract, as well as any cash-settled

natural gas contract that qualifies as a

referenced contract,

279

would be

separately subject to a federal spot

month limit, net long or net short, of

2,000 NYMEX NG equivalent-size

contracts.

Under the referenced contract

definition in proposed § 150.1, ICE’s

cash-settled Henry Hub LD1 contract,

ICE’s Henry Financial Penultimate

Fixed Price Futures, NYMEX’s cash-

settled Henry Hub Natural Gas Last Day

Financial Futures contract, Nodal

Exchange’s (‘‘Nodal’’) cash-settled

Henry Hub Monthly Natural Gas

contract, and NFX cash-settled Henry

Hub Natural Gas Financial Futures

contract, for example, would each

qualify as a referenced contract subject

to federal limits by virtue of being cash-

settled to the physically-settled NYMEX

NG core referenced futures contract.

280

Any other cash-settled contract that

meets the referenced contract definition

would also be subject to federal limits,

as would an ‘‘economically equivalent

swap,’’ as defined in proposed § 150.1,

with respect to any natural gas

referenced contract.

Proposed § 150.3(a)(4) would permit a

new federal conditional spot month

limit exemption for certain cash-settled

natural gas referenced contracts. Under

proposed § 150.3(a)(4), market

participants seeking to exceed the

proposed 2,000 NYMEX NG equivalent-

size contract spot month limit for a

cash-settled natural gas referenced

contract listed on any DCM could

receive an exemption that would be

capped at 10,000 NYMEX NG

equivalent-size contracts net long or net

short per DCM, plus an additional

10,000 NYMEX NG futures equivalent

size contracts in economically

equivalent swaps. A grant of such an

exemption would be conditioned on the

participant not holding or controlling

any positions during the spot month in

the physically-settled NYMEX NG core

referenced futures contract.

281

This proposed conditional exemption

level of 10,000 contracts per DCM in

natural gas would codify into federal

regulations the industry practice of an

exchange-set conditional limit that is

five times the size of the spot month

limit that has developed over time, and

which the Commission preliminarily

believes has functioned well. The

practice balances the needs of certain

market participants, who may currently

hold or control 5,000 contracts in each

DCM’s cash-settled natural gas futures

contracts and prefer a sizeable position

in a cash-settled contract in order to

obtain the desired exposure without

needing to make or take delivery of

natural gas, with the policy objectives of

the Commission, which has historically

had concerns about the possibility of

traders attempting to manipulate the

physically-settled NYMEX NG contract

(i.e., mark-the close) in order to benefit

from a larger position in the cash-settled

ICE LD1 Natural Gas Swap and/or

NYMEX Henry Hub Natural Gas Last

Day Financial Futures contract during

the spot month as these contracts

expired.

282

NYMEX, ICE, NFX, and Nodal

currently have rules in place

establishing a conditional spot month

limit exemption equivalent to up to

5,000 contracts (in NYMEX-equivalent

size) for their respective cash-settled

natural gas contracts, provided that the

trader does not maintain a position in

the physically-settled NYMEX NG

contract during the spot month.

283

Together, the ICE, NYMEX, NFX, and

Nodal rules allow a trader to hold up to

20,000 (NYMEX-equivalent size)

contracts during the spot month

combined across ICE, NYMEX, NFX,

and Nodal cash-settled natural gas

contracts, provided the trader does not

hold positions in excess of 5,000

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In practice, a majority of the trading in such

contracts is on ICE and NYMEX. As noted above,

Nodal is acquiring NFX, including its Henry Hub

Natural Gas Financial Futures contract.

285

See supra Section II.B.2.k. (discussion of

netting).

286

‘‘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.

287

See supra Section II.A.1.c.ii.(1). (discussion of

the temporary substitute test and risk-management

exemptions).

288

See supra Section II.A.1.c.vi. (discussion of

proposed pass-through language).

contracts on any one DCM, and

provided further that the trader does not

hold any positions in the physically-

settled NYMEX NG contract during the

spot month.

284

The DCMs originally adopted these

rules, in consultation with Commission

staff, in large 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, and to

accommodate certain trading dynamics

unique to the natural gas contracts. In

particular, in natural gas, open interest

tends to decline in the NYMEX NG

contract approaching expiration and

tends to increase rapidly in the ICE

cash-settled Henry Hub LD1 contract.

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 without being

required to make or take delivery.

The condition in proposed

§ 150.3(a)(4), however, should remove

the potential to manipulate the

physically-settled natural gas contract in

order to benefit a sizeable position in

the cash-settled contract. To qualify for

the exemption, market participants

would not be permitted to hold any spot

month positions in the physically-

settled contract. This proposed

conditional exemption would prevent

manipulation by traders with leveraged

positions in the cash-settled contracts

(in comparison to the level of the limit

in the physical-delivery contract) who

might otherwise attempt to mark the

close or distort physical-delivery prices

in the physically-settled contract to

benefit their leveraged cash-settled

positions. Thus, the exemption would

establish a higher conditional limit for

the cash-settled contract than for the

physical-delivery contract, so long as

the cash-settled positions are decoupled

from spot-month positions in physical-

delivery contracts which set or affect the

value of such cash-settled positions.

While the Commission is unaware of

any natural gas swaps that would

qualify as ‘‘economically equivalent

swaps,’’ the Commission proposes to

apply the conditional exemption to

swaps as well, provided that a given

market participant’s positions in such

cash-settled swaps do not exceed 10,000

futures-equivalent contracts and

provided that the participant does not

hold spot-month positions in physically

settled natural gas contracts. Because

swaps may generally be fungible across

markets, that is, a position may be

established on one SEF and offset on

another SEF or OTC, the Commission

proposes that economically equivalent

swap contracts have a conditional spot

month limit of 10,000 economically

equivalent contracts in total across all

SEFs and OTC.

A market participant that sought to

hold positions in both the NYMEX NG

physically-settled contract and in any

cash-settled natural gas contract would

not be eligible for the proposed

conditional exemption. Such a

participant could only hold up to 2,000

contracts net long or net short across

exchanges/OTC in physically-settled

natural gas referenced contract(s), and

another 2,000 contracts net long or net

short across exchanges/OTC in cash-

settled natural gas contract referenced

contract(s).

285

f. Exemption for Pre-Enactment Swaps

and Transition Period Swaps

In order to promote a smooth

transition to compliance for swaps not

previously subject to federal speculative

position limits, proposed § 150.3(a)(5)

would provide that federal speculative

position limits shall not apply to

positions acquired in good faith in any

pre-enactment swap or in any transition

period swap, in either case as defined

by § 150.1.

286

Any swap that meets the

proposed economically equivalent swap

definition, but that otherwise qualifies

as a pre-enactment swap or transition

period swap, would thus be exempt

from federal speculative position limits.

This exemption would be self-

effectuating and would not require a

market participant to request relief.

In order to further lessen the impact

of the proposed federal limits on market

participants, for purposes of complying

with the proposed federal non-spot

month limits, the proposed rule would

also allow both pre-enactment swaps

and transition period swaps to be netted

with commodity derivative contracts

acquired more than 60 days after

publication of final rules in the Federal

Register. Any such positions would not

be permitted to be netted during the

spot month so as to avoid rendering spot

month limits ineffective—the

Commission is particularly concerned

about protecting the spot month in

physical-delivery futures from price

distortions or manipulation that would

disrupt the hedging and price discovery

utility of the futures contract.

g. Previously-Granted Risk Management

Exemptions

As discussed elsewhere in this

release, the Commission previously

recognized, as bona fide hedges under

§ 1.47, certain risk-management

positions in physical commodity futures

and/or options on futures contracts

thereon held outside of the spot month

that were used to offset the risk of

commodity index swaps and other

related exposure, but that did not

represent substitutes for transactions or

positions to be taken in a physical

marketing channel. However, as noted

earlier in this release, the Commission

interprets 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).

287

Accordingly, to ensure

consistency with the Dodd-Frank Act,

the Commission will not recognize

further risk management positions as

bona fide hedges, unless the position

otherwise satisfies the requirements of

the pass-through provisions.

288

In addition, the Commission proposes

in § 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 § 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 limits proposed in

§ 150.2 go into effect.

h. Recordkeeping

Proposed § 150.3(d) establishes

recordkeeping requirements for persons

who claim any exemptions or relief

under proposed § 150.3. Proposed

§ 150.3(d) should help to ensure that

any person who claims any exemption

permitted under proposed § 150.3 can

demonstrate compliance with the

applicable requirements. Under

proposed § 150.3(d)(1), any persons

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See supra Section II.A.1.c.vi. (discussion of

proposed pass-through language).

290

See 7 U.S.C. 7(d)(5).

291

See 7 U.S.C. 7b–3(f)(6).

292

See 7 U.S.C. 7(d)(1) and 7 U.S.C. 7b–3(f)(1).

293

17 CFR 150.5.

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 § 150.3(d)(2) addresses

recordkeeping requirements related to

the pass-through swap provision in the

proposed definition of bona fide

hedging transaction or position in

proposed § 150.1.

289

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.

i. Call for Information

The Commission proposes to move

existing § 150.3(b), which currently

allows the Commission or certain

Commission staff to make special calls

to demand certain information regarding

positions or trading, to proposed

§ 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.

j. 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).

k. 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

amount of time required for a person to

bring its position 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 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.

l. Request for Comment

The Commission requests comment

on all aspects of proposed § 150.3. In

addition, the Commission understands

that there may be certain not-for-profit

electric and natural gas utilities that

have certain public service missions and

that are prohibited, by their governing

body, risk management policies, or

otherwise, from speculating, and that

would request relief from federal

position limits once federal limits on

swaps are implemented. The

Commission requests comment on all

aspects of the concept of an exemption

from part 150 of the Commission’s

regulations for certain not-for-profit

electric and natural gas utility entities

that have unique public service

missions to provide reliable, affordable

energy services to residential,

commercial, and industrial customers,

and that are prohibited from

speculating. In addition, the

Commission requests comment on

whether the definition of ‘‘economically

equivalent swap’’ would cover the types

of hedging activities such utilities

engage in with respect to their OTC

swap activity.

The Commission also invites

comments on the following:

(29) What are the overarching issues

or concerns the Commission should

consider regarding a potential

exemption from position limits for such

not- for-profit electric and natural gas

utilities?

(30) Are there certain provisions in

part 150 of the Commission’s

regulations that should apply to such

not-for-profit electric and natural gas

utilities even if the Commission were to

grant such entities an exemption with

respect to federal position limits?

(31) Are there other types of entities,

similar to the not-for-profit electric and

natural gas utilities described above, for

which the Commission should also

consider granting such exemptive relief

by rule, and why?

(32) What types of conditions,

restrictions, or criteria should the

Commission consider applying with

respect to such an exemption?

(33) Should higher position limits in

cash-settled natural gas futures be

conditioned on the closing of any

positions in the physically delivered

natural gas contract? Are there

characteristics of the natural gas futures

markets that weigh in favor of or against

the higher conditional limits?

D. § 150.5—Exchange-Set Position

Limits and Exemptions Therefrom

1. Background

For the avoidance of confusion, the

discussion of § 150.5 that follows

addresses exchange-set limits and

exemptions therefrom, not federal

limits. For a discussion of the proposed

processes by which an exemption may

be recognized for purposes of federal

limits, please see the discussion of

proposed § 150.3 above and §150.9

below.

Under DCM Core Principle 5, DCMs

shall adopt for each contract, as is

necessary and appropriate, position

limitations or position accountability for

speculators, and, for any contract

subject to a federal position limit, DCMs

must establish exchange-set limits for

that contract no higher than the federal

limit level.

290

Similarly, under SEF Core

Principle 6, SEFs that are trading

facilities shall adopt for each contract,

as is necessary and appropriate, position

limitations or position accountability for

speculators, and, for any contract

subject to a federal position limit, SEFs

that are trading facilities must establish

exchange-set limits for that contract no

higher than the federal limit, and 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.

291

Beyond

these and other statutory and

Commission requirements, unless

otherwise determined by the

Commission, DCM and SEF Core

Principle 1 afford DCMs and SEFs

‘‘reasonable discretion’’ in establishing

the manner in which they comply with

the core principles.

292

The current regulatory provisions

governing exchange-set position limits

and exemptions therefrom appear in

§ 150.5.

293

To align § 150.5 with Dodd-

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While existing §150.5 on its face only applies

to contracts that are not subject to federal limits,

DCM Core Principle 5, as amended by Dodd-Frank,

and SEF Core Principle 6, establish requirements

both for contracts that are, and are not, subject to

federal limits. 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–

3(f)(6).

295

Significant changes proposed herein include

the process set forth in proposed §150.9 and

revisions to the bona fide hedging definition

proposed in §150.1.

296

The Commission has observed in prior

releases that courts have upheld relieving regulated

entities of their statutory obligations where

compliance is impossible or impracticable. 2016

Supplemental Proposal, 81 FR at 38462.

297

2016 Supplemental Proposal, 81 FR at 38459–

62; 2016 Reproposal, 81 FR at 96784–86.

298

7 U.S.C. 6a(a)(3).

299

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).

300

See 17 CFR 150.5(b)(1)–(3) (no greater than

one-quarter of the estimated spot month deliverable

supply for physical delivery contracts during the

spot month; no greater than necessary to minimize

the potential for manipulation or distortion of the

contract’s or the underlying commodity’s price for

cash-settled contracts during the spot month; no

greater than 1,000 contracts for tangible

commodities other than energy outside the spot

month; and no greater than 5,000 contracts for

energy products and nontangible commodities,

including financials outside the spot month).

301

See 17 CFR 150.5(d)(1).

302

17 CFR 150.5(e).

303

17 CFR 150.5(e)(1)–(4).

304

17 CFR 150.5(f).

305

Id.

306

As mentioned above, while proposed §150.5

will include 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.

Frank statutory changes

294

and with

other changes proposed herein,

295

the

Commission proposes a new version of

§ 150.5. This new proposed §150.5

would generally afford exchanges the

discretion to decide for themselves how

best to set limit levels and grant

exemptions from such limits in a

manner that best reflects their specific

markets.

2. Implementation of Exchange-Set

Limits on Swaps

With respect to the DCM Core

Principle 5 and SEF Core Principle 6

requirements addressing exchange-set

limits on swaps, the Commission is

preliminarily determining that it is

reasonable to delay implementation

because requiring compliance would be

impracticable, and in some cases

impossible, at this time.

296

The Commission has previously

explained why it has proposed to

temporarily delay imposition of

exchange-set position limits on

swaps.

297

The decision to delay

imposing exchange-set position limits

on swaps is based largely on the lack of

exchange access to sufficient data

regarding individual market

participants’ open swap positions,

which means that, without action to

provide further access to swap data to

exchanges, the exchanges cannot

effectively monitor swap position limits.

The Commission preliminarily

believes that delayed implementation of

exchange-set speculative position limits

on swaps at this time is not inconsistent

with the statutory objectives outlined in

section 4a(a)(3) of the CEA: To diminish

excessive speculation, to deter market

manipulation, to ensure sufficient

liquidity for bona fide hedgers, and to

ensure that the price discovery function

of the underlying market it not

disrupted.

298

Accordingly, while proposed § 150.5

will apply to DCMs and SEFs, the

requirements associated with swaps

would be enforced at a later time. In

other words, exchanges must comply

with proposed § 150.5 only with respect

to futures and options on futures traded

on DCMs, and with respect to swaps at

a later time as determined by the

Commission.

3. Existing § 150.5

As noted above, existing § 150.5 pre-

dates the Dodd-Frank Act and addresses

the establishment of DCM-set position

limits for all contracts not subject to

federal limits under existing § 150.2

(aside from certain major foreign

currencies).

299

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 limit

levels for spot month limits in physical-

delivery contracts, spot month limits in

cash-settled contracts, non-spot month

limits for tangible commodities other

than energy, and non-spot month limits

for energy products and non-tangible

commodities, including financials.

300

Existing § 150.5(c) provides that DCMs

may adjust their speculative initial

levels as follows: (i) No greater than 25

percent of deliverable supply for

adjusted spot month levels in

physically-delivered contracts; (ii) ‘‘no

greater than necessary to minimize the

potential for manipulation or distortion

of the contract’s or the underlying

commodity’s price’’ for adjusted spot

month levels in cash-settled contracts;

and (iii) for adjusted non-spot month

limit levels, either no greater than 10

percent of open interest, up to 25,000

contracts, with a marginal increase of

2.5 percent thereafter, or based on

position sizes customarily held by

speculative traders on the DCM.

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 consideration by DCMs 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.’’

301

Existing § 150.5(e) permits DCMs in

certain circumstances to submit for

Commission approval, as a substitute for

the position limits required under

§ 150.5(a), (b), and (c), a DCM rule

requiring traders ‘‘to be accountable for

large positions,’’ meaning that under

certain circumstances, traders must

provide information about their position

upon request to the exchange, and/or

consent to halt increasing further a

position if so ordered by the

exchange.

302

Among other things, this

provision includes open interest and

volume-based parameters for

determining when DCMs may do so.

303

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 authority

of 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.

304

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 provides

procedures for doing so.

305

Finally,

existing § 150.5(g) addresses aggregation

of positions for which a person directly

or indirectly controls trading.

4. Proposed § 150.5

Pursuant to CEA sections 5(d)(1) and

5h(f)(1), the Commission proposes a

new version of § 150.5.

306

Proposed

§ 150.5 is intended to provide the ability

for DCMs and SEFs to set limit levels

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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 federal limits and recognition of

exchange-granted exemptions and bona fide

hedging determinations for purposes of federal

limits.

308

Under the proposal, 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.

309

For example, an exchange would not be

permitted to adopt rules allowing for risk

management exemptions in physical commodities

because the Commission interprets Dodd-Frank

amendments to CEA section 4a(c)(2) as prohibiting

risk management exemptions in such commodities.

See supra Section II.A.1.c.ii.(1). (discussion of the

temporary substitute test and risk-management

exemptions).

310

For example, as discussed below, proposed

§150.5(a)(2)(ii)(C) would require that exchanges

take into account 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.

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 and ensuring

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

limits proposed in § 150.9.

307

Proposed § 150.5 contains two main

sub-sections, with each sub-section

addressing a different category of

contract: (i) Proposed § 150.5(a) would

include rules governing exchange-set

limits for contracts subject to federal

limits; and (ii) proposed § 150.5(b)

would include rules governing

exchange-set limits for physical

commodity contracts that are not subject

to federal limits.

As described in further detail below,

the proposed provisions addressing

exchange-set limits on contracts that are

not subject to federal limits reflect a

principles-based approach and include

acceptable practices that provide for

non-exclusive methods of compliance

with the principles-based regulations.

The Commission would therefore

provide exchanges with the ability to set

limits and grant exemptions in the

manner that most suits their unique

markets. Each proposed provision of

§ 150.5 is described in detail below.

a. Proposed § 150.5(a)—Requirements

for Exchange-Set Limits on Commodity

Derivative Contracts Subject to Federal

Limits Set Forth in § 150.2

Proposed § 150.5(a) would apply to all

contracts subject to the federal limits

proposed in § 150.2 and, among other

things, is intended to help ensure that

exchange-set limits do not undermine

the federal 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 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 § 150.2. Exchanges would be

free to set position limits that are more

stringent than the federal limit for a

particular contract, and would also be

permitted to adopt position

accountability at a level lower than the

federal limit, in addition to an

exchange-set position limit that is equal

to or less than the federal limit.

Proposed § 150.5(a)(2) would permit

exchanges to grant exemptions from

exchange-set limits established under

proposed § 150.5(a)(1) as follows:

First, if such exemptions from

exchange-set limits conform to the types

of exemptions that may be granted for

purposes of federal limits under

proposed §§ 150.3(a)(1)(i), 150.3(a)(2)(i),

and 150.3(a)(4)–(5) (enumerated bona

fide hedge recognitions and spread

exemptions that are listed in the spread

transaction definition in proposed

§ 150.1, as well as exempt conditional

spot month positions in natural gas and

pre-enactment and transition period

swaps), then the level of the exemption

may exceed the applicable federal

position limit under proposed § 150.2.

Since the proposed exemptions listed

above are self-effectuating for purposes

of federal position limit levels,

exchanges may grant such exemptions

pursuant to proposed § 150.5(a)(2)(i).

Second, if such exemptions from

exchange-set limits conform to the

exemptions from federal limits that may

be granted under proposed

§§ 150.3(a)(1)(ii) and 150.3(a)(2)(ii)

(respectively, non-enumerated bona fide

hedges and spread transactions that are

not currently listed in 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 limits is first

approved in accordance with proposed

§ 150.3(b) or §150.9, as applicable.

Third, if such exemptions conform to

the exemptions from federal 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 approving such

exemption pursuant to a request

submitted under § 140.99.

308

Finally, for purposes of exchange-set

limits only, 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 limit framework,

unless the Commission has first

approved such exemption for purposes

of federal limits pursuant to § 150.3(b).

Exchanges that wish to offer

exemptions from their own limits other

than the types listed in proposed

§ 150.3(a) could also submit rules to the

Commission allowing for such

exemptions pursuant to part 40. The

Commission would carefully review any

such exemption types for compliance

with applicable standards, including

any statutory requirements

309

and

Commission-set standards.

310

Under proposed § 150.5(a)(2)(ii)(A),

exchanges that wish to grant exemptions

from their own limits would have to

require traders to file an application.

Aside from the requirements discussed

below, including the requirement that

the exchange collect cash-market and

swaps market information from the

applicant, exchanges would have

flexibility to establish the application

process as they see fit, including

adopting protocols to reduce burdens by

leveraging existing processes with

which their participants are already

familiar. 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, but exchanges

would be given the discretion to adopt

rules allowing traders to file

applications within five business days

after a trader established such position.

Exchanges wishing to grant such

retroactive exemptions would have to

require market participants to

demonstrate circumstances warranting a

sudden and unforeseen hedging need.

Proposed § 150.5(a)(2)(ii)(B) would

provide that exchanges must require

that a trader reapply for the exemption

granted under proposed § 150.5(a)(2) at

least annually so that the exchange and

the Commission can closely monitor

exemptions for contracts subject to

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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.

314

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).

315

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 positon 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.

federal speculative 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

exchanges to deny, limit, condition, or

revoke any exemption request in

accordance with exchange rules,

311

and

would set forth a principles-based

standard for the granting of exemptions

that do not conform to the type that the

Commission may grant under proposed

§ 150.3(a). Specifically, exchanges

would be required to take into account:

(i) Whether the requested exemption

from its limits 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 the

requested exemption would result in a

position that would ‘‘exceed an amount

that may be established or liquidated in

an orderly fashion in that market.’’

Exchanges’ evaluation of exemption

requests against these standards would

be a facts and circumstances

determination.

Activity may reflect ‘‘sound

commercial practice’’ for a particular

market or market participant but not for

another. 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 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 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.’’

The Commission understands that the

above-described parameters for

exemptions from exchange-set limits are

generally consistent with current

industry practice among DCMs. Bearing

in mind that proposed § 150.5(a) would

apply to contracts subject to federal

limits, the Commission proposes

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 limits framework. Proposed

§ 150.5(a) also would afford exchanges

the ability to generally oversee their

programs for granting exemptions from

exchange limits as they see fit,

including to establish different

application processes and requirements

to accommodate the unique

characteristics of different contracts.

If adopted, changes proposed herein

may result in certain ‘‘pre-existing

positions’’ being subject to speculative

position limits even though the position

predated the adoption of such limits.

312

So as not to undermine the federal

position limits framework during the

spot month, and to minimize disruption

outside the spot month, the Commission

proposes § 150.5(a)(3), which would

require that during the spot month, for

contracts subject to federal limits,

exchanges must 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,

exchanges would not be required to

impose limits on such positions,

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 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 limits

set forth in proposed § 150.2(g) and is

intended to prevent spot month limits

from being rendered ineffective.

Not subjecting pre-existing positions

to spot month 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 is

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.

313

Finally, the Commission 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 proposes under

§ 150.5(a)(4) to require one monthly

report by each exchange. Certain

exchanges already voluntarily 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 for contracts that

are subject to federal 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.

314

As specified under proposed

§ 150.5(a)(4), the report would provide

certain details regarding the bona fide

hedging position or spread 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);

315

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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The Commission would provide such form

and manner instructions on the Forms and

Submissions page at www.cftc.gov. Such

instructions would likely be published in the form

of a technical guidebook.

317

See infra Section III.F.

318

See supra Section II.B.2. (discussion of

proposed §150.2).

319

Guidance for calculating deliverable supply

can be found in Appendix C to part 38. 17 CFR part

38, Appendix C.

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. 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.

Accordingly, the Commission suggests

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.

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 its 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

expects 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 proposes that,

for each derivative position that an

exchange wishes to recognize as a bona

fide hedge, or any revocation or

modification of such recognition or

exemption, 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 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 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,

and the analysis of the information

contained therein, the Commission

would establish reporting and

transmission standards. The proposal

would also require that such reports be

submitted to the Commission using an

electronic data format, coding structure,

and electronic data transmission

procedures approved in writing by the

Commission, as specified on its

website.

316

Request for Comment

The Commission requests comment

on all aspects of proposed § 150.5(a).

The Commission also invites comments

on the following:

(34) The Commission has proposed

that exchanges submit monthly reports

under § 150.5(a)(4). Do exchanges prefer

that the Commission specify a particular

day each month as a deadline for

submitting such monthly reports or do

exchanges prefer to have discretion in

determining which day to submit such

reports?

b. Proposed § 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

As described elsewhere in this

release, the Commission is proposing

federal speculative limits on 25 core

referenced futures contracts and their

respective referenced contracts.

317

DCMs, and, ultimately, SEFs, listing

physical commodity contracts for which

federal limits do not apply would have

to comply with proposed § 150.5(b),

which includes a combination of rules

and references to acceptable practices.

Under proposed § 150.5(b), for

physical commodity derivatives that are

not subject to federal limits, whether

cash-settled or physically-settled,

exchanges would be subject to flexible

standards during the product’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.

318

The Commission recognizes, however,

that there may be circumstances where

an exchange may not wish to use the 25

percent 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.

319

Accordingly, the proposal would afford

exchanges the ability to submit to the

Commission alternative potential

methodologies for calculating spot

month limit levels required by proposed

§ 150.5(b)(1), 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 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 proposes 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 are 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

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The acceptable practices proposed in

Appendix F to part 150 herein reflect non-exclusive

methods of compliance. Accordingly, the language

of this proposed acceptable practice, along with the

other acceptable practices proposed herein, uses 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.

321

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.

322

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.

323

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.

324

17 CFR 150.5(b) and (c). Proposed §150.5(b)

would address physical commodity contracts that

are not subject to federal limits.

325

While existing §150.5(e) includes open-

interest and volume-based limitations on the use of

accountability, the Commission opts not to include

such limitations in this proposal. Under the rules

proposed herein, 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

does not want to use one-size-fits-all volume-based

limitations for making such determinations.

contracts that are not subject to federal

limits. While exchanges would be

provided the ability 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 proposes separate

acceptable practices for exchanges that

wish to adopt non-spot month position

limits and exchanges that wish to adopt

non-spot month accountability.

320

For

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, exchanges would be deemed

in compliance with proposed

§ 150.5(b)(2)(i) if they set non-spot 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;

321

(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);

322

or (4) 10

percent of open interest in that contract

for the most recent calendar year up to

50,000 contracts, with a marginal

increase of 2.5 percent of open interest

thereafter.

323

When evaluating average

position sizes held by speculative

traders, the Commission expects

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 non-spot

month limits, either for initial or

subsequent levels.

324

The Commission

is of the view that these parameters

would be useful, flexible standards to

carry forward as acceptable practices.

For example, the Commission expects

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 limits, the Commission

proposes 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

non-spot month limits or accountability

levels.

Along those lines, the Commission

recognizes that other parameters may be

preferable and/or just as effective, and

would be 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

encourages 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 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, submitted to the

Commission pursuant to part 40, that

require traders to, upon request by the

exchange, consent to: (i) Provide

information to the exchange about their

position, including, but not limited to,

information about the nature of the their

positions, trading strategies, and

hedging information; and (ii) halt

further increases to their position or to

reduce their position in an orderly

manner.

325

Proposed § 150.5(b)(3) addresses a

circumstance 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. 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

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For reasons discussed elsewhere in this

release, this provision would not apply to natural

gas contracts. See supra Section II.C.2.e. (discussion

of proposed conditional spot month exemption in

natural gas).

327

See supra Section II.A.16. (discussion of the

proposed referenced contract definition and linked

contracts).

328

The Commission understands an intramarket

spread position to be a long position in one or more

commodity derivative contracts in a particular

commodity, or its products or its by-products, and

a short position in one or more commodity

derivative contracts in the same, or similar,

commodity, or its products or by-products, on the

same DCM. The Commission understands an

intermarket spread position to be a long (or short)

position in one or more commodity derivative

contracts in a particular commodity, or its products

or its by-products, at a particular DCM and a short

(or long) position in one or more commodity

derivative contracts in that same, or similar,

commodity, or its products or its by-products, away

from that particular DCM. For instance, the

Commission would consider a spread between

CBOT Wheat (W) futures and MGEX HRS Wheat

(MWE) futures to be an intermarket spread based on

the similarity of the commodities.

329

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.

330

See Position Limits and Position

Accountability for Security Futures Products, 83 FR

at 36799, 36802 (July 31, 2018).

331

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).

332

See 83 FR at 36799, 36802 (July 31, 2018).

333

See Position Limits and Position

Accountability for Security Futures Products, 84 FR

at 51005, 51009 (Sept. 27, 2019).

334

See 17 CFR 41.25. Rule §41.25 establishes

conditions for the trading of security futures

products.

335

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 percent or greater

ownership interest. Commission Regulation

§150.4(b) sets forth several permissible 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.

applicable.

326

Proposed § 150.5(b)(3) is

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

proposal to generally apply equivalent

federal limits to linked contracts,

including linked contracts listed on

multiple exchanges.

327

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 limits; thus, exchanges

would be given flexibility to grant

exemptions in such contracts, including

exemptions for both intramarket and

intermarket spread positions,

328

as well

as other exemption types not explicitly

listed in proposed § 150.3.

329

However,

such exchanges must require that

traders apply for the exemption. In

considering any such application, the

exchanges would be required to take

into account 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, 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.

c. Proposed § 150.5(c)—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.

330

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.

331

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.

332

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.

333

Proposed

§ 150.5(c), therefore, would include a

cross-reference clarifying that for

security futures products, position

limitations and accountability

requirements for exchanges are

specified in § 41.25.

334

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.

d. Proposed § 150.5(d)—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

limits. The Commission recognizes that

with respect to contracts not subject to

federal 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 limits,

would be required to adopt aggregation

rules for such contracts that conform to

§ 150.4.

335

Exchanges that list excluded

commodities would be encouraged to

also adopt 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.

e. Proposed § 150.5(e)—Requirements

for Submissions to the Commission

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.

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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). The

Commission also expects that exchanges would re-

evaluate such levels in the event of unanticipated

shocks to the supply or demand of the underlying

commodity.

337

See Futures Trading Act of 1982, Public Law

97–444, 96 Stat. 2299–30 (1983).

338

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

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).

339

17 CFR 150.6.

Proposed § 150.5(e) further provides

that exchanges would be required to

review regularly

336

any position limit

levels established under proposed

§ 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.

f. Delegation of Authority to the Director

of the Division of Market Oversight

The Commission proposes 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.

g. Commission Enforcement of

Exchange-Set Limits

As discussed throughout this release,

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.

337

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).

338

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.

h. Request for Comment

The Commission requests comment

on all aspects of proposed § 150.5.

E. § 150.6—Scope

Existing § 150.6 provides that nothing

in this part shall be construed to affect

any provisions of the Act relating to

manipulation or corners nor to relieve

any contract market or its governing

board from responsibility under section

5(4) of the Act to prevent manipulation

and corners.

339

Position limits are meant to diminish,

eliminate, or prevent excessive

speculation and deter and prevent

market manipulation, squeezes, and

corners. The Commission stresses that

nothing in the proposed revisions to

part 150 would impact the anti-

disruptive, anti-cornering, and anti-

manipulation provisions of the Act and

Commission regulations, including but

not limited to CEA sections 6(c) or

9(a)(2) regarding manipulation, 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

recognition from 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 Act or

the regulations that a trader’s position

was within position limits.

Like existing § 150.6, proposed

§ 150.6 is intended to make clear that

fulfillment of specific part 150

requirements alone does not necessarily

satisfy other obligations of an exchange.

Proposed § 150.6 would provide that

part 150 of the Commission’s

regulations shall 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 would provide further that

nothing in part 150 shall affect any

other provisions of the Act or

Commission regulations including those

relating to actual or attempted

manipulation, corners, squeezes,

fraudulent or deceptive conduct, or to

prohibited 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 Act or Commission regulations

applicable to exchanges to prevent

manipulation and corners. Likewise, a

market participant’s compliance with

position limits or an exemption thereto

does 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

are intended to help clarify that § 150.6

applies 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.

F. § 150.8—Severability

The Commission proposes to add new

§ 150.8 to provide for the severability of

individual provisions of part 150.

Should any provision(s) of part 150 be

declared invalid, including the

application thereof to any person or

circumstance, § 150.8 would provide

that 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.

G. § 150.9—Process for Recognizing

Non-Enumerated Bona Fide Hedging

Transactions or Positions With Respect

to Federal Speculative Position Limits

1. Background and Overview

For the nine legacy agricultural

contracts currently subject to federal

position limits, the Commission’s

current processes for recognizing non-

enumerated bona fide hedge positions

and certain enumerated anticipatory

bona fide hedge positions exist in

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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 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 proposes to separately allow for

enumerated hedges and spreads that meet the

‘‘spread transaction’’ definition to be self-

effectuating. See supra Section II.C.2. (discussion of

proposed §150.3).

341

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.

342

See 7 U.S.C. 6a(c) and 17 CFR 1.3, 1.47, and

1.48.

343

7 U.S.C. 6a(c)(1).

344

As described above, the Commission proposes

to move an amended version of the bona fide

hedging definition from §1.3 to § 150.1. See supra

Section II.A. (discussion of proposed §150.1).

345

As described below, the Commission proposes

to eliminate Form 204 and to rely instead on the

cash-market information submitted to exchanges

pursuant to proposed §§150.5 and 150.9. See infra

Section II.H.3. (discussion of proposed amendments

to part 19).

346

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.

347

7 U.S.C. 7(d)(5).

348

17 CFR 150.5(d).

349

See, e.g., CME Rule 559 and ICE Rule 6.29

(addressing position limits and exemptions).

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. Thus, when

requesting certain bona fide hedging

position recognitions that are not self-

effectuating, market participants must

currently comply with the exchanges’

processes for exchange-set limits and

the Commission’s processes for federal

limits. Although this disparity is

currently only an issue for the nine

agricultural futures contracts subject to

both federal and exchange-set limits, the

parallel approaches may become more

inefficient and burdensome once the

Commission adopts limits on additional

commodities.

Accordingly, the Commission is

proposing § 150.9 to establish a separate

framework, applicable to proposed

referenced contracts in all commodities,

whereby a market participant who is

seeking a bona fide hedge recognition

that is not enumerated in proposed

Appendix A can file one application

with an exchange to receive a bona fide

hedging recognition for purposes of both

exchange-set limits and for federal

limits.

340

Given the proposal to

significantly expand the list of

enumerated hedges, the Commission

expects the use of the proposed § 150.9

non-enumerated process described

below would be rare and exceptional.

This separate framework would be

independent of, and serve as an

alternative to, the Commission’s process

for reviewing exemption requests under

proposed § 150.3. Among other things,

proposed § 150.9 would help to

streamline the process by which non-

enumerated bona fide hedge recognition

requests are addressed, minimize

disruptions by leveraging existing

exchange-level processes with which

many market participants are already

familiar,

341

and reduce inefficiencies

created when market participants are

required to comply with different

federal and exchange-level processes.

For instance, currently, market

participants seeking recognitions of

non-enumerated bona fide hedges for

the nine legacy agricultural

commodities must request recognitions

from both the Commission under

existing § 1.47, and from the relevant

exchange. If the recognition is for an

‘‘enumerated’’ hedge under existing

§ 1.3 (other than anticipatory

enumerated hedges), the market

participant would not need to file an

application with the Commission (as the

enumerated hedge has a self-effectuating

recognition for purposes of federal

limits).

If the exemption is for a ‘‘non-

enumerated’’ hedge or certain

enumerated anticipatory hedges under

existing § 1.3, the market participant

would need to file an application with

the Commission pursuant to §§ 1.47 or

1.48, respectively. In either case, the

market participant would also still need

to seek an exchange exemption and file

a Form 204/304 on a monthly basis with

the Commission. As discussed more

fully in this section, with respect to

bona fide hedges that are not self-

effectuating for purposes of federal

limits, proposed § 150.9 would permit

such a market participant to file a single

application with the exchange and

relieve the market participant from

having to separately file an application

and/or monthly cash-market reporting

information with the Commission.

The existing Commission and

exchange level approaches are described

in more detail below, followed by a

more detailed discussion of proposed

§ 150.9.

2. Existing Approaches for Recognizing

Bona Fide Hedges

The Commission’s authority and

existing processes for recognizing bona

fide hedges can be found in section

4a(c) of the Act, and §§ 1.3, 1.47, and

1.48 of the Commission’s regulations.

342

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.’’

343

Further,

under the existing definition of ‘‘bona

fide hedging transactions and positions’’

in § 1.3,

344

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;

345

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 Commission

recognition of a position as a non-

enumerated bona fide hedge must

submit an application to the

Commission in advance of taking on the

position, and pursuant to the processes

found 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.

b. Exchanges’ Existing Approach for

Granting Bona Fide Hedge

Exemptions

346

With Respect to

Exchange-Set Limits

Under DCM Core Principle 5,

347

DCMs have, for some time, established

exchange-set limits for futures contracts

that are subject to federal limits, as well

as for contracts that are not. In addition,

under existing § 150.5(d), DCMs may

grant exemptions to exchange-set

position limits for positions that meet

the Commission’s general definition of

bona fide hedging transactions or

positions as defined in paragraph (1) of

§ 1.3.

348

As such, with respect to

exchange-set limits, exchanges have

adopted processes for handling trader

requests for bona fide hedging

exemptions, and generally have granted

such requests pursuant to exchange

rules that incorporate the Commission’s

existing general definition of bona fide

hedging transactions or positions in

paragraph (1) of § 1.3.

349

Accordingly,

DCMs currently have rules and

application forms in place to process

applications to exempt bona fide

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Id.

351

7 U.S.C. 7b–3(f)(6). The Commission codified

Core Principle 6 under §37.600. 17 CFR 37.600.

352

Id.

353

17 CFR 37.601. Under Appendix B to part 37,

for Required Transactions, as defined in §37.9,

SEFs may demonstrate compliance with SEF Core

Principle 6 by setting and enforcing position limits

or position accountability levels only with respect

to trading on the SEF’s own market. For Permitted

Transactions, as defined in §37.9, SEFs may

demonstrate compliance with SEF Core Principle 6

by setting and enforcing position accountability

levels or by sending the Commission a list of

Permitted Transactions traded on the SEF.

354

Id.

355

Proposed §150.9(a)(5) of the 2016 Reproposal

provided that an applicant’s derivatives position

shall be deemed to be recognized as a non-

enumerated bona fide hedging position exempt

from federal position limits at the time that a

designated contract market or swap execution

facility notifies an applicant that such designated

contract market or swap execution facility will

recognize such position as a non-enumerated bona

fide hedging position.

356

In U.S. Telecom Ass’n v. FCC, the D.C. Circuit

held ‘‘that, while federal agency officials may

subdelegate their decision-making authority to

subordinates absent evidence of contrary

congressional intent, they may not subdelegate 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) (citing Shook v. District of Columbia Fin.

Responsibility & Mgmt. Assistance Auth., 132 F.3d

775, 783–84 & n. 6 (D.C. Cir.1998); Nat’l Ass’n of

Reg. Util. Comm’rs (‘‘NARUC’’) v. FCC, 737 F.2d

1095, 1143–44 & n. 41 (D.C. Cir.1984); Nat’l Park

and Conservation Ass’n v. Stanton, 54 F.Supp.2d 7,

18–20 (D.D.C.1999). Nevertheless, the D.C. Circuit

recognized three circumstances that the agency may

‘‘delegate’’ its authority to an outside party because

they do not involve subdelegation of decision-

making authority: (1) Establishing a reasonable

condition for granting federal approval; (2) fact

gathering; and (3) advice giving. The first instance

involves conditioning of obtaining a permit on the

approval by an outside entity as an element of its

Continued

hedging positions with respect to

exchange-set position limits.

350

Separately, under SEF Core Principle

6, currently SEFs are required to adopt,

as is necessary and appropriate, position

limits or position accountability levels

for each swap contract to reduce the

potential threat of market manipulation

or congestion.

351

For contracts that are

subject to a federal position limit, the

SEF must set its position limits at a

level that is no higher than the federal

limit, and must monitor positions

established on or through the SEF for

compliance with both the Commission’s

federal limit and the exchange-set

limit.

352

Section 37.601 further

implements SEF Core Principle 6 and

specifies that until such time that SEFs

are required to comply with the

Commission’s position limits

regulations, a SEF may refer to the

associated guidance and/or acceptable

practices set forth in Appendix B to part

37 of the Commission’s regulations.

353

Currently, in practice, there are no

federal position limits on swaps for

which SEFs would be required to

establish exchange-set limits.

As noted above, the application

processes currently used by exchanges

are different than the Commission’s

processes. In particular, exchanges

typically use one application process to

grant all exemption types, whereas the

Commission has different processes for

different exemptions, as explained

below. Also, exchanges generally do not

require the submission of monthly cash-

market information, whereas the

Commission has various monthly

reporting requirements under Form 204

and part 17 of the Commission’s

regulations. Finally, exchanges

generally require exemption

applications to include cash-market

information supporting positions that

exceed the limits, to be filed annually

prior to exceeding a position limit, and

to be updated on an annual basis.

354

The Commission, on the other hand,

currently has different processes for

permitting enumerated bona fide hedges

and for recognizing positions as non-

enumerated 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.

Recognition requests for 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.

3. Proposed § 150.9

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

speculative 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 would

facilitate Commission review and

determinations by ensuring that any

bona fide hedge recognized by an

exchange for purposes of exchange-set

limits and in accordance with proposed

§ 150.9 conforms to the Commission’s

standards.

For a given referenced contract,

proposed § 150.9 would potentially

allow a person to exceed federal

position limits if the exchange listing

the contract has recognized the position

as a bona fide hedge with respect to

exchange-set limits. Under this

framework, the exchange would make

such determination with respect to its

own speculative position limits, set in

accordance with proposed § 150.5(a),

and, 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

exemption would be deemed approved

for purposes of federal positions limits.

The exchange’s exemption would be

valid only if the exchange meets the

following additional conditions, each

described in greater detail below: (1)

The exchange maintains rules, approved

by the Commission pursuant to § 40.5,

that establish application processes for

recognizing bona fide hedges in

accordance with § 150.9; (2) the

exchange meets specified prerequisites

for granting such recognitions; (3) the

exchange satisfies specified

recordkeeping requirements; and (4) the

exchange notifies the Commission and

the applicant upon determining to

recognize a bona fide hedging

transaction or position. A person may

exceed the applicable federal position

limit ten business days (for new and

annually renewed exemptions) or two

business days (for applications,

including retroactive applications,

submitted due to sudden and

unforeseen circumstances) after the

exchange makes its determination,

unless the Commission notifies the

exchange and the applicant otherwise.

The above-described elements of the

proposed approach differ from the

regulations proposed in the 2016

Reproposal, which did not require a 10-

day Commission review period. The

2016 Reproposal allowed DCMs and

SEFs to recognize non-enumerated bona

fide hedges for purposes of federal

position limits.

355

However, the 2016

Reproposal may not have conformed to

the legal limits on what an agency may

delegate to persons outside the

agency.

356

The 2016 Reproposal

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decision process. The second provides the agency

with nondiscretionary information gathering. The

third allows a federal agency to turn to an outside

entity for advice and policy recommendations,

provided the agency makes the final decisions

itself. Id. at 568. ‘‘An agency may not, however,

merely ‘rubber-stamp’ decisions made by others

under the guise of seeking their ‘advice,’ [ ], nor will

vague or inadequate assertions of final reviewing

authority save an unlawful subdelegation, [ ].’’ Id.

357

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.c.ii.(1) (discussion of the temporary substitute

test and risk-management exemptions).

delegated to the DCMs and SEFs a

significant component of the

Commission’s authority to recognize

bona fide hedges for purposes of federal

position limits. Under that proposal, the

Commission did not have a substantial

role in reviewing the DCMs’ or SEFs’

recognitions of non-enumerated bona

fide hedges for purposes of federal

position limits. Upon further reflection,

the Commission believes that the 2016

Reproposal may not have retained

enough authority with the Commission

under case law on sub-delegation of

agency decision making authority.

Under the new proposed model, the

Commission would be informed by the

exchanges’ determinations to make the

Commission’s own determination for

purposes of federal position limits

within a 10-day review period.

Accordingly, the Commission would

retain its decision-making authority

with respect to the federal position

limits and provide legal certainty to

market participants of their

determinations.

Both DCMs and SEFs would be

eligible to allow traders to utilize the

processes set forth under proposed

§ 150.9. However, as a practical matter,

the Commission expects that upon

implementation of § 150.9, the process

proposed therein will likely be used

primarily by DCMs, rather than by SEFs,

given that most economically equivalent

swaps that would be subject to federal

position limits are expected to be traded

OTC and not executed on SEFs.

The Commission emphasizes that

proposed § 150.9 is intended to serve as

a separate, self-contained 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. Proposed §150.9 is intended to

serve as a voluntary process exchanges

can implement to provide additional

flexibility for their market participants

seeking non-enumerated bona fide

hedges to file one application with an

exchange to receive a recognition or

exemption for purposes of both

exchange-set limits and for federal

limits. Proposed § 150.9 is discussed in

greater detail below.

Request for Comment

The Commission requests comment

on all aspects of proposed § 150.9. The

Commission also invites comments on

the following:

(35) Considering that the

Commission’s proposed position limits

would apply to OTC economically

equivalent swaps, should the

Commission develop a mechanism for

exchanges to be involved in the review

of non-enumerated bona fide hedge

applications for OTC economically

equivalent swaps?

(36) If so, what, if any, role should

exchanges play in the review of non-

enumerated bona fide hedge

applications for OTC economically

equivalent swaps?

a. Proposed § 150.9(a)—Approval of

Rules

Under proposed § 150.9(a), the

exchange must have rules, adopted

pursuant to the rule approval process in

§ 40.5 of the Commission’s regulations,

establishing processes and standards in

accordance with proposed § 150.9,

described below. The Commission

would review such rules to ensure that

the exchange’s standards and processes

for recognizing bona fide hedges from

its own exchange-set limits conform to

the Commission’s standards and

processes for recognizing bona fide

hedges from the federal limits.

b. Proposed § 150.9(b)—Prerequisites for

an Exchange To Recognize Non-

Enumerated Bona Fide Hedges in

Accordance With This Section

This section sets forth conditions that

would require an exchange-recognized

bona fide hedge to conform to the

corresponding definitions or standards

the Commission uses in proposed

§§ 150.1 and 150.3 for purposes of the

federal position limits regime.

An exchange would be required to

meet the following prerequisites with

respect to recognizing bona fide hedging

positions under proposed § 150.9(b): (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 section 4a(c)(2) of the Act;

and (iii) the exchange does not

recognize as bona fide hedges any

positions that include commodity index

contracts and one or more referenced

contracts, nor does the exchange grant

risk management exemptions for such

contracts.

357

Request for Comment

The Commission requests comment

on all aspects of proposed § 150.9. The

Commission also invites comments on

the following:

(37) Does the proposed compliance

date of twelve-months after publication

of a final federal position limits

rulemaking in the Federal Register

provide a sufficient amount of time for

exchanges to update their exemption

application procedures, as needed, and

begin reviewing exemption applications

in accordance with proposed § 150.9? If

not, please provide an alternative longer

timeline and reasons supporting a

longer timeline.

c. Proposed § 150.9(c)—Application

Process

Proposed § 150.9(c) sets forth the

information and representations that the

exchange, at a minimum, would be

required to obtain from applicants as

part of the application process for

granting bona fide hedges. In this

connection, exchanges may rely upon

their existing application forms and

processes in making such

determinations, provided they collect

the information outlined below. The

Commission believes the information

set forth below is sufficient for the

exchange to determine, and the

Commission to verify, whether a

particular transaction or position

satisfies the federal definition of bona

fide hedging transaction for purposes of

federal position limits.

i. Proposed § 150.9(c)(1)—Required

Information for 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 section

4a(c)(2) of the Act and the definition of

bona fide hedging transaction or

position in proposed § 150.1, including

factual and legal analysis; (iii) a

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358

The Commission would expect that exchanges

would require applicants to provide cash market

data for at least the prior year.

359

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.3. (discussion of Form 204

and proposed 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, options, and swaps

(including OTC swaps) positions held by the

applicant.

360

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 of § 38.951, 17 CFR 38.951.

361

The Commission does not intend, in proposed

§150.9(d), to create any new obligation for an

exchange to record conversations with applicants or

their representatives; however, the Commission

does expect that an exchange would preserve any

written or electronic notes of verbal interactions

with such parties.

362

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 five-

year recordkeeping period for electronic records. In

addition, the Commission expects that records

required to be maintained by an exchange pursuant

Continued

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;

358

and (v) any other

information the exchange requires, in its

discretion, to enable the exchange to

determine, and the Commission to

verify, whether such position should be

recognized as a bona fide hedge.

359

These proposed application

requirements are similar to current

requirements for recognizing a bona fide

hedging position under existing §§ 1.47

and 1.48.

Market participants have raised

concerns that such requirements, even if

administered by the exchanges, would

require hedging entities to change

internal books and records to track

which category of bona fide hedge a

position would fall under. The

Commission notes that, as part of this

current proposal, exchanges would not

need to require the identification of a

hedging need against a particular

identified category. So long as the

requesting party satisfies 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 Commission is not

intending to require the hedging party’s

books and records to identify the

particular type of hedge being applied.

ii. Proposed § 150.9(c)(2)—Timing of

Application

The Commission does not propose to

prescribe timelines (e.g., a specified

number of days) for exchanges to review

applications because the Commission

believes 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), the exchange must

separately require that applicants

submit their application in advance of

exceeding the applicable federal

position limit for any given referenced

contract. However, an exchange may

adopt rules that allow a person to

submit a bona fide hedge application

within five days after the person has

exceeded federal speculative limits if

such person exceeds the limits due to

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 proposed rules 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, the

Commission would caution exchanges

that applications submitted after a

person has exceeded federal position

limits should not be habitual and

should be reviewed closely. Finally, if

the Commission finds that the position

does 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 does not reduce the position within a

commercially reasonable time.

iii. Proposed § 150.9(c)(3)—Renewal of

Applications

Under proposed § 150.9(c)(3), the

exchange must require that persons with

bona fide hedging recognitions in

referenced contracts granted pursuant to

proposed § 150.9 reapply at least on an

annual basis by updating their original

application, and receive a notice of

approval from the exchange prior to

exceeding the applicable position limit.

iv. Proposed § 150.9(c)(4)—Exchange

Revocation Authority

Under proposed § 150.9(c)(4), the

exchange retains 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.

Request for Comment

The Commission requests comment

on all aspects of proposed § 150.9. The

Commission also invites comments on

the following:

(38) As described above, the

Commission does not propose to

prescribe timelines for exchanges to

review applications. Please comment on

what, if any, timing requirements the

Commission should prescribe for

exchanges’ review of applications

pursuant to proposed § 150.9.

(39) Currently, certain exchanges

allow for the submission of exemption

requests up to five business days after

the trader established the position that

exceeded the exchange-set limit. Under

proposed § 150.9, should exchanges

continue to be permitted to recognize

bona fide hedges and grant spread

exemptions retroactively—up to five

days after a trader has established a

position that exceeds federal position

limits?

d. Proposed § 150.9(d)—Recordkeeping

Proposed § 150.9(d) would set forth

recordkeeping requirements for

purposes of § 150.9. The required

records would form a critical element of

the Commission’s oversight of the

exchanges’ application process and such

records could be requested by the

Commission as needed. Under proposed

§ 150.9(d), exchanges must 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.

360

Such records must

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.

361

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

filed with the exchange.

Exchanges would be required to store

and produce records pursuant to

existing § 1.31,

362

and would be subject

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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.

363

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).

to requests for information pursuant to

other applicable Commission

regulations, including, for example,

existing § 38.5.

363

Request for Comment

The Commission requests comment

on all aspects of proposed § 150.9. The

Commission also invites comments on

the following:

(40) Do the proposed recordkeeping

requirements set forth in § 150.9

comport with existing practice? Are

there any ways in which the

Commission could streamline the

proposed recordkeeping requirements

while still maintaining access to

sufficient information to carry out its

statutory responsibilities?

e. Proposed § 150.9(e)—Process for a

Person To Exceed Federal Position

Limits

Under proposed § 150.9(e), once an

exchange recognizes a bona fide hedge

with respect to its own speculative

position limits established pursuant to

§ 150.5(a), a person could rely on such

determination for purposes of exceeding

federal position limits provided that

specified conditions are met, including

that the exchange provide the

Commission with notice of any

approved application as well as a copy

of the application and any supporting

materials, and the Commission does not

object to the exchange’s determination.

The exchange is only required to

provide this notice to the Commission

with respect to its initial (and not

renewal) determinations for a particular

application. Under proposed § 150.9(e),

the exchange must provide such notice

to the Commission concurrent with the

notice provided to the applicant, and,

except as provided below, a trader can

exceed federal position limits ten

business days after the exchange issues

the required notification, provided the

Commission does not notify the

exchange or applicant otherwise.

However, for a person with sudden or

unforeseen bona fide hedging needs that

has filed an application, pursuant to

proposed § 150.9(c)(2)(ii), after they

already exceeded federal speculative

position limits, the exchange’s

retroactive approval of such application

would be deemed approved by the

Commission two business days after the

exchange issues the required

notification, provided the Commission

does not notify the exchange or

applicant otherwise. That is, the bona

fide hedge recognition would be

deemed approved by the Commission

two business days after the exchange

issues the required notification, unless

the Commission notifies the exchange

and the applicant otherwise during this

two business day timeframe.

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

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.

However, under proposed

§ 150.9(e)(5), if, during the ten (or two)

business day timeframe, the

Commission notifies the exchange and

applicant that the Commission (and not

staff) has determined to stay the

application, the person 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.

Separately, under proposed

§ 150.9(e)(5), the Commission (or

Commission staff) may 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.

Further, under proposed § 150.9(e)(6),

the applicant would not be subject to

any finding of a position limits violation

during the Commission’s review of the

application. Or, if the Commission

determines (in the case of retroactive

applications) that the bona fide hedge is

not approved for purposes of federal

limits after a person has already

exceeded federal position limits, the

Commission would not find that the

person has committed a position limits

violation so long as the person brings

the position into compliance within a

commercially reasonable time.

The Commission believes that the ten

(or two) business day period to review

exchange determinations under

proposed § 150.9 would allow the

Commission enough time to identify

applications that may not comply with

the proposed bona fide hedging position

definition, while still providing a

mechanism whereby market

participants may exceed federal position

limits pursuant to Commission

determinations.

Request for Comment

The Commission requests comment

on all aspects of proposed § 150.9. The

Commission also invites comments on

the following:

(41) The Commission has proposed,

in § 150.9(e)(3), a ten business day

period for the Commission to review an

exchange’s determination to recognize a

bona fide hedge for purposes of the

Commission approving such

determination for federal position

limits. Please comment on whether the

review period is adequate, and if not,

please comment on what would be an

appropriate amount of time to allow the

Commission to review exchange

determinations while also providing a

timely determination for the applicant.

(42) The Commission has proposed a

two business day review period for

retroactive applications submitted to

exchanges after a person has already

exceeded federal position limits. Please

comment on whether this time period

properly balances the need for the

Commission to oversee the

administration of federal position limits

with the need of hedging parties to have

certainty regarding their positions that

are already in excess of the federal

position limits.

(43) With respect to the Commission’s

review authority in § 150.9(e)(5), if the

Commission stays an application during

the ten (or two) business-day review

period, the Commission’s review, as

would be the case for an exchange,

would not be bound by any time

limitation. Please comment on what, if

any, timing requirements the

Commission should prescribe for its

review of applications pursuant to

proposed § 150.9(e)(5).

(44) Please comment on whether the

Commission should permit a person to

exceed federal position limits during the

ten business day period for the

Commission’s review of an exchange-

granted exemption.

(45) Under proposed § 150.9(e), an

exchange is only required to notify the

Commission of its initial approval of an

exemption application (and not any

renewal approvals). Should the

Commission require that exchanges

submit approved renewals of

applications to the Commission for

review and approval if there are

material changes to the facts and

circumstances underlying the renewal

application?

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364

None of the provisions in proposed §150.9

would compromise the Commission’s emergency

authorities under CEA section 8a(9), including the

Commission’s authority to fix ‘‘limits that may

apply to a market position acquired in good faith

prior to the effective date of the Commission’s

action.’’ CEA section 8a(9). 7 U.S.C. 12a(9).

365

CFTC Form 204: Statement of Cash Positions

in Grains, Soybeans, Soybean Oil, and Soybean

Meal, U.S. Commodity Futures Trading

Commission website, available at https://

www.cftc.gov/sites/default/files/idc/groups/public/

@forms/documents/file/cftcform204.pdf (existing

Form 204).

366

CFTC Form 304: Statement of Cash Positions

in Cotton, U.S. Commodity Futures Trading

Commission website, available at http://

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 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.

367

17 CFR 19.01.

368

Proposed amendments to Part III of the Form

304, which addresses cotton on-call, are discussed

below.

369

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.

f. Proposed § 150.9(f)—Commission

Revocation of an Approved Application

Proposed § 150.9(f) sets forth the

limited circumstances under which the

Commission would revoke a bona fide

hedge recognition granted pursuant to

proposed § 150.9. The Commission

expects such revocation to be rare, and

this authority would not be delegated to

Commission staff. First, under proposed

§ 150.9(f)(1), if an exchange revokes its

recognition of a bona fide hedge, then

such bona fide hedge would also be

deemed revoked for purposes of federal

limits.

Second, 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 shall notify the person and

exchange, and, after an opportunity to

respond, the Commission can require

the person to reduce the derivatives

position within a commercially

reasonable time, or otherwise come into

compliance. In determining a

commercially reasonable amount of

time, the Commission must consult with

the applicable exchange and applicant,

and may consider factors including,

among others, current market conditions

and the protection of price discovery in

the market.

The Commission expects that it

would only exercise its revocation

authority under 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. In

addition, the Commission’s authority to

require a market participant to reduce

certain positions in proposed

§ 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 pursuant to

proposed § 150.9(f)(2).

If the Commission determines that a

person must reduce its position or

otherwise bring it into compliance, 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 identified

by the Commission in consultation with

the applicable exchange and applicant.

The Commission intends for persons to

be able to rely on recognitions and

exemptions granted pursuant to § 150.9

with the certainty that the exchange

decision would only be reversed in very

limited circumstances. Any action

compelling a market participant to

reduce its position pursuant to

§ 150.9(f)(2) would be a Commission

action, and would not be delegated to

Commission staff.

364

g. Proposed § 150.9(g)—Delegation of

Authority to the Director of the Division

of Market Oversight

The Commission proposes 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 does not propose,

however, to delegate its authority, in

proposed § 150.9(e)(5) and (6) to stay or

reject such application, nor proposed

§ 150.9(f)(2), to revoke a 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 believes

that if an exchange’s disposition of an

application raises concerns regarding

consistency with the Act, presents novel

or complex issues, or requires

remediation, then the Commission, and

not Commission staff, should 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, the

Commission would maintain the

authority to consider any matter which

has been delegated, including the

proposed delegations in §§ 150.3 and

150.9 described above. The Commission

will closely monitor staff administration

of the proposed processes for granting

bona fide hedge recognitions.

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

365

and Form 304,

366

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

commodities currently subject to federal

limits must justify such overages by

filing the applicable report each month:

Form 304 for cotton, and Form 204 for

the other commodities.

367

These reports

are generally filed after exceeding the

limit, show a snapshot of such traders’

cash positions on one given day each

month, and are used by the Commission

to determine whether a trader has

sufficient cash positions that justify

futures and options on futures positions

above the speculative limits.

2. Proposed Elimination of Form 204

and Cash-Reporting Elements of Form

304

For the reasons set forth below, the

Commission proposes to eliminate Form

204 and Parts I and II of existing Form

304, which requests information on

cash-market positions for cotton akin to

the information requested in Form

204.

368

First, the Commission would no

longer need the cash-market information

currently reported on Forms 204 and

304 because the exchanges would

collect, and make available to the

Commission, cash-market information

needed to assess whether any such

position is a bona fide hedge.

369

Further, the Commission would

continue to have access to information,

including cash-market information, by

issuing special calls relating to positions

exceeding limits.

Second, Form 204 as currently

constituted would be inadequate for the

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See, e.g., ICE Rule 6.29 and CME Rule 559.

371

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.

372

As discussed earlier in this release, proposed

§150.9 also includes reporting and recordkeeping

requirements pertaining to spread exemptions.

Those requirements will not be discussed again in

this section of the release, which addresses cash-

market reporting in connection with bona fide

hedges. This section of the release focuses on the

cash-market reporting requirements in §150.9 that

pertain to bona fide hedges.

373

See proposed §150.5(a)(2)(ii)(A)(1).

374

As discussed above in connection with

proposed §150.9, market participants who wish to

request a bona fide hedge recognition under §150.9

would not be required to file such applications with

both the exchange and the Commission. They

would only file the applications with the exchange,

which would then be subject to recordkeeping

requirements in proposed §150.9(d), as well as

proposed §§150.5 and 150.9 requirements to

provide certain information to the Commission on

a monthly basis and upon demand.

375

See proposed §150.9(c)(1)(iv)–(v).

376

See proposed §150.5(a)(4).

377

See, e.g., proposed §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 proposed

§19.00(b) (requiring, among other things, all

persons exceeding speculative limits who have

received a special call to file any pertinent

information as specified in the call).

378

See proposed §150.9(d).

379

See proposed §19.00(b).

reporting of cash-market positions

relating to certain energy contracts

which would be subject to federal limits

for the first time under this proposal.

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.

While the Commission considered

proposing to modify Form 204 to cover

energy and metal contracts, the

Commission has opted instead to

propose a more streamlined approach to

cash-market reporting that reduces

duplication between the Commission

and the exchanges. In particular, to

obtain information with respect to cash

market positions, the Commission

proposes to leverage the cash-market

information reported to the exchanges,

with some modifications. When

granting exemptions from their own

limits, exchanges do not use a monthly

cash-market reporting framework akin

to Form 204. 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 limit.

370

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.

371

To ensure that the Commission

continues to have access to the same

information on cash-market positions

that is already provided to exchanges,

the Commission proposes several

reporting and recordkeeping

requirements in §§ 150.3, 150.5, and

150.9, as discussed above.

372

First,

exchanges would be required to collect

applications, updated at least on an

annual basis, for purposes of granting

bona fide hedge recognitions from

exchange-set limits for contracts subject

to federal limits,

373

and for recognizing

bona fide hedging positions for

purposes of federal limits.

374

Among

other things, such applications would

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 to

determine, and the Commission to

verify, whether the exchange may

recognize such position as a bona fide

hedge.

375

Second, consistent with

existing industry practice for certain

exchanges, exchanges would 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.

376

Collectively, these proposed §§ 150.5

and 150.9 rules would provide the

Commission with monthly information

about all recognitions and exemptions

granted for purposes of contracts subject

to federal 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 would help

the Commission verify that any person

who claims a bona fide hedging position

can demonstrate satisfaction of the

relevant requirements. This information

would 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 would no

longer receive the monthly snapshot

data currently included on Form 204,

the Commission would 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.

377

This would 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 would also

provide the Commission with access to

any supporting or related records the

exchanges would be required to

maintain.

378

Furthermore, the proposed changes

would 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 further

below, the Commission proposes 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.

379

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. The Commission

encourages exchanges to continue this

practice. Similarly, the Commission

anticipates that its own staff would

engage in dialogue with market

participants, either through the use of

informal conversations or, in limited

circumstances, via special call

authority.

For market participants who are

accustomed to filing Form 204s with

information supporting classification as

a federally enumerated hedging

position, the proposed elimination of

Form 204 would result in a slight

change in practice. Under the proposed

rules, such participants’ bona fide hedge

recognitions could still be self-

effectuating for purposes of federal

limits, provided the market participant

also separately applies for a bona fide

hedge exemption from exchange-set

limits established pursuant to proposed

§ 150.5(a), and provided further that the

participant submits the requisite cash-

market information to the exchange as

required by proposed

§ 150.5(a)(2)(ii)(A)(1).

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380

17 CFR 19.01.

381

17 CFR 19.00(a)(3).

382

17 CFR 15.01.

383

17 CFR 19.00(a)(3).

384

Cotton On-Call, U.S. Commodity Futures

Trading Commission website, available at https://

www.cftc.gov/MarketReports/CottonOnCall/

index.htm (weekly report).

385

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 proposed change would help

Commission staff to connect the various reports

filed by the same market participants. This release

includes a representation of the proposed Form 304,

which would be submitted in an electronic format

published pursuant to the proposed rules, either via

the Commission’s web portal or via XML-based,

secure FTP transmission.

386

17 CFR part 17.

387

See Final Aggregation Rulemaking.

Specifically, the Commission proposes to delete

paragraphs (1), (2), and (3) from §17.00(b). 17 CFR

17.00(b).

388

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

Continued

3. Proposed Changes to Parts 15 and 19

To Implement the Proposed 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.

To effectuate the proposed

elimination of Form 204 and the cash-

market reporting components of Form

304, the Commission proposes

corresponding amendments to certain

provisions in parts 15 and 19. These

amendments would eliminate: (i)

Existing § 19.00(a)(1), which requires

persons holding reportable positions

which constitute bona fide hedging

positions to file a Form 204; and (ii)

existing § 19.01, which, among other

things, sets forth the cash-market

information required on Forms 204 and

304.

380

Based on the proposed

elimination of existing § 19.00(a)(1) and

Form 204, the Commission also

proposes to remove related 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.

4. Special Calls

Notwithstanding the proposed

elimination of Form 204, the

Commission does 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

proposes 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 a series

’04 report.

381

The Commission also proposes 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.

382

The Commission proposes

this change to clarify an existing

requirement found in § 19.00(a)(3),

which requires persons holding or

controlling positions that are reportable

pursuant to § 15.00(p)(1) who have

received a special call to respond.

383

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 would

delegate authority to issue such special

calls to the Director of the Division of

Enforcement, and proposed § 19.03(b)

would delegate 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.

5. Form 304 Cotton On-Call Reporting

With the proposed elimination of the

cash-market reporting elements 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.

384

The

requirements pertaining to that report

would remain in proposed §§ 19.00(a)

and 19.02, with minor modifications to

existing provisions. The Commission

proposes 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. In particular,

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 proposes some

modifications to the Form 304 itself,

including conforming and technical

changes to the organization,

instructions, and required identifying

information.

385

Request for Comment

The Commission requests comment

on all aspects of the proposed

amendments to Part 19 and related

provisions. The Commission also invites

comments on the following:

(46) 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?

(47) Does publication of the cotton on-

call report create any informational

advantages or disadvantages, and/or

otherwise impact competition in any

way?

(48) Should the Commission 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’’)?

(49) Alternatively, should the

Commission stop publishing the cotton

on-call report and also eliminate the

Form 304 altogether, including Part III?

6. Proposed Technical Changes to Part

17

Part 17 of the Commission’s

regulations addresses reports by

reporting markets, FCMs, clearing

members, and foreign brokers.

386

The

Commission proposes 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 aggregation,

because those provisions have become

duplicative of aggregation provisions

that were adopted in § 150.4 in the 2016

Final Aggregation Rulemaking.

387

The

Commission also proposes 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.

388

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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

§17.03(i) would conform § 17.03 to that change in

delegation.

389

See supra note 11 and accompanying

discussion.

390

Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010, §737(a)(4), Public Law 111–

203, 124 Stat. 1376, 1723 (July 21, 2010).

391

7 U.S.C. 6a(a)(2)(A).

392

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

393

887 F. Supp.2d 259.

394

See, e.g., 2013 Proposal, 78 FR at 75680,

75684.

395

See, e.g., id.

396

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

397

Id.

398

Public Law 74–675 §5, 49 Stat. 1491, 1492

(June 15, 1936).

I. Removal of Part 151

Finally, the Commission is proposing

to remove and reserve part 151 in

response to its vacatur by the U.S.

District Court for the District of

Columbia,

389

as well as in light of the

proposed revisions to part 150 that

conform part 150 to the amendments

made to the CEA section 4a by the

Dodd-Frank Act.

III. Legal Matters

A. Introduction

Section 737 (a)(4) of the Dodd-Frank

Act,

390

codified as section 4a(a)(2)(A) of

the Commodity Exchange Act,

391

states

in relevant part that ‘‘the Commission

shall’’ establish position limits for

contracts in physical commodities other

than excluded commodities ‘‘[i]n

accordance with the standards set forth

in’’ section 4a(a)(1), which primarily

contains the Commission’s preexisting

authority to establish such position

limits as it ‘‘finds are necessary.’’

392

In

connection with the 2011 Final

Rulemaking, the Commission

determined that section 4a(a)(2)(A) is an

unambiguous mandate to establish

position limits for all physical

commodities. In ISDA,

393

however, the

U.S. District Court for the District of

Columbia held that the term ‘‘standards

set forth in paragraph (1)’’ is ambiguous

as to whether it includes the

requirement under section 4a(a)(1) that

before the Commission establishes a

position limit, it must first find it

‘‘necessary’’ to do so. The court

therefore vacated the 2011 Final

Rulemaking and directed the

Commission to determine, in light of the

Commission’s ‘‘experience and

expertise’’ ’’ and the ‘‘competing

interests at stake,’’ whether section

4a(a)(2)(A) requires the Commission to

make a necessity finding before

establishing the relevant limits, or if

section 4a(a)(2)(A) is a mandate from

Congress to do so without that

antecedent finding.

Following the court’s order, the

Commission subsequently determined

that the ‘‘standards set forth in

paragraph (1)’’ do not include the

requirement in that paragraph that the

Commission find position limits

‘‘necessary.’’

394

Rather, the Commission

determined, ‘‘the standards set forth in

paragraph (1)’’ refer only to what the

Commission called the ‘‘aggregation

standard’’ and the ‘‘flexibility

standard.’’

395

The ‘‘aggregation

standard’’ referred to directions under

section 4a(a)(1)(A) that in determining

whether any person has exceeded an

applicable position limit, the

Commission must aggregate the

positions a party controls directly or

indirectly, or held by two persons acting

in concert ‘‘the same as if the positions

were held by, or the trading were done

by, a single person.’’

396

The ‘‘flexibility

standard’’ referred to the statement in

section 4a(a)(1)(A) that ‘‘[n]othing in

this section shall be construed to

prohibit’’ the Commission from fixing

different limits for different

commodities, markets, futures, delivery

months, numbers of days remaining on

the contract, or for buying and selling

operations.

397

The Commission here preliminarily

reaches a different conclusion. In light

of its experience with and expertise in

position limits and the competing

interests at stake, the Commission now

determines that it should interpret ‘‘the

standards set forth in paragraph (1)’’ to

include the traditional necessity and

aggregation standards. The Commission

also preliminarily determines that the

‘‘flexibility standard’’ is not an accurate

way of describing the statute’s lack of a

prohibition on differential limits, and

therefore is not included in ‘‘the

standards set forth in paragraph (1)’’

with which position limits must accord.

However, even if that were not so, the

Commission would still preliminarily

determine that ‘‘the standards set forth

in paragraph (1)’’ should be interpreted

to include necessity.

B. Key Statutory Provisions

The Commission’s authority to

establish position limits dates back to

the Commodity Exchange Act of

1936.

398

The relevant CEA language,

now codified in its present form as

section 4a(a)(1), states, among other

things that the Commission ‘‘shall, from

time to time . . . proclaim and fix such

limits on the amounts of trading which

may be done or positions which may be

held by any person under such

contracts’’ as the Commission ‘‘finds are

necessary to diminish, eliminate, or

prevent such burden.’’ Thus, the

Commission’s original authority to

establish a position limit required it first

to find that it was necessary to do so.

Section 4a(a)(1) also includes what the

Commission has referred to as the

aggregation and flexibility standards.

Section 4a(a)(2)(A) provides, in

relevant part, that ‘‘[i]n accordance with

the standards set forth in paragraph (1)

of this subsection,’’ i.e., paragraph

4a(a)(1) discussed above, 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 DCM. This direction

applies only to physical commodities

other than excluded commodities.

Paragraph 4a(a)(2)(B) states that the

limits for exempt physical commodities

‘‘required’’ under subparagraph (A)

‘‘shall’’ be established within 180 days,

and for agricultural commodities the

limits ‘‘required’’ under subparagraph

(A) ‘‘shall’’ be established within 270

days. Paragraph 4a(a)(2)(C) establishes

as a ‘‘goal’’ that the Commission ‘‘shall

strive to ensure that trading on foreign

boards of trade in the same commodity

will be subject to comparable limits’’

and that any limits imposed by the

Commission not cause price discovery

to shift to foreign boards of trade.

Next, paragraph 4a(a)(3) establishes

certain requirements for position limits

set pursuant to paragraph 4a(a)(2). It

directs that when the Commission

establishes ‘‘the limits required in

paragraph (2),’’ it shall, ‘‘as

appropriate,’’ set limits on the number

of positions that may be held in the spot

month, each other month, and the

aggregate number of positions that may

be held by any person for all months;

and ‘‘to the extent practicable, in its

discretion’’ the Commission shall

fashion the limits to (i) ‘‘diminish,

eliminate, or prevent excessive

speculation as described under this

section;’’ (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.’’

Paragraph 4a(a)(5) adds a further

requirement that when the Commission

establishes limits under paragraph

4a(a)(2), the Commission must establish

limits on the amount of positions, ‘‘as

appropriate,’’ on swaps that are

‘‘economically equivalent’’ to futures

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399

ISDA, 887 F.Supp.2d at 274.

400

Id.

401

Id. at 276–278.

402

Id.

403

Id.

404

Id. at 280.

405

Id. at 281.

406

ISDA, Defendant Commodity Futures Trading

Commission’s Cross-Motion for Summary Judgment

at 24–25, (quoting definition of ‘‘standard’’ as

‘‘something set up and established by authority as

a rule for the measure of quantity, weight, extent,

value, or quality’’ from Merriam-Webster’s

Collegiate Dictionary 1216 (11th ed. 2011)).

407

Black’s Law Dictionary 1624 (10th ed. 2014)

(‘‘A criterion for measuring acceptability, quality, or

accuracy.’’); The American Heritage Dictionary of

the English Language (5th ed. 2011) (‘‘A degree or

level of requirement, excellence, or attainment.’’);

New Oxford American Dictionary 1699 (3rd ed.

2010) (‘‘an idea or thing used as a measure, norm,

or model in comparative evaluations’’); The

Random House Unabridged Dictionary 1857 (2d ed.

1993) (‘‘rule or principle that is used as a basis for

judgment’’); XVI The Oxford English Dictionary 505

(2d ed. 1989) (‘‘A rule, principle, or means of

judgment or estimation; a criterion, measure.’’).

408

Home Buyers Warranty Corp. v. Hanna, 750

F.3d 427, 435 (4th Cir. 2014) (applying a

‘‘‘necessity’ standard’’ under Fed. R. Civ. P.

19(a)(1)(A)); United States v. Cartagena, 593 F.3d

104, 111 n.4 (1st Cir. 2010) (discussing a ‘‘necessity

standard’’ under the Omnibus Crime Control and

Safe Streets Act of 1968); Fones4All Corp. v. F.C.C.,

550 F.3d 811, 820 (9th Cir. 2008) (applying a

‘‘necessity standard’’ under the

Telecommunications Act of 1996); Swonger v.

Surface Transp. Bd., 265 F.3d 1135, 1141–42 (10th

Cir. 2001) (applying a ‘‘necessity standard’’ under

transportation law); see also Minnesota v. Mille

Lacs Band of Chippewa Indians, 526 U.S. 172, 205

(1999) (‘‘conservation necessity standard’’); Int’l

Union, United Auto., Aerospace & Agr. Implement

Workers of Am., UAW v. Johnson Controls, Inc., 499

U.S. 187, 198 (1991) (‘‘business necessity

standard’’).

409

7 U.S.C. 6a(a)(1)(A).

410

See, e.g., OSU Student Alliance v. Ray, 699

F.3d 1053, 1064 (9th Cir. 2012) (holding that the

First Amendment was violated by enforcement of

a rule that ‘‘created no standards to cabin

discretion’’); Lenis v. U.S. Attorney General, 525

F.3d 1291, 1294 (11th Cir. 2008) (dismissing

petition for review where agency procedural

regulation ‘‘specifie[d] no standards for a court to

use to cabin’’ the agency’s discretion); Tamenut v.

Mukasey, 521 F.3d 1000, 1004 (8th Cir. 2008);

Drake v. FAA, 291 F.3d 59, 71 (D.C. Cir. 2002)

(similar).

411

Tamenut v. Mukasey, 521 F.3d 1000, 1004

(8th Cir. 2008) (explaining that a statute placing ‘‘no

constraints on the [agency’s] discretion . . .

specifie[d] no standards’’); United States v.

Gonzalez-Aparicio, 663 F.3d 419, 435 (9th Cir.

2011) (Tashima, J., dissenting) (‘‘If we can pick

whatever standard suits us, free from the direction

of binding principles, then there is no standard at

all.’’); Downs v. Am. Emp. Ins. Co., 423 F.2d 1160,

1163 (5th Cir. 1970) (‘‘best judgment is no standard

at all’’).

412

E.g., ISDA, Commission Appellate Brief at 37–

38.

413

Michigan v. EPA, 135 S.Ct. 2699, 2707 (2015).

Because Michigan was not a CEA case, the

Commission does not mean to imply that Michigan

would be controlling or compels any particular

result in determining when a position limit is

appropriate. To the contrary, the court in ISDA held

that the CEA is ambiguous in that regard. The

Commission merely finds the Supreme Court’s

discussion in Michigan useful in reasonably

resolving that ambiguity.

414

7 U.S.C. 5, 6a(a)(2)(C) and (a)(3)(B).

and options contracts subject to

paragraph 4a(a)(2).

C. Ambiguity of Section 4a With Respect

to Necessity Finding

The district court held that section

4a(a)(2) is ambiguous as to whether,

before the Commission establishes a

position limit, it must first find that a

limit is ‘‘necessary.’’ The court found

the phrase ‘‘[i]n accordance with the

standards set forth in paragraph (1) of

this subsection’’ unclear as to whether

it includes the proviso in paragraph (1)

that position limits be established only

‘‘as the Commission finds are

necessary.’’

399

The court noted that, by

some definitions of ‘‘standard,’’ a

requirement that position limits be

‘‘necessary’’ could qualify.

400

The district court found the ambiguity

compounded by the phrase ‘‘as

appropriate’’ in sections 4a(a)(2)(A),

4a(a)(3), and 4a(a)(5).

401

It was unclear

to the court whether this phrase gives

the Commission discretion not to

impose position limits at all if it finds

them not appropriate, or if the

discretion extends only to determining

‘‘appropriate’’ levels at which to set the

limits.

402

Neither the grammar of the

relevant provisions nor the available

legislative history resolved these issues

to the court’s satisfaction.

403

In sum,

‘‘the Dodd-Frank amendments do not

constitute a clear and unambiguous

mandate to set position limits.’’

404

The

court therefore directed the Commission

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.’’

405

D. Resolution of Ambiguity

The Commission has applied its

experience and expertise in light of the

competing interests at stake and

preliminarily determined that paragraph

4a(a)(2) should be interpreted as

incorporating the requirement of

paragraph 4a(a)(1) that position limits

be established only ‘‘as the Commission

finds are necessary.’’ This is based on a

number of considerations.

First, while the Commission has

previously taken the position that

necessity does not fall within the

definition of the word ‘‘standard,’’ that

view relied on only one of the many

dictionary definitions of ‘‘standard,’’

406

and the Commission now believes it

was an overly narrow interpretation.

The word ‘‘standard’’ is used in

different ways in different contexts, and

many reasonable definitions would

encompass ‘‘necessity.’’

407

In legal

contexts, ‘‘necessity’’ is routinely called

a ‘‘standard.’’

408

The Commission

preliminarily believes that the more

natural reading of ‘‘standard’’ in section

4a(a)(2)(A) does include the requirement

of a necessity finding.

Second, and relatedly, the

Commission believes the term

‘‘standard’’ is a less natural fit for the

language in subparagraph 4a(a)(1) that

the Commission has previously called

the ‘‘flexibility standard.’’ The sentence

provides that ‘‘[n]othing in this section

shall be construed to prohibit the

Commission from fixing different

trading or position limits for different’’

contracts or situations.

409

Typically a

legal standard constrains an agency’s

discretion.

410

But nothing in the so-

called ‘‘flexibility’’ language constrains

the Commission at all. In other words,

the express lack of any prohibition of

differential limits under section 4a(a)(1)

is better understood as the absence of

any standard.

411

And if flexibility is not

a standard, then necessity must be,

because section 4a(a)(2)(A) refers to

‘‘standards,’’ plural.

Third, the requirement that position

limits be ‘‘appropriate’’ is an additional

ground to interpret the statute as lacking

an across-the board-mandate. In the

past, the Commission has taken the

view that the word ‘‘appropriate’’ as

used in section 4a(a)(2)(A)—and in

sections 4a(a)(3) and 4a(a)(5) in

connection with position limits

established pursuant to section

4a(a)(2)(A)—refers to position limit

levels but not to the determination of

whether to establish a limit.

412

However, the Supreme Court has opined

in the context of the Clean Air Act that

‘‘[n]o regulation is ‘appropriate’ if it

does significantly more harm than

good.’’

413

That was not a CEA case, but

the Commission finds the Court’s

reasoning persuasive in this context.

It is reasonable to interpret the

direction to set a position limit ‘‘as

appropriate’’ to mean that in a given

context, it may be that no position limit

is justified. Under an across-the-board

mandate, however, the Commission

would be compelled to impose some

limit even if any level of position limit

would do significantly more harm than

good, including with respect to the

public interests Congress set forth in

section 4a(a)(1) itself and elsewhere in

section 4a and the CEA generally.

414

The Commission does not believe that is

the best reading of section 4a(a)(2)(A).

Rather, Congress’s use of ‘‘appropriate’’

in that section and elsewhere in the

Dodd-Frank amendments is more

consistent with a directive that the

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415

135 S.Ct. at 2707, 2711.

416

E.g., Whiteman v. American Trucking Assns.,

Inc., 531 U.S. 457, 468 (2000) (Congress . . . does

not alter the fundamental details of a regulatory

scheme in vague terms. . . .’’); EEOC v. Staten

Island Sav. Bank, 207 F.3d 144, (2d Cir. 2000) (‘‘we

are reluctant to infer . . . a mandate for radical

change absent a clearer legislative command’’);

Canup v. Chipman-Union, Inc., 123 F.3d 1440,

(11th Cir. 1997) (‘‘We would expect Congress to

speak more clearly if it intended such a radical

change. . . .’’).

417

See, e.g., Daily Agricultural Volume and Open

Interest, CME Group website, available at https://

www.cmegroup.com/market-data/volume-open-

interest/agriculture-commodities-volume.html

(tables of daily trading volume and open interest for

CME futures contracts).

418

E.g., 2013 Proposal, 78 FR at 75787 nn.122–

124; ISDA, Brief for Appellant Commodity Futures

Trading Commission at 14–15.

419

Id.

420

7 U.S.C. 6a(a)(2)(B).

421

The Commission also does not believe that

establishing and enforcing position limits for all

contracts on physical commodities, regardless of

their importance to the price or delivery process of

the underlying commodities or to the economy

more broadly, would be a productive use of the

public resources Congress has appropriated to the

Commission.

Commission consider all relevant

factors and, on that basis, set an

appropriate limit level—or no limit at

all, if to establish one would contravene

the public interests Congress articulated

in section 4a(a)(1) and the CEA

generally. That is also better policy. To

be clear, this does not mean the

Commission must conduct a formal

cost-benefit analysis in which each

advantage and disadvantage is assigned

a monetary value. To the contrary, the

Commission retains broad discretion to

decide how to determine whether a

position limit is appropriate.

415

Fourth, mandatory federal position

limits for all physical commodities

would be a sea change in derivatives

regulation, and the Commission does

not believe it should infer that Congress

would have acted so dramatically

without speaking clearly and

unequivocally.

416

It is important to

understand the reach of the proposition

that the Commission must impose

position limits for every physical

commodity. The Commission estimates,

based on information from the

Commission’s surveillance system, that

currently there are over 1,200 contracts

on physical commodities listed on

DCMs. Some of these contracts have

little or no active trading.

417

Absent

clearer statutory language than is

present in the statute, the Commission

does not believe it should interpret the

statute as though Congress had concerns

about or even considered each and

every one of the similar number of

contracts listed at the time of Dodd-

Frank. In a similar vein, the

Commission previously has cited Senate

Subcommittee’s staff studies of potential

excessive speculation that preceded the

enactment of section 4a(a)(2).

418

But

those studies covered only a few

commodities—oil, natural gas, and

wheat.

419

While these studies

demonstrate that Senate subcommittee’s

concern with potential excessive

speculation, the Commission does not

believe it should interpret a statute by

extrapolating from one Senate

subcommittee’s interest in three specific

commodities to a requirement to impose

limits on all of the many hundreds of

physical futures contracts listed on

exchanges, where Congress as a whole

has not said so unambiguously.

DCMs also regularly create new

contracts. If Congress intended federal

position limits to apply to all physical

commodity contracts, the Commission

would expect there to be a provision

directing it to establish position limits

on a continuous basis. There is no such

provision—and Congress directed the

Commission to complete its position-

limits rulemaking within 270 days.

420

The only other relevant provision is the

preexisting and broadly discretionary

requirement that the Commission make

an assessment ‘‘from time to time.’’ That

structure is inconsistent, both as a

statutory and policy matter, with an

across-the-board mandate.

Fifth, the Commission believes as a

matter of policy judgment that requiring

a necessity finding better carries out the

purposes of section 4a. As Congress

presumably was aware, position limits

create costs as well as potential benefits.

The Commission has recognized, and

Congress also presumably understood,

that there are costs even for well-crafted

position limits. As discussed below in

the Commission’s consideration of costs

and benefits, market participants must

monitor their positions and have

safeguards in place to ensure

compliance with limits. In addition to

compliance costs, position limits may

constrain some economically beneficial

uses of derivatives, because a limit

calculated to prevent excessive

speculation or to restrict opportunities

for manipulation may, in some

circumstances, affect speculation that is

desirable. While the Commission has

designed limits to avoid interference

with normal trading, certain negative

effects cannot be ruled out.

For example, to interpret section

4a(a)(2) as a mandate even where

unnecessary could pose risks to

liquidity and hedging. Well-calibrated

position limits can protect liquidity by

checking excessive speculation, but

unnecessary limits can have the

opposite effect by drawing capital out of

markets. Indeed, the liquidity of a

futures contract, upon which hedging

depends, is directly related to the

amount of speculation that takes place.

Speculators contribute valuable

liquidity to commodity markets, and

section 4a(a)(1) identified ‘‘excessive

speculation’’—not all speculation—as

‘‘an undue burden on interstate

commerce.’’ To needlessly reduce

liquidity, impair price discovery, and

make hedging more difficult for

commodity end-users without sufficient

beneficial effects on interstate

commerce is unsound policy, as

Congress has defined the policy. If

Congress had drafted the statute

unambiguously to reflect the judgment

that these costs of position limits are

justified in all instances, the

Commission of course would follow it.

Without such clarity, the Commission

does not believe it should interpret the

statute to impose those costs regardless

of whether and to what extent doing so

advances Congress’ stated goals.

Sixth, while Congress has deemed

position limits an effective tool, it is

sound regulatory policy for the

Commission to apply its experience and

expertise to determine whether

economic conditions with respect to a

given commodity at a given point in

time render it likely that position limits

will achieve positive outcomes. A

mandate without the requirement of a

necessity finding would eliminate the

Commission’s expertise and experience

from the process and could lead to

position limits that do not have

significantly positive effects, or even

position limits that are

counterproductive. Necessity findings

may also enhance public confidence

that position limits in place are

necessary to their statutory purposes,

potentially improving public confidence

in the markets themselves. It is therefore

sound policy to construe the statute in

a way that requires the Commission to

make a necessity finding before

establishing position limits.

421

Finally, also as a matter of policy, the

Commission’s approach will prevent

market participants from suffering the

costs of statutory ambiguity. Mandating

position limits across all products

would automatically impose costs on

market participants regardless of

whether doing so fulfills the purpose of

section 4a. The associated compliance

costs remain as long as those limits are

in place. Reading a mandate into section

4a would exchange regulatory

convenience, with or without any

public benefit, for long-term burdens on

market participants. The Commission

does not believe that ambiguity should

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7 U.S.C. 6a(a).

423

E.g., 2016 Reproposal, 81 FR at 96715, 96716

(discussing comments on past releases); 2013

Proposal, 78 FR at 75684.

424

7 U.S.C. 6a(a)(3).

425

E.g., 2016 Reproposal, 81 FR at 96716

(discussing comments on earlier releases).

426

Id.

427

See, e.g., 2013 Proposal, 78 FR at 75682 and

nn.24–26 (describing Congressional studies).

be resolved reflexively in a manner that

shifts costs to market participants.

Rather, the Commission believes that

where an agency has discretion to

choose from among reasonable

alternative interpretations, it should not

impose costs without a strong

justification, which in this context

would be lacking without a necessity

finding.

E. Evaluation of Considerations Relied

Upon by the Commission in Previous

Interpretation of Paragraph 4a(a)(2)

As noted above, the Commission

previously has identified a number of

considerations it believed supported

interpreting paragraph 4a(a)(2) to

mandate position limits for all physical

commodities other than excluded

commodities, without the need for a

necessity finding. Although the

Administrative Procedure Act does not

require the Commission to rebut those

previous points, the Commission

believes it is useful to discuss them.

While certain of these considerations

could support such an interpretation,

the Commission is no longer persuaded

that, on balance, they support

interpreting paragraph 4a(a)(2) as an

across-the-board mandate.

Considerations on which the

Commission previously relied include

the following:

1. When Congress enacted paragraph

4a(a)(2), the text of what previously was

paragraph 4a(a),

422

already provided

that the Commission ‘‘shall . . .

proclaim and fix’’ position limits ‘‘as the

Commission finds are necessary’’ to

diminish, eliminate, or prevent the

burdens on commerce associated with

excessive speculation. This directive

applied—and still applies—to all

exchange-traded commodities,

including the physical commodities that

are the subject of paragraph 4a(a)(2).

The Commission has previously

reasoned that if paragraph 4a(a)(2) were

not a mandate to establish position

limits without such a necessity finding,

it would be a nullity.

423

That is, the

Commission already had the authority

to issue position limits, so 4a(a)(2)

would add nothing were it not a

mandate. The Commission is no longer

convinced that is correct.

Whereas the Commission’s

preexisting authority under the

predecessor to paragraph 4a(a)(1)

directed the Commission to establish

position limits ‘‘from time to time,’’ new

paragraph 4a(a)(2) directed the

Commission to consider position limits

promptly within two specified time

limits after Congress passed the Dodd-

Frank Act. That is a new directive, and

it is consistent with maintaining the

requirement for, and preserving the

benefits of, a necessity finding. This

interpretation is also consistent with the

Commission’s belief that Congress

would not have intended a drastic

mandate without a clear statement to

that effect. This interpretation is

likewise consistent with Congress’

addition of swaps to the Commission’s

jurisdiction—it makes sense to direct

the Commission to give prompt

consideration to whether position limits

are necessary at the same time Congress

was expanding the Commission’s

oversight responsibilities to new

markets, and the Commission believes

that is sound policy to ensure that the

regime works well as a whole. Rather

than leave it to the Commission’s

preexisting discretion to set limits ‘‘from

time to time,’’ it is reasonable to believe

that Congress found it important for the

Commission to focus on this issue at a

time certain.

In addition, paragraph 4a(a)(2) triggers

other requirements added to section

4a(a) by Dodd-Frank and not included

in paragraph 4a(a)(1). For example, as

described above, paragraph 4a(a)(3)(B)

identifies objectives the Commission is

required to pursue in establishing

position limits, including three, set forth

in subparagraphs 4a(a)(3)(B)(ii)–(iv),

that are not explicitly mentioned in

paragraph 4a(a)(1). The Commission

previously opined that paragraph

4a(a)(5), which directs the Commission

to establish, position limits on swaps

‘‘economically equivalent’’ to futures

subject to new position limits, would

add nothing to paragraph 4a(a)(1),

because if there were no mandate. The

Commission no longer finds that

reasoning persuasive. Paragraph 4a(a)(5)

goes beyond paragraph 4a(a)(1), because

it separately requires that when the

Commission imposes limits on futures

pursuant to paragraph 4a(a)(2), it also

does so on economically equivalent

swaps. Without that text, the

Commission would have no such

obligation to issue both types of limits

at the same time.

2. The Commission has also

previously been influenced by the

requirements of paragraph 4a(a)(3),

which directs the Commission, ‘‘as

appropriate’’ when setting limits, to

establish them for the spot month, each

other month, and all months; and sets

forth four policy objectives the

Commission must pursue ‘‘to the

maximum extent practicable.’’

424

The

Commission described these as

‘‘constraints’’ and found it ‘‘unlikely’’

that Congress intended to place new

constraints on the Commission’s

preexisting authority to establish

position limits, given the background of

the amendments and in particular the

studies that preceded their

enactment.

425

However, on further

consideration of this statutory language,

the Commission does not interpret that

language as a set of constraints in the

sense of directing the Commission to

make less use of limits or to impose

higher limits than in the past. Rather, it

focuses the Commission’s decision

process by identifying relevant

objectives and directing the Commission

to achieve them to the maximum extent

practicable. Requiring the Commission

to prioritize, to the extent practicable,

preventing excessive speculation and

manipulation, ensuring liquidity, and

avoiding disruption of price discovery is

reasonable regardless of whether there is

an across-the-board mandate.

In past releases the Commission has

also suggested that it is unclear why

Congress would have imposed the

decisional ‘‘constraints’’ of paragraph

4a(a)(3) ‘‘with respect to physical

commodities but not excluded

commodities or others’’ unless this

provision was enacted as part of a

mandate to impose limits without a

necessity finding.

426

However, all of

these relevant amendments pertain only

to physical commodities other than

excluded commodities. The

Congressional studies that preceded the

enactment of paragraph 4a(a)(2)

demonstrated concern specifically with

problems in markets for physical

commodities such as oil and natural

gas.

427

It therefore is not surprising that

Congress enacted provisions specifically

addressing limits for physical

commodities and not others, whether or

not Congress intended a necessity

finding. Those physical commodities

were the focus of Congress’ concern.

3. The Commission has previously

stated that the time requirements for

establishing limits set forth in

subparagraph 4a(a)(2)(B) are

inconsistent with a necessity finding

because, based on past experience,

necessity findings for individual

commodity markets cannot be made

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E.g., 2016 Reproposal, 81 FR at 96708; 2013

Proposal, 78 FR at 75682, 75683.

429

The Commission’s reasoning in this respect

has also assumed that a necessity finding means a

granular market-by-market study of whether

position limits will be useful for a given contract.

As explained below, however, the Commission here

preliminarily determines that such an analysis is

not required. Under the Commission’s current

preliminary interpretation of the necessity finding

requirement, it would have been plausible to

complete the required findings under the deadlines

Congress established.

430

E.g., 2013 Proposal, 78 FR at 75683, 75684.

431

Id.

432

Establishment of Speculative Position Limits,

46 FR at 50945 (Oct. 16, 1981).

433

Id.

434

Id. at 50946.

435

Id. at 50945.

436

Id.

437

Id.

438

46 FR at 50945 (section 1.61(a)(1)).

439

Id. at 50943; Speculative Position Limits, 45

FR at 79834.

440

46 FR at 50945 (in section 1.61(a)(2)); 45 FR

at 79833, 79834.

441

See, e.g., 2016 Reproposal, 81 FR at 96709,

96710.

442

Id. at 96710.

443

E.g., ISDA, Brief for Appellant Commodity

Futures Trading Commission at 26–27.

within the specified time periods.

428

However, the fact that many decades

ago a number of months may have

elapsed between proposals and final

position limits does not mean that much

time was necessary then or is necessary

now. There are a number of possible

reasons, such as limits on agency

resources and why the agency took that

amount of time. It is not a like-to-like

comparison, because the agencies acting

many decades ago were not acting

pursuant to a mandate. The speed with

which an agency could or would enact

discretionary position limits is not

necessarily a good proxy for how long

would be required under a mandate.

429

There is accordingly no inconsistency,

and thus the deadlines do not

necessarily imply that Congress

intended to eliminate a necessity

finding for limits under paragraph

4a(a)(2).

4. The Commission previously has

stated that Congress appears to have

modeled the text of paragraph 4a(a)(2)

on the text of the Commission’s 1981

rule requiring exchanges to set

speculative position limits for all

contracts.

430

The Commission has

further stated that the 1981 rule treated

aggregation and flexibility as

‘‘standards,’’ and Congress therefore

likely did the same in paragraph

4a(a)(2).

431

The Commission no longer

agrees with that description or that

reasoning.

Under the 1981 rule, former section

1.61(a) of the Commission’s regulations

required exchanges to adopt position

limits for all contracts listed to trade.

432

The rule also established requirements

similar to the current statutory

aggregation requirements: Section

1.61(a) required that limits apply to

positions a person may either ‘‘hold’’ or

‘‘control,’’

433

section 1.61(g) established

more detailed aggregation

requirements.

434

Section 1.61(a)(1)

contained language the Commission has

called the ‘‘flexibility standard,’’ i.e.,

that ‘‘nothing’’ in section 1.61 ‘‘shall be

construed to prohibit a contract market

from fixing different and separate

position limits for different types of

futures contracts based on the same

commodity, different position limits for

different futures, or for different

delivery months, or from exempting

positions which are normally known in

the trade as ‘spreads, straddles or

arbitrage’ or from fixing limits which

apply to such positions which are

different from limits fixed for other

positions.’’

435

Section 1.61(d)(1) of the

rule required every exchange to submit

information to the Commission

demonstrating that it had ‘‘complied

with the purpose and standards set forth

in paragraph (a).’’

436

In the 2013 and

2016 proposals, the Commission

concluded that the cross-reference to the

‘‘standards set forth in paragraph (a)’’

meant both the aggregation and

flexibility language, because both of

those sets of language appear in

paragraph (a). By contrast, paragraph (a)

did not include a requirement for a

necessity finding, since the 1981 rule

required position limits on all actively

traded contracts.

437

On further review, the Commission

does not find this reasoning persuasive.

The ‘‘flexibility’’ language gave the

exchange unfettered discretion to set

different limits for different kinds of

positions—there was expressly

‘‘nothing’’ in that language to limit the

exchange’s discretion.

438

In other

words, there is nothing in that flexibility

text with which to ‘‘comply,’’ so it

cannot be part of what section 1.61(d)(1)

referenced as a ‘‘standard’’ for which

compliance must be demonstrated.

As discussed above, ‘‘standard’’ is an

ill-fitting label for this lack of a

prohibition. Indeed, the 1981 release

and associated 1980 NPRM did use the

word ‘‘standard’’ to refer to certain

language directing and constraining the

discretion of the exchanges, a much

more natural use of that word. For

example, the preambles to both releases

called requirements to aggregate certain

holdings ‘‘aggregation standards.’’

439

And, in both the 1980 NPRM (in the

preamble) and the 1981 Final Rule (in

rule text), the Commission used the

word ‘‘standard’’ to describe factors,

such as position sizes customarily held

by speculative traders, that exchanges

were required to consider in setting the

level of position limits.

440

Although the wording of the 1981 rule

and paragraph 4a(a)(2) have similarities,

there are also differences. These

differences weaken the inference that

Congress intended the statute to hew

closely to the rule. There is no

legislative history articulating any

relationship between the two. And even

if Congress in Dodd-Frank did borrow

concepts from the 1981 rule, there is

little reason to infer that Congress was

borrowing the precise meaning of any

individual word—much less that the

use of ‘‘standards’’ includes what

‘‘nothing in this section shall be

construed to prohibit . . . .’’

5. In past releases the Commission has

also observed that, in 1983, as part of

the Futures Trading Act of 1982, Public

Law 96–444, 96 Stat. 2294 (1983),

Congress added a provision to the CEA

making it a violation of the Act to

violate exchange-set position limits,

thus, in effect, ratifying the

Commission’s 1981 rule.

441

The

Commission reasoned that this history

supports the possibility that Congress

could reasonably have followed an

across-the-board approach here.

442

But

while that may be so, the Commission

today does not find that mere possibility

helpful in interpreting the ambiguous

term ‘‘standards,’’ because there is no

evidence that Congress in 1982

considered the lack of a prohibition on

different position limit levels in the rule

to be a ‘‘standard.’’ By extension, the

Futures Trading Act does not bear on

the Commission’s preliminary

interpretation of ‘‘standards’’ in section

4a(a)(2)(A) today.

6. In briefs in the ISDA case, the

Commission pointed out that CEA

paragraphs 4a(a)(2)(B) and 4a(a)(3)

repeatedly use the word ‘‘required’’ in

connection with position limits

established pursuant to paragraph

4a(a)(2), implying that the Commission

is required to establish those limits

regardless of whether it finds them to be

necessary.

443

But that is not the only

way to interpret the word ‘‘required.’’

Position limits are required under

certain circumstances even if there is no

across-the-board mandate—i.e., when

the Commission finds that they are

‘‘necessary.’’ Under the Commission’s

current preliminary interpretation, the

Commission was required to assess

within a specified timeframe if position

limits were ‘‘necessary’’ and, if so,

section 4a(a)(2) states that the

Commission ‘‘shall’’ establish them.

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See, e.g., 2013 Proposal, 78 FR at 75684, 75685

(discussing evolution of statutory language as

supporting mandate).

445

See, e.g., id. at 75684.

446

See, e.g., id.

447

See, e.g., 2016 Reproposal, 81 FR at 96709.

448

See H.R. Rep. 111–385 part 1 at 4 (Dec. 19,

2009).

449

Id. at 19.

450

See Actions—H.R.977—111th Congress (2009–

2010) Derivatives Markets Transparency and

Accountability Act of 2009, Congress website,

available at https://www.congress.gov/bill/111th-

congress/house-bill/977/all-actions?

overview=closed#tabs (bill history).

451

155 Cong. Rec. H14682, H14692 (daily ed.

Dec. 10, 2009).

452

Id. at H14705.

453

Dodd-Frank Wall Street Reform and Consumer

Protection Act, Conference Report to Accompany

H.R. 4173 at 969 (H.R. Rep. 111–517 June 29, 2010).

454

He stated, ‘‘This conference report includes

the tools we authorized [in response to concerns

about excessive speculation] and the direction to

the CFTC to mitigate outrageous price spikes we

saw 2 years ago.’’ 156 Cong. Rec. H5245 (daily ed.

June 30, 2010).

455

156 Cong. Rec. S5919 (daily ed. July 15, 2010).

456

In addition, the remainder of the Senate

chairman’s floor statement with regard to position

limits focused on volatility and price discovery

problems arising from the use of commodity swaps,

implying that her reference to setting position limits

‘‘across all markets’’ refers to Dodd-Frank’s

extension of position limits authority to swaps

markets. 156 Cong. Rec. at S5919–20 (daily ed. July

15, 2010).

457

See, e.g., 2016 Reproposal, 81 FR at 96711–

96713.

Thus, the word ‘‘required’’ in

paragraphs 4a(a)(2)(B) and 4a(a)(3)

leaves open the question of whether

paragraph 4a(a)(2) itself requires

position limits for all physical

commodity contracts or, on the other

hand, only requires them where the

Commission finds them necessary under

the standards of paragraph 4a(a)(1). The

use of the word ‘‘required’’ in

paragraphs 4a(a)(2)(B) and 4a(a)(3)

therefore does not resolve the ambiguity

in the statute. For the same reason, the

evolution of the statutory language

during the legislative process, during

which the word ‘‘may’’ was changed to

‘‘shall’’ in a number of places, also does

not resolve the ambiguity.

444

7. The Commission has pointed out

that section 719 of the Dodd-Frank Act

required the Commission to ‘‘conduct a

study of the effects (if any) of the

position limits imposed’’ pursuant to

paragraph 4a(a)(2) and report the results

to Congress within twelve months after

the imposition of limits.

445

The

Commission has suggested that

Congress would not have required such

a study if paragraph 4a(a)(2) left the

Commission with discretion to find that

limits were unnecessary so that there

would be nothing for the Commission to

study and report on to Congress.

446

However, while the study requirement

implies that Congress perhaps

anticipated that at least some limits

would be imposed pursuant to

paragraph 4a(a)(2), it leaves open the

question of whether Congress mandated

limits for every physical commodity

without the need for a necessity finding.

In addition, the phrase ‘‘the effects (if

any)’’ language does not imply that

Congress expected position limits on all

physical commodities. This language

simply recognizes that new position

limits could be imposed, but have no

demonstrable effects.

8. In past releases and court filings,

the Commission has stated that the

legislative history of section 4a, as

amended by the Dodd-Frank Act,

supports the conclusion that paragraph

4a(a)(2) requires the establishment of

position limits for all physical

commodities whether or not the

Commission finds them necessary to

achieve the objectives of the statute.

447

However, the most relevant legislative

history, taken as a whole, does not

resolve the ambiguity in the statutory

language or compel the conclusion that

Congress intended to drop the necessity

finding requirement when it enacted

paragraph 4a(a)(2) as part of the Dodd-

Frank Act.

The language of paragraph 4a(a)(2)

derives from section 6(a) of a bill, the

Derivatives Markets Transparency and

Accountability Act of 2009, H.R. 977

(111th Cong.), which was approved by

the House Committee on Agriculture in

February of 2009.

448

The committee

report on this bill included explanatory

language stating that the relevant

provision required the Commission to

set position limits ‘‘for all physical

commodities other than excluded

commodities.’’

449

However, H.R. 977

was never approved by the full House

of Representatives.

450

The relevant language concerning

position limits was incorporated into

the House of Representatives version of

what became the Dodd-Frank Act, H.R.

4173 (111th Cong.), as part of a floor

amendment that was introduced by the

chairman of the Committee on

Agriculture.

451

In explaining the

amendment’s language regarding

position limits, the chairman stated that

it ‘‘strengthens confidence in position

limits on physically deliverable

commodities as a way to prevent

excessive speculation trading’’ but did

not specify that limits would be

required for all physical commodities

without the need for a necessity

finding.

452

The House of

Representatives language regarding

position limits was ultimately

incorporated into the Dodd-Frank Act

by a conference committee. However,

the explanatory statement in the

Conference report states, with respect to

position limits, only that the act’s

‘‘regulatory framework outlines

provisions for: . . . [p]osition limits on

swaps contracts that perform or affect a

significant price discovery function and

requirements to aggregate limits across

markets.’’

453

In subsequent floor debate, the

chairman of the House Agriculture

Committee alluded to position limits

provisions deriving from earlier bills

reported by that committee, but did not

describe them with specificity.

454

In the

Senate, the chairman of the Senate

Committee on Agriculture, Nutrition,

and Forestry stated that the conference

bill would ‘‘grant broad authority to the

Commodity Futures Trading

Commission to once and for all set

aggregate position limits across all

markets on non-commercial market

participants.’’

455

The statement that the

bill would grant ‘‘authority’’ to set

position limits implies an exercise of

judgement by the Commission in

determining whether to set particular

limits.

456

Thus, this legislative history is

itself ambiguous on the question of

whether federal position limits are now

mandatory on all physical commodities

in the absence of a finding of necessity.

Looking at legislative history in more

general terms, the Commission, in past

releases, has pointed out that the

enactment of paragraph 4a(a)(2)

followed congressional investigations in

the late 1990s and early 2000s that

concluded that excessive speculation

accounted for volatility and prices

increases in the markets for a number of

commodities.

457

However, while the

history of congressional investigations

supports the conclusion that Congress

intended the Commission to take action

with respect to position limits, it does

not resolve the specific interpretive

issue of whether the ‘‘[i]n accordance

with the standards set forth in

paragraph (1)’’ language that was

ultimately enacted by Congress

incorporates a necessity finding. As

discussed above, the congressional

investigations focused on only a few

commodities, which weakens the

inference that Congress considered the

question of what speculative positions

to limit a closed question.

Overall, in past releases the

Commission has expressed the view that

construing section 4a as an ‘‘integrated

whole’’ leads to the conclusion that

paragraph 4a(a)(2) does not require a

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458

See, e.g., 2016 Reproposal, 81 FR at 96713,

96714.

459

As discussed, the Commission is not

proposing non-spot-month limits apart from the

legacy agricultural contracts. Non-spot-month

prices serve as references for cash-market

transactions much less frequently than spot-month

prices. Accordingly, the burdens of excessive

speculation in non-spot-months on commodities in

interstate commerce would be substantially less

than the burdens of excessive speculation in spot-

months. It is also not possible to execute a corner

or squeeze in non-spot-months. And because there

generally are fewer market participants in non-spot-

months, holders of large speculative positions may

play a more important role in providing liquidity

to bona fide hedgers.

460

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

461

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

462

It is not the Commission’s role to determine

if these findings are correct. See Public Citizen v.

FTC, 869 F.2d 1541, 1557 (D.C. Cir. 1989)

(‘‘[A]gencies surely do not have inherent authority

to second-guess Congress’ calculations.’’); see also

46 FR at 50938, 50940 (‘‘Section 4a(1) [now 4a(a)(1)]

represents an express Congressional finding that

excessive speculation is harmful to the market, and

a finding that speculative limits are an effective

prophylactic measure.’’).

463

Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303,

1310 (10th Cir. 2007).

464

Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303,

1310 (10th Cir. 2007); see also Black’s Law

Dictionary 1227 (3d ed. 1933) (‘‘As used in

jurisprudence, the word ‘necessary’ does not always

import an actual physical necessity, so strong that

one thing, to which another may be termed

‘necessary,’ cannot exist without the other.... To

employ the means necessary to an end is generally

understood as employing any means calculated to

produce the end, and not as being confined to those

single means without which the end would be

entirely unattainable.’’ (citing McCullouch v.

Maryland, 4 Wheat. 216, 4 L. Ed. 579 (1819)).

465

7 U.S.C. 9(1), 9(3), 13(a)(2).

466

7 U.S.C. 6c(a).

467

7 U.S.C. 7(d).

468

7 U.S.C. 12a(9).

469

See Nat. Res. Def. Council, Inc. v. Thomas, 838

F.2d 1224, 1236–37 (D.C. Cir. 1988) (‘‘[A] measure

may be ’necessary’ even though acceptable

alternatives have not been exhausted.’’); F.T.C. v.

Rockefeller, 591 F.2d 182, 188 (2d Cir. 1979)

(rejecting ‘‘the notion that ’necessary’ means that

the [Federal Trade Commission] must pursue all

other ‘reasonably available alternatives’’’ before

undertaking the measure at issue). Indeed, where

the Commission considers setting such prophylactic

limits, it is unlikely to be knowable whether

position limits will be the only effective tool. The

existence of other tools to prevent unwarranted

volatility and price changes may be relevant, but

cannot be dispositive in all cases.

470

See, e.g., 7 U.S.C. 2(h)(4)(A) (empowering the

Commission to prescribe rules ‘‘as determined by

the Commission to be necessary to prevent evasions

of the mandatory clearing requirements’’); 7 U.S.C.

2(h)(4)(B)(iii) (requiring that the Commission

‘‘shall’’ take such actions ‘‘as the Commission

determines to be necessary’’ when it finds that

certain swaps subject to the clearing requirement

are not listed by any derivatives clearing

organization); 7 U.S.C. 21(e) (subjecting registered

persons to such ‘‘rules and regulations as the

Commission may find necessary to protect the

public interest and promote just and equitable

principles of trade.’’).

necessity finding.

458

However, for

reasons explained above, the

Commission preliminarily believes that

the better interpretation is that prior to

imposing position limits, it must make

a finding that the position limits are

necessary.

F. Necessity Finding

The Commission preliminarily finds

that federal speculative position limits

are necessary for the 25 core referenced

futures contracts, and any associated

referenced contracts. This preliminary

finding is based on a combination of

factors including: The particular

importance of these contracts in the

price discovery process for their

respective underlying commodities; the

fact that they require physical delivery

of the underlying commodity; and, in

some cases, the especially acute

economic burdens that would arise from

excessive speculation causing sudden or

unreasonable fluctuations or

unwarranted changes in the price of the

commodities underlying these contracts.

The Commission has preliminarily

determined that the benefit of advancing

the statutory goal of preventing those

undue burdens with respect to these

commodities in interstate commerce

justifies the potential burdens or

negative consequences associated with

establishing these targeted position

limits.

459

1. Meaning of ‘‘Necessary’’ Under

Section 4a(a)(1)

Section 4a(a)(1) of the Act 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.’’

460

For the purpose of

‘‘diminishing, eliminating, or

preventing’’ that burden, section 4a(a)(1)

tasks the Commission with establishing

such position limits as it finds are

‘‘necessary.’’

461

The Commission’s

analysis, therefore, proceeds on the

basis of these legislative findings that

excessive speculation threatens negative

consequences for interstate commerce

and the accompanying proposition that

position limits are an effective tool to

diminish, eliminate, or prevent the

undue and unnecessary burdens

Congress has targeted in the statute.

462

The Commission will therefore

determine whether position limits are

necessary for a given contract, in light

of those premises, considering facts and

circumstances and economic factors.

The statute does not define

‘‘necessary.’’ In legal contexts, the term

can have ‘‘a spectrum of meanings.’’

463

‘‘At one end, it may ‘import an absolute

physical necessity, so strong, that one

thing, to which another may be termed

necessary, cannot exist without that

other;’ at the opposite, it may simply

mean ‘no more than that one thing is

convenient, or useful, or essential to

another.’ ’’

464

The Commission does not

believe Congress intended either end of

this spectrum in section 4a(a)(1). On one

hand, ‘‘necessary’’ in this context

cannot mean that position limits must

be the only means capable of addressing

the burdens associated with excessive

speculation. The Act contains numerous

provisions designed to prevent,

diminish, or eliminate price disruptions

or distortions or unreasonable volatility.

For example, the Commission’s anti-

manipulation authority is designed to

stop, redress, and deter intentional acts

that may give rise to uneconomic prices

or unreasonable volatility.

465

Other

examples include prohibitions on

disruptive trading practices,

466

certain

core principles for contract markets,

467

and the Commission’s emergency

powers.

468

Yet the Commission is directed by

section 4a(a)(1) not only to impose

position limits to diminish or eliminate

sudden and unwarranted fluctuations in

price caused by excessive speculation

once those other protections have failed,

it is directed to establish position limits

as necessary to ‘‘prevent’’ those burdens

on interstate commerce from arising in

the first place. It makes little sense to

suppose that Congress meant for the

Commission to ‘‘prevent’’ unreasonable

fluctuations or unwarranted price

changes caused by excessive

speculation only after they have already

begun to occur, or when the

Commission can somehow predict with

confidence that the Act’s other tools

will be absolutely ineffective.

469

The

Act uses the word ‘‘necessary’’ in a

number of places to authorize measures

it is highly unlikely Congress meant to

apply only where the relevant policy

goals will otherwise certainly fail.

470

On the other hand, the Commission

also does not believe that Congress

intended position limits where they are

merely ‘‘useful’’ or ‘‘convenient.’’ As

explained above, Congress has already

determined that position limits are

useful in preventing undue burdens on

interstate commerce associated with

excessive speculation, but requires the

Commission to make the further finding

that they are also necessary. A

‘‘convenience’’ standard would be

similarly toothless.

Rather than accepting either extreme,

the Commission preliminarily interprets

that sections 4a(a)(1) and 4a(a)(2) direct

the Commission to establish position

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471

The Commission will also be mindful that the

undue burdens Congress tasked the Commission

with diminishing, eliminating, or preventing would

not generally be borne exclusively by speculators or

other participants in futures and swaps markets, but

instead the public at large or a certain industry or

sector of the economy. In a given context, the

Commission may find that this factor supports a

finding that position limits are necessary.

472

The Commission is well positioned to select

from among all commodities within the scope of

4a(a)(1) and (2)(A), from its ongoing regulatory

activities, including but not limited to market

surveillance and product review.

473

7 U.S.C. 19(a).

474

See, e.g., Limits on Position and Daily Trading

in Soybeans for Future Delivery, 16 FR at 8107

(Aug. 16, 1951); Findings of Fact, Conclusions, and

Order in the Matter of Limits on Position and Daily

Trading in Cotton for Future Delivery, 5 FR at 3198

(Aug. 28, 1940); In re Limits on Position and Daily

Trading in Wheat, Corn, Oats, Barley, Rye, and

Flaxseed, for Future Delivery, 3 FR at 3146, 3147

(Dec. 24, 1938).

475

See, e.g., Limits on Position and Daily Trading

in Soybeans for Future Delivery, 16 FR at 8107

(Aug. 16, 1951); Findings of Fact, Conclusions, and

Order in the Matter of Limits on Position and Daily

Trading in Cotton for Future Delivery, 5 FR at 3198

(Aug. 28, 1940); In re Limits on Position and Daily

Trading in Wheat, Corn, Oats, Barley, Rye, and

Flaxseed, for Future Delivery, 3 FR at 3146, 3147

(Dec. 24, 1938).

476

The records available from the National

Archives during this period are sparse.

477

Compare 5 FR at 3198 (cotton) with 3 FR at

3146, 3147 (six types of grain).

478

46 FR at 50945.

479

Id. at 50938, 50940. Section 4a(a)(1) was at the

time numbered 4a(1).

480

46 FR at 50940 (Oct. 16, 1981). The

Commission based this finding in part upon then-

recent events in the silver market, an apparent

reference to the corner and squeeze perpetrated by

members of the Hunt family in 1979 and 1980.

481

2013 Proposal, 78 FR at 75686, 75693.

482

Id. at 75691, 75193.

483

See 2016 Reproposal, 81 FR at 96894, 96924.

484

In any event, the Commission found those

studies inconclusive. 2016 Reproposal, 81 FR at

96723.

485

2016 Reproposal, 81 FR at 96722; see also

Corn Products Refining Co. v. Benson, 232 F.2d 554,

Continued

limits where the Commission finds,

based on the relevant facts and

circumstances, that position limits

would be an efficient mechanism to

advance the congressional goal of

preventing undue burdens on interstate

commerce in the given underlying

commodity caused by excessive

speculation. For example, it may be that

for a given commodity, volatility in

derivatives markets would be unlikely

to cause high levels of sudden or

unreasonable fluctuations or

unwarranted changes in the price of the

underlying commodity and would have

little overall impact on the national

economy/interstate commerce. Under

those circumstances, the Commission

may find that position limits are

unnecessary. There are, however, also

contract markets in which volatility

would be highly likely to cause sudden

or unreasonable fluctuations or

unwarranted changes in the price of the

underlying commodity or have

significantly negative effects on the

broader economy. Even if such

disruptions would be unlikely due to

the characteristics of an individual

market, the Commission may

nevertheless determine that position

limits are necessary as a prophylactic

measure given the potential magnitude

or impact of the event.

471

Most commodities lie somewhere in

between, with varying degrees of

linkage between derivative contracts

and cash-market prices, and differences

in importance to the overall economy.

There is no mathematical formula to

make this determination, though the

Commission will consider relevant data

where it is available. The Commission

must instead exercise its judgment in

light of facts and circumstances,

including its experience and expertise,

to determine what limits are

economically justified.

472

In all

instances, the Commission will consider

the applicable costs and benefits as

required under section 15(a) of the

Act.

473

With this interpretation of

‘‘necessary’’ in mind, the Commission

below explains its selection of the 25

core referenced futures contracts, and

any associated referenced contracts.

Going forward, the Commission will

make this assessment ‘‘from time to

time’’ as required under section 4a(a)(1).

The Commission recognizes that this

approach differs from that taken in

earlier necessity findings. For example,

when the Commission’s predecessor

agency, the Commodity Exchange

Commission (‘‘CEC’’), established

position limits, it would publish them

in the Federal Register along with

necessity findings that were generally

conclusory recitations of the statutory

language.

474

The published basis would

be a recitation that trading of a given

commodity for future delivery by a

person who holds or controls a net

position in excess of a given amount

tends to cause sudden or unreasonable

fluctuations or changes in the price of

that commodity, not warranted by

changes in the conditions of supply and

demand.

475

Apart from that, the CEC

typically would refer to a public

hearing, but provide no specifics of the

evidence presented or what the CEC

found persuasive.

476

The CEC variously

imposed limits one commodity at a

time, or for several commodities at

once.

477

In 1981, the Commission issued a rule

directing all exchanges to establish

position limits for each contract not

already subject to federal limits, and for

which delivery months were listed to

trade.

478

There, as here, the Commission

explained that section 4a(a)(1)

represents an ‘‘express Congressional

finding that excessive speculation is

harmful to the market, and a finding

that speculative limits are an effective

prophylactic measure.’’

479

The

Commission observed that all futures

markets share the salient characteristics

that make position limits a useful tool

to prevent the potential burdens of

excessive speculation. Specifically, ‘‘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.’’

480

In 2013, the Commission proposed a

necessity finding applicable to all

physical commodities, and then

reproposed it in 2016. In that finding,

the Commission discussed incidents in

which the Hunt family in 1979 and 1980

accumulated unusually large silver

positions, and in which Amaranth

Advisors L.L.C. in 2006 accumulated

unusually large natural gas positions.

481

The Commission preliminarily

determined that the size of those

positions contributed to unwarranted

volatility and price changes in those

respective markets, which imposed

undue burdens on interstate commerce,

and that position limits could have

prevented this.

482

The Commission here

preliminarily finds those parts of the

2013 and 2016 proposed necessity

finding to be beside the point, because

Congress has already determined that

excessive speculation can place undue

burdens on interstate commerce in a

commodity, and that position limits can

diminish, eliminate, or prevent those

burdens. In 2013 and 2016, the

Commission also considered numerous

studies concerning position limits.

483

To the extent that those studies merely

examined whether or not position limits

are an effective tool, the Commission

here does not find them directly

relevant, again because Congress has

already determined that position limits

can be effective to diminish, eliminate,

or prevent sudden or unreasonable

fluctuations or unwarranted changes in

commodity prices.

484

In the 2013 and 2016 necessity

findings, the Commission stated again

that ‘‘all markets in physical

commodities’’ are susceptible to the

burdens of excessive speculation

because all such markets have a finite

ability to absorb the establishment and

liquidation of large speculative

positions in an orderly manner.

485

The

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560 (1956) (finding it ‘‘obvious that transactions in

such vast amounts as those involved here might

cause ‘sudden or unreasonable fluctuations in the

price’ of corn and hence be an undue and

unnecessary burden on interstate commerce’’

(alteration omitted)).

486

See supra Section III.D.

487

ISDA Survey of the Derivatives Usage by the

World’s Largest Companies 2009. It has also been

estimated that the use of commercial derivatives

added 1.1 percent to the size of the U.S. economy

between 2003 and 2012. See Apanard Prabha et al.,

Deriving the Economic Impact of Derivatives, (Mar.

2014), available at http://

assets1b.milkeninstitute.org/assets/Publication/

ResearchReport/PDF/Derivatives-Report.pdf.

488

The Commission observes that there has been

much written in the academic literature about price

discovery of the 25 core referenced futures

contracts. This demonstrates the importance of the

commodities underlying such contracts in our

society. The Commission’s Office of the Chief

Economist conducted a preliminary search on the

JSTOR and Science Direct academic research

databases for journal articles that contain the key

words: Price Discovery <Commodity Name>

Futures. While the articles made varying

conclusions regarding aspects of the futures

markets, and in some cases position limits, almost

all articles agreed that the futures markets in

general are important for facilitating price discovery

within their respective markets.

Commission here, however,

preliminarily determines that this

characteristic is not sufficient to support

a finding that position limits are

‘‘necessary’’ for all physical

commodities, within the meaning of

section 4a(a)(1). Congress has already

determined that excessive speculation

can give rise to unwarranted burdens on

interstate commerce and that position

limits can be an effective tool to

eliminate, diminish, or prevent those

burdens. Yet the statute directs the

Commission to establish position limits

only when they are ‘‘necessary.’’ In that

context, the Commission considers it

unlikely that Congress intended the

Commission to find that position limits

are ‘‘necessary’’ even where facts and

circumstances show the significant

potential that they will cause

disproportionate negative consequences

for markets, market participants, or the

commodity end users they are intended

to protect. Similarly, because the

Commission has preliminarily

determined that section 4a(a)(2) does

not mandate federal speculative

position limits for all physical

commodities,

486

it cannot be that federal

position limits are ‘‘necessary’’ for all

physical commodities, within the

meaning of section 4a(a)(1), on the basis

of a property shared by all of them, i.e.,

a limited capacity to absorb the

establishment and liquidation of large

speculative positions in an orderly

fashion.

The Commission requests comments

on all aspects of this interpretation of

the requirement in section 4a(a)(1) of a

necessity finding.

2. Necessity Findings as to the 25 Core

Referenced Futures Contracts

As noted above, the proposed rule

would impose federal position limits

on: 25 core referenced futures contracts,

including 16 agricultural products, five

metals products, and four energy

products; any futures or options on

futures directly or indirectly linked to

the core referenced futures contracts;

and any economically equivalent swaps.

As discussed above, the Commission’s

necessity analysis proceeds on the basis

of certain propositions reflected in the

text of 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, i.e., fluctuations

not attributable to the forces of supply

of and demand for that underlying

commodity; second, that such price

fluctuations and changes are an undue

and unnecessary burden on interstate

commerce in that commodity, and;

third, that position limits can diminish,

eliminate, or prevent that burden. With

those propositions established by

Congress, the Commission’s task is to

make the 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. Unlike prior preliminary

necessity findings which focused on

evidence of excessive speculation in just

wheat and natural gas, this necessity

finding addresses all 25 core referenced

futures contracts and focuses on two

interrelated factors: (1) The importance

of the derivatives markets to the

underlying cash markets, including

whether they call for physical delivery

of the underlying commodity; and (2)

the importance of the cash markets

underlying the referenced futures

contracts to the national economy. The

Commission will apply the relevant

facts and circumstances holistically

rather than formulaically, in light of its

experience and expertise.

With respect to the first factor, the

markets for the 25 core referenced

futures contracts are large in terms of

notional value and open interest, and

are critically important to the

underlying cash markets. These

derivatives markets enable food

processors, farmers, mining operations,

utilities, textile merchants,

confectioners, and others to hedge the

risks associated with volatile changes in

price that are the hallmark of cash

commodity markets.

Futures markets were established to

allow industries that are vital to the U.S.

economy and critical to the American

public to accurately manage future

receipts, expenses, and financial

obligations with a high level of

certainty. In general, futures markets

perform valuable functions for society

such as ‘‘price discovery’’ and by

allowing counterparties to transfer price

risk to their counterparty. The risk

transfer function that the futures

markets facilitate allows someone to

hedge against price movements by

establishing a price for a commodity for

a time in the future. Prices in

derivatives markets can inform the cash

market prices of, for example, energy

used in homes, cars, factories, and

hospitals. More than 90 percent of

Fortune 500 companies use derivatives

to manage risk, and over 50 percent of

all companies use derivatives in

physical commodity markets such as the

25 core referenced futures contracts.

487

The 25 core referenced futures

contracts are vital for establishing

reliable commodity prices and enabling

the beneficial risk transfer between

buyers and sellers of commodities,

allowing participants to hedge risk and

undertake planning with greater

certainty. By providing a highly efficient

marketplace for participants to offset

risks, the 25 core referenced futures

contracts attract a broad range of

participants, including farmers,

ranchers, producers, utilities, retailers,

investors, banking institutions, and

others. These participants hedge

production costs and delivery prices so

that, among other things, consumers can

always find plenty of food at reliable

prices on the grocery store shelves.

Futures prices are used for pricing of

cash market transactions but also serve

as economic signals that help various

members of society plan. These signals

help farmers decide which crops to

plant as well as assist producers to

decide how to implement their

production processes given the

anticipated costs of various inputs and

the anticipated prices of any anticipated

finished products, and they serve

similar functions in other areas of the

economy. For the commodities that are

the subject of this necessity finding, the

Commission preliminarily has

determined that there is a significant

amount of participation in these

commodity markets, both directly and

indirectly, through price discovery

signals.

488

Two key features of the 25 core

referenced futures contracts are the role

they play in the price discovery process

for their respective underlying

commodities and the fact that they

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489

Futures contracts are traded for settlement at

a date in the future. At a contract’s delivery month

and date, a commodity cash market price and its

futures price converge, allowing an efficient transfer

of physical commodities between buyers and sellers

of the futures contract.

490

Standardized terms and conditions for

physically-settled futures contracts typically

include delivery quantities, qualities, sizes, grades

and locations for delivery that are commonly used

in the commodity cash market.

491

See The Bureau of Economic Analysis, U.S.

Department of Commerce, Interactive Access to

Industry Economic Accounts Data: GDP by Industry

(Historical) that includes GDP contributions by U.S.

Farms, Oil & Gas extraction, pipeline

transportation, petroleum and coal products,

utilities, mining and support activities, primary and

fabricated metal products and finance in securities,

commodity contracts and investments.

492

For energy contracts, physical delivery of the

underlying commodity does not occur during the

spot month. This allows time to schedule pipeline

deliveries and so forth. Instead, a shipping

certificate (a financial instrument claim to the

physical product), not the underlying commodity,

is the delivery instrument that is exchanged at

expiration of the futures contract.

require physical delivery of the

underlying commodity. Price discovery

is the process by which markets,

through the interaction of buyers and

sellers, produce prices that are used to

value underlying futures contracts that

allow society to infer the value of

underlying physical commodities.

Adjustments in futures market

requirements and valuations by a

diverse array of futures market

participants, each with different

perspectives and access to supply and

demand information, can result in

adjustments to the pricing of the

commodities underlying the futures

contract. The futures markets are

generally the first to react to such price-

moving information, and price

movements in the futures markets

reflect a judgment of what is likely to

happen in the future in the underlying

cash markets. The 25 core referenced

futures contracts were selected in part

because they generally serve as

reference prices for a large number of

cash-market transactions, and the

Commission knows from large trader

reporting that there is a significant

presence of commercial traders in these

contracts, many of whom may be using

the contracts for hedging and price

discovery purposes.

For example, a grain elevator may use

the futures markets as a benchmark for

the price it offers local farmers at

harvest. In return, farmers look to

futures prices to determine for

themselves whether they are getting fair

value for their crops. The physical

delivery mechanism further links the

cash and futures markets, with cash and

futures prices expected to converge at

settlement of the futures contract.

489

In

addition to facilitating price

convergence, the physical delivery

mechanism allows the 25 core

referenced futures contracts to be an

alternative means of obtaining or selling

the underlying commodity for market

participants. While most physically-

settled futures contracts are rolled-over

or unwound and are not ultimately

settled using the physical delivery

mechanism, because the futures

contracts have standardized terms and

conditions that reflect the cash market

commodity, participants can reasonably

expect that the commodity sold or

purchased will meet their needs.

490

This

physical delivery and price discovery

process contributes to the complexity of

the markets for the 25 core referenced

futures contracts. If these markets

function properly, American producers

and consumers enjoy reliable

commodity prices. Excessive

speculation causing sudden or

unreasonable fluctuations or

unwarranted changes in the price of

those commodities could, in some cases,

have far reaching consequences for the

U.S. economy by interfering with proper

market functioning.

The cash markets underlying the 25

core referenced futures contracts are to

varying degrees vitally important to the

U.S. economy, driving job growth,

stimulating economic activity, and

reducing trade deficits while impacting

everyone from consumers to automobile

manufacturers and farmers to financial

institutions. These 25 cash markets

include some of the largest cash markets

in the world, contributing together,

along with related industries,

approximately 5 percent to the U.S.

gross domestic product (‘‘GDP’’) directly

and a further 10 percent indirectly.

491

As described in detail below, the cash

markets underlying the 25 core

referenced futures contracts are critical

to consumers, producers, and, in some

cases, the overall economy.

By ‘‘excessive speculation,’’ the

Commission here refers to the

accumulation of speculative positions of

a size that threaten to cause the ills

Congress addressed in Section 4a—

sudden or unreasonable fluctuations or

unwarranted changes in the price of the

underlying commodity. These

potentially violent price moves in the

futures markets could impact producers

such as utilities, farmers, ranchers, and

other hedging market participants. Such

unwarranted volatility could result in

significant costs and price movements,

compromising budgeting and planning,

making it difficult for producers to

manage the costs of farmlands and oil

refineries, and impacting retailers’

ability to provide reliable prices to

consumers for everything from cereal to

gasoline. To be clear, volatility is

sometimes warranted in the sense that

it reflects legitimate forces of supply

and demand, which can sometimes

change very quickly. The purpose of

this proposed rule is not to constrain

those legitimate price movements.

Instead, the Commission’s purpose is to

prevent volatility caused by excessive

speculation, which Congress has

deemed a potential burden on interstate

commerce.

Further, excessive speculation in the

futures market could result in price

uncertainty in the cash market, which in

turn could cause periods of surplus or

shortage that would not have occurred

if prices were more reliable. Properly

functioning futures markets free from

excessive speculation are essential for

hedging the volatility in cash markets

for these commodities that are the result

of real supply and demand. Specific

attributes of the cash and derivatives

markets for these 25 commodities are

discussed below.

3. Agricultural Commodities

Futures contracts on the 16

agricultural commodities are essential

tools for hedging against price moves of

these widely grown crops, and are key

instruments in helping to smooth out

volatility and to ensure that prices

remain reliable and that food remains

on the shelves. These agricultural

futures contracts are used by grain

elevators, farmers, merchants, and

others and are particularly important

because prices in the underlying cash

markets swing regularly depending on

factors such as crop conditions,

weather, shipping issues, and political

events.

Settlement prices of futures contracts

are made available to the public by

exchanges in a process known as ‘‘price

discovery.’’ To be an effective hedge for

cash market prices, futures contracts

should converge to the spot price at

expiration of the futures contract.

Otherwise, positions in a futures

contract will be a less effective tool to

hedge price risk in the cash market

since the futures positions will less than

perfectly offset cash market positions.

Convergence is so important for the 16

agricultural contracts that exchanges

have deliveries occurring during the

spot month, unlike for the energy

commodities covered by this

proposal.

492

This delivery mechanism

helps to force convergence because

shorts who can deliver cheaper than the

futures prices may do so, and longs can

stand in for delivery if it’s cheaper to

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CME Group website, available at https://

www.cmegroup.com/trading/products/

#pageNumber=1&sortAsc=false&sortField=oi.

494

Notional values here and throughout this

section of the release are derived from CFTC

internal data obtained from the Commitments of

Traders Reports. Notional value means the U.S.

dollar value of both long and short contracts

without adjusting for delta in options. Data is as of

June 30, 2019.

495

What is Agriculture’s Share of the Overall U.S.

Economy, USDA Economic Research Services,

available at https://www.ers.usda.gov/data-

products/chart-gallery/gallery/chart-detail/

?chartId=58270.

496

Ag and Food Sales and the Economy, USDA

Economic Research Services, available at https://

www.ers.usda.gov/data-products/ag-and-food-

statistics-charting-the-essentials/ag-and-food-

sectors-and-the-economy.

497

Outlook for U.S. Agricultural Trade, USDA

Economic Research Services, available at https://

www.ers.usda.gov/topics/international-markets-us-

trade/us-agricultural-trade/outlook-for-us-

agricultural-trade.

498

The 16 agricultural core referenced futures

contracts are: CBOT Corn (C), CBOT Oats (O), CBOT

Soybeans (S), CBOT Soybean Meal (SM), CBOT

Soybean Oil (SO), CBOT Wheat (W), CBOT KC

HRW Wheat (KW), ICE Cotton No. 2 (CT), MGEX

HRS Wheat (MWE), CBOT Rough Rice (RR), CME

Live Cattle (LC), ICE Cocoa (CC), ICE Coffee C (KC),

ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and

ICE U.S. Sugar No. 16 (SF).

499

Decision Innovation Solutions, 2018 Soybean

Meal Demand Assessment, United Soybean Board,

available at https://www.unitedsoybean.org/wp-

content/uploads/LOW-RES-FY2018-Soybean-Meal-

Demand-Analysis-1.pdf.

500

Wheat Sector at a Glance, USDA Economic

Research Service, available at https://

www.ers.usda.gov/topics/crops/wheat/wheat-sector-

at-a-glance.

501

Cattle & Beef Sector at a Glance, USDA

Economic Research Service, available at https://

www.ers.usda.gov/topics/animal-products/cattle-

beef/sector-at-a-glance.

502

World of Cotton, National Cotton Council of

America, available at http://www.cotton.org/econ/

world/index.cfm.

503

Feedgrains Sector at a Glance, USDA

Economic Research Service, available at https://

www.ers.usda.gov/topics/crops/corn-and-other-

feedgrains/feedgrains-sector-at-a-glance.

504

Where is Rice Grown, Think Rice website,

available at http://www.thinkrice.com/on-the-farm/

where-is-rice-grown.

505

The United States Meat Industry at a Glance,

North American Meat Institute website, available at

https://www.meatinstitute.org/index.php?ht=d/sp/i/

47465/pid/47465.

506

The Economic Impact of the Coffee Industry,

National Coffee Association, available at http://

www.ncausa.org/Industry-Resources/Economic-

Impact.

507

U.S. Sugar Industry, The Sugar Association,

available at https://www.sugar.org/about/us-

industry. While Sugar No. 11 (SB) is primarily an

international benchmark, the contract is still used

for price discovery and hedging within the United

States and has significantly more open interest and

daily volume than the domestic Sugar No. 16 (SF).

As a pair, these two contracts are crucial tools for

risk management and for ensuring reliable pricing,

with much of the price discovery occurring in the

higher-volume Sugar No. 11 (SB) contract.

508

Although the macroeconomic impact of these

markets is smaller, the Commission reiterates that

it has selected the 25 core referenced futures

contracts also based on the importance of

derivatives in these commodities to cash-market

pricing.

509

Feed Outlook: May 2019, USDA Economic

Research Service, available at https://

www.ers.usda.gov/publications/pub-details/

?pubid=93094.

510

Economic Profile of the U.S. Chocolate

Industry, World Cocoa Foundation, available at

https://www.worldcocoafoundation.org/wp-content/

uploads/Economic_Profile_of_the_US_Chocolate_

Industry_2011.pdf.

obtain the underlying through the

futures market than the cash market.

The Commission does not collect

information on all cash market

transactions. Nevertheless, the

Commission understands that futures

prices are often used by counterparties

to settle many cash-market transactions

due to approximate convergence of the

futures contract price to the cash-market

price at expiration.

Agricultural futures markets are some

of the most active, and open interest on

agricultural futures have some of the

highest notional value. The CBOT Corn

(C) and CBOT Soybean (S) contracts, for

example, trade over 350,000 and

200,000 contracts respectively per

day.

493

Outstanding futures and options

notional values range anywhere from

approximately $ 71 billion for CBOT

Corn (C) to approximately $ 70 million

for CBOT Oats (O), with the other core

referenced futures contracts on

agricultural commodities all falling

somewhere in between.

494

The American agricultural market,

including markets for the commodities

underlying the 16 agricultural core

referenced contracts, is foundational to

the U.S. economy. Agricultural, food,

and related industries contributed $

1.053 trillion to the U.S. economy in

2017, representing 5.4 percent of U.S.

GDP.

495

In 2017, agriculture provided

21.6 million full and part time jobs, or

11 percent of total U.S. employment.

496

Agriculture’s contribution to

international trade is also sizeable. For

fiscal year 2019, it was projected that

agricultural exports would exceed $ 137

billion, with imports at $ 129 billion for

a net balance of trade of $ 8 billion.

497

This balance of trade is good for the

nation and for American farmers. The

U.S. commodity futures markets have

provided risk mitigation and pricing

that reflects the economic value of the

underlying commodity to farmers,

ranchers, and producers.

The 16 agricultural core referenced

futures contracts

498

are key drivers to

the success of the American agricultural

industry. The commodities underlying

these markets are used in a variety of

consumer products including:

Ingredients in animal feeds for

production of meat and dairy (soybean

meal and corn); margarine, shortening,

paints, adhesives, and fertilizer

(soybean oil); home furnishings and

apparel (cotton); and food staples (corn,

soybeans, wheat, oats, frozen orange

juice, cattle, rough rice, cocoa, coffee,

and sugar).

The cash markets underlying the 16

agricultural core referenced futures

contracts help create jobs and stimulate

economic activity. The soybean meal

market alone has an implied value to

the U.S. economy through animal

agriculture which contributed more

than 1.8 million American jobs,

499

and

wheat remains the largest produced

food grain in the United States, with

planted acreage, production, and farm

receipts ranking third after corn and

soybeans.

500

The United States is the

world’s largest producer of beef, and

also produced 327,000 metric tons of

frozen orange juice in 2018.

501

Total

economic activity stimulated by the

cotton crop is estimated at over $ 75

billion.

502

Many of these markets are

also significant export commodities,

helping to reduce the trade deficit. The

United States exports between 10 and

20 percent of its corn crop and 47

percent of its soybean crop, generating

tens of billions of dollars in annual

economic output.

503

Many of these agricultural

commodities are also crucial to rural

areas. In Arkansas alone, which ranks

first among rice-producing states, the

annual rice crop contributes $1.3 billion

to the state’s economy and accounts for

tens of thousands of jobs to an industry

that contributes more than $35 billion to

the U.S. economy on an annual basis.

504

Similarly, the U.S. meat and poultry

industry, which includes cattle,

accounts for $1.02 trillion in total

economic output equaling 5.6 percent of

GDP, and is responsible for 5.4 million

jobs.

505

Coffee-related economic activity

comprises 1.6 percent of total U.S.

GDP,

506

and U.S. sugar producers

generate nearly $20 billion per year for

the U.S. economy, supporting 142,000

jobs in 22 states.

507

Even some of the

smaller agricultural markets have a

noteworthy economic impact.

508

For

example, oats are planted on over 2.6

million acres in the United States, with

the total U.S. supply in the order of 182

million bushels,

509

and in 2010 the

United States exported chocolate and

chocolate-type confectionary products

worth $799 million to more than 50

countries around the world.

510

4. Metal Commodities

The core referenced futures contracts

on metal commodities play an

important role in the price discovery

process and are some of the most active

and valuable in terms of notional value.

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Gold Futures Quotes, CME Group website,

available at https://www.cmegroup.com/trading/

metals/precious/gold_quotes_globex.html.

512

Calculations based on data submitted to the

Commission pursuant to part 16 of the

Commission’s regulations.

513

Mineral Commodity Summaries 2019, U.S.

Geological Survey, available at http://prd-wret.s3-

us-west-2.amazonaws.com/assets/palladium/

production/atoms/files/mcs2019_all.pdf.

514

CPM Gold Yearbook 2019, CPM Group,

available at https://www.cpmgroup.com/store/cpm-

gold-yearbook-2019; Goldhub, World Gold Council,

available at https://www.gold.org/goldhub.

515

World Silver Survey 2019, The Silver Institute,

available at https://www.silverinstitute.org/wp-

content/uploads/2019/04/WSS2019V3.pdf.

516

Id.

517

Creamer, Martin, Global Mining Derives 45%-

Plus of World GDP, Mining Weekly (July. 4, 2012),

available at https://www.miningweekly.com/print-

version/global-mining-drives-45-plus-of-world-gdp-

cutifani-2012-07-04. Platinum and palladium mine

production in 2018 was less substantial, worth $114

million and $695 million, respectively (All such

valuations throughout this release are at current

prices as of July 2, 2019.). See Bloxham, Lucy, et

al., Pgm Market Report May 2019, Johnson Matthey,

available at http://www.platinum.matthey.com/

documents/new-item/pgm%20market%20reports/

pgm_market_report_may_19.pdf. However,

derivatives contracts in those commodities do play

a role in price discovery.

518

Historical Data, SPDR Gold Shares, available

at http://www.spdrgoldshares.com/usa/historical-

data. Data as of July 1, 2019.

519

iShares Silver Trust Fund, iShares, available

at https://www.ishares.com/us/products/239855/

ishares-silver-trust-fund/1521942788811.

ajax?fileType=xls&fileName=iShares-Silver-Trust_

fund&dataType=fund, https://

www.aberdeenstandardetfs.us/institutional/us/en-

us/products/product/etfs-physical-platinum-shares-

pplt-arca#15.

520

Calculations based on data submitted to the

Commission pursuant to part 16 of the

Commission’s regulations.

521

Calculations based on data submitted to the

Commission pursuant to part 16 of the

Commission’s regulations.

522

CME Comment letter dated April 24, 2015 at

79.

523

Id. at 136.

524

Natural Gas and Oil National Factsheet, API

Energy, available at https://www.api.org/∼/media/

Files/Policy/Jobs/National-Factsheet.pdf.

525

The four energy core referenced futures

contracts are: 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).

The Gold (GC) contract, for example,

trades the equivalent of nearly 27

million ounces and 170,000 contracts

daily.

511

Outstanding futures and

options notional values range from

approximately $234 billion in the case

of Gold (GC), to approximately $2.34

billion in the case of Palladium (PA),

with the other metals core referenced

futures contracts all falling somewhere

in between.

512

Metals futures are used

by a diverse array of commercial end-

users to hedge their operations,

including mining companies, merchants

and refiners.

The underlying commodities are also

important to the U.S. economy. In 2018,

U.S. mines produced $82.2 billion of

raw materials, including the

commodities underlying the five metals

core referenced futures contracts:

COMEX Gold (GC), COMEX Silver (SI),

COMEX Copper (HG), NYMEX Platinum

(PL), and NYMEX Palladium (PA).

513

U.S. mines produced 6.6 million ounces

of gold in 2018 worth around $9.24

billion as of July 1, 2019, and the United

States holds the largest official gold

reserves of any country, worth around

$366 billion and representing 75 percent

of the value of total U.S. foreign

reserves.

514

U.S. silver refineries

produced around 52.5 million ounces of

silver worth around $800 million in

2018 at current prices.

515

Major industries, including steel,

aerospace, and electronics, process and

transform these materials, creating about

$3.02 trillion in value-added

products.

516

The five metals

commodities are key components of

these products, including for use in:

Batteries, solar panels, water

purification systems, electronics, and

chemical refining (silver); jewelry,

electronics, and as a store of value

(gold); building construction,

transportation equipment, and

industrial machinery (copper);

automobile catalysts for diesel engines

and in chemical, electric, medical and

biomedical applications, and petroleum

refining (platinum); and automobile

catalysts for gasoline engines and in

dental and medical applications

(palladium). A disruption in any of

these markets would impact highly

important and sensitive industries,

including those critical to national

security, and would also impact the

price of consumer products.

The underlying metals markets also

create jobs and contribute to GDP. Over

20,000 people were employed in U.S.

gold and copper mines and mills in

2017 and 2018, metal ore mining

contributed $54.5 billion to U.S. GDP in

2015, and the global copper mining

industry drives more than 45 percent of

the world’s GDP, either on a direct basis

or through the use of products that

facilitate other industries.

517

The gold and silver markets are

especially important because they serve

as financial assets and a store of value

for individual and institutional

investors, including in times of

economic or political uncertainty.

Several exchange-traded funds (‘‘ETFs’’)

that are important instruments for U.S.

retail and institutional investors also

hold significant quantities of these

metals to back their shares. A disruption

to any of these metals markets would

thus not only impact producers and

retailers, but also potentially retail and

institutional investors. The iShares

Silver Trust ETF, for example, holds

around 323.3 million ounces of silver

worth $4.93 billion, and the largest U.S.

listed gold-backed ETF holds around

25.5 million ounces to back its shares

worth around $35.7 billion.

518

Platinum

and palladium ETFs are worth hundreds

of millions of dollars as well.

519

5. Energy Commodities

The energy core referenced futures

markets are crucial tools for hedging

price risk for commodities which can be

highly volatile due to changes in

weather, economic health, demand-

related price swings, and pipeline and

supply availability or disruptions. These

futures contracts are used by some of

the largest refiners, exploration and

production companies, distributors, and

by other key players in the energy

industry, and are some of the most

widely traded and valuable contracts in

the world in terms of notional value.

The NYMEX Light Sweet Crude Oil (CL)

contract, for example, is the world’s

most liquid and actively traded crude

oil contract, trading nearly 1.2 million

contracts a day, and the NYMEX Henry

Hub Natural Gas (NG) contract trades

400,000 contracts daily.

520

Futures and

option notional values range from $ 53

billion in the case of NYMEX NY Harbor

RBOB Gasoline (RB) and NYMEX NY

Harbor ULSD Heating Oil (HO), to $ 498

billion for NYMEX Light Sweet Crude

Oil (CL).

521

Some of the energy core referenced

futures contracts also serve as key

benchmarks for use in pricing cash-

market and other transactions. 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.

522

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.

523

The U.S. energy markets are some of

the most important and complex in the

world, contributing over $ 1.3 trillion to

the U.S. economy.

524

Crude oil, heating

oil, gasoline, and natural gas, the

commodities underlying the four energy

core reference futures contracts,

525

are

key contributors to job growth and GDP.

In 2015, the natural gas and oil

industries supported 10.3 million jobs

directly and indirectly, accounting for

5.6 percent of total U.S. employment,

and generating $ 714 billion in wages to

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Natural Gas and Oil National Factsheet, API

Energy, available at https://www.api.org/∼/media/

Files/Policy/Jobs/National-Factsheet.pdf;

PricewaterhouseCoopers, Impacts of the Natural

Gas and Oil Industry on the US Economy in 2015,

API Energy, available at https://www.api.org/∼/

media/Files/Policy/Jobs/Oil-and-Gas-2015-

Economic-Impacts-Final-Cover-07-17-2017.pdf.

527

PricewaterhouseCoopers, Impacts of the

Natural Gas and Oil Industry on the US Economy

in 2015, API Energy, at 12, available at https://

www.api.org/∼/media/Files/Policy/Jobs/Oil-and-

Gas-2015-Economic-Impacts-Final-Cover-07-17-

2017.pdf.

528

CME Comment Letter dated April 24, 2015 at

135.

529

Natural Gas: The Facts, American Gas

Association, available at https://www.aga.org/

globalassets/2019-natural-gas-factsts-updated.pdf.

530

Id.

531

The Bloomberg Commodity Index

Methodology, Bloomberg, at 17 (Dec. 2018)

available at https://data.bloomberglp.com/

professional/sites/10/BCOM-Methodology-

December-2019.pdf. The list of commodities that

Bloomberg deems eligible for inclusion in its index

overlaps significantly with the Commission’s

proposed list of 25 core referenced futures

contracts.

532

S&P GSCI Methodology, S&P Dow Jones

Indices, at 8 (Oct. 2019) available at https://

us.spindices.com/documents/methodologies/

methodology-sp-gsci.pdf?force_download=true.

533

FIA notes that volume for exchange-traded

futures is measured by the number of contracts

traded on a round-trip basis to avoid double-

counting. Furthermore, FIA notes that open interest

for exchange-traded futures is measured by the

number of contracts outstanding at the end of the

month.

534

CEA section 4a(a)(1).

535

See infra Section IV.A. (discussion of cost-

benefit considerations for the proposed changes).

536

See infra Section IV.A.2.a. (cost-benefit

discussion of market liquidity and integrity).

account for 6.7 percent of national

income.

526

Crude oil alone, which is a

key component in making gasoline,

contributes 7.6 percent of total U.S.

GDP. RBOB gasoline, which is a

byproduct of crude oil that is used as

fuel for vehicles and appliances,

contributes $ 35.5 billion in income and

$57 billion in economic activity.

527

ULSD comprises all on-highway diesel

fuel consumed in the United States, and

is also commonly used as heating oil.

528

Natural gas is similarly important,

serving nearly 69 million homes,

185,400 factories, and 5.5 million

businesses such as hotels, restaurants,

hospitals, schools, and supermarkets.

More than 2.5 million miles of pipeline

transport natural gas to more than 178

million Americans.

529

Natural gas is

also a key input for electricity

generation and comprises more than one

quarter of all primary energy used in the

United States.

530

U.S. agricultural

producers also rely on an affordable,

dependable supply of natural gas, as

fertilizer used to grow crops is

composed almost entirely of natural gas

components.

6. Consistency With Commodity Indices

The criteria underlying the

Commission’s necessity finding is

consistent with the criteria used by

several widely tracked third party

commodity index providers in

determining the composition of their

indices. Bloomberg 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.’’

531

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.’’

532

Applying these criteria,

Bloomberg and S&P have deemed

eligible for inclusion in their indices

lists of commodities that overlap

significantly with the Commission’s

proposed list of 25 core referenced

futures contracts. Independent index

providers thus appear to have arrived at

similar conclusions to the Commission’s

preliminary necessity finding regarding

the relative importance of certain

commodity markets.

7. Conclusion

This proposal only sets limits for

referenced contracts for which a DCM

currently lists a physically-settled core

referenced futures contract. As

discussed above, there are currently

over 1,200 contracts on physical

commodities listed on DCMs, and there

are physical commodities other than

those underlying the 25 core referenced

futures contracts that are important to

the national economy, including, for

example, steel, butter, uranium,

aluminum, lead, random length lumber,

and ethanol. However, unlike the 25

core referenced futures contracts, the

derivatives markets for those

commodities are not as large as the

markets for the 25 core referenced

futures contracts and/or play a less

significant role in the price discovery

process.

For example, the futures contracts on

steel, butter, and uranium were not

included as core referenced futures

contracts because they are cash-settled

contracts that settle to a third party

index. Among the agricultural

commodity futures listed on CME that

are cash-settled only to an index are:

class III milk, feeder cattle, and lean

hogs. All three of these were included

in the 2011 Final Rulemaking. Because

there are no physically-settled futures

contracts on these commodities, these

cash-settled contracts would not qualify

as referenced contracts are would not be

subject to the proposed rule. While the

futures contracts on aluminum, lead,

random length lumber, and ethanol are

physically settled contracts, their open

interest and trading volume is lower

than that of the CBOT Oats contract,

which is the smallest market included

among the 25 core referenced futures

contracts as measured by open interest

and volume. In that regard, based on

FIA end of month open interest data and

12-month total trading volume data for

December 2019, CBOT Oats had end of

month open interest of 4,720 contracts

and 12-month total trading volume

ending in December 2019 of 162,682

round turn contracts.

533

In comparison,

the end of month December 2019 open

interest and 12-month total trading

volume ending in December 2019 for

the other commodity futures contracts

that were not selected to be included as

core referenced futures contracts were

as follows: COMEX Aluminum (267 OI/

2,721 Vol), COMEX Lead (0 OI/0 Vol),

CME Random Length Lumber (3,275 OI/

11,893 Vol), and CBOT Ethanol (708 OI/

2,686 Vol.). It would be impracticable

for the Commission to analyze in

comprehensive fashion all contracts that

have either feature, so the Commission

has chosen commodities for which the

underlying and derivatives markets both

play important economic roles,

including the potential for especially

acute burdens on a given commodity in

interstate commerce that would arise

from excessive speculation in

derivatives markets. Line drawing of

this nature is inherently inexact, and the

Commission will revisit these and other

contracts ‘‘from time to time’’ as the

statute requires.

534

Depending on facts

and circumstances, including the

Commission’s experience administering

the proposed limits with respect to the

25 core referenced futures contracts, the

Commission may determine that

additional limits are necessary within

the meaning of section 4a(a)(1).

As discussed in the cost benefit

consideration below, the Commission’s

proposed limits are not without costs,

and there are potential burdens or

negative consequences associated with

establishing the proposed limits.

535

In

particular, if the levels are set too high,

there is a greater risk of excessive

speculation that could harm market

participants and the public. If the levels

are set too low, transaction costs may

rise and liquidity could be reduced.

536

Nevertheless, the Commission

preliminarily believes that the specific

proposed limits applicable to the 25

core referenced futures contracts would

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7 U.S.C. 19(a).

538

Id.

539

This cost-benefit consideration section is

divided into seven parts, including this

introductory section, each discussing their

respective baseline benchmarks with respect to any

applicable CEA or regulatory provisions.

540

For example, the proposal 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 limits). On the

other hand, existing costs could decrease for those

existing traders whose positions would fall below

the new proposed limits and therefore would not

be forced to adjust their trading strategies and/or

apply for exemptions from the limits, particularly

if the Commission’s proposal 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.

541

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).

542

While the general themes contained in

comments submitted in response to prior proposals

informed this rulemaking, the Commission is

withdrawing the 2013 Proposal, the 2016

Supplemental Proposal, and the 2016 Reproposal.

See supra Section I.A.

limit such potential costs, and that the

significant benefits associated with

advancing the statutory goal of

preventing the undue burdens

associated with excessive speculation in

these commodities justify the potential

costs associated with establishing the

proposed limits.

G. Request for Comment

The Commission requests comment

on all aspects of the proposed necessity

finding. The Commission also invites

comments on the following:

(50) Does the proposed necessity

finding take into account the relevant

factors to ascertain whether position

limits would be necessary on a core

referenced futures contract?

(51) Does the proposed necessity

finding base its analysis on the correct

levels of trading volume and open

interest? If not, what would be a more

appropriate minimum level of trading

volume and/or open interest upon

which to evaluate whether federal

position limits are necessary to prevent

excessive speculation?

(52) Are there particular attributes of

any of the 25 proposed core referenced

futures contracts that the Commission

should consider when determining

whether federal position limits are or

are not necessary for that particular

product?

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.

537

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’’).

538

The Commission interprets section

15(a) to require the Commission to

consider only those costs and benefits of

its proposed 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 requirements. For this

purpose, the status quo requirements

include the CEA’s statutory

requirements as well as any applicable

Commission regulations that are

consistent with the CEA.

539

As a result,

any proposed changes to the

Commission’s regulations that are

required by the CEA or other applicable

statutes would not be deemed to be a

discretionary change for purposes of

discussing related costs and benefits.

The Commission anticipates that the

proposed position limits regulations

will affect market participants

differently depending on their business

model and scale of participation in the

commodity contracts that are covered by

the proposal.

540

The Commission also

anticipates that the proposal 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 preliminarily

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.

541

The

Commission believes that for many of

the costs and benefits that quantification

is not feasible with reasonable precision

because doing so would require

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 proposal. Further, while Congress

has tasked the Commission with

establishing such 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, would 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 proposed regulations, the

Commission in its discretion relies on:

(1) Its experience and expertise in

regulating the derivatives markets; (2)

information gathered through public

comment letters

542

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.

In addition to the specific questions

included throughout the discussion

below, the Commission generally

requests comment on all aspects of its

consideration of costs and benefits,

including: Identification and assessment

of any costs and benefits not discussed

herein; data and any other information

to assist or otherwise inform the

Commission’s ability to quantify or

qualify the costs and benefits of the

proposed rules; and substantiating data,

statistics, and any other information to

support positions posited by

commenters with respect to the

Commission’s consideration of costs

and benefits.

The Commission preliminarily

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.

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7 U.S.C. 2(i).

544

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).

545

17 CFR 150.2. Because the Commission has

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 International

Swaps and Derivatives Association v. United States

Commodity Futures Trading Commission, 887 F.

Supp. 2d 259 (D.D.C. 2012)), the baseline or status

quo consists 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.

546

The 16 proposed new products that would be

subject to federal spot month limits would include

seven agricultural (CME Live Cattle (LC), CBOT

Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC),

ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and

ICE U.S. 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.

547

See supra Section III.F. (discussion of the

necessity finding).

548

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.

549

See supra Section III.F. (discussion of the

necessity finding).

550

Open interest for this purpose includes the

sum of open contracts, as defined in §1.3 of the

Commission’s regulations, in futures contracts and

in futures option contracts converted to a futures-

equivalent amount, as defined in current §150.1(f)

of the Commission’s regulations. See 17 CFR 1.3

and 150.1(f).

551

Notional value of open interest for this

purpose is open interest multiplied by the unit of

trading for the relevant futures contract multiplied

by the price of that futures contract.

552

A combination of higher average trading

volumes and open interest is an indicator of a

contract’s market liquidity. Higher trading volumes

make it more likely that the cost of transactions is

lower with narrower bid-ask spreads.

Where the Commission does not

specifically refer to matters of location,

the discussion of benefits and costs

below refers to the effects of this

proposal on all activity subject to the

proposed regulations, 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).

543

The Commission will identify and

discuss the costs and benefits organized

conceptually by topic, and certain

topics may generally correspond with a

specific proposed regulatory section.

The Commission’s discussion is

organized as follows: (1) The scope of

the commodity derivative contracts that

would be subject to the proposed

position limits framework, including

with respect to the 25 proposed core

referenced futures contracts and the

proposed definitions of ‘‘referenced

contract’’ and ‘‘economically equivalent

swaps;’’ (2) the proposed federal

position limit levels (proposed § 150.2);

(3) the proposed federal bona fide

hedging definition (proposed § 150.1)

and other Commission exemptions from

federal position limits (proposed

§ 150.3); (4) proposed streamlined

process for the Commission and

exchanges to recognize bona fide hedges

and to grant exemptions for purposes of

federal position limits (proposed

§§ 150.3 and 150.9) and related

reporting changes to part 19 of the

Commission’s regulations; (5) the

proposed exchange-set position limits

framework and exchange-granted

exemptions thereto (proposed § 150.5);

and (6) the section 15(a) factors.

2. ‘‘Necessity Finding’’ and Scope of

Referenced Futures Contracts Subject to

Proposed Federal Position Limit Levels

Federal spot and non-spot month

limits currently apply to futures and

options on futures on the nine legacy

agricultural commodities.

544

The

Commission’s proposal would expand

the scope of commodity derivative

contracts currently subject to the

Commission’s existing federal position

limits framework

545

so that federal spot-

month limits would apply to futures

and options on futures on 16 additional

physical commodities, for a total of 25

physical commodities.

546

The Commission has preliminarily

interpreted CEA section 4a to require

that the Commission must 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.

547

As the

statute does not define the term

‘‘necessary,’’ 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),

as noted throughout this discussion of

the Commission’s cost-benefit

considerations.

548

As discussed in

greater detail in the preamble, the

Commission proposes to establish

position limits on futures and options

on futures for these 25 commodities on

the basis that position limits on such

contracts are ‘‘necessary.’’ In

determining to include the proposed 25

core referenced futures contracts within

the proposed federal position limit

framework, the Commission considered

the effects that these contracts have on

the underlying commodity, especially

with respect to price discovery; the fact

that they require physical delivery of

the underlying commodity and therefore

may be more affected by manipulation

such as corners and squeezes compared

to cash-settled contracts; and, in some

cases, the especially acute economic

burdens on interstate commerce that

could arise from excessive speculation

in these contracts causing sudden or

unreasonable fluctuations or

unwarranted changes in the price of the

commodities underlying these

contracts.

549

More specifically, the 25 core

referenced futures contracts were

selected because they: (i) Physically

settle, (ii) have high levels of open

interest

550

and significant notional

value of open interest,

551

(iii) serve as a

reference price for a significant number

of swaps and/or cash market

transactions, and/or (iv) have, in most

cases, relatively higher average trading

volumes.

552

These factors reflect the

important and varying degrees of

linkage between the derivatives markets

and the underlying cash markets. The

Commission preliminarily

acknowledges that there is no

mathematical formula that would be

dispositive, though the Commission has

considered relevant data where it is

available.

As a result, the Commission

preliminarily has concluded that it must

exercise its judgment in light of facts

and circumstances, including its

experience and expertise, to determine

whether federal position limit levels are

economically justified. For example,

based on its general experience, the

Commission preliminarily recognizes

that contracts that physically settle can,

in certain circumstances during the spot

month, be at risk of corners and

squeezes, which could distort pricing

and resource allocation, make it more

costly to implement hedge strategies,

and harm the underlying cash market.

Similarly, certain contracts with higher

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See supra Section III.F. (discussion of the

necessity finding).

554

See supra Section III.F. (discussion of the

necessity finding).

555

The contracts that would be subject to the

Commission’s proposal generally have higher

trading volumes and open interest, which tend to

have greater liquidity, including relatively narrower

bid-ask spreads and relatively smaller price impacts

from larger transaction sizes. Further, all other

factors being equal, markets for contracts that are

more illiquid tend to be more concentrated, so that

a position limit on such contracts might reduce

open interest on one side of the market, because a

large trader would face the potential of being

capped out by a position limit. For this reason,

among others, the contracts to which the federal

position limits in existing §150.2 apply include

some of the most liquid physical-delivery futures

contracts.

556

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 section 4a(a)(1), and the CEA generally.

open interest and/or trading volume are

more likely to serve as benchmarks and/

or references for pricing cash market

and other transactions, meaning a

distortion of the price of any such

contract could potentially impact

underlying cash markets that are

important to interstate commerce.

553

As discussed in more detail in

connection with proposed § 150.2

below, the Commission preliminarily

believes that establishing federal

position limits at the proposed levels for

the proposed 25 core referenced futures

contracts and related referenced

contracts would result in several

benefits, including a reduction in the

probability of excessive speculation and

market manipulation (e.g., squeezes and

corners) and the attendant harms to

price discovery that may result. The

Commission acknowledges, in

connection with establishing federal

position limit levels under proposed

§ 150.2 (discussed below), that position

limits, especially if set too low, could

adversely affect market liquidity and

increase transaction costs, especially for

bona fide hedgers, which ultimately

might be passed on to the general

public. However, the Commission is

also cognizant that setting position limit

levels too high may result in an increase

in the possibility of excessive

speculation and the harms that may

result, such as sudden or unreasonable

fluctuations or unwarranted changes in

the price of the commodities underlying

these contracts.

For purposes of this discussion, rather

than discussing the general potential

benefits and costs of the federal position

limit framework, the Commission will

instead focus on the benefits and costs

resulting from the Commission’s

proposed necessity finding with respect

to the 25 core referenced futures

contracts.

554

The Commission will

address potential benefits and costs of

its approach with respect to: (1) The

liquidity and integrity of the futures and

related options markets and (2) market

participants and exchanges.

a. Potential Impact of the Scope of the

Commission’s Necessity Finding on

Market Liquidity and Integrity

The Commission has preliminarily

determined that the 25 contracts that the

Commission proposes to include in its

necessity finding are among the most

liquid physical commodity contracts, as

measured by open interest and/or

trading volume, and therefore, imposing

positions limits on these contracts may

impose costs on market participants by

constraining liquidity. However, the

Commission believes that the 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.

555

The Commission has preliminarily

determined that, as a general matter,

focusing on the 25 proposed 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/

or trading volumes. As a result, the

Commission preliminarily believes that

excessive speculation or potential

market manipulation in such contracts

would be more likely to affect more

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 proposed core referenced

futures contract is physically-settled, as

opposed to cash-settled, the proposal

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.

556

While the Commission recognizes that

market participants may engage in

market manipulation through cash-

settled futures and options on futures,

the Commission preliminarily 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 proposed core

referenced futures contracts will allow

the Commission to focus on those

contracts that, in general, the

Commission preliminarily 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.

To the extent the Commission does

not include additional commodities in

its necessity finding, the Commission’s

approach may also introduce additional

costs in the form of loss of certain

benefits associated with the proposed

federal position limits framework, such

as stronger prevention of market

manipulation, such as corners and

squeezes. Accordingly, the greater the

potential benefits of the proposed

federal position limits framework in

general, the greater the potential cost in

the reduction in market integrity in

general from not including other

possible commodities within the federal

position limits framework (only to the

extent any such additional commodities

would be found to be ‘‘necessary’’ for

purposes of CEA section 4a).

Nonetheless, 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

potential federal limits, to defend

against certain market behavior.

Similarly, for those contracts that would

not be subject to the proposal, exchange-

set position limits alternatively may

achieve the same benefits discussed in

connection with the proposed federal

position limits.

b. Potential Impact of the Scope of the

Commission’s Necessity Finding on

Market Participants and Exchanges

The Commission acknowledges that

the federal position limits proposed

herein 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. However, the

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Commenters on prior proposals have

requested a sufficient phase-in period. See, e.g.,

2016 Reproposal, 81 FR at 96815 (implementation

timeline).

558

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).

559

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.

560

See supra Section II.B.1—Existing §150.2

(discussing that establishing spot month levels at 25

percent or less of EDS is consistent with past

Commission practices).

561

The 16 proposed new products that would be

subject to federal spot month limits would include

seven agricultural (CME Live Cattle (LC), CBOT

Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC),

ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and

ICE U.S. 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.

562

The proposal would maintain the current spot

month limits on CBOT Oats (O).

563

As discussed below, for most of the legacy

agricultural commodities, this would result in a

higher non-spot month limit. However, the

Commission is not proposing to change 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 proposed to

maintain the current non-spot month limit for

CBOT KC Hard Red Winter Wheat (KW).

564

See supra Section II.B.2.c. (for further

discussion regarding the CEA’s statutory objectives

for the federal position limits framework).

Commission preliminarily believes that

its approach to delaying the effective

date by 365 days from publication of

any final rule in the Federal Register

should mitigate compliance costs by

permitting the update and build out of

technological and compliance systems

more gradually. It 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.

557

Further, the delayed

effective date 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 preliminarily anticipates

that the extra time provided by the

delayed effective date will result in

more robust systems for market

oversight, which should better facilitate

the implementation of the Commission’s

position limits framework and avoid

unnecessary market disruptions while

exchanges and market participants

prepare for its implementation.

However, the longer the proposed delay

in the proposal’s effective date, the

longer it will take to realize the benefits

identified above.

3. Federal Position Limit Levels

(Proposed § 150.2)

a. General Approach

Existing § 150.2 establishes position

limit levels that apply net long or net

short to futures and futures-equivalent

options contracts on nine legacy

physically-settled agricultural

contracts.

558

The Commission has

previously set separate federal position

limits for: (i) The spot month, and (ii)

the single month and all-months

combined limit levels (i.e., ‘‘non-spot

months’’).

559

For the existing spot

month federal limit levels, the contract

levels are based on 25 percent, or lower,

of the estimated deliverable supply

(‘‘EDS’’).

560

For the existing single

month and all-months combined limit

levels, the levels are set at 10 percent of

open interest for the first 25,000

contracts of open interest, with a

marginal increase of 2.5 percent of open

interest thereafter (the ‘‘10, 2.5 percent

formula’’).

Proposed § 150.2 would revise and

expand the current federal position

limits framework as follows: First, for

spot month levels, proposed § 150.2

would (i) cover 16 additional

physically-settled futures and related

options contracts, based on the

Commission’s existing approach of

establishing limit levels at 25 percent or

lower of EDS, for a total of 25 core

referenced futures contracts subject to

federal spot month limits (i.e., the nine

legacy agricultural contracts plus the

proposed 16 additional contracts);

561

and (ii) update the existing spot month

levels for the nine legacy agricultural

contracts based on revised EDS.

562

Second, for non-spot month levels,

proposed § 150.2 would revise the 10,

2.5 percent formula so that (i) the

incremental 2.5 percent increase takes

effect after 50,000 contracts of open

interest, rather than after 25,000

contracts under the existing rule (the

‘‘marginal threshold level’’), and (ii) the

limit levels will be calculated by

applying the updated 10, 2.5 percent

formula to open interest data for the

periods from July 2017–June 2018 and

July 2018–June 2019 of the applicable

futures and delta adjusted futures

options.

563

Third, the proposed position limits

framework would expand to cover (i)

any cash-settled futures and related

options 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

proposed position limits would apply

separately, net long or short, to cash-

settled contracts and to physically-

settled contracts in the same

commodity. This would result in a

separate net long/short position for each

category so that cash-settled contracts in

a particular commodity would be netted

with other cash-settled contracts in that

commodity, and physically-settled

contracts in a given commodity would

be netted with other physically-settled

contracts in that commodity; a cash-

settled contract and a physically-settled

contract would not net with one

another. Outside the spot month, cash

and physically-settled contracts in the

same commodity would be netted

together to determine a single net long/

short position.

Fourth, proposed § 150.2 would

subject certain pre-existing positions to

federal position limits during the spot

month but would grandfather certain

pre-existing positions outside the spot

month.

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).

564

The Commission

recognizes that relatively high limit

levels may be more likely to support

some of the statutory goals and less

likely to advance others. For instance, a

relatively higher 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, 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

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565

For example, relatively lower federal 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.

566

‘‘Choppy’’ prices often refers 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.

567

For the spot month, all the legacy agricultural

contracts other than CBOT Oats (O) would have

higher federal 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), would have higher federal

levels.

568

While the Commission proposes to generally

either increase or maintain the federal position

limits for both the spot-months and non-spot

months compared to existing federal limits, where

applicable, and exchange limits, the proposed

federal level for COMEX Copper (HG) would be

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 would violate the proposed lower

federal limit levels.

569

For most of the legacy agricultural

commodities, this would result in a higher non-spot

month limit. However, the Commission is not

proposing to change 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 proposed to

maintain the current non-spot month limit for

CBOT KC HRW Wheat (KW). See supra Section

II.B.2.e. —Methodology for Setting Proposed Non-

Spot Month Limit Levels for further discussion.

570

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 percent

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.2.e.

—Methodology for Setting Proposed Non-Spot

Month Limit Levels for further discussion.

the price discovery function in the

underlying markets.

Conversely, setting a relatively lower

federal 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.

565

Additionally, setting federal

position limits too low may cause non-

excessive speculation to exit a market,

which could reduce liquidity, cause

‘‘choppy’’

566

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 limit levels, to the maximum

extent practicable, to benefit the

statutory goals identified by Congress.

As discussed above, the contracts that

would be subject to the proposed federal

limits are currently subject to either

federal- or exchange-set limits (or both).

To the extent that the proposed federal

position limit levels 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 proposed

federal limits in proposed § 150.2 that

otherwise would be prohibited under

existing § 150.2.

567

On the other hand,

to the extent an exchange-set limit level

would be lower than its proposed

corresponding federal limit, the

proposed federal limit would not affect

market participants since market

participants would be required to

comply with the lower exchange-set

limit level (to the extent that the

exchanges maintain their current

levels).

568

b. Spot Month Levels

The Commission proposes to

maintain 25 percent of EDS as a ceiling

for federal limits. 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 proposed levels

listed in Appendix E of part 150 of the

Commission’s regulations appears to be

so low as to reduce liquidity for bona

fide hedgers or disrupt price discovery

function of the underlying market, or 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.

c. Levels Outside of the Spot Month

i. The 10, 2.5 Percent Formula

The Commission preliminarily has

determined that the existing 10, 2.5

percent 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

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

proposing to revise the levels based on

the periods from July 2017–June 2018

and July 2018–June 2019 to reflect the

general increases in open interest and

trading volume that have occurred over

time in the nine legacy agricultural

contracts (other than CBOT Oats (O),

MGEX HRS Wheat (MWE), and CBOT

KC HRW Wheat (KW)).

569

Since the

proposed increase for most of the

federal non-spot position limits is

predicated on the increase in open

interest and trading volume, as reflected

in the revised data reviewed by the

Commission, the Commission

preliminarily believes that its proposal

may enhance, or at least should

maintain, general liquidity, which the

Commission preliminarily believes may

benefit those with bona fide hedging

positions, and commercial end users in

general. On the other hand, the

Commission understands that many

market participants, especially

commercial end users, generally believe

that the existing non-spot month 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 Commission’s

proposal may increase the risk of

excessive speculation without achieving

any concomitant benefits of increased

liquidity for bona fide hedgers

compared to the status quo.

The Commission also preliminarily

recognizes that there could be potential

costs to keeping the existing 10, 2.5

percent 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 percent formula may have reflected

‘‘normal’’ observed market activity

through 1999 when the Commission

adopted it, it no longer reflects current

open interest figures. When adopting

the 10, 2.5 percent 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.

570

As the nine

legacy agricultural contracts (with the

exception of CBOT Oats (O)) all have

open interest well above 25,000

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See supra Section II.B.2.e.—Methodology for

Setting Proposed Non-Spot Month Limit Levels for

further discussion.

572

Id.

573

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, MarketWatch website (Feb. 5, 2019),

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. . . .’’).

574

See supra Section II.A.1.c.v. (preamble

discussion of pass-through swap provision); see

infra Section IV.A.4.b.i.(2).

575

As discussed in preamble Section II.B.2.e.—

Methodology for Setting Proposed Non-Spot Month

Limit Levels, 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 converge 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.

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

proposed formula. Further, if open

interest continues to increase over time,

the Commission anticipates that the

existing 10, 2.5 percent 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 increase, a greater relative

proportion of the commodity’s open

interest is subject to the 2.5 percent

limit level rather than the initial 10

percent 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 constrains, the

Commission has determined that this

potential concern could be mitigated, at

least in part, by the Commission’s

proposed change to increase the

marginal threshold level from 25,000

contracts to 50,000 contracts, which the

Commission preliminarily believes

should provide a conservative increase

in the non-spot month limits for most

contracts to better reflect the general

increase observed in open interest

across futures markets. The Commission

acknowledges that the marginal

threshold level could be increased

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 this proposed change

could benefit several market

participants per legacy agricultural

commodity who otherwise would bump

up against the all-months and/or single

month limits with based on the status

quo threshold of 25,000 contracts. As a

result, the Commission preliminarily

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

proposed change is relatively minor

compared to revising the existing 10, 2.5

percent formula based on updated open

interest data.

Second, the Commission

preliminarily recognizes that an

alternative formula that allows for

higher non-spot limits, compared to the

existing 10, 2.5 percent 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.

571

Compared to when the

Commission first adopted the 10, 2.5

percent formula, today there exist

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).

572

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 non-

spot month limits might provide greater

market liquidity, and possibly increased

market efficiency, by allowing for

greater market-making activities.

573

However, the Commission believes

that any purported benefits related to a

hypothetical alternative formula that

would allow for higher non-spot limits

would be minimal at best. Specifically,

bona fide hedgers and end users

generally have not requested a revised

formula to allow for significantly higher

non-spot limits. Similarly, liquidity

providers would still be able to

maintain, and possibly increase, market

making activities under the

Commission’s proposal since the non-

spot month limits will generally still

increase under the existing 10, 2.5

percent formula to reflect the increase in

open interest. Further, to the extent that

the Commission’s proposal to eliminate

the risk management exemption could

theoretically force liquidity providers to

reduce their trading activities, the

Commission preliminarily believes that

certain liquidity-providing activity of

the existing risk management exemption

holders may still be permitted under the

Commission’s proposal, either as a

result of the proposed swap pass-

through provision or because of the

general increase in limits based on the

revised open interest levels.

574

The

Commission also preliminarily

recognizes an additional benefit to

market integrity of the current proposal

compared to a hypothetical alternative

formula: While the Commission believes

that the proposed 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 also permit

increased excessive speculation and

increase the probability of market

manipulation or harm the underlying

price discovery function.

Additionally, some 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.

575

Third, if the Commission’s proposed

non-spot position limits would be too

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On the other hand, relying on exchanges may

have potential costs because exchanges may have

conflicting interests and therefore may not establish

position limit (or accountability) levels lower than

the proposed federal limits. For example, exchanges

may not be incentivized to lower their limits due

to competitive concerns with another exchange, or

due to influence from a large customer. Conversely,

exchange and Commission interests may be aligned

to the extent that exchanges do have a

countervailing interest to protect their markets from

manipulation and price distortion: If market

participants lose confidence in the contract as a tool

for hedging, they will look for alternatives, possibly

migrating to another product on a different

exchange. The Commission is aware of at least one

instance in which exchanges adopted spot-month

position limits and/or adopted a lower exchange-set

limit for particular futures contracts as a result of

excessive manipulation and potential market

manipulation. Similarly, exchanges remain subject

to their core principle obligations to prevent

manipulation, and the Commission conducts

general market oversight through its own

surveillance program. Accordingly, the Commission

acknowledges such concerns about conflicting

exchange incentives, but preliminarily believes that

such concerns are mitigated for the foregoing

reasons.

577

As discussed in the preamble, the proposed

position limits framework would also apply to

physically-settled swaps that qualify as

economically equivalent swaps. However, the

Commission preliminarily believes that physically-

settled economically equivalent swaps would be

few in number.

high for a commodity, the proposal

might be less effective in deterring

excessive speculation and market

manipulation for that commodity’s

market. Conversely, if the Commission’s

proposed position limit levels would be

too low for a commodity, the proposal

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 proposed non-spot limit

levels could be too high, the

Commission preliminarily believes

these costs could be mitigated because

exchanges would be able to establish

lower non-spot month levels.

576

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 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 proposing to

maintain current non-spot 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.

ii. Exceptions to the Proposed 10, 2.5

Percent 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 non-spot

month speculative position limit levels

for MGEX HRS Wheat (‘‘MWE’’) and

CBOT KC HRW Wheat (‘‘KW’’) core

referenced futures contracts, the

Commission is proposing to maintain

the proposed 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

percent formula. Maintaining the status

quo for the MWE and KW non-spot

month limit levels would result in

partial wheat parity between those two

wheat contracts, but not with CBOT

Wheat (‘‘W’’), which would increase to

19,300 contracts. The Commission

preliminarily believes that this will

benefit the MWE and KW markets since

the two species of wheat are similar to

one another; accordingly, decreasing the

non-spot month levels for MWE could

impose liquidity costs on the MWE

market and harm bona fide hedgers,

which could further harm liquidity or

bona fide hedgers in the KW market. On

the other hand, the Commission has

determined not to raise the proposed

limit levels for either KW or MWE to the

limit level for W since the non-spot

month level appears to be

extraordinarily large in comparison to

open interest in KW and MWE markets,

and the limit level for the MWE contract

is already larger than the limit level

would be based on the 10, 2.5 percent

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 preliminarily

determined that this is a reasonable

compromise to 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 non-spot

month speculative position limit for

CBOT Oats (O), the Commission is

proposing the limit level at the current

2,000 contract 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 preliminarily

determined that there is no evidence of

potential market manipulation or

excessive speculation, and so there

would be no perceived benefit to

reducing the non-spot month limit for

the CBOT Oats (O) contract, while

reducing the level could impose

liquidity costs.

d. 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 below, by

applying the federal position limits to

‘‘referenced contracts,’’ the

Commission’s proposal would expand

the federal position limits beyond the

proposed 25 physically-settled ‘‘core

referenced futures contracts’’ listed in

proposed Appendix E to part 150 by

also including any cash-settled

‘‘referenced contracts’’ linked thereto as

well as swaps that meet the proposed

‘‘economically equivalent swap’’

definition and thus qualify as

‘‘referenced contracts.’’

577

i. Referenced Contracts

The Commission preliminarily has

determined that including futures

contracts and options thereon that are

‘‘directly’’ or ‘‘indirectly linked’’ to the

core referenced contracts, including

cash-settled contracts, under the

proposed definition of ‘‘referenced

contract’’ would help 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. The Commission preliminarily

has determined that this will benefit

market integrity and potentially reduce

costs to market participants that

otherwise could result from market

manipulation.

The Commission also recognizes that

including cash-settled contracts within

the proposed federal position limits

framework may impose additional

compliance costs on market participants

and exchanges. Further, the proposed

federal position limits—especially

outside the spot month—may not

provide 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 of such non-spot, cash-

settled contracts, the Commission’s

authority to regulate and oversee futures

and related options markets (other than

through establishing federal position

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See infra Section IV.A.3.d.iv. (discussion of

economically equivalent swaps).

579

Otherwise, a 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

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.

580

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. 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.

limits) may also be effective in

uncovering or preventing manipulation,

especially in the non-spot cash markets,

and may result in relatively lower

compliance costs incurred by market

participants. Similarly, the Commission

preliminarily acknowledges that

exchange oversight could provide the

same benefit 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 proposed ‘‘referenced contract’’

definition would also include

‘‘economically equivalent swaps,’’ and

for the reasons discussed below would

include a narrower set of swaps

compared to the set of futures and

options thereon that would be, under

the proposed ‘‘referenced contract’’

definition, captured as either ‘‘directly’’

or ‘‘indirectly linked’’ to a core

referenced futures contract.

578

ii. Netting

The Commission proposes to permit

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 would not be

able to net their positions in cash-settled

referenced contracts against their

positions in physically-settled

referenced contracts. The Commission

preliminarily believes that its proposal

would benefit liquidity formation and

bona fide hedgers outside the spot

months since the proposed netting rules

would 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

would be able to maintain larger gross

positions outside the spot month.

However, the Commission preliminarily

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 would not be able to

maintain a relatively large position in

the physical markets by netting it

against its positions in the cash

markets.

579

While this may increase

compliance and transaction costs for

speculators, it might benefit some bona

fide hedgers and end users. It might 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 their net physical and cash

positions.

iii. Exclusions From the ‘‘Referenced

Contract’’ Definition

First, while the proposed ‘‘referenced

contract’’ definition would include

linked contracts, it would explicitly

exclude location basis contracts, which

are contracts that reflect the difference

between two delivery locations or

quality grades of the same

commodity.

580

The Commission

preliminarily believes that excluding

location basis contracts from the

‘‘referenced contract’’ definition would

benefit market integrity by preventing a

trader from obtaining an extraordinarily

large speculative position in the

commodity underlying the referenced

contract. Otherwise, absent the

proposed 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 by restricted by

position limits. Similarly, the

Commission preliminarily believes that

this would reduce hedging costs for

hedgers and commercial end-users, as

they would be able to more efficiently

hedge the cost of commodities at their

preferred location without the risk of

possibly hitting a position limits ceiling

or incur compliance costs related to

applying for a bona fide hedge related

to such position.

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 would not be subject to

federal limits and thus could be more

easily subject to manipulation by a

market participant that obtained an

excessively large position. However, the

Commission preliminarily 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 the

proposal is consistent with current

market practice, any benefits or costs

already may have been realized.

Second, the Commission

preliminarily has concluded that

excluding commodity indices from the

‘‘referenced contract’’ definition would

benefit 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

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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.—Bona Fide

Hedging and Spread and Other Exemptions from

Federal Position Limits (proposed §§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.

582

Similarly, the proposed anti-evasion provision

would also provide that a spread exemption would

no longer apply.

583

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 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.

584

As discussed below, the proposed definition

of ‘‘economically equivalent swaps’’ with respect to

natural gas referenced contracts would contain the

same terms, except that it would include delivery

dates diverging by less than two calendar days.

585

See supra Section II.A.4. (for further

discussion regarding the Commission’s proposed

definition of ‘‘economically equivalent swap’’).

position limits framework.

581

However,

the Commission preliminarily believes

that its proposed exclusion could

impose costs on market participants that

trade commodity indices since, as

noted, such contracts would not be

subject to federal limits and thus could

be more easily subject to manipulation

by a market participant that obtained an

excessively large position. The

Commission preliminarily believes such

costs would be mitigated because the

commodities 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. Further, the

Commission believes that it is possible

that excluding commodity indices from

the definition of ‘‘referenced contracts’’

could result in some trading shifting to

commodity indices 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 further 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 preliminarily

believes that using indices is an

inefficient means of obtaining exposure

to a certain commodity.

Under certain circumstances, a

participant that has reached the

applicable position limit could use a

commodity index to purchase and

weight a commodity index contract,

which is otherwise excluded from the

‘‘referenced contract’’ definition and

therefore from federal position limits, in

a manner that would allow the

participant to exceed limits of the

applicable referenced contract (i.e., the

participant could be long outright in a

referenced contract, purchase a

commodity index contract that includes

the applicable referenced contract as a

component, and short the remaining

components of the index. The

Commission observes that these short

positions would be subject to the

proposed federal limits, so there would

be a ceiling on this strategy and, in

addition, it would be costly to potential

manipulators because margin would

have to be posted and exchanged to

retain the positions. In this

circumstance, excluding commodity

indices from the ‘‘referenced contract’’

definition could impose costs on market

integrity. However, the Commission

preliminarily believes any related costs

should be mitigated because proposed

§ 150.2 would include anti-evasion

language that would deem such

commodity index contract to be a

referenced contract subject to federal

limits. Also, analogous costs could

apply to the discussion above regarding

location basis contracts and such

proposed anti-evasion provision would

similarly cover location basis

contracts.

582

iv. Economically Equivalent Swaps

The existing federal position limits

framework does not include limit levels

on swaps. The Dodd-Frank Act added

CEA section 4a(a)(5), which requires

that when the Commission imposes

position limits on futures and options

on futures pursuant to CEA section

4a(a)(2), the Commission also establish

limits simultaneously for ‘‘economically

equivalent’’ swaps ‘‘as appropriate.’’

583

As the statute does not define the term

‘‘economically equivalent,’’ the

Commission will apply 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

proposed definition of ‘‘economically

equivalent swap’’ set forth in proposed

§ 150.1, a swap would generally qualify

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, disregarding any differences

with respect to lot size or notional

amount, delivery dates diverging by less

than one calendar day (other than for

natural gas referenced contracts),

584

or

post-trade risk-management

arrangements.

585

As discussed further

below, the Commission explains that

the definition of ‘‘economically

equivalent swaps’’ is relatively narrow,

especially compared to the definition of

‘‘referenced contract’’ as applied to

cash-settled look-alike contracts.

The Commission preliminarily

believes that the proposed definition of

‘‘economically equivalent swaps’’

would benefit (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.

However, as discussed below,

exchanges would be subject to delayed

compliance with respect to the

proposed § 150.5 requirements

regarding exchange-set speculative

position limits on swaps until such time

that exchanges have access to sufficient

data to monitor for limits on swaps

across exchanges; as a result, exchange-

set limits would not need to include,

nor would exchanges be required to

oversee, compliance with exchange-set

position limits on swaps until such

time.

(1) Benefits and Costs Related to Market

Integrity

The Commission preliminarily

believes that the proposed definition

will benefit market integrity in two

ways. First, the proposed definition

would protect against excessive

speculation and potential market

manipulation by limiting the ability of

speculators to obtain excessive positions

through netting. For example, a more

inclusive ‘‘economically equivalent’’

definition that would encompass

additional swaps (e.g., swaps that may

differ in their ‘‘material’’ terms or

physical swaps with delivery dates that

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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 infra Section

IV.A.3.d.iv.(3) (discussion of natural gas swaps).

587

In contrast, since futures 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 or options on futures contract.

diverge by one day or more) could make

it easier for market participants to

inappropriately net down against their

referenced contracts by allowing market

participants to structure swaps that do

not necessarily offer identical risk or

economic exposure or sensitivity. In

such a 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 this position against

its position in a referenced contract,

enabling it to hold an even greater

position in the referenced contract.

Similarly, requiring ‘‘economically

equivalent swaps’’ to share all 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 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)

586

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 such as squeezes

and corners, insufficient market

liquidity for bona fide hedgers, or

disruption to the price discovery

function. 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

proposed 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 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

proposed definition would benefit

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 would not be

covered by the proposed definition to

effect market manipulation, such

potential costs would not differ from the

status quo since no swaps are currently

covered by federal position limits. The

Commission however acknowledges

that its narrow definition may increase

this cost, as fewer swaps will be covered

under the limits.

Further, the proposal to delay

compliance with respect to exchange-set

limits on swaps will benefit 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, which means that

requiring exchanges to establish

oversight over participants’ positions

currently could impose substantial costs

and also may be impractical to achieve.

As a result, the Commission has

preliminarily determined that allowing

exchanges delayed compliance with

respect to swaps would reduce

unnecessary costs. 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.

Additionally, while futures and

related options 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 a referenced

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 proposed

‘‘economically equivalent swap’’

definition, the Commission

preliminarily believes that it would not

be difficult for market participants to

avoid federal position limits by entering

into such OTC swaps.

587

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

and options 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 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 this proposal, market

participants would be 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. The Commission

preliminarily 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. 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

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In this regard, the proposed 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 proposed definition is similar, the

Commission’s proposed definition requires

‘‘identical material’’ terms rather than simply

‘‘identical’’ terms. Further, the Commission’s

proposed 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).

589

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.

590

Proposed §150.1 would define ‘‘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.

591

The Commission is particularly concerned

about protecting the spot month in physical-

delivery futures from corners and squeezes.

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

preliminarily believes that such

potential costs would be mitigated due

to its surveillance functions and the

proposal to reserve the authority to

declare that a particular swap or class of

swaps either would or would not

qualify as economically equivalent.

(2) The Proposed Definition Could

Increase Benefits or Costs Related to

Market Liquidity

First, the proposed 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 an

alternative in which the Commission

would proposed a broader definition.

For example, if the Commission were to

adopt an alternative to its proposed

‘‘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 speculator

with a large portfolio of swaps could

more easily bump up against the

applicable position limits and therefore

would have a strong incentive either to

reduce its swaps activity or move its

swaps activity to foreign jurisdictions. If

there were many similarly situated

speculators, 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 proposed 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’’).

588

Additionally, the Commission

preliminarily believes that proposing a

definition similar to that used by the EU

will benefit international comity.

589

Further, since market participants

trading in both U.S. and EU markets

would find the proposed definition to

be familiar, it may help reduce

compliance costs for those market

participants that already have systems

and personnel in place to identify and

monitor such swaps.

(3) The Proposed Definition Could

Create Benefits or Costs Related to

Market Liquidity for the Natural Gas

Market

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. As a result, the Commission

believes that creating an exception to

the proposed ‘‘economically equivalent

swap’’ definition for natural gas would

benefit market liquidity by not

unnecessarily favoring existing

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

proposal—regularly trade in both the

physically-settled core referenced

futures contract and the cash-settled

look-alike referenced contracts.

Accordingly, the Commission

preliminarily has concluded that a

slightly broader definition of

‘‘economically equivalent swap’’ would

uniquely benefit the natural gas markets

by helping to deter and prevent

manipulation of a physically-settled

contract to benefit a related cash-settled

contract.

e. Pre-Existing Positions

Proposed § 150.2(g) would impose

federal limits on ‘‘pre-existing

positions’’—other than pre-enactment

swaps and transition period swaps—

during the spot month, while non-spot

month pre-existing positions would not

be subject to position limits as long as

(i) the position was acquired in good

faith consistent with the ‘‘pre-existing

position’’ definition in proposed

§ 150.1;

590

and (ii) such position would

be attributed to the person if the

position increases after the limit’s

effective date.

The Commission believes that this

approach would benefit 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.

591

However, the

Commission acknowledges that the

proposed ‘‘good-faith’’ standard also

could impose certain costs on market

integrity since an inherently subjective

‘‘good faith’’ standard could result in

disparate treatment of traders by a

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This discussion sometimes refers to the ‘‘bona

fide hedging transactions or positions’’ 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.

593

As discussed in Section II.A.—§150.1—

Definitions of the preamble, the existing definition

of ‘‘bona fide hedging transactions and positions’’

currently appears in §1.3 of the Commission’s

regulations; the proposal would move the revised

definition to proposed §150.1.

594

See supra Section II.A.1.c.ii.(1). 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).

The Commission preliminarily 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 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 preliminary 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

proposed bona fide hedging definition.

particular exchange or across exchanges

seeking a competitive advantage with

one another and could impose trading

costs on those traders given less

advantageous treatment. For example,

the Commission acknowledges that

since it has given discretion to an

exchange in interpreting this ‘‘good

faith’’ standard, an exchange may be

more liberal with concluding that a

large trader or influential exchange

member obtained a position in ‘‘good

faith.’’ As a result, the proposal could

potentially harm market integrity and/or

increase transaction costs if an exchange

were to benefit certain market

participants compared to other market

participants that receive relatively less

advantageous treatment. However, the

Commission believes the risk of any

unscrupulous trader or exchange is

mitigated since exchanges continue to

be subject to Commission oversight and

to DCM Core Principles 4 (‘‘prevention

of market disruption’’) and 12

(‘‘protection of markets and market

participants’’), among others, and since

proposed § 150.2(g)(2) also would

require that exchanges must attribute

the position to the trader if its position

increases after the position limit’s

effective date.

4. Bona Fide Hedging and Spread and

Other Exemptions From Federal

Position Limits (Proposed §§ 150.1 and

150.3)

a. Background

The proposal provides for several

exemptions that, subject to certain

conditions, would permit a trader to

exceed the applicable federal position

limit set forth under proposed § 150.2.

Specifically, proposed § 150.3 would

generally maintain, with certain

modifications discussed below, the two

existing federal exemptions for bona

fide hedging positions and spread

positions, and would include new

federal exemptions for certain

conditional spot month positions in

natural gas, certain financial distress

positions, and pre-enactment and

transition period swaps. Proposed

§ 150.1 would set forth the proposed

definitions for ‘‘bona fide hedging

transactions or positions’’ and for

‘‘spread transactions.’’

592

b. Bona Fide Hedging Definition;

Enumerated Bona Fide Hedges; and

Guidance on Measuring Risk

The Commission is proposing several

amendments related to bona fide

hedges. First, the Commission is

proposing to include a revised

definition of ‘‘bona fide hedging

transactions or positions’’ in § 150.1 to

conform to the statutory bona fide hedge

definition in CEA section 4a(c) as

Congress amended it in the Dodd-Frank

Act. As discussed in greater detail in the

preamble, the Commission proposes to

(1) revise 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) revise the economically

appropriate test to make explicit that the

position must be economically

appropriate to the reduction of ‘‘price

risk’’; and (3) eliminate the incidental

test and orderly trading requirement,

which Dodd-Frank removed from

section 4a of the CEA. The Commission

preliminarily believes that these

changes include non-discretionary

changes that are required by Congress’s

amendments to section 4a of the CEA.

The Commission also proposes to revise

the bona fide hedge definition to

conform to the CEA’s statutory

definition, which permits certain pass-

through offsets.

593

Second, the Commission would

maintain the distinction between

enumerated and non-enumerated bona

fide hedges but would (1) move the

currently-enumerated hedges in the

existing definition of ‘‘bona fide hedging

transactions and positions’’ currently

found in Commission regulation § 1.3 to

proposed Appendix A in part 150 that

will serve as examples of positions that

would comply with the proposed bona

fide hedging definition; and (2) propose

to make all existing enumerated bona

fide hedges as well as additional

enumerated hedges to be self-

effectuating for federal position limit

purposes, without the need for prior

Commission approval. In contrast, the

existing enumerated anticipatory bona

fide hedges are not currently self-

effectuating and require market

participants to apply to the Commission

for recognition.

Third, the Commission is proposing

guidance with respect to whether an

entity may measure risk on a net or

gross basis for purposes of determining

its bona fide hedge positions.

The Commission expects these

proposed modifications will provide

market participants with the ability to

hedge, and exchanges with the ability to

recognize hedges, in a manner that is

consistent with common commercial

hedging practices, reducing compliance

costs and increase the benefits

associated with sound risk management

practices.

i. Bona Fide Hedging Definition

(1) Elimination of Risk Management

Exemptions; Addition of the Proposed

Pass-Through Swap Exemption

First, the Commission has

preliminarily determined that

eliminating the risk-management

exemption in physical commodity

derivatives subject to federal speculative

position limits, unless the position

satisfies the pass-through/swap offset

requirements in section 4a(c)(2)(B) of

the CEA discussed further below, is

consistent with Congressional and

statutory intent, as evidenced by the

Dodd-Frank Act’s amendments to the

bona fide hedging definition in CEA

section 4a(c)(2).

594

Accordingly, once

the proposed federal limit levels go into

effect, market participants with

positions that do not otherwise satisfy

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Such pass-through swap counterparties are

typically swap dealers providing liquidity to bona

fide hedgers.

596

See paragraph (2)(i) of the proposed bona fide

hedging definition. Of course, if the pass-through

swap qualifies as an ‘‘economically appropriate

swap,’’ then the pass-through swap counterparty

would not need to rely on the proposed 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.

597

To the extent that the pass-through swap

counterparty is a swap dealer or major swap

participant, they 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.

598

See paragraph (2)(ii) of the proposed bona fide

hedging transactions or positions definition.

599

Proposed §150.2 generally would increase

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 would

maintain existing levels.

the proposed bona fide hedging

definition or qualify for an exemption

would no longer be able to rely on

recognition of such risk-reducing

techniques as bona fide hedges. Absent

other factors, market participants who

have, or have requested, a risk

management exemption under the

existing definition may resort to less

effective hedging strategies resulting in,

for example, increased costs for

liquidity providers due to increased

basis risk and/or decreased market

efficiency due to higher transaction (i.e.,

hedging) costs. Moreover, absent other

factors, by excluding risk management

positions from the bona fide hedge

definition (other than those positions

that would meet the pass-through/swap

offset requirement in the proposed bona

fide hedge definition, discussed further

below), the proposed definition may

affect the overall level of liquidity in the

market since dealers who approach or

exceed the federal position limit may

decide to pull back on providing

liquidity, including to bona fide

hedgers.

On the other hand, the Commission

believes that these potential costs could

be mitigated for several reasons. First,

the proposed bona fide hedging

definition, consistent with the Dodd-

Frank Act’s changes to CEA section

4a(c)(2), would permit 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’’)

595

opposite bona fide

hedging swap counterparties (the ‘‘bona

fide hedge counterparty’’), as long as: (1)

The pass-through swap counterparty

can demonstrate, upon request from the

Commission and/or from an exchange,

that the pass-through swap qualifies as

a bona fide hedge for the bona fide

hedge counterparty; and (2) the pass-

through swap counterparty enters into a

futures or option on a futures position

or a swap position, in each case in the

same physical commodity as the pass-

through swap to offset and reduce the

price risk attendant to the pass-through

swap.

596

Accordingly, a subset of risk

management exemption holders 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

counterparty.

The Commission preliminarily 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 create and maintain

records to demonstrate the bona fides of

the pass-through swap would cause the

swap counterparty to incur marginal

recordkeeping costs.

597

The proposed pass-through swap

provision, consistent with the Dodd-

Frank Act’s changes to CEA section

4a(c)(2), also would address 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 proposed definition)

seeks, at some later time, to offset that

swap position.

598

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 or

options on futures 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 limits using either new futures

or options on futures or swap positions

that reduce the risk of the original swap.

The Commission expects the pass-

through swap provision to facilitate

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 swap’’ for such risk

management purposes since swaps that

are not deemed to be ‘‘economically

equivalent’’ to a referenced contract

would not be subject to the

Commission’s proposed position limits

framework.

The Commission preliminarily

observes that market participants may

not need to rely on the proposed pass-

through swap provision to the extent

such parties employ swaps that qualify

as ‘‘economically equivalent swaps,’’

since such market participants may be

able to net such swaps against the

corresponding futures or options on

futures. As a result, the Commission

preliminarily anticipates that the

proposed pass-through swap provision

would benefit those bona fide hedgers

and pass-through swap counterparties

that use swaps that would not qualify as

economically equivalent under the

Commission’s proposal. To the extent

market participants use swaps that

would qualify as economically

equivalent swaps, or could shift their

trading strategies to use such swaps

without incurring additional costs, the

Commission preliminarily believes that

the elimination of the risk management

position would not necessarily result in

market participants incurring costs or

limiting their trading since they would

be able to net the positions in

economically equivalent swaps with

their futures and options on futures

positions, or with other economically

equivalent swaps.

Second, for the nine legacy

agricultural contracts, the proposal

would generally set federal non-spot

month limit levels higher than existing

non-spot limits, which may enable

additional dealer activity described

above.

599

The remaining 16 core

referenced futures contracts would be

subject to existing exchange-set limits or

accountability outside of the spot

month, which does not represent a

change from the status quo under

existing or proposed § 150.5. The

proposed higher levels with respect to

the nine legacy agricultural contracts

and the exchanges’ flexible

accountability regimes with respect to

the proposes new 16 core referenced

futures contract should mitigate at least

some potential costs related to the

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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 proposed definition would

merely move this requirement to the proposed

definition’s revised ‘‘economically appropriate test’’

requirement.

601

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 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).

Dodd-Frank added CEA section 4a(c)(2), which

copied the ‘‘economically appropriate test’’ from

the Commission’s definition in §1.3. See also 2013

Proposal, 78 FR at 75702, 75703.

prohibition on recognizing risk

management positions as bona fide

hedges.

Third, the proposal 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

Commission’s proposal would benefit

the public and strengthen market

integrity by improving market

transparency since certain dealers

would no longer be able to maintain the

grandfathered risk management

exemption while other dealer lack this

ability under the status quo. While the

Commission believes that the risk

management exemption may allow

dealers to more effectively provide

market making activities, which benefits

market liquidity and ultimately leads to

lower prices for end-users, as noted

above, the potential costs resulting from

removing the risk management

exemption may be mitigated by the

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 proposed spot month and

non-spot month levels, which generally

will be higher than the status quo,

together with the elimination of the risk

management exemptions that benefit

only certain dealers, might 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 proposed

framework may strengthen market

integrity by decreasing concentration

risk potentially posed by too few market

makers. However, the benefits to market

liquidity the Commission describes

above may be muted since this analysis

is predicated, in part, on the

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.

(2) Limiting ‘‘Risk’’ to ‘‘Price’’ Risk;

Elimination of the Incidental Test and

Orderly Trading Requirement

As discussed in the preamble, the

proposed bona fide hedging definition’s

‘‘economically appropriate test’’ would

clarify that only hedges that offset price

risks could be recognized as bona fide

hedging transactions or positions. The

Commission does not believe that this

clarification would impose any new

costs or benefits, as it is consistent with

both the existing bona fide hedging

definition

600

as well as the

Commission’s longstanding policy.

601

Nonetheless, the Commission realizes

that hedging occurs for more types of

risks than price (e.g., volumetric

hedging). Therefore, the Commission

recognizes that by expressly limiting the

bona fide hedge exemption to hedging

only price risk, certain market

participants may not be able to receive

a bona fide hedging recognition, and for

certain dealers, this may limit their

ability to provide liquidity to the market

because without being able to rely on

bona fide hedging status, their trading

activity would cause them to otherwise

exceed federal limits.

The Commission further would

implement Congress’s Dodd-Frank Act

amendments that eliminated the

statutory bona fide hedge definition’s

incidental test and orderly trading

requirement by proposing to make the

same changes to the Commission’s

regulations. As discussed in the

preamble, the Commission preliminarily

believes that these proposed 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 proposed

changes.

ii. Proposed Enumerated Bona Fide

Hedges

The Commission proposes

enumerated bona fide hedges in

Appendix A to part 150 of the

Commission’s regulations to provide a

list bona fide hedges that would

include: (i) 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

proposed enumerated bona fide hedges

in Appendix A would be ‘‘self-

effectuating’’ for purposes of federal

position limits levels, which are

expected to reduce delays and

compliance costs associated with

requesting an exemption.

Additionally, as part of the

Commission’s proposal, the exchanges

would have discretion to determine, for

purposes of their own exchange-granted

bona fide hedges, whether any of the

proposed enumerated bona fide hedges

in proposed Appendix A to part 150 of

the Commission’s regulations would be

permitted to be maintained during the

lesser of the last five days of trading or

the time period for the spot month in

such contract (the ‘‘five-day rule’’), and

the Commission’s proposal otherwise

would not require any of the

enumerated bona fide hedges to be

subject to the five-day rule for purposes

of federal position limits. Instead, the

Commission expects exchanges to make

their own determinations with respect

to exchange-set limits as to whether it

is appropriate to apply the five-day rule

for a particular bona fide hedge type and

commodity contract. The Commission

has preliminarily 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 this is the most opportune time to

hedge. On the other hand, the

Commission believes that price

convergence may be particularly

sensitive to potential market

manipulation or excessive speculation

during this period. Accordingly, the

Commission preliminarily believes that

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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.

603

Under proposed §150.3(b)(2) and (e) and

proposed §150.9(e)(5), and (g), the Commission

would have access to any information related to the

applicable exemption request.

604

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.

605

The proposed ‘‘spread transactions’’ definition

would list the most common types of spread

positions, including: Calendar spreads,

intercommodity spreads, quality differential

spreads, processing spreads (such as energy ‘‘crack’’

or soybean ‘‘crush’’ spreads), product or by-product

differential spreads, and futures-options spreads.

Proposed §150.3(b) also would permit market

participants to apply to the Commission for other

spread transactions.

606

As discussed under proposed §150.3, spread

exemptions identified in the proposed ‘‘spread

transaction’’ definition in proposed §150.1 would

be self-effectuating similar to the status quo and

would 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.

607

See supra Section IV.A.4.b.ii. (discussion of

the five-day rule).

the proposal to not impose the five-day

rule with respect to any of the

enumerated bona fide hedges for federal

purposes but instead rely on exchange’s

determination with respect to exchange-

granted exemptions would help to better

optimize these considerations. The

Commission notes a potential cost for

market integrity if exchanges fail to

implement a five-day rule in order to

encourage additional trading in order to

increase profit, which could harm price

convergence. However, the Commission

believes this concern is mitigated since

exchanges also 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 would fail to occur in

such contracts as they may generally

desire to hedge cash market prices with

futures contracts.

iii. Guidance for Measuring Risk on a

Gross or Net Basis

The Commission proposes guidance

in paragraph (a) of Appendix B to part

150 on whether positions may be

hedged on either a gross or net basis.

Under the proposed guidance, among

other things, a trader may measure risk

on a gross basis if it would be 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.

602

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 DCM

documents justifications for allowing

gross hedging and maintains any

relevant records in accordance with

proposed § 150.9(d).

603

However, the

Commission also recognizes that there

are myriad of ways in which

organizations are structured and engage

in commercial hedging practices,

including the use of multi-line business

strategies in certain industries that

would be subject to federal position

limits for the first time under this

proposal and for which net hedging

could impose significant costs or be

operationally unfeasible.

c. 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 all-

months limit set forth in § 150.2.’’

604

Proposed §§ 150.1 and 150.3 would

amend the existing spread position

exemption for federal limits by (i) listing

specific spread transactions that may be

granted; and (ii) other than for the listed

spread positions, which would be self-

effectuating, requiring a person to apply

for spread exemptions directly with the

Commission pursuant to proposed

§ 150.3.

605

In addition, the proposed

rule would permit spread exemptions

outside the same crop year and/or

during the spot month.

606

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 exchanges are able

to exempt spreads 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 not in the same crop

year or during the spot month may

potentially improve price discovery as

well as provide market participants with

the ability to use strategies involving

spread positions, which may reduce

hedging costs.

As in the intermarket wheat example

discussed below, the proposed spread

relief not limited to the same crop year

month 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, in this example,

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 so close to the

expiration of a futures contract, which

positions are normally tied to large

liquidity providers, may actually 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

preliminarily believes that these

concerns would be mitigated as

exchanges would 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 believed it

would harm its markets, require a

participant to reduce its positions, or

implement a five-day-rule for spread

exemptions, as discussed above.

607

Generally, the Commission

preliminarily finds that, by allowing

speculators to execute intermarket and

intramarket spreads as proposed,

speculators would be able to hold a

greater amount of open interest in

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608

The NYMEX Henry Hub Natural Gas (NG)

contract is the only natural gas contract included as

a core referenced futures contract under this

proposal.

609

See 2016 Reproposal, 81 FR at 96862, 96863.

610

See ICE Rule 6.20(c) and NYMEX Rule 559.F.

See, e.g., NASDAQ Futures Rule ch. v, section

13(a)(ii) and Nodal Exchange Rulebook Appendix C

(equivalent rules of NASDAQ and Nodal

exchanges).

611

See 2016 Reproposal, 81 FR at 96862, 96863.

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 proposed spread exemption:

•Reverse crush spread in soybeans

on the CBOT subject to an intermarket

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

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 intermarket 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 intermarket

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

intermarket 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.

d. Conditional Spot Month Exemption

Positions in Natural Gas

Proposed § 150.3(a)(4) would provide

a new federal conditional spot month

limit exemption position for cash-

settled natural gas contracts that would

permit traders to acquire positions up to

10,000 NYMEX Henry Hub Natural Gas

(NG) equivalent-size contracts (the

federal spot month limit in proposed

§ 150.2 for NYMEX Henry Hub Natural

Gas (NG) referenced contracts is

otherwise 2,000 contracts in the

aggregate across all one’s net positions)

per exchange that lists the relevant

natural gas cash-settled referenced

contracts, along with an additional

futures-adjusted 10,000 contracts of

cash-settled economically equivalent

swaps, as long as such person does not

also hold positions in the physically-

settled natural gas referenced

contract.

608

NYMEX, ICE, Nasdaq

Futures, and Nodal currently have rules

in place establishing a conditional spot

month limit exemption equivalent to up

to 5,000 contracts in NYMEX-equivalent

size. By proposing to include the

conditional exemption for purposes of

federal limits on natural gas contracts,

the Commission reduces the incentive

and ability for a market participant to

manipulate a large physically-settled

position to benefit a linked cash-settled

position.

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.

609

While a trader with a position in the

physical-delivery natural gas 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 proposal, as the trader

would have to do so as a condition of

the exchange-level exemption under

current exchange rules.

610

e. Financial Distress Exemption

Proposed § 150.3(a)(3) would provide

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 proposed 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 the

proposal would make it less likely that

positions will be prematurely or

needlessly liquidated. The Commission

has determined that costs related to

filing and recordkeeping are likely to be

minimal. 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.

611

The Commission, nevertheless, believes

that emergency or distressed market

situations that might trigger the need for

this exemption will be infrequent, and

that codifying this historical practice

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In the case of cotton, market participants

currently file the relevant portions of Form 304.

613

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.5.a.iv.

614

Under the status quo, market participants

must apply to the Commission for recognition of

certain enumerated anticipatory bona fide hedges.

The Commission’s proposal also would make these

enumerated anticipatory bona fide hedges self-

effectuating for the nine legacy agricultural

contracts.

615

The proposed ‘‘spread transaction’’ definition

would include a calendar spread, intercommodity

spread, quality differential spread, processing

spread (such as energy ‘‘crack’’ or soybean ‘‘crush’’

spreads), product or by-product differential spread,

or futures-option spread.

616

As discussed below, the proposal would also

eliminate the Form 204 and the equivalent portions

of the Form 304.

will add transparency to the

Commission’s oversight responsibilities.

f. Pre-Enactment and Transition Period

Swaps Exemption

Proposed § 150.3(a)(5) would also

provide 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 proposed § 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 would be

self-effectuating, and the Commission

preliminarily believes that proposed

§ 150.3(a)(5) would benefit both

individual market participants by

lessening the impact of the proposed

federal limits, and market liquidity in

general as liquidity providers initially

would not be forced to reduce or exit

their positions.

The proposal would benefit 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 the proposed

§ 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 would still be 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 will incur negligible recordkeeping

costs.

5. Process for the Commission or

Exchanges To Grant Exemptions and

Bona Fide Hedge Recognitions for

Purposes of Federal Limits (Proposed

§§ 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 limits, and existing § 150.3 sets

forth a list of spread exemptions a

person can rely on for purposes of

federal limits. However, 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,

although market participants are

required to file Form 204 monthly

reports

612

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

limits and also to the relevant exchanges

for purposes of exchange-set limits. The

Commission has preliminarily

determined that this dual application

process creates inefficiencies for market

participants.

Proposed §§ 150.3 and 150.9, taken

together, would make several changes to

the process of acquiring bona fide hedge

recognitions and spread exemptions for

federal position limits purposes.

Proposed §§ 150.3 and 150.9 would

maintain certain elements of the status

quo while also adopting certain changes

to facilitate the exemption process.

613

First, with respect to the proposed

enumerated bona fide hedges, proposed

§ 150.3 would maintain the status quo

by providing that those enumerated

bona fide hedges that currently are self-

effectuating for the nine legacy

agricultural contracts would remain

self-effectuating for the nine legacy

agricultural contracts for purposes of

federal position limits.

614

Similarly, the

enumerated bona fide hedges for the

proposed additional 16 contracts that

would be newly subject to federal

position limits (i.e., those contracts

other than the nine legacy agricultural

contracts) also would be self-

effectuating for purposes of federal

position limits.

Second, for recognition of any non-

enumerated bona fide hedge in

connection with any referenced

contract, market participants would be

required to apply either directly to the

Commission under proposed § 150.3 or

through an exchange that adheres to

certain requirements under proposed

§ 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 Commission’s

proposal does not represent a change to

the status quo in this respect for the

nine legacy agricultural contracts.

Third, proposed § 150.3 would

maintain the status quo by providing

that the most common spread

exemptions for the nine legacy

agricultural contracts would remain

self-effectuating. Similarly, these

common spread exemptions also would

be self-effectuating for the proposed

additional 16 contracts that would be

newly subject to federal position limits.

These common spread exemptions

would be listed in the proposed ‘‘spread

transaction’’ definition under proposed

§ 150.1.

615

Fourth, for any spread exemption not

listed in the proposed ‘‘spread

transaction’’ definition, market

participants would be required to apply

directly to the Commission under

proposed § 150.3. There would be no

exception for the nine legacy

agricultural products nor would market

participants be permitted to apply

through an exchange under proposed

§ 150.9 for these types of spread

exemptions.

616

The Commission anticipates that

most—if not all—market participants

would utilize the exchange-centric

process set forth in proposed § 150.9

with respect to applying for recognition

of non-enumerated bona fide hedges

rather than apply directly to the

Commission under proposed § 150.3

because market participants are likely

already familiar with the proposed

processes set forth in § 150.9, which is

intended to leverage the processes

currently in place at the exchanges for

addressing requests bona fide hedge

recognitions from exchange-set limits.

In the sections below, the Commission

will discuss the costs and benefits

related to both processes.

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For bona fide hedges and spread exemptions,

this information would 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 meets the applicable requirements for

a bona fide hedge or spread transaction; (iii) a

statement concerning the maximum size of all gross

positions in derivative contracts for which the

application is submitted; (iv) for bona fide hedges,

information regarding the applicant’s activity in the

cash markets and swaps markets for the commodity

underlying the position for which the application

is submitted; 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.

618

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

proposed additional 16 contracts that would be

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 would not need to apply to the

Commission in connection with any of the

proposed additional 16 contracts, the Commission’s

proposal would not impose additional costs or

benefits compared to the status quo.

619

As noted above, since market participants do

not need to apply to the Commission for bona fide

hedge recognition for any of the proposed

additional 16 contracts that would be newly subject

to federal position limits, the Commission’s

proposal would not result in any additional costs

or benefits to the extent such bona fide hedge

recognitions would be self-effectuating.

620

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, bona

fide hedgers must 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.

a. Process for Requesting Exemptions

and Bona Fide Hedge Recognitions

Directly From the Commission

(Proposed § 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

proposed approach. Existing §§ 1.47 and

1.48 require market participants seeking

recognition of non-enumerated bona

fide hedges and enumerated

anticipatory bona fide hedges,

respectively, for 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.

For those market participants that

would choose to apply directly to the

Commission for recognition of non-

enumerated bona fide hedges or spread

exemptions not included in the

proposed ‘‘spread transaction’’

definition, which in each case would

not be self-effectuating under the

proposal, proposed § 150.3 would

provide a process for the Commission to

review and approve requests. Under

proposed § 150.3, any person seeking

Commission recognition of these types

of bona fide hedges or a spread

exemptions (as opposed to applying to

using the exchange-centric process

under proposed § 150.9 described

below) would be 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.

617

i. 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 proposal, the Commission

would maintain the distinction between

enumerated bona fide hedges and non-

enumerated bona fide hedges under

proposed § 150.3: (1) Enumerated bona

fide hedges would continue to be self-

effectuating; (2) enumerated

anticipatory bona fide hedges would

become self-effectuating so market

participants would no longer need to

apply to the Commission; and (3) non-

enumerated bona fide hedges would

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) would be 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.

618

With respect to enumerated

anticipatory bona fide hedges for the

nine legacy contracts, for which market

participants currently are required to

apply to the Commission for recognition

for federal position limit purposes, the

Commission preliminarily anticipates

that the proposal would benefit market

participants by making such hedges self-

effectuating.

619

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.

620

Under existing § 1.48,

market participants could proceed with

their proposed bona fide hedges if the

Commission does not notify a market

participants otherwise within the

specific 10-day period. Because bona

fide hedgers could implement

enumerated anticipatory bona fide

hedges without waiting the requisite 10

days, they may be able to implement

their hedging strategy more efficiently

with reduced cost and risk. The

Commission acknowledges that making

such bona fide hedges easier 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

preliminarily 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 desire 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).

Proposed § 150.3 would similarly

require market participants seeking

recognition of a non-enumerated bona

fide hedge for any of the proposed 25

core referenced futures contracts to

apply to the Commission prior to

exceeding federal position limits, but

proposed § 150.3 would not prescribe a

certain time period by which a bona fide

hedger must apply or by which the

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As discussed below, for spread exemptions

not identified in the proposed ‘‘spread transaction’’

definition in proposed §150.3, market participants

would be required to apply directly to the

Commission under proposed §150.3 and would not

be able to apply under proposed §150.9.

622

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.

623

The Commission discusses the costs and

benefits related to the proposed process for non-

enumerated bona fide hedge recognitions with

respect to the nine legacy agricultural products in

the above section.

624

The Commission’s Paperwork Reduction Act

analysis identifies some of these information

collection burdens in greater specificity. See supra

Section IV.A.4.c. (discussing in greater detail the

cost and benefits related to spread exemptions).

Commission must respond. The

Commission preliminarily anticipates

that the proposal would benefit 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, in which case the Commission

believes hedging-related costs would

decrease. However, the Commission

believes that there could also be

circumstances in which the overall

process 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 proposal 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 proposed § 150.3 not requiring the

Commission to respond within a certain

amount of time. The Commission

believes this concern is mitigated to the

extent market participants utilize the

proposed § 150.3 process that would

permit 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 preliminarily believes this

‘‘five-business day retroactive

exemption’’ would benefit bona fide

hedgers compared to existing §§ 1.47

and 1.48, which requires Commission

prior approval, since hedgers that would

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 would

also leverage, 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

of 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

preliminarily believes this concern is

partially mitigated since proposed

§ 150.3 would require 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.

ii. Spread Exemptions and Non-

Enumerated Bona Fide Hedges

Proposed § 150.3 would impose a new

requirement for market participants to

(1) apply either directly to the

Commission pursuant to proposed

§ 150.3 or to an exchange pursuant to

proposed § 150.9 for any non-

enumerated bona fide hedge; and (2) to

apply directly to the Commission

pursuant to proposed § 150.3 for any

spread exemptions not identified in the

proposed ‘‘spread transaction’’

definition for any of the proposed 25

core referenced futures contracts.

621

As

noted above, common spread

exemptions (i.e., those identified in the

proposed definition of ‘‘spread

transaction’’ in proposed § 150.1) would

remain self-effectuating for the nine

legacy agricultural products and also

would be self-effectuating for the 16

proposed core referenced futures

contracts.

622

Unlike non-enumerated

bona fide hedges, for which market

participants could apply directly to the

Commission under proposed § 150.3 or

through an exchange under proposed

§ 150.9, for spread exemptions not

identified in the proposed ‘‘spread

transaction’’ definition, market

participants would be required to apply

directly to the Commission under

proposed § 150.3.

As noted above, proposed § 150.3 also

would maintain the status quo and

continue to require any non-enumerated

bona fide hedge in one of the nine

legacy agricultural products to receive

prior approval, and similarly would

require prior approval for such non-

enumerated bona fide hedges for the

proposed additional 16 contracts that

would be newly subject to federal

position limits.

623

The Commission

anticipates that there will be no change

to the status quo baseline with respect

to the most common spread exemptions

since these exemptions would be self-

effecting for purposes of federal position

limits.

To the extent market participants

would be required to obtain prior

approval for a non-enumerated bona

fide hedge or spread exemption for any

of the additional 16 contracts that

would be newly subject to federal

position limits, the Commission

recognizes that proposed § 150.3 would

impose costs on market participants

who will now be required to spend time

and resources submitting applications to

the Commission (for certain spread

exemptions) or to either the

Commission or an exchange (for non-

enumerated bona fide hedges) for prior

approval for federal position limit

purposes.

624

Further, compared to the

status quo in which the proposed new

16 contracts are not subject to federal

position limits, the proposed process

could increase uncertainty since market

participants would be required to seek

prior approval and wait up to 10 days.

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. However, the Commission

preliminarily believes that proposed

§ 150.3’s framework would be 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 limits for those market

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The Commission preliminarily anticipates that

the proposed 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 proposed §150.3 would provide 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 and spread exemptions when

provided the option under proposed §150.9, the

Commission believes that most market participants

would incur the costs and benefits discussed

thereunder.

626

As noted above, market participants seeking

spread exemptions not listed in the proposed

‘‘spread transaction’’ definition in proposed §150.1

would be required to apply directly with the

Commission under proposed §150.3 and would not

be permitted to apply under proposed §150.9. The

Commission preliminarily recognizes that these

types of spread exemptions are difficult to analyze

compared to either the spread exemptions

identified in proposed §150.1 or bona fide hedges

in general. Accordingly, the Commission

preliminarily has determined to require market

participants to apply directly to the Commission.

Further, compared to the spread exemptions

identified in proposed §150.1, the Commission

anticipates relatively few requests, and so does not

believe the proposed application requirement will

impose a large aggregate burden across market

participants.

627

As discussed below, with respect to exchange-

set limits under proposed §150.5 or the exchange

process for federal limits under proposed §150.9,

market participants would be required to annually

reapply to exchanges.

participants.

625

The Commission also

preliminarily believes that this analysis

also would apply to the nine legacy

agricultural contracts for spread

exemptions that are not listed in the

proposed ‘‘spread transaction’’

definition and therefore also would

require 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

preliminarily has determined that most

spread transactions would be self-

effectuating (especially for the nine

legacy agricultural contracts based on

the Commission’s experience), the

Commission believes that the proposal

would impose only small costs with

respect to spread exemptions for both

the nine legacy agricultural contracts as

well as the proposed additional 16

contracts that would be newly subject to

federal position limits.

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 would

be subject to the proposed federal

position limits and the new proposed

exemption processes for the first time.

Accordingly, the Commission

preliminarily recognizes that permitting

enumerated bona fide hedges and

spread recognitions identified in the

proposed ‘‘spread transaction’’

definition for these additional 16

contracts might not provide the

purported benefits, or could result in

increased costs, compared to the

Commission’s experience with the nine

legacy agricultural products.

The Commission also preliminarily

believes that the proposal will benefit

market participants by providing market

participants 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

proposed § 150.9 below) for the

additional 16 contracts that would be

newly subject to federal position limits

that would be more efficient given the

market participants unique facts,

circumstances, and experience.

626

If a

market participant chooses to apply

through an exchange for federal position

limits pursuant to proposed § 150.9, the

market participant would also receive

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 proposed streamlined process

§ 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 preliminarily

believes that this analysis also would

apply with respect to non-enumerated

bona fide hedges for the nine legacy

agricultural contracts.

iii. Exemption-Related Recordkeeping

Proposed § 150.3(d) would require

persons who avail themselves of any of

the foregoing exemptions to maintain

complete books and records relating to

the subject position, and to make such

records available to the Commission

upon request under proposed § 150.3(e).

These requirements would 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 proposed § 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.

iv. Exemption Renewals

Consistent with existing §§ 1.47 and

1.48, with respect to any Commission-

recognized bona fide hedge or

Commission-granted spread exemption

pursuant to proposed § 150.3, the

Commission would not require a market

participant to reapply annually for bona

fide hedges.

627

The Commission

preliminarily believes that this will

reduce burdens on market participants

but also recognizes that not requiring

market participants to annually reapply

ostensibly could harm market integrity

since the Commission would not

directly receive updated information

with respect to particular bona fide

hedgers or exemption holders prior to

the trader excessing the applicable

federal limits.

However, the Commission

preliminarily believes that any potential

harm would be mitigated since the

Commission, unlike exchanges, has

access to aggregate market data,

including positions held by individual

market participants. Further, proposed

§ 150.3 would require a market

participant to submit a new application

if any information changes, or upon the

Commission’s request. On the other

hand, market participants would benefit

by not being required to annually

submit new applications, which the

Commission preliminarily believes will

reduce compliance costs.

v. Exemptions for Financial Distress and

Conditional Natural Gas Positions

Proposed § 150.3 would codify the

Commission’s existing informal practice

with respect to exemptions for financial

distress and 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 would also apply. However,

to the extent the Commission currently

allows exemptions related to financial

distress, the Commission preliminarily

has determined that the costs and

benefits with respect to the related

application process already may be

recognized by market participants.

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As noted above, the Commission preliminarily

anticipates that most, if not all, market participants

will use proposed §150.9, rather than proposed

§150.3, where permitted.

629

See infra Section II.H.3. (discussion of

proposed changes to part 19 eliminating Form 204

and portions of Form 304).

b. Process for Market Participants To

Apply to an Exchange for Non-

Enumerated Bona Fide Hedge

Recognitions for Purposes of Federal

Limits (Proposed § 150.9) and Related

Changes to Part 19 of the Commission’s

Regulations

Proposed § 150.9 would provide 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 would not be self-

effectuating for purposes of federal

position limits. Under this process, a

person would be allowed to exceed the

federal limit levels following an

exchange’s review and approval of an

application for a bona fide hedge

recognition or spread exemption,

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

proposed § 150.9 for purposes of federal

position limits would be required to

request relief both directly from the

Commission under proposed § 150.3, as

discussed above, and also apply to the

relevant exchange, consistent with

existing practices.

628

i. Proposed § 150.9—Establishment of

General Exchange Process

Pursuant to proposed § 150.9,

exchanges that elect to process these

applications would be 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 to determine, and

the Commission to verify, that the facts

and circumstances support a non-

enumerated bona fide hedge

recognition. The Commission initially

believes that exchanges’ existing

practices generally are consistent with

the requirements of proposed § 150.9,

and therefore exchanges would only

incur marginal costs, if any, to modify

their existing practices to comply.

Similarly, the Commission preliminarily

anticipates that establishing uniform,

standardized exemption processes

across exchanges would benefit 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 proposed § 150.9

would be required to expend resources

to establish a process consistent with

the Commission’s proposal. However, to

the extent exchanges have similar

procedures, such benefits and costs may

already have been realized by market

participants and exchanges.

The Commission preliminarily

believes that there are significant

benefits to the proposed § 150.9 process

that would be largely realized by market

participants. The Commission

preliminarily has determined that the

use of a single application to process

both exchange and federal position

limits will benefit market participants

and exchanges by simplifying and

streamlining the process. For applicants

seeking recognition of a non-

enumerated bona fide hedge, proposed

§ 150.9 should reduce duplicative

efforts because applicants would be

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.

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 proposal, the

Commission would no longer

distinguish among different types of

enumerated bona fide hedges (e.g.,

anticipatory versus non-anticipatory

enumerated bona fide hedges), and

therefore, would not require exchanges

to have separate processes for

enumerated anticipatory positions

under proposed § 150.9 for the nine

legacy agricultural contracts. The

Commission’s proposal would also

eliminate the requirement for bona fide

hedgers to file Form 204 or Form 304,

as applicable, with respect to any bona

fide hedge, whether enumerated or non-

enumerated.

629

The Commission

preliminarily 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.

On the other hand, the Commission

recognizes proposed § 150.9 would

impose new costs related to non-

enumerated bona fide hedges for the

additional 16 contracts that would be

newly subject to federal position limits.

Under the proposal, market participants

would now be required to submit

applications to receive prior approval

for federal position limits purposes.

However, since the Commission

preliminarily 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 proposed § 150.9 would impose

any additional incremental costs on

market participants beyond those

already incurred under exchanges’

existing processes. Accordingly, the

Commission preliminarily believes that

any costs already may have been

realized by market participants.

Further, the Commission

preliminarily believes that employing a

concurrent process with exchanges to

oversee the non-enumerated bona fide

hedges that would not be self-

effectuating for federal position limits

purposes would benefit 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.

ii. Proposed § 150.9—Exchange

Expertise, Market Integrity, and

Commission Oversight

For non-enumerated bona fide hedge

recognitions that would require the

Commission’s prior approval, the

proposal would provide 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 any other conduct that

would disrupt markets are deterred and

prevented. Proposed § 150.9 would

build on existing exchange processes,

which the Commission preliminarily

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For a discussion on the history of exemptions,

see 2013 Proposal, 78 FR at 75703–75706.

believes would strengthen the ability of

the Commission and exchanges to

monitor markets and trading strategies

while reducing burdens on both the

exchanges, which would administer the

process, and market participants, who

would 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;

accordingly, exchanges should be able

to readily identify bona fide hedges.

630

For these reasons, the Commission

has preliminarily determined that

allowing market participants to apply

through an exchange under proposed

§ 150.9, rather than directly to the

Commission as required under existing

§ 1.47, is likely to be more efficient than

if the Commission itself initially had to

review and approve all applications.

The Commission preliminarily

considers the increased efficiency in

processing applications under proposed

§ 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 would be 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 these real-time notices. 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.

On the other hand, to the extent

exchanges would 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 preliminarily recognizes that this

aspect of the proposal could potentially

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 preliminarily

believes that these hypothetical costs

are unfounded since under proposed

§ 150.9 the Commission would review

the applications submitted by market

participants for bona fide hedge

recognitions and spread exemptions; the

Commission emphasizes that proposed

§ 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. Rather, proposed

§ 150.9(e) and (f) would 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 would provide to the

applicant, and the Commission would

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 proposed § 150.3,

proposed § 150.9 would require the

Commission to make its determination

within two business days).

On the other hand, the Commission

also recognizes that there could be

potential costs to bona fide hedgers if

under the proposal they are forced to

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 would be

subject to federal limits for the first time

under this release and currently are not

required to receive the Commission’s

prior approval. As a result, the

Commission preliminarily 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. However, the

Commission believes this concern is

mitigated since proposed § 150.9,

similar to proposed § 150.3, would

permit 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. In turn, the

Commission would only have two

business days (as opposed to the default

10 business days) to complete its review

for federal purposes. The Commission

preliminarily believes this ‘‘five-

business day retroactive exemption’’

would benefit bona fide hedgers

compared to existing § 1.47, which

requires Commission prior approval,

since hedgers that would 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 would

also leverage, 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 since the Commission

would be able to require a market

participant to exit its position if the

exchange or the Commission does not

approve of the retroactive request, and

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 preliminarily believes this

concern is partially mitigated since

proposed § 150.9 would require 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 approval.

While existing § 1.47 does not require

market participants to annually reapply

for certain bona fide hedges, proposed

§ 150.9 would require market

participants to reapply at least annually

with exchanges for purposes of federal

position limits. 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

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See infra Section IV.A.6. (discussing proposed

§150.5).

632

In contrast, the Commission, unlike

exchanges, has access to aggregate market data,

including positions held by individual market

participants, and so the Commission has

preliminarily determined that requiring market

participants to apply annually under proposed

§150.3, absent any changes to their application,

would not benefit market integrity to the same

extent.

633

Moreover, consistent with existing §1.31, the

Commission expects that these records would 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.

634

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

proposed §150.9(d) may impose additional

recordkeeping obligations on such exchanges. The

Commission estimates that each exchange electing

to administer the proposed process would likely

incur a de minimis cost annually to retain records

for each proposed process compared to the status

quo. See generally Section IV.B. (discussing the

Commission’s PRA determinations).

635

See supra Section III.F.6. (discussion of

commodity indices); see supra Section

IV.A.4.b.i.(1). (discussion of elimination of the risk

management exemption).

636

See supra Section IV.A.4.b.i.(1). (discussion of

the pass-through swap exemption).

with respect to exchange-set limits and

that market participants are familiar

with exchanges’ exemption processes,

which should reduce related costs.

631

Further, the Commission preliminarily

believes that market integrity would be

strengthened by ensuring that exchanges

receive updated trader information that

may be relevant to the exchange’s

oversight.

632

However, to the extent any

of these benefits and costs reflect

current market practice, they already

may have been realized by exchanges

and market participants.

In addition, the proposed exchange-

to-Commission monthly report in

proposed § 150.5(a)(4) would further

detail 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. The

Commission believes that such reports

would provide greater transparency by

facilitating the tracking of these

positions by the Commission and would

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

proposed §§ 150.9(e)(1) and 150.5(a)(4),

respectively, would provide the

Commission with enhanced

surveillance tools on both a ‘‘real-time’’

and a monthly basis to ensure

compliance with the requirements of

this proposal. The Commission

anticipates additional costs for

exchanges required to create and submit

monthly reports because the proposed

rules would require exchanges to

compile the necessary information in

the form and manner required by the

Commission. 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

iii. Proposed 150.9(d)—Recordkeeping

Proposed § 150.9(d) would require

exchanges to maintain complete books

and records of all activities relating to

the processing and disposition of any

applications, including applicants’

submission materials, exchange notes,

and determination documents.

633

The

Commission preliminarily believes that

this will benefit market integrity and

Commission oversight by ensuring that

pertinent records will be readily

accessible, as needed by the

Commission. However, the Commission

acknowledges that such requirements

would 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.

634

iv. Proposed § 150.9 (g)—Commission

Revocation of Previously-Approved

Applications

The Commission preliminarily

acknowledges that there may be costs to

market participants if the Commission

revokes the hedge recognition for

federal purposes under proposed

§ 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 proposed

§ 150.9(f)(2).

However, the potential cost to market

participants would be mitigated under

proposed § 150.9(f) since the

Commission would provide 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.

v. Proposed § 150.9—Commodity

Indexes and Risk Management

Exemptions

Proposed § 150.9(b) would prohibit

exchanges from recognizing as a bona

fide hedge with respect to commodity

index contracts. The Commission

recognizes that this proposed

prohibition could alter trading strategies

that currently use commodity index

contracts as part of an entity’s risk

management program. Although there

likely would be 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.

635

In

addition, the Commission further posits

that this cost may be reduced or

mitigated by the proposed increased in

federal position limit levels set forth in

proposed § 150.2 or by the

implementation of the pass-through

swap provision of the proposed bona

fide hedge definition.

636

c. Request for Comment

(48) The Commission requests

comment on its considerations of the

benefits and costs of proposed § 150.3

and § 150.9. Are there additional

benefits or costs that the Commission

should consider? Has the Commission

misidentified any benefits or costs?

Commenters are encouraged to include

both quantitative and qualitative

assessments of these benefits and costs,

as well as data or other information to

support such assessments.

(49) The Commission requests

comment on whether a Commission-

administered process, such as the

process in proposed § 150.3, would

promote more consistent and efficient

decision-making. Commenters are

encouraged to include both quantitative

and qualitative assessments, as well as

data or other information to support

such assessments.

(50) The Commission recognizes there

exist alternatives to proposed § 150.9.

These include such alternatives as: (1)

Not permitting exchanges to administer

any process to recognize bona fide

hedging transactions or positions or

grant exempt spread positions for

purposes of federal limits; or (2)

maintaining the status quo. The

Commission requests comment on

whether an alternative to what is

proposed would result in a superior

cost-benefit profile, with support for any

such position.

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CFTC Form 204: Statement of Cash Positions

in Grains, Soybeans, Soybean Oil, and Soybean

Meal, U.S. Commodity Futures Trading

Commission website, available at https://

www.cftc.gov/sites/default/files/idc/groups/public/

@forms/documents/file/cftcform204.pdf (existing

Form 204).

638

CFTC Form 304: Statement of Cash Positions

in Cotton, U.S. Commodity Futures Trading

Commission website, available at http://

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 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.

639

17 CFR 19.01.

640

See supra Section II.G.3. (discussion of

proposed §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. While the Commission would recognize

spread exemptions based on exchanges’ application

processes that satisfy the requirements in proposed

§150.9, for purposes of federal 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.

641

The Commission has noted that certain

commodity markets will be 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 would be subject to

federal limits for the first time under this proposal.

642

See proposed §19.00(b).

643

17 CFR 19.00(a)(3).

644

See 17 CFR 150.2. Existing §150.5 addresses

only contracts not subject to federal 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 proposed

§150.5 deals solely with exchange-set position

limits and exemptions therefrom, whereas proposed

§150.9 deals solely with the process for purposes

of federal limits.

645

See 17 CFR 150.4.

646

See 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.

d. 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

637

and

Form 304,

638

known collectively as the

‘‘series ‘04’’ reports, to monitor for

compliance with federal position limits.

Under existing part 19, market

participants that hold bona fide hedging

positions in excess of federal limits for

the nine legacy agricultural contracts

currently subject to federal limits under

existing § 150.2 must justify such

overages by filing the applicable report

(Form 304 for cotton and Form 204 for

the other eight legacy commodities)

each month.

639

The Commission uses

these reports to determine whether a

trader has sufficient cash positions that

justify futures and options on futures

positions above the speculative limits.

As discussed above, with respect to

bona fide hedging positions, the

Commission is proposing a streamlined

approach under proposed § 150.9 to

cash-market reporting that reduces

duplication between the Commission

and the exchanges. Generally, the

Commission is proposing amendments

to part 19 and related provisions in part

15 that would: (i) Eliminate Form 204;

and (ii) amend the Form 304, in each

case to remove any cash-market

reporting requirements. Under this

proposal, the Commission would

instead rely on cash-market reporting

submitted directly to the exchanges,

pursuant to proposed §§ 150.5 and

150.9,

640

or request cash-market

information through a special call.

The proposed 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.

The proposed elimination of Form 204

and the cash-market reporting segments

of the Form 304 would eliminate a

reporting burden and the costs

associated thereto for market

participants. Instead, market

participants would 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.

641

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

would be newly subject to federal

position limits.

Further, the proposed changes would

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

proposes that all persons exceeding the

proposed limits set forth in proposed

§ 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.

642

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 a series ’04 report.

643

The

Commission preliminarily 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.

6. Exchange-Set Position Limits

(Proposed § 150.5)

a. Introduction

Existing § 150.5 addresses exchange-

set position limits on contracts not

subject to federal 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, proposed § 150.5(a) and (b)

would (1) expand existing § 150.5’s

framework to also cover contracts

subject to federal limits under § 150.2;

(2) simplify the existing standards that

DCMs apply when establishing

exchange-set position limits; and (3)

provide non-exclusive acceptable

practices for compliance with those

standards.

644

Additionally, proposed

§ 150.5(d) would require DCMs to adopt

aggregation rules that conform to

existing § 150.4.

645

b. Physical Commodity Derivative

Contracts Subject to Federal Position

Limits Under § 150.5 (Proposed

§ 150.5(a))

i. Exchange-Set Position Limits and

Related Exemption Process

For contracts subject to federal limits

under § 150.2, proposed §150.5(a)(1)

would require 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.

646

Proposed § 150.5(a)(2) would

authorize DCMs to grant exemptions

from such limits and is generally

consistent with current industry

practice. The Commission has

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647

This proposed 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 proposed 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).

648

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.

649

See supra Section IV.A.5.b.ii. (discussion of

monthly exchange-to-Commission report in

proposed §150.5(a)).

650

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).

651

Proposed §150.1 would define ‘‘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.

652

The Commission is particularly concerned

about protecting the spot month in physical-

delivery futures from corners and squeezes.

preliminarily determined that codifying

such practice would establish

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 limits framework.

647

In

particular, proposed § 150.5(a)(2) would

protect market integrity and prevent

exchange-granted exemptions from

undermining the federal limits

framework by requiring DCMs to either

conform their exemptions to the type

the Commission would grant under

proposed §§ 150.3 or 150.9, or to cap the

exemption at the applicable federal

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 proposal 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,

proposed § 150.5(a)(2) would mitigate

these risks by requiring that exemptions

that do not conform to the types the

Commission may grant under proposed

§ 150.3 could not exceed proposed

§ 150.2’s applicable federal limit unless

the Commission has first approved such

exemption. Moreover, before a DCM

could permit a new exemption category,

proposed § 150.5(e) would require 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.’’

Proposed § 150.5(a)(2) additionally

would require 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.

648

This familiarity should

reduce related costs, and the proposal

should strengthen market integrity by

ensuring that DCMs receive updated

information related to a particular

exemption.

Proposed § 150.5(a)(2) also would

require a DCM to provide the

Commission with certain monthly

reports regarding the disposition of any

exemption 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

proposed § 150.3 or an exchange under

proposed § 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 preliminarily has

determined that it would assist with its

oversight functions and therefore benefit

market integrity. The Commission

discusses this proposed requirement in

greater detail in its discussion of

proposed § 150.9.

649

Further, while existing § 150.5(d) does

not explicitly address whether traders

should request an exemption prior to

taking on its position, proposed

§ 150.5(a)(2), in contrast, would

explicitly authorize (but 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.

650

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.

ii. Pre-Existing Positions

Proposed § 150.5(a)(3) would require

DCMs to impose exchange-set position

limits on ‘‘pre-existing positions,’’ other

than pre-enactment swaps and

transition period swaps, during the spot

month, but not outside of the spot

month, as long as any position outside

of the spot month: (i) Was acquired in

good faith consistent with the ‘‘pre-

existing position’’ definition in

proposed § 150.1;

651

and (ii) would be

attributed to the person if the position

increases after the limit’s effective date.

The Commission believes that this

approach would benefit 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.

652

However,

the Commission acknowledges that, on

its face, including a ‘‘good-faith’’

requirement in the proposed ‘‘pre-

existing position’’ definition could

hypothetically diminish market

integrity since determining whether a

trader has acted in ‘‘good faith’’ is

inherently subjective and could result in

disparate treatment of traders by a

particular exchange or across exchanges

seeking a competitive advantage with

one another. For example, with respect

to a particular large or influential

exchange member, an exchange could,

in order to maintain the business

relationship, be incentivized to be more

liberal with its conclusion that the

member obtained its position in ‘‘good

faith,’’ or could be more liberal in

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653

Proposed §150.5(b)(1) would require 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-percent metric for

physically-settled contracts. Proposed §150.5(b)

would eliminate this distinction. The Commission

intends the proposed §150.5(b)(1) standard to be

substantively the same as the existing §150.5

standard for cash-settled contracts, except that

under proposed §150.5(b)(1), the standard would

apply to physically-settled contracts.

654

Since the existing §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-percent EDS parameter under the existing

framework.

655

As noted above, in establishing the specific

metric, existing §150.5 distinguishes between

‘‘levels at designation’’ and ‘‘adjustments to

[subsequent] levels.’’ Proposed §150.5(b)(2) would

eliminate this distinction and apply the qualitative

standard for all non-spot month position limit and

accountability levels.

656

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 proposed

§150.5(b)(2) would require DCMs to establish

position limits or accountability, the proposal does

not represent a change to the status quo baseline

requirements.

657

Specifically, the acceptable practices proposed

in Appendix F to part 150 would provide that

DCMs would be deemed to comply with the

proposed §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 percent of open interest in that contract

for the most recent calendar year up to 50,000

contracts, with a marginal increase of 2.5 percent

of open interest thereafter.

These proposed 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 proposed acceptable practice

parameters would create a uniform standard of

5,000 contracts for all physical commodities. The

Commission expects that the 5,000 contract

acceptable practice, for example, would be a useful

rule of thumb 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.

The spot month limit level under item (2) above

general in order to gain a competitive

advantage. The Commission believes the

risk of any such unscrupulous trader or

exchange is mitigated since exchanges

would still be subject to Commission

oversight and to DCM Core Principles 4

(‘‘prevention of market disruption’’) and

12 (‘‘protection of markets and market

participants’’), among others, and since

proposed § 150.5(a)(3) also would

require that exchanges must attribute

the position to the trader if its position

increases after the position limit’s

effective date.

c. Physical Commodity Derivative

Contracts Not Yet Subject to Federal

Position Limits Under § 150.2 (Proposed

§ 150.5(b))

i. 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 percent of EDS.

In contrast, the proposed standard for

setting spot month limit levels for

physical commodity derivative

contracts not subject to federal position

limits set forth in proposed § 150.5(b)(1)

would not distinguish between cash-

settled and physically-settled contracts,

and instead would require DCMs to

apply the existing § 150.5 qualitative

standard to both.

653

The Commission

also proposes a related, non-exclusive

acceptable practice that would deem

exchange-set position limits for both

cash-settled and physically-settled

contracts subject to proposed § 150.5(b)

to be in compliance if the limits are no

higher than 25 percent of the spot-

month EDS.

Applying the existing § 150.5

qualitative standard and non-exclusive

acceptable practice in proposed

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 percent

EDS parameter set forth in existing

§ 150.5. While the Commission

recognizes that the existing 25 percent

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 proposed § 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.

654

However, the

Commission believes these potential

risks would be mitigated since (i)

proposed § 150.5(e) would require

DCMs to submit proposed position

limits to the Commission, which would

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) proposed

§ 150.5(b)(3) would require 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 Commission

approves otherwise. 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.

ii. Non-Spot Month Limits/

Accountability Levels and Related

Acceptable Practices

Existing § 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.

655

In contrast, for

contracts outside the spot-month,

proposed § 150.5(b)(2) would require

DCMs to establish either position limits

or position accountability levels that

satisfy the same proposed qualitative

standard discussed above for spot-

month contracts.

656

For DCMs that

establish position limits, the

Commission proposes related acceptable

practices that would provide non-

exclusive parameters that are generally

consistent with existing § 150.5’s

parameters for non-spot month

contracts.

657

For DCMs that establish

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would be a new parameter for non-spot month

contracts.

658

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.

659

The Commission adopted final aggregation

rules in 2016 under existing §150.4, which applies

to contracts subject to federal 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

percent 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 §150.4(b) sets forth several

permissible exemptions from aggregation.

position accountability, § 150.1’s

proposed definition of ‘‘position

accountability’’ would provide that a

trader must reduce its position upon a

DCM’s request, which is generally

consistent with existing § 150.5’s

framework, but would not distinguish

between trading volume or contract

type, like existing § 150.5. While DCMs

would be provided the ability to decide

whether to use limit levels or

accountability levels for any such

contract, under either approach, the

DCM 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.’’

Proposed § 150.5(b)(2) would benefit

market efficiency by authorizing DCMs

to determine whether position limits or

accountability would be 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

proposed § 150.5 qualitative standard to

contracts outside the spot-month would

benefit 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

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 proposed

§ 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 have increased, the

exchange would be able to raise its

limits to facilitate liquidity consistent

with an orderly market. However, the

Commission reiterates that the specific

parameters in the proposed acceptable

practices are merely non-exclusive

examples, and an exchange would be

able to establish higher (or lower) limits,

provided the exchange submits its

proposed limits to the Commission

under proposed § 150.5(e) and explains

how its proposed limits satisfy the

proposed qualitative standard and are

otherwise consistent with all applicable

requirements.

The Commission, however, recognizes

that proposed § 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, proposed

§ 150.5(e) would require DCMs to

submit any proposed position

accountability rules to the Commission

for review, and the Commission would

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 would be mitigated since (i)

proposed § 150.5(e) would require

DCMs to submit proposed position

accountability (or limits) to the

Commission, which would 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) proposed § 150.5(b)(3) would require

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

Commission approves otherwise.

iii. Exchange-Set Limits on

Economically Equivalent Swaps

As discussed above, swaps that would

qualify as ‘‘economically equivalent

swaps’’ would become subject to the

federal position limits framework.

However, the Commission is proposing

to allow exchanges to delay

compliance—including enforcing

position limits—with respect to

exchange-set limits on economically

equivalent swaps. The proposed

delayed compliance would benefit the

swaps markets by permitting SEFs and

DCMs that list economically equivalent

swaps more time to establish

surveillance and compliance systems; as

noted in the preamble, such exchanges

currently lack sufficient data regarding

individual market participants’ open

swap positions, which means that

requiring exchanges to establish

oversight over participants’ positions

currently would impose substantial

costs and would be currently

impracticable.

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,

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.

658

However, the Commission

believes that these concerns would be

mitigated to the extent the Commission

would still oversee and enforce federal

position limits even if the exchanges

would not be required to do so.

d. Position Aggregation

Proposed § 150.5(d) would require all

DCMs that list physical commodity

derivative contracts to apply aggregation

rules that conform to existing § 150.4,

regardless of whether the contract is

subject to federal position limits under

§ 150.2.

659

The Commission believes

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660

The discussion here covers the proposed

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

proposed amendments that are not specifically

addressed, the Commission has not identified any

effects.

661

See supra Section III.F.2. (discussion of the

necessity findings as to the 25 core referenced

futures contacts).

662

See supra Section III.F. (discussion of the

necessity finding).

proposed § 150.5(d) would benefit

market integrity in several ways. First,

a harmonized approach to aggregation

across exchanges that list physical

commodity derivative contracts would

prevent confusion that could result from

divergent standards between federal

limits under § 150.2 and exchange-set

limits under § 150.5(b). As a result,

proposed § 150.5(d) would provide

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

limits framework. Third, since, for

contracts subject to federal limits,

proposed § 150.5(a) would require

DCMs to set position limits at a level not

higher than that set by the Commission

under proposed § 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 proposed §§ 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 exchange-

based rules, proposed § 150.5(d) could

impose costs with respect to market

participants trading referenced contracts

for the proposed new 16 commodities

that would become subject to federal

position limits for the first time. Market

participants would be required to

update their trading and compliance

systems to ensure they comply with the

new aggregation rules.

e. Request for Comment

(51) The Commission requests

comment on all aspects of the

Commission’s cost-benefit discussion of

the proposal.

7. Section 15(a) Factors

660

a. 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. The Commission

preliminarily believes that the proposed

position limits regime would operate to

deter excessive speculation and

manipulation, such as squeezes and

corners, which might impair the

contract’s price discovery function and

liquidity for hedgers—and ultimately,

would protect the integrity and utility of

the commodity markets for the benefit

of both producers and consumers.

At this time, the Commission is

proposing to include the proposed 25

core referenced futures contracts within

the proposed federal position limit

framework. In selecting the proposed 25

core referenced contracts, the

Commission, in accordance with its

necessity analysis, considered the

effects that these contracts have on the

underlying commodity, especially with

respect to price discovery; the fact that

they require physical delivery of the

underlying commodity; and, in some

cases, the potentially acute economic

burdens on interstate commerce that

could arise from excessive speculation

in these contracts causing sudden or

unreasonable fluctuations or

unwarranted changes in the price of the

commodities underlying these

contracts.

661

Of particular importance are the

proposed position limits during the spot

month period because the Commission

preliminarily believes that deterring and

preventing manipulative behaviors,

such as corners and squeezes, is more

urgent during this period. The proposed

spot month position limits are designed,

among other things, to deter and prevent

corners and squeezes as well as promote

a more orderly liquidation process at

expiration. 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, 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, diminishing

that trader’s incentive to manipulate the

cash settlement price. As the

Commission has determined in the

preamble, the Commission has

concluded that excessive speculation or

manipulation may cause sudden or

unreasonable fluctuations or

unwarranted changes in the price of the

commodities underlying these

contracts.

662

In this way, the

Commission preliminarily believes that

the proposed limits would benefit

market participants that seek to hedge

the spot price of a commodity at

expiration, and benefit consumers who

would be 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 preliminarily

believes that the proposed Commission

and exchange-centric processes for

granting exemptions from federal limits,

including non-enumerated bona fide

hedging recognitions, would help

ensure the hedging utility of the futures

market for commercial end-users. First,

the proposal to allow 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,

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

futures and cash market for that

commodity. Third, allowing for

exchange-granted spread exemptions

could improve liquidity in all months

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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

would review each application for bona

fide hedge recognitions or spread

exemptions (other than those bona fide

hedges and spread exemptions that

would be self-effectuating under the

Commission’s proposal), but the

proposal would allow the Commission

to also leverage the exchange’s

knowledge and experience of its own

markets and market participants

discussed above.

The Commission also understands

that there are costs to market

participants and the public to setting the

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

proposed 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 would 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 not

be available 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 proposed 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.

b. 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 proposed expansion of

the federal position limits regime to 25

core referenced futures contracts (e.g.,

the existing nine legacy agricultural

contracts and the 16 proposed new

contracts) enhances the buffer against

excessive speculation historically

afforded to the nine legacy agricultural

contracts exclusively, improving the

financial integrity of those markets.

Moreover, the proposed limits in

proposed § 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 futures market if

they 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—

such as futures contracts or swaps that

are similar to or correlated with (but not

otherwise deemed to be a referenced

contract), forward contracts, or trade

options—in order to meet their demand

for speculative instruments. These

traders may also decide to not trade

beyond the federal speculative position

limit. Trading in substitute instruments

may be less effective than trading in

referenced contracts and, thus, may

raise the transaction costs for such

traders. In these circumstances, 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

might be harmed.

The Commission preliminarily

believes that focusing on the proposed

25 core referenced futures contracts,

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

derivatives markets that it regulates,

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 (of course, only to the

extent that the Commission would be

able to make the requisite necessity

finding for such contracts).

Finally, the Commission preliminarily

believes that the proposal to cease

recognizing certain risk management

positions as bona fide hedges, coupled

with the proposed increased non-spot

month limit levels for 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 to an

inconsistent patchwork of staff-granted

exemptions. Accommodating risk

management activity by additional

entities with higher 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.

c. Price Discovery

Market manipulation or excessive

speculation may result in artificial

prices. Position limits may help to

prevent the price discovery function of

the underlying commodity markets from

being disrupted. Also, in the absence of

position limits, market participants

might elect to trade less as a result of a

perception that the market pricing is

unfair as a consequence of what they

perceive is the exercise of too much

market power by a larger speculator.

Reduced liquidity 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 Commission

proposes to set 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 preliminarily

believes that the bona fide hedging

recognition and exemption processes

will foster liquidity and potentially

improve price discovery by making it

easier for market participants to have

their bona fide hedging recognitions and

spread exemptions granted.

In addition, position limits serve as a

prophylactic measure that reduces

market volatility due to a participant

otherwise engaging in large trades that

induce price impacts that interrupt

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

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663

44 U.S.C. 3501 et seq.

664

Currently, OMB control number 3038–0013 is

titled ‘‘Aggregation of Positions.’’ The Commission

proposes to rename the OMB control number

‘‘Position Limits’’ to better reflect the nature of the

information collections covered by that OMB

control number.

665

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 proposed position

limits framework. As a result, the collections of

information discussed herein under this OMB

control number 3038–0093 will not be consolidated

under OMB control number 3038–0013.

666

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. Final Rule. 78 FR

69178 at 69200 (Nov. 18, 2013) (transferring

§§16.02, 17.01, 18.04, and 18.05 to OMB Control

Number 3038–0103).

at expiration and damaging price

discovery.

d. Sound Risk Management Practices

Proposed exemptions for bona fide

hedges help to ensure that market

participants with positions that are

hedging legitimate commercial needs

are recognized as hedgers under the

Commission’s speculative position

limits regime. This promotes sound risk

management practices. In addition, the

Commission has crafted the proposed

rules to ensure sufficient market

liquidity for bona fide hedgers to the

maximum extent practicable, e.g.,

through the proposals to: (1) Create 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)

maintain the status quo with respect to

existing bona fide hedge recognitions

and spread exemptions that would

remain self-effectuating and make

additional bona fide hedges self-

effectuating (i.e., certain anticipatory

hedging); (3) provide additional ability

for a streamlined process where market

participants can make a single

submission to an exchange in which the

exchange and Commission would 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) to allow 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 would be

promoted by the proposal 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, the proposal to increase

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.

e. Other Public Interest

The Commission has not identified

any additional public interest

considerations related to the costs and

benefits of this 2020 Proposal.

f. Request for Comment

(52) The Commission requests

comment on all aspects of the

Commission’s discussion of the 15(a)

factors for this proposal.

B. Paperwork Reduction Act

1. Overview

Certain provisions of the proposed

rule on position limits for derivatives

would amend or impose new

‘‘collection of information’’

requirements as that term is defined

under the Paperwork Reduction Act

(‘‘PRA’’).

663

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

proposed rule would modify 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;

664

and (iii) OMB control number 3038–

0093 (Provisions Common to Registered

Entities), which covers Commission

regulations in part 40.

Certain provisions of the proposed

rule would impose new collection of

information requirements under the

PRA. As a result, the Commission is

proposing to revise OMB control

numbers 3038–0009, 3038–0013, and

3038–0093 and is submitting this

proposal to OMB for review 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 is proposing 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.

665

First, the

Commission would transfer 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 would be

renamed as ‘‘Position Limits.’’ This

renaming change is non-substantive and

would allow 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.

One collection would make it easier

for market participants to know where

to find the relevant position limits PRA

burdens. If the proposed rule is

finalized, the remaining collections of

information under OMB control number

3038–0009 would cover reports by

various entities under parts 15, 17, and

21

666

of the Commission’s regulations,

while OMB control number 3038–0013

would hold collections of information

arising from parts 19 and 150.

As discussed in section 3 below, this

non-substantive reorganization would

result 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 proposed part

19 that would be transferred to OMB

control number 3038–0013 would be

less than the existing burden estimate

under OMB control number 3038–0009

since the Commission’s proposal would

amend 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 would see a net reduction

of collections of information and burden

hours under revised part 19.

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As noted above, the Commission would

accomplish this by eliminating existing From 204

and Parts I and II of Form 304. Additionally,

proposed changes to part 17, covered by OMB

control number 3038–0009, would make

conforming amendments to remove certain

duplicative provisions and associated information

collections related to aggregation of positions,

which are in current §150.4. These conforming

changes would not impact the burden estimates of

OMB control number 3038–0009.

668

As noted above, the proposed amendments to

part 19 affect certain provisions of part 15 and

§17.00. Based on the proposed elimination of Form

204 and Parts I and II of Form 304, the Commission

proposes 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 proposed

conforming amendments to part 15 would not

impact the existing burden estimates.

669

The Commission is proposing a 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

preliminarily has determined that this would not

result in any change to its existing PRA estimates

with respect to the collections of information

related to Part III of Form 304.

670

See ICR Reference No: 201906–3038–008.

671

3,105 Series ’04 submissions × 0.5 hours per

submission = 1,553 aggregate burden hours for all

submissions. The Commission notes that it has

preliminarily 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.

672

55 Form 304 reports + 50 Form 205 reports =

105 reportable traders.

673

2,860 Form 304s + 600 Form 204s = 3,460 total

annual Series ’04 reports.

674

3,460 Series ’04 reports × 0.5 hours per report

= 1,730 annual aggregate burden hours.

675

These revised estimates result in an increased

estimate under existing part 19 of 355 Series ’04

Continued

3. Collections of Information

The proposed rule would amend

existing regulations, and create new

regulations, concerning speculative

position limits. Among other

amendments, the Commission’s

proposed rule would include: (1) New

and amended federal spot month limits

for the proposed 25 physical commodity

derivatives; (2) amended federal non-

spot limits for the nine legacy

agricultural commodities contracts

currently subject to 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 exchange-

administered process for recognizing

non-enumerated bona fide hedge

positions from federal limit

requirements; and (6) amendments to

part 19 and related provisions that

would eliminate certain reporting

obligations that require traders to

submit a Form 204 and Parts I and II of

Form 304.

Specifically, this proposal would

amend parts 15, 17, 19, 40, and 150 of

the Commission’s regulations to

implement the proposed federal

position limits framework. The proposal

would also transfer an amended version

of the ‘‘bona fide hedging transactions

or positions’’ definition from existing

§ 1.3 to proposed §150.1, and remove

§§ 1.47, 1.48, and 140.97. The

Commission’s proposal would revise

existing collections of information

covered by OMB control number 3038–

0009 by amending part 19, along with

conforming changes to part 15, in order

to narrow the scope of who is required

to report under part 19.

667

Furthermore, the proposed rule’s

amendments to part 150 would 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 designated contract

markets (‘‘DCMs’’) and swap execution

facilities (‘‘SEFs’’) (collectively,

‘‘exchanges’’). Finally, the proposed rule

would also amend part 40 to incorporate

a new reporting obligation into the

definition of ‘‘terms and conditions’’ in

§ 40.1(j) and result in a revised existing

collection of information covered by

OMB control number 3038–0093.

a. 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 commodity contracts

currently subject to federal 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 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 Commission’s proposal would

amend part 19 to remove these reporting

obligations associated with Form 204

and Parts I and II of Form 304. As

discussed under proposed § 150.9

below, the Commission preliminarily

has determined that it may eliminate

these forms and still receive adequate

information to carry out its market and

financial surveillance programs since its

proposed amendments to §§ 150.5 and

150.9 would also enable the

Commission to obtain the necessary

information from the exchanges. To

effect these changes to traders’ reporting

obligations, the Commission would

eliminate (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 the Forms 204 and 304.

668

The Commission would maintain 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.

669

The

Commission would also maintain 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

670

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.

671

However,

based on more current and recent 2019

submission data, the Commission is

revising its existing estimates slightly

higher for the Series ’04 reports under

part 19:

•Form 204: 50 monthly reports, for

an annual total of 600 reports (50

monthly reports × 12 months = 600 total

annual reports) and 300 annual burden

hours (600 annual Form 204s submitted

× 0.5 hours per report = 300 aggregate

annual burden hours for all Form 204s).

•Form 304: 55 weekly reports, for an

annual total of 2,860 reports (55 weekly

reports × 52 weeks = 2,860 total annual

reports) and 1,430 annual burden hours

(2,860 annual Form 304s submitted ×

0.5 hours per report = 1,430 aggregate

annual burden hours for all Form 304s).

Accordingly, based on the above

revised estimates the Commission

would revise its estimate of the current

collections of information under

existing part 19 to reflect that

approximately 105 reportable traders

672

file a total of 3,460 responses

annually

673

resulting in an aggregate

annual burden of 1,730 hours.

674 675

The

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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).

676

50 monthly Form 204 reports × 12 months =

600 total annual reports.

677

600 Form 204 reports × 0.5 burden hours per

report = 300 aggregate annual burden hours.

678

Since the Commission’s proposal would

eliminate Parts I and II of Form 304, proposed Form

304 would only refer to existing Part III of that form.

679

55 weekly Form 304 reports × 52 weeks =

2,860 total annual Form 304 reports.

680

2,860 Form 304 reports × 0.5 burden hours per

report = 1,430 aggregate annual burden hours.

681

4 possible reportable traders × 5 hours each =

20 aggregate annual burden hours.

682

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.

683

Currently, in order to determine whether a

futures, an option on a futures, or a swap position

qualifies 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

revised definition would be accompanied by an

expanded list of enumerated bona fide hedges that

would appear in acceptable practices, rather than in

the definition. The Commission additionally

proposes to include an additional enumerated bona

fide hedge for anticipatory merchandizing, which

would be self-effectuating like the other enumerated

hedges. Under the existing framework, anticipatory

merchandizing is considered to be a non-

enumerated bona fide hedge. The Commission

preliminarily does not expect this change to have

any PRA impacts.

Commission’s proposal would reduce

the current OMB control number 3038–

0009 by these revised burden estimates

under part 19 as they would be

transferred to OMB control number

3038–0013.

With respect to the overall collections

of information that would be transferred

to OMB control number 3038–0013

based on the Commission’s revised part

19 estimate, the Commission estimates

that the Commission’s proposal would

reduce the collections of information in

part 19 by 600 reports

676

and by 300

annual aggregate burden hours since the

Commission’s proposal would eliminate

Form 204, as discussed above.

677

The

Commission does not expect a change in

the number of reportable traders that

would be required to file Part III of Form

304.

678

Thus, the Commission continues

to expect approximately 55 weekly

Form 304 reports, for an annual total of

2,860 reports

679

for an aggregate total of

1,430 burden hours, which information

collection burdens would be transferred

to OMB control number 3038–0013.

680

In addition, the Commission would

maintain its authority to issue special

calls for information to any person

claiming an exemption from speculative

federal position limits. While the

position limits framework will expand

to traders in the proposed twenty-five

commodities (an increase from the

existing nine legacy agricultural

products), the position limit levels

themselves will also be higher. The

higher position limit levels would 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

and smaller universe of traders who

would likely exceed the position limits,

the Commission estimates that it is

likely to issue a special call for

information to 4 reportable traders. The

Commission preliminarily estimates

that it would take approximately 5

hours to respond to a special call. The

Commission therefore estimates that

industry would incur a total of 20

aggregate annual burden hours.

681

b. OMB Control Number 3038–0013—

Aggregation of Positions (To Be

Renamed ‘‘Position Limits’’)

i. Introduction; Bona Fide Hedge

Recognition and Exemption Process

The Commission is proposing to

amend 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.

Proposed §§ 150.3 and 150.9 would

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 proposed § 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. Proposed § 150.3 also would

include 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.

682

The Commission’s proposal would

maintain the existing process where

market participants may apply directly

to the Commission, although the

Commission expects market participants

to predominantly rely on the exchange-

administered process to obtain

recognition of their non-enumerated

bona fide hedging positions for

purposes of federal position limit

requirements. Enumerated bona fide

hedge positions would remain self-

effectuating, which means that market

participants would not need to apply to

the Commission for purposes of federal

position limits, although market

participants would still need to apply to

an exchange for recognition of bona fide

hedge positions for purposes of

exchange-set position limits. The

Commission forms this expectation on

the fact that all the contracts that will

now be 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 is

being proposed under § 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.

As previously discussed, the proposal

would move the ‘‘bona fide hedge

transaction or position’’ definition to

proposed § 150.1, and amend the

definition to, among other things,

remove the distinction between

different types of enumerated bona fide

hedge positions so that anticipatory

enumerated bona fide hedges would be

self-effectuating like other non-

anticipatory enumerated bona fide

hedges. The proposal would maintain

the distinction between enumerated and

non-enumerated bona fide hedges, and

market participants would be required

to apply for recognition of non-

enumerated bona fide hedge positions

either directly from the Commission

pursuant to proposed § 150.3 or

indirectly through an exchange-centric

process under § 150.9.

683

The

Commission does not preliminarily

believe that this amendment will have

any PRA impacts since it is maintaining

the status quo in which most

enumerated bona fide hedges are self-

effectuating while requiring traders to

apply to the Commission for recognition

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684

In 2018, the DCMs submitted deliverable

supply estimates for all the commodities that would

be subject to federal position limits. Thus, the

Commission expects that the exchanges would be

able to leverage these recent estimates to minimize

the burden of the initial submission under the

Commission’s proposal.

685

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.

686

Proposed §150.3(b) would include (1)

recognitions of bona fide hedges under proposed

§150.3(b); (2) spread exemptions under proposed

§150.3(b); (3) financial distress positions a person

could request from the Commission under §140.99;

and (4) exemptions for certain natural gas positions

held during the spot month. Proposed §150.3(b)

would also exempt pre-enactment and transition

period swaps. The enumerated bona fide hedge

recognitions and spread exemptions identified in

the proposed ‘‘spread transaction’’ definition in

proposed §150.1 would be self-effectuating.

687

Proposed §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 proposed changes to

§§150.3(f) and 150.3(g) do not impact the current

estimates for these OMB control numbers. Also, the

proposal reminds persons of the relief provisions in

§140.99, covered by OMB control number 3038–

0049, which does not impact the burden estimates.

688

The requirement would include all details of

related cash, forward, futures, options, and swap

positions and transactions, including anticipated

requirements, production and royalties, contracts

for services, cash commodity products and by-

Continued

of non-enumerated bona fide hedge

positions.

ii. § 150.2 Speculative Limits

Under proposed § 150.2(f), upon

request from the Commission, DCMs

listing a core referenced futures contract

would be required to supply to the

Commission deliverable supply

estimates for each core referenced

futures contract listed at that DCM.

DCMs would only be required to submit

estimates if requested to do so by the

Commission on an as-needed basis.

When submitting estimates, DCMs

would be 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 limits would be a new reporting

obligation for DCMs. The Commission

estimates that six DCMs would be

required to submit initial deliverable

supply estimates. The Commission

estimates that it would 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 would result in one initial

submission for each of the proposed

twenty-five core referenced futures

contracts.

684

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.

685

Accordingly, the

proposed changes to § 150.2(f) would

result in an initial, one-time increase to

the current burden estimates of OMB

control number 3038–0013 by an

increase of 25 submissions across six

respondent DCMs for the initial number

of submissions for the twenty-five core

referenced futures contracts and an

initial, one-time burden of 500 hours.

iii. § 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 proposed § 150.3.

Proposed § 150.3 would specify the

circumstances in which a trader could

exceed federal position limits.

686

With

respect to non-enumerated bona fide

hedge recognitions and spread

exemptions not identified in the

proposed ‘‘spread transaction’’

definition in proposed § 150.1, proposed

§ 150.3(b) would provide a process for

market participants to request such 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 would be self-effectuating

and would not require a market

participant to submit a request).

Proposed § 150.3(b), (d), and (e) set forth

exemption-related reporting and

recordkeeping requirements that impact

the current burden estimates in OMB

control number 3038–0013.

687

The

proposed collection of information is

necessary for the Commission to

determine whether to recognize a

trader’s position as a bona fide hedge

exempted from position limit

requirements.

Proposed § 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

proposed § 150.3 would be new for

market participants seeking spread

exemptions (which are currently self-

effectuating), the proposed 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 would request

recognition of a non-enumerated bona

fide hedge, and those traders that do

would likely prefer the exchange-

administered process in proposed

§ 150.9 (discussed further below) rather

than apply directly to the Commission

under proposed § 150.3(b). Similarly,

the Commission estimates that very few

or no traders would submit a request for

a spread exemption since the

Commission preliminarily has

determined that the most common

spread exemptions are included in the

proposed ‘‘spread transaction’’

definition and therefore would be self-

effectuating and would not need

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 position

that poses a novel or complex question

under the Commission’s rules.

Particularly when the exchanges have

not recognized that type of practice as

a non-enumerated bona fide hedge

previously, the Commission expects

market participants to seek more

regulatory clarity under proposed

§ 150.3(b). In the event a trader submits

such request under proposed § 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.

Proposed § 150.3(d) establishes

recordkeeping requirements for persons

who claim any exemptions or relief

under proposed § 150.3. Proposed

§ 150.3(d) should help to ensure that if

any person claims any exemption

permitted under proposed § 150.3 such

exemption holder can demonstrate

compliance with the applicable

requirements as follows:

First, under proposed § 150.3(d)(1),

any person claiming an exemption

would be required to keep and maintain

complete books and records concerning

certain details.

688

Proposed § 150.3(d)(1)

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products, cross-commodity hedges, and a record of

bona fide hedging swap counterparties.

689

Proposed §150.3(e) would refer to commodity

derivative contracts, whereas current §150.3(b)

refers to futures and options. The proposed change

would result in the inclusion of swaps.

690

The special call authority under part 19 and

the proposed special call authority discussed under

§150.3 would be similar in nature; however, part

19 would apply to special calls regarding bona fide

hedge recognitions and related underlying cash

market positions while the special calls under

proposed §150.3 would apply to the other

exemptions under proposed §150.3.

691

2 respondents subject to special calls under

existing §150.3 + 18 additional respondents under

proposed §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.

692

20 special calls × 10 burden hours per call =

200 total burden hours.

693

Proposed §150.5 addresses exchange-set

position limits and exemptions therefrom, whereas

proposed §150.9 addresses federal limits and an

exchange-administered process for purposes of

federal 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.

would establish recordkeeping

requirements for any person relying on

an exemption granted directly from the

Commission. The Commission estimates

that very few or no traders would claim

an exemption directly from the

Commission. In the event a trader

requests an exemption, the Commission

estimates that the trader would create

one record per exemption per year for

a total of one annual record for all

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

one aggregate annual burden hour for all

traders.

Second, under proposed § 150.3(d)(2),

a pass-through swap counterparty, as

defined by proposed § 150.1, that relies

on a 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 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 demand. Proposed § 150.3(d)(2)

would create a new recordkeeping

obligation for certain persons relying on

the proposed pass-through swap

representations, and the Commission

estimates that 425 traders would be

requested to maintain the required

records. The Commission estimates that

each trader would maintain one record

per year for a total of 425 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 one annual burden hour for

each trader and 425 aggregate annual

burden hours for all traders.

The Commission proposes to move

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

proposed § 150.3(e), with some

modifications to include swaps.

689

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. 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 1 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.

690

The Commission estimates that

proposed § 150.3(e) would impose

information collection burdens related

to special calls by the Commission on

approximately 18 additional

respondents, for an estimated 20 special

calls per year.

691

The Commission

estimates that these 20 market

participants would 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 would 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.

692

The Commission notes that it is also

maintaining its special call authority for

reporting requirements under proposed

part 19 discussed above.

iv. § 150.5 Exchange Set Limits and

Exemptions

Amendments to § 150.5 would 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

limits (§ 150.5(a)), physical commodity

derivatives not subject to federal limits

(§ 150.5(b)), and excluded commodity

contracts (§ 150.5(c)).

693

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. If the

proposal is adopted, the Commission

expects that the exchanges would

accordingly update their rulebooks, both

to conform to proposed new

requirements and to incorporate the

additional contracts that will be subject

to federal position limits into their

process for setting exchange-level 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 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. Under proposed

§ 150.5(a)(2), exchanges that wish to

grant exemptions from exchange-set

limits on commodity derivative

contracts subject to federal limits would

have to require traders to file an

application to show a request for a bona

fide hedge recognition or exemption

conforms to a type that may be granted

under proposed § 150.3(a)(1)–(4).

Exchanges would have to 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 would be

given the discretion to adopt rules

allowing traders to file applications

within five business days after a trader

took on such position. Proposed

§ 150.5(a)(2) would also provide that

exchanges must require that the trader

reapply for the exemption at least

annually. Proposed § 150.5(a)(4) would

require 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

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694

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 all-

months-combined, as applicable; (K) Any size

limitations or conditions established for a spread

exemption or other exemption; and (L) For bona

fide hedging transactions or positions, 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.

695

To increase efficiency and reduce duplicative

efforts, the proposed rule would permit an

exchange to have a single process in place that

would allow 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 proposed

§150.5(a) discussed in this section for exemptions

from exchange-set limits will include the burdens

under the federal limit exemption process for non-

enumerated bona fide hedges under proposed

§150.9 discussed below.

696

6 exchanges × 12 months = 72 total monthly

reports per year.

697

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.

698

18 estimated annual submissions × 10 burden

hours per submission = 180 aggregate annual

burden hours.

recognition or exemption, or the

rejection of any application.

694

These proposed 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 would use the

information to confirm that exemptions

are granted and renewed in accordance

with the types of exemptions that may

be granted under proposed

§ 150.3(a)(1)–(4).

The Commission estimates under

proposed § 150.5(a) that 425 traders

would submit applications to claim

spread exemptions and bona fide hedge

recognitions from exchange-set position

limits on commodity derivatives

contracts subject to federal limits set

forth in § 150.2. The Commission

estimates that each trader on average

would submit one application to an

exchange each year for a total of 425

applications for all respondents. The

Commission further estimates that it

will take 2 hours to complete and file

each application for a total of 2 annual

burden hours for each trader and 850

aggregate burden hours for all traders.

695

The Commission estimates under

proposed § 150.5(a)(4) that six

exchanges would provide monthly

reports for a total of 72 monthly reports

for all exchanges.

696

The Commission

further estimates that it will take 5

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.

697

Proposed § 150.5(b) would require

exchanges, for physical commodity

derivatives that are not subject to federal

limits to set limits during the spot

month and to set either limits or

accountability outside of the spot

month. Under proposed § 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

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) is intended to help ensure

that position limits established on one

exchange would 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,

proposed § 150.5(b)(3) would be

consistent with the Commission’s

proposal to generally apply equivalent

federal limits to linked contracts,

including linked contracts listed on

multiple exchanges.

The Commission estimates that under

proposed § 150.5(b)(3), six exchanges

would make submissions to

demonstrate to the Commission how the

non-comparable levels comply with the

standards set forth in proposed

§ 150.5(b)(1) and (2). The Commission

estimates that each exchange on average

would make 3 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.

698

Proposed § 150.5(b)(4) would permit

exchanges to grant exemptions from any

exchange limit established for physical

commodity contracts not subject to

federal limits. To grant such

exemptions, exchanges must require

traders to file an application to show

whether the requested exemption from

exchange-set limits would be 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 proposed collection of

information is necessary to confirm that

any exemptions granted from exchange

limits on physical commodity contracts

not subject to federal limits do not pose

a threat of market manipulation or

congestion, and maintains orderly

execution of transactions. The

Commission estimates that 200 traders

would submit one application each year

and that each application would take

approximately two hours to complete,

for an aggregate total of 400 burden

hours per year for all traders.

Proposed § 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 proposed § 150.5(a), (b), (c),

or Appendix F to part 150, would

qualify as a ‘‘rule’’ and must be

submitted to the Commission pursuant

to part 40 of the Commission’s

regulations. Proposed § 150.5(e) further

provides that exchanges would be

required to review regularly any

position limit levels established under

proposed § 150.5 to ensure the level

continues to comply with the

requirements of those sections. The

Commission estimates under proposed

§ 150.5(e) that six exchanges would

submit revised rulebooks to satisfy their

compliance obligations under part 40.

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6 initial applications × 30 burden hours = 180

initial aggregate burden hours.

700

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 both

exchange-set position limits and federal position

limits. The information would be used by the

exchange to determine, and the Commission to

review and verify, whether the facts and

circumstances demonstrate it is appropriate to

recognize a position as a non-enumerated bona fide

hedging transaction or position.

701

As discussed above, the process and estimated

burdens under proposed §150.9 would not apply to

§150.5(b) because proposed § 150.5(b) applies to

those physical commodity contracts that are not

subject to federal limits (as opposed to proposed

§150.5(a), which applies to those contracts subject

to federal limits). As a result, a trader that would

use the process established under §150.5(b) for

exchange-set limits would not need to apply under

proposed §150.9 since the traders would not need

a bona fide hedge recognition or an exemption from

federal position limits.

702

As discussed in connection with proposed

§150.5(a) above, the Commission estimates that

each trader on average would make one application

each year for a total of 425 applications across all

exchanges. The Commission further estimates that,

for proposed §§150.5(a) and 150.9(a), taken

together, it will take two hours to complete and file

each application for a total of two annual burden

hours for each trader and 850 aggregate annual

burden hours for all traders. (425 annual

applications × 2 burden hours per application = 850

aggregate annual burden hours). The Commission

preliminarily anticipates that compared to proposed

§150.5(a), fewer traders will apply under proposed

§150.9 since proposed § 150.9 applies only to non-

enumerated bona fide hedge recognitions for federal

purposes. In comparison, while proposed §150.5

would encompass these same applications for non-

enumerated bona fide hedge recognitions (but for

the purpose of exchange-set limits), proposed

§150.5(a) also would include enumerated bona fide

hedge applications along with spread exemption

requests. The Commission’s estimate of 850

aggregate annual burden hours encompasses all

such requests from all traders. However, for the

sake of clarity, the Commission preliminarily

anticipates that 6 exchanges each would receive one

application per year for a non-enumerated bona fide

hedge under proposed §150.9 (for a total of six

applications across all exchanges); as noted, this

burden is included in the Commission’s estimate of

425 annual applications in connection with its

estimate under proposed §150.5(a).

The Commission estimates that each

exchange on average would make 1

initial revision of its rulebook to reflect

the new position limit framework for a

total of 6 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.

699

This proposed collection of

information is necessary to ensure that

the exchanges’ rulebooks reflect the

most up to date rules and requirements

in compliance with the proposed

position limits framework. The

information would be used to confirm

that exchanges are complying with their

requirements to regularly review any

position limit levels established under

proposed § 150.5.

v. § 150.9 Exchange Process for Bona

Fide Hedge Recognitions From Federal

Limits

Proposed § 150.9 would establish a

new streamlined process in which a

trader could apply through an exchange

to request a non-enumerated bona fide

hedging recognition from federal

position limits. As part of the process,

proposed § 150.9 would create 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

would submit to the exchange and

which the exchange would

subsequently provide 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 proposed § 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 the

proposed rule will be less burdensome

because the exchanges may leverage

their existing policies and procedures to

comply with the proposed rule. The

Commission estimates that six

exchanges would elect to process

applications for non-enumerated bona

fide hedge recognitions that would

satisfy the federal position limit

requirements under proposed § 150.9,

and would 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.

Proposed § 150.9(c) would require a

trader to submit an application with

sufficient information to enable the

exchange to determine whether it

should recognize a position as a bona

fide hedge for purposes of federal

position limits. Each applicant would

need to reapply for its non-enumerated

bona fide hedge recognition at least on

an annual basis by updating its original

application. The Commission expects

that traders would benefit from the

exchange-administered framework

established under proposed § 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 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.

700

Accordingly, the estimated burden for

traders requesting non-enumerated bona

fide hedge recognitions from exchange-

set limits under § 150.5(a) would

subsume the burden estimates in

connection with proposed § 150.9 for

requesting non-enumerated bona fide

hedge recognition’s from federal limits

since the Commission preliminarily

believes exchanges would combine the

two processes (i.e., any trader who

applies through an exchange under

proposed § 150.9 for a non-enumerated

bona fide hedge for federal position

limits purposes also would be deemed

to be applying at the same time under

proposed § 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

preliminarily anticipates that 6

exchanges each would receive only one

application for a non-enumerated bona

fide hedge recognition under proposed

§ 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 proposed § 150.5(a).

701

Specifically, as discussed above in

connection with proposed § 150.5(a),

the Commission estimates under

proposed §§ 150.5(a) and 150.9(a) that

425 traders would submit applications

to claim exemptions and/or bona fide

hedge recognitions for contracts subject

to federal position limits as set forth in

§ 150.2.

702

Proposed § 150.9(d) would require

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

proposed § 150.9(g), the Commission

may, in its discretion, at any time,

review the designated contract market’s

records retained pursuant to proposed

§ 150.9(d). The proposed recordkeeping

requirement is necessary for the

Commission to review the exchanges’

processes, retention of records, and

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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 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.

704

Proposed §150.9(g)(1) provides the

Commission’s authority to, at its discretion, and at

any time, review the exchange’s processes,

retention of records, and compliance with

requirements established and implemented under

this section. Under proposed §150.9(g)(2), if the

Commission determines additional information is

required to conduct its review, pursuant to

proposed §150.9(g)(1), then it would notify the

exchange and the relevant market participant of any

issues identified and provide them with ten

business days to provide supplemental information.

705

2 exchanges per year subject to a Commission

inspection × 4 hours per inspection request = 8

aggregate annual burden hours for all exchanges.

706

12 notices for all exchanges × 0.5 hours per

notice = six (6) total burden hours across all

exchanges.

707

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 hour per

response, for a total of 42 burden hours for all

respondents.

compliance with requirements

established and implemented under this

section.

Proposed § 150.9(d) would create a

new recordkeeping obligation consistent

with the standards in existing § 1.31.

703

The Commission estimates that six

exchanges would each create one record

in connection with proposed § 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

proposed 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.

Proposed § 150.9(f) would allow the

Commission to inspect such books and

records.

704

In the event the Commission

exercises its authority to inspect such

books and records, it estimates that the

Commission would make an inspection

to two exchanges per year and each

exchange would incur four hours to

make its books and records available to

the Commission for review for a total of

8 aggregate annual burden hours for the

two estimated respondent exchanges.

705

Under proposed § 150.9(e), an

exchange would need to provide an

applicant and the Commission with

notice of any approved application of an

exchange’s determination to recognize

bona fide hedges and grant spread

exemptions with respect to its own

position limits for purposes of

exceeding the federal position limits.

The proposed notification requirement

is necessary to inform the Commission

of the details of the type of bona fide

hedge recognitions or spread

exemptions being granted. The

information would be 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

proposed § 150.9(e), 6 exchanges would

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

would make 2 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.

706

c. OMB Control Number 3038–0093—

Provisions Common to Registered

Entities

1. § 150.9(a)

Under proposed § 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 have rules, adopted

pursuant to the rule approval process in

§ 40.5 of the Commission’s regulations,

establishing processes consistent with

the provisions of proposed § 150.9. The

proposed 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 would be 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.

707

If the proposed rule is

adopted, the Commission estimates that

six exchanges would make one initial

§ 40.5 rule filings per year for a total of

six one-time initial submissions for all

exchanges. The Commission further

estimates that the exchanges would

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.

2. Request for Comments on Collection

The Commission invites the public

and other Federal agencies to comment

on any aspect of the proposed

information collection requirements

discussed above. Pursuant to 44 U.S.C.

3506(c)(2)(B), the Commission solicits

comments in order to (i) evaluate

whether the proposed collections of

information are necessary for the proper

performance of the functions of the

Commission, including whether the

information will have practical utility;

(ii) evaluate the accuracy of the

Commission’s estimate of the burden of

the proposed collections of information;

(iii) determine whether there are ways

to enhance the quality, utility, and

clarity of the information proposed to be

collected; and (iv) minimize the burden

of the proposed collections of

information on those who are to

respond, including through the use of

appropriate automated collection

techniques or other forms of information

technology.

Those desiring to submit comments

on the proposed information collection

requirements should submit them

directly to the Office of Information and

Regulatory Affairs, OMB, by fax at (202)

395–6566, or by email at

OIRAsubmissions@omb.eop.gov. Please

provide the Commission with a copy of

submitted comments so that all

comments can be summarized and

addressed in the final rule preamble.

Refer to the

ADDRESSES

section of this

notice of proposed rulemaking for

comment submission instructions to the

Commission. A copy of the supporting

statements for the collection of

information discussed above may be

obtained by visiting http://

www.RegInfo.gov. OMB is required to

make a decision concerning the

collection of information between 30

and 60 days after publication of this

document in the Federal Register.

Therefore, a comment is best assured of

having its full effect if OMB receives it

within 30 days of publication.

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

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44 U.S.C. 601 et seq.

709

5 U.S.C. 601(2), 603–05.

710

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 20740–43, 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).

711

See 2013 Proposal, 78 FR at 75784.

712

See 2016 Supplemental Proposal, 81 FR at

38499.

713

See 2016 Reproposal, 81 FR at 96894.

714

7 U.S.C. 19(b).

715

Section 3(b) of the CEA, 7 U.S.C. 5(b).

716

7 U.S.C. 7a(a) (burdens on interstate

commerce; trading or position limits).

impact.

708

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).

709

The requirements related to

the proposed amendments fall mainly

on registered entities, exchanges, FCMs,

swap dealers, clearing members, foreign

brokers, and large traders. The

Commission has previously determined

that registered DCMs, FCMs, swap

dealers, major swap participants,

eligible contract participants, SEFs,

clearing members, foreign brokers and

large traders are not small entities for

purposes of the RFA.

710

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 proposed to be

taken herein would not have a

significant economic impact on a

substantial number of small entities.

The Chairman made the same

certification in the 2013 Proposal,

711

the

2016 Supplemental Proposal,

712

and the

2016 Reproposal.

713

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 objectives of the Act, and

the policies and purposes of the Act, in

issuing any order or adopting any

Commission rule or regulation

(including any exemption under section

4(c) or 4c(b)), or in requiring or

approving any bylaw, rule, or regulation

of a contract market or registered futures

association established pursuant to

section 17 of the Act.

714

The Commission believes that the

public interest to be protected by the

antitrust laws is generally to protect

competition. The Commission requests

comment on whether the proposed rule

implicates any other specific public

interest to be protected by the antitrust

laws.

The Commission has considered the

proposed rules to determine whether

they are anticompetitive and has

preliminarily determined that the

proposed rules could, in some

circumstances, be anticompetitive

because position limits at low levels are,

to some degree, inherently

anticompetitive. A more established

DCM that already lists, or is first to list,

a core referenced futures contract (an

‘‘incumbent DCM’’) has a competitive

advantage over smaller DCMs seeking to

expand or future entrant DCMs

(collectively ‘‘entrant DCMs’’), even in

the absence of position limits, because

‘‘liquidity attracts liquidity.’’ That is, a

market participant seeking to execute a

single transaction or, for that matter,

establish a large position would, other

things being equal, gravitate toward a

more established facility that

successfully lists a contract with

relatively consistent volume and

transparent pricing—where there is

likely to be someone willing to take the

other side of a trade. This is especially

true if the market participant is already

clearing other products with the

incumbent DCM. This would tend to

protect the incumbent DCM’s contract

and reinforce the advantage of an

incumbent DCM, which has to do less

to keep and attract customers and

should be able to keep more of the

profits from trading volume. That is, the

status of incumbency by itself may to

some extent create a barrier to entry for

an entrant DCM where the presence of

a counterparty at the desired price is

less assured. Position limits at low

levels, especially in the non-spot month,

may exacerbate the situation. If a market

participant establishes a futures position

on an incumbent DCM and then reaches

the federal limit level on the incumbent

DCM, it becomes even less likely that

the market participant will migrate to an

entrant DCM, because the federal limit

would still apply and prevents the

market participant from increasing its

aggregate futures position where ever

located. Higher volume may permit an

incumbent DCM to charge lower

transaction fees than an entrant DCM;

the price concession that a market

participant might have to absorb to

establish a large position may be lower

on an incumbent DCM than an entrant

DCM. Both of these factors would

inform a DCM’s decision regarding

where to set the levels for its own

exchange-set limits. Moreover, the

incumbent DCM can use other tools to

defend its advantage such as the

implementation of new technologies,

the use of various fees/charges and the

application of exemptions to federal

limits. The Commission preliminarily

believes that the relatively high limit

levels that the Commission proposes

today do not at this time establish a

barrier to entry or competitive restraint

likely to facilitate anticompetitive

effects in any relevant antitrust market

for contract trading. This is because the

limit levels that the Commission

proposes today are based on recent data

regarding deliverable supply and open

interest. However, if the size of the

relevant markets continues on an

upward trend and the Commission does

not adjust federal limit levels

commensurately, limit levels that

become stale over time could facilitate

anticompetitive effects. The

Commission requests comment on

whether and in what circumstances

adopting the proposed rules could be

anticompetitive.

The Commission has also

preliminarily determined that the

proposed rules serve the regulatory

purpose of the Act ‘‘to deter and prevent

price manipulation or any other

disruptions to market integrity.’’

715

The

Commission proposes to implement the

rules pursuant to section 4a(a) of the

CEA, which articulates additional

policies and purposes.

716

The Commission has identified the

following less anticompetitive means:

Requiring derivatives clearing

organizations (‘‘DCOs’’) to impose initial

margin surcharges for position limits.

This would be less anticompetitive

because initial margin surcharges would

still allow a large speculator to

accumulate a futures position on

another DCM if the speculator so

desired while protecting against the

price impact from a large price change

against the speculator who would

otherwise be forced to offload a position

due to position limits. The Commission

requests comment on whether there are

other less anticompetitive means of

achieving the relevant purposes of the

Act. The Commission is not required to

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7 U.S.C. 7a–1(c)(2)(A)(ii).

718

17 CFR 39.10(b).

719

17 CFR 39.13(g)(2)(i).

720

See generally 17 CFR 39.13.

721

See supra Section III.F. (discussion of the

necessity finding).

follow the least anticompetitive course

of action.

The Commission has examined

whether requiring DCOs to impose

initial margin surcharges for position

limits in lieu of imposing position limits

is feasible and has preliminarily

determined that is not because it could

be inconsistent with a relevant

provision of the CEA and would require

the Commission to revise its current

regulations in part 39 to be more

prescriptive and less principles-based.

Thus, the Commission has preliminarily

determined not to adopt this less

anticompetitive means. Under section

5b(c)(2)(A)(ii) of the CEA

717

and the

corresponding provision of the

Commission’s current regulations, a

registered DCO has ‘‘reasonable

discretion in establishing the manner by

which it complies with each core

principle.’’

718

Moreover, the

Commission’s regulations already

require DCOs to ‘‘establish initial

margin requirements that are

commensurate with the risks of each

product and portfolio, including any

unusual characteristics of, or risks

associated with, particular products or

portfolios . . ., ’’

719

which would

include large positions. DCOs are also

already required to use models that take

into account concentration, minimum

liquidation time, and other risk factors

inherent in large positions, and the

Commission reviews these models.

720

Finally, Congress has required that the

Commission establish position limits

‘‘as the Commission finds are

necessary.’’

721

The Commission

requests comment on its feasibility

analysis.

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, Reporting and

recordkeeping requirements, Procedural

rules.

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 proposes to amend

17 CFR chapter I as follows:

PART 1—GENERAL REGULATIONS

UNDER THE COMMODITY EXCHANGE

ACT

■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).

§ 1.3 [Amended]

■2. In § 1.3, remove the definition of

the term ‘‘bona fide hedging

transactions and positions for excluded

commodities.’’

§ 1.47 [Removed and Reserved]

■3. Remove and reserve § 1.47.

§ 1.48 [Removed and Reserved]

■4. Remove and reserve § 1.48.

PART 15—REPORTS—GENERAL

PROVISIONS

■5. 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).

■6. 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 future 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.

* * * * *

■7. 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.

* * * * *

■8. 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.

Form No. Title Rule

40 ................... Statement of Reporting Trader ................................................................................................................................... 18.04

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Form No. Title Rule

71 ................... Identification of Omnibus Accounts and Sub-accounts .............................................................................................. 17.01

101 ................. Positions of Special Accounts .................................................................................................................................... 17.00

102 ................. Identification of Special Accounts, Volume Threshold Accounts, and Consolidated Accounts ................................. 17.01

304 ................. Statement of Cash Positions for Unfixed-Price Cotton ‘‘On Call’’ .............................................................................. 19.00

(Approved by the Office of Management

and Budget under control numbers

3038–0007, 3038–0009, 3038–0013, and

3038–0103.)

PART 17—REPORTS BY REPORTING

MARKETS, FUTURES COMMISSION

MERCHANTS, CLEARING MEMBERS,

AND FOREIGN BROKERS

■9. 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.

■10. 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.

* * * * *

■11. In § 17.03, add paragraph (i) to

read as follows:

§ 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

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.

■12. 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 Market Oversight and

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:

(1) Exceeding speculative position

limits under § 150.2 of this chapter; or

(2) Holding or controlling positions

for future delivery that are 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.

§ 19.03 Delegation of authority to the

Director of the Division of Enforcement.

(a) 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 § 19.00(b) to issue

special calls.

(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 § 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.

§ §19.04–19.10 [Reserved]

Appendix A to Part 19—Form 304

BILLING CODE 6351–01–P

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CFTC FORM 304

Statement

of

Cash Positions for Unfixed-Price

Cotton "On Call"

NOTICE: Failure to file a report required by the Commodity Exchange Act ("CEA"

or

the

"Act")1 and the regulations thereunder,2

or

the filing

of

a report with the Commodity Futures

Trading Commission ("CFTC"

or

"Commission") that includes a false, misleading,

or

fraudulent

statement

or

omits material facts that are required to be reported therein

or

are necessary to make

the report not misleading, may (a) constitute a violation

of

section 6(c)(2)

of

the Act (7 U.S.C. 9),

section 9(a)(3)

of

the

Act

(7 U.S.C. 13(a)(3)), and/or section 1001

of

Title 18, Crimes and

Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment,

or

both.

PRIVACY ACT NOTICE

The Commission's authority for soliciting this information is granted in sections 4i and 8

of

the

CEA and related regulations (see, e.g.,

17

CFR

19.02). The information solicited from entities

and individuals engaged in activities covered by the CEA is required to be provided to the CFTC,

and failure to comply may result in the imposition

of

criminal

or

administrative sanctions (see,

e.g., 7 U.S.C. 9 and 13a-l, and/or

18

U.S.C. 1001). The information requested is used

by

the

Commission to prepare its cotton on-call report. The requested information may be used

by

the

Commission in the conduct

of

investigations and litigation and, in limited circumstances, may be

made public in accordance with provisions

of

the CEA and other applicable laws. It may also be

disclosed to other government agencies and to contract markets to meet responsibilities assigned

to them

by

law. The information will be maintained in, and any additional disclosures will be

made in accordance with, the CFTC System

of

Records Notices, available on www.cftc.gov.

1 7 U.S.C.

1,

et seq.

2 Unless otherwise noted, the rules and regulations referenced

in

this notice are found

in

chapter I

of

title 17

of

the Code

of

Federal Regulations; 17 CFR chapter

I.

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BACKGROUND & INSTRUCTIONS

Applicable Regulations:

•

17

CPR 19.00(a) specifies who shall file Form 304.

•

17

CPR 19.02(a) specifies the information required on Form 304.

•

17

CPR 19.02(b) specifies the frequency (weekly), the report date (close

of

business on

Friday), and the time

(9

a.m. Eastern Time on the third business day following that

Friday) and manner, for filing the Form 304.

Please follow the instructions below to generate and submit the required filing. Relevant

regulations are cited in parentheses() for reference. Unless the context requires otherwise, the

terms used herein shall have the same meaning as ascribed in parts

15

to

21

of

the Commission's

regulations.

Complete Form 304 as follows:

The trader identification fields should be completed by all filers. This Form 304 requires

traders to identify themselves using their Public Trader Identification Number, in lieu

of

the

CFTC Code Number required on previous versions

of

the Form 304. This number is provided to

traders who have previously filed Forms 40

or

102 with the Commission. Traders may contact the

Commission to obtain this number

if

it is unknown.

If

a trader has a National Futures Association

Identification Number ("NF A ID") and/or a Legal Entity Identifier ("LEI"), the trader should also

identify itself using those numbers. Form 304 requires traders to identify the name

of

the

reporting trader

or

firm and the contact information (including full name, address, phone number,

and email address) for a natural person the Commission may contact regarding the submitted

Form 304.

Merchants and dealers

of

cotton shall report

on

Form 304. Report in hundreds

of

500-lb.

bales unfixed-price cotton "on-call" pursuant

to§

19.02(a)

of

the Commission's regulations.

Include under "Call Purchases" stocks on hand for which price has not yet been fixed. For each

listed stock, report the delivery month, delivery year, quantity

of

call purchases, and quantity

of

call sales.

The signature/authorization page shall be completed by all filers. This page shall include the

name and position

of

the natural person filing Form 304 as well as the name

of

the reporting

trader represented by that person. The trader certifying this Form 304 on the

signature/authorization page should note that filing a report that includes a false, misleading,

or

fraudulent statement

or

omits material facts that are required to be reported therein

or

are

necessary to make the report not misleading, may (a) constitute a violation

of

section 6(c)(2)

of

the Act

(7

U.S.C. 9), section 9(a)(3)

of

the Act

(7

U.S.C. 13(a)(3)), and/or section 1001

of

Title

18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine

or

imprisonment,

or

both.

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Submitting Form 304: Once completed, please submit this form to the Commission pursuant to

the instructions on www.cftc.gov

or

as otherwise directed by Commission staff.

If

submission

attempts fail, the reporting trader shall contact the Commission at techsupport@cftc.gov for

further technical support.

Please be advised that pursuant to 5

CPR

1320.5(b)(2)(i), you are not required to respond to this

collection

of

information unless it displays a currently valid

0MB

control number.

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COMMODITY

FUTURES

TRADING COMMISSION

FORM304

STATEMENT

OF

CASH POSITIONS

FOR

UNFIXED-PRICE

COTTON "ON-CALL"

NFAID

First Name

Address

Identification Codes:

Legal Entity Identifier (LEI)

Name

of

Reporting Trader or Firm:

Name

of

Person to Contact Regarding This Form:

Middle

Name Last Name

Contact Information:

Phone

Number Email Address

Suffix

NOTICE: Failure lo lile a report required by the Commodity Exchange Act ("CEA" or the "Act") and the regulations thereunder,

or

the filing

of

a report with the Commodity Futures Trading Commission ("CFTC"

or

"Commission") that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein

or

are necessary to make the report not misleading, may (a) constitute a violation

of

section 6(c)(2)

of

the Act (7 U.S.C. 9), section 9(a)(3)

of

the Act (7 U.S.C. l3(a)(3)), and/or section l001

of

Title 18, Crimes and Criminal Procedure (18 U.S.C. l001) and (b) result inpunishmeut by fine

or

imprisonment, or

both. Please

be

advised that pursuant

to

5

CFR

l320.5(b)(2)(i), you are

not

required to respond to this collection

of

information unless it displays a currently valid

0MB

control number.

Delivery Month

CF'l'C Form 304 (XX-XX)

Previous Editions Obsolete

Delivery Year Call Purchases

('00

bales)

Call Sales

('00

bales)

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Please sign/authenticate the Form 304 prior to submitting.

Signature/ Electronic Authentication:

D By checking this box and submitting this form (or by clicking "submit," "send," or any other analogous transmission command

if

transmitting electronically), I certify

that

I am duly authorized by

the

reporting trader identified below to provide

the

information and representations submitted

on

this Form 304, and

that

to

the

best

of

my knowledge the information and

representations made herein are

true

and correct.

Reporting Trader Authorized Representative (Name and Position):

-------

(Name)

---------

(Position)

Submitted on

behalf

of:

________

(Reporting Trader

Name)

Date

of

Submission:

----------

CFTC Form 304 (XX-XX)

Previous Editions Obsolete

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I

II

Form 304, Example -July 2017 Call purchases

of

200 bales and sales

of

1,800 bales; October Call purchases

of

6,600 bales

and sales

of

8,000 bales.

Unfixed-price

Cotton'

. . .

fixed. Report in

hund:r:

-

Call Purchases Call Sales

Delivery Month Delivery Year

('00

bales)

('00

bales)

July 2017 2

II

18

October 2017

66

11

80 I

I

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1

The definition of the term eligible entity was

amended by the Commission in a final rule

published on December 16, 2016 (81 FR at 91454,

91489). Aside from proposing to remove the

lettering from each of the defined terms and to

display them in alphabetical order, the definition of

Continued

BILLING CODE 6351–01–C

PART 40—PROVISIONS COMMON TO

REGISTERED ENTITIES

■13. 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).

■14. In § 40.1, revise paragraphs

(j)(1)(vii) and (j)(2)(vii) to read as

follows:

§ 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 § 150.1

of this chapter, and, if so, the name of

the core referenced futures contract on

which the referenced contract 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 § 150.1 of this chapter, and,

if so, the name of the referenced

contract to which the swap is

economically equivalent.

* * * * *

PART 140—ORGANIZATION,

FUNCTIONS, AND PROCEDURES OF

THE COMMISSION

■15. 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).

§ 140.97 [Removed and Reserved]

■16. Remove and reserve § 140.97.

PART 150—LIMITS ON POSITIONS

■17. 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).

■18. Revise § 150.1 to read as follows:

§ 150.1 Definitions.

As used in this part—

Bona fide hedging transactions or

positions means a position in

commodity derivative contracts in a

physical commodity, where:

(1) Such 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 position qualifies as:

(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); and

(B) The pass-through swap offset is a

futures, option on a futures, or swap

position entered into by the pass-

through swap counterparty in the same

physical commodity as the pass-through

swap, and which reduces the pass-

through swap counterparty’s price risks

attendant to that pass-through swap;

and provided that the pass-through

swap counterparty is able to

demonstrate upon request that the pass-

through swap qualifies as a bona fide

hedging transaction or position

pursuant to paragraph (1) of this

definition; or

(ii) Offsets of a bona fide hedger’s

qualifying swap position. A futures,

option on a futures, 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, option on a futures, or swap

contract 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

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 § 150.4

and does not claim an exemption from

aggregation for such entity.

Eligible entity

1

means a commodity

pool operator; the operator of a trading

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the term eligible entity would not be further

amended by this proposal and is included solely to

maintain the continuity of this definitions section.

2

The definition of the term independent account

controller was amended by the Commission in a

final rule published on December 16, 2016 (81 FR

at 91454, 91489). This term would not be further

amended by this proposal and is included solely to

maintain the continuity of this definitions section.

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.

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) An option contract, whether an

option on a future or an option that is

a swap, which has been adjusted by an

economically reasonable and

analytically supported risk factor, or

delta coefficient, for that option

computed as of the previous day’s close

or the current day’s close or

contemporaneously during the trading

day, and converted to an economically

equivalent amount of an open position

in a core referenced futures contract,

provided however, if a participant’s

position exceeds speculative position

limits as a result of an option

assignment, that participant is allowed

one business day to liquidate the excess

position without being considered in

violation of the limits;

(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

2

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

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 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 § 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 is submitted to the Commission

pursuant to part 40 of this chapter in

lieu of, or along with, a speculative

position limit, and that requires a trader

whose position exceeds the

accountability level to consent to: (1)

Provide information about its position

to the designated contract market or

swap execution facility; and (2) 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-

equivalent basis with respect to a

particular core referenced futures

contract, a futures contract or options 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, or a

trade option that meets the requirements

of § 32.3 of this chapter.

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

combined positions in all commodity

derivative contracts in a particular

commodity, including the spot month

future and all single month futures (the

spot month and all single month

futures, cumulatively, ‘‘all-months-

combined’’), positions in a single month

of commodity derivative contracts in a

particular commodity other than the

spot month future (‘‘single month’’), or

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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 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 the close of business on the

trading day preceding the third-to-last

trading day, until the contract expires,

except as follows:

(i) For 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

until the contract expires;

(ii) For 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 until the

contract expires;

(iii) For 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 fifth business day of the

contract month until the contract

expires;

(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 either a

calendar spread, intercommodity

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 § 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 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.

■19. 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 cash-

settled referenced contracts, no person

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:

T

ABLE

1

TO

P

ARAGRAPH

(d)—C

ORE

R

EFERENCED

F

UTURES

C

ONTRACTS

Commodity type Designated contract market Core referenced futures contract

1

Legacy Agricultural Chicago Board of Trade Corn (C).

Oats (O).

Soybeans (S).

Soybean Meal (SM).

Soybean Oil (SO).

Wheat (W).

Hard Winter Wheat (KW).

ICE Futures U.S. Cotton No. 2 (CT).

Minneapolis Grain Exchange Hard Red Spring Wheat (MWE).

Other Agricultural Chicago Board of Trade Rough Rice (RR).

Chicago Mercantile Exchange Live Cattle (LC).

ICE Futures U.S. Cocoa (CC).

Coffee C (KC).

FCOJ–A (OJ).

U.S. Sugar No. 11 (SB).

U.S. Sugar No. 16 (SF).

Energy New York Mercantile Exchange Light Sweet Crude Oil (CL).

NY Harbor ULSD (HO).

RBOB Gasoline (RB).

Henry Hub Natural Gas (NG).

Metals Commodity Exchange, Inc. Gold (GC).

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T

ABLE

1

TO

P

ARAGRAPH

(d)—C

ORE

R

EFERENCED

F

UTURES

C

ONTRACTS

—Continued

Commodity type Designated contract market Core referenced futures contract

1

Silver (SI).

Copper (HG).

New York Mercantile Exchange Palladium (PA).

Platinum (PL).

1

The core referenced futures contract includes any successor contracts.

(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;

provided however, compliance with

such speculative limits shall not be

required until 365 days after publication

in the Federal Register.

(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.

(2) Pre-existing positions in a non-

spot month. A single month or all-

months-combined speculative position

limit established under this section

shall not apply to pre-existing positions,

provided however, that if such position

is not a pre-enactment swap or

transition period swap then that

position shall be attributed to the person

if the person’s position is increased after

the effective date of such limit.

(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 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 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

§ 150.4, the eligible affiliate may choose

to utilize that exemption, or it may opt

to be aggregated with its affiliated

entities.

■20. Revise § 150.3 to read as follows:

§ 150.3 Exemptions.

(a) Positions which may exceed limits.

The speculative position limits set forth

in § 150.2 may be exceeded to the extent

that all applicable requirements in this

part are met, provided that such

positions are 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) Bona fide hedging transactions or

positions, other than those enumerated

in appendix A to this part, that are

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 related 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

to the Commission pursuant to § 140.99

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 § 150.2, provided that

such positions:

(i) Do not exceed the equivalent of

10,000 contracts of the NYMEX Henry

Hub Natural Gas core referenced futures

contract per designated contract market

that lists a natural gas cash-settled

referenced contract;

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(ii) Do not exceed 10,000 futures

equivalent contracts in economically

equivalent swaps in natural gas; and

(iii) That the person holding or

controlling such positions does not hold

or control positions in spot-month

physical-delivery referenced contracts

in natural gas; or

(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 pre-

enactment swap, or in any transition

period swap, in either case as defined

by § 150.1; 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 § 150.2, may submit an

application 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

a 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 limited to, the name

of the underlying commodity and the

derivative position size;

(B) Information to demonstrate why

the position satisfies the requirements of

section 4a(c)(2) of the Act and the

definition of bona fide hedging

transaction or position in § 150.1,

including factual and legal analysis;

(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 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

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 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

submit an application 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) A person may, however, due to

demonstrated sudden or unforeseen

increases in their bona fide hedging

needs, submit an application for 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) 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) The Commission will not

determine that the person holding the

position has committed a position limits

violation during the period of the

Commission’s review nor once the

Commission has issued its

determination.

(4) Commission determination. After

review of the application and any

supplemental information provided by

the requestor, the Commission will

determine, with respect to the

transaction or position for which the

request 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 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 the information provided

pursuant to paragraph (b)(1) of this

section changes 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 notify the person holding such

position and, in its discretion, revoke or

modify the bona fide hedge recognition

or spread exemption for purposes of

federal speculative position limits and

require the person to reduce the

derivatives position within a

commercially reasonable time 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. Exemptions

previously granted by the Commission

under § 1.47 of this chapter, or by a

designated contract market or swap

execution facility, in either case to the

extent that such exemptions are for the

risk management of positions in

financial instruments, including but not

limited to index funds, shall not apply

after the effective date of speculative

position limit levels adopted, pursuant

to § 150.2(e). Nothing in this paragraph

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shall preclude the Commission, a

designated contract market, or swap

execution facility 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.

(d) Recordkeeping. (1) Persons who

avail themselves of exemptions or relief

under this section shall 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, 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

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 § 150.1 shall

keep and make available to the

Commission upon request all relevant

books and records supporting such a

representation, including any record 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

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 make a determination

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 (b)(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.

■21. Revise § 150.5 to read as follows:

§ 150.5 Exchange-set speculative position

limits and exemptions therefrom.

(a) Requirements for exchange-set

limits on commodity derivative

contracts subject to federal 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

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. Exemptions of

the type that conform to the exemptions

the Commission identified in:

(A) Sections 150.3(a)(1)(i), (a)(2)(i),

and (a)(4) through (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 that,

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, the Commission has first

approved such exemption pursuant to a

request submitted under § 140.99 of this

chapter; and

(D) Exemptions of the type that do not

conform to the exemptions identified in

§ 150.3(a) shall be granted at a level that

is capped at the level of the applicable

federal limit in § 150.2 and that

complies with paragraph (a)(2)(ii)(C) 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.

(ii) Application for exemption from

exchange-set limits. 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) (1) Except as provided in

paragraph (a)(2)(ii)(A)(2) of this section,

shall require traders 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 to determine, and the

Commission to verify, 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.

(2) The designated contract market or

swap execution facility may, however,

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

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established the position that exceeded

the applicable exchange-set speculative

position limit.

(3) The designated contract market or

swap execution facility must require

that any application filed pursuant to

paragraph (a)(2)(ii)(A)(2) of this section

include an explanation of the

circumstances warranting the sudden or

unforeseen increases in bona fide

hedging needs.

(4) If an application filed pursuant to

paragraph (a)(2)(ii)(A)(2) 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.

(5) The designated contract market,

swap execution facility, or Commission

will not determine that the person

holding the position has committed a

position limits violation 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;

(B) Shall require, for any such

exemption granted, that the trader re-

apply for the exemption at least on an

annual basis;

(C) 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 shall take into account 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

that may be established and liquidated

in an orderly fashion in that market; and

(D) Notwithstanding paragraph

(a)(2)(ii)(C) of this section, may require

persons with positions that comply

either with the bona fide hedging

transactions or positions definition or

the spread transactions definition in

§ 150.1, as applicable, 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 to

otherwise limit the size of such

position. Designated contract markets

and swap execution facilities may refer

to paragraph (b) of appendix B to part

150 for guidance regarding the

foregoing.

(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 not apply to any

pre-existing positions in commodity

derivative contracts, provided however,

that if such position is not a pre-

enactment swap or transition period

swap, then such position shall be

attributed to the person if the person’s

position is increased after the effective

date of such limit.

(4) Monthly reports detailing the

disposition of each 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, or the

rejection of any application, as well as

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 all-months-combined,

as applicable;

(K) Any size limitations or conditions

established for a spread exemption or

other exemption; and

(L) For bona fide hedging transactions

or positions, 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—(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 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.

(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

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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, a 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

speculative position limits it sets under

paragraphs (b)(1) or (b)(2) of this section

in accordance with the following:

(i) Traders 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, and shall take

into account 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. A designated contract

market or swap execution facility that is

a trading facility that adopts speculative

position limits and/or position

accountability levels pursuant to

paragraphs (a) or (b) of this section, and/

or that elects to offer exemptions from

any such levels pursuant to such

paragraphs, shall submit to the

Commission pursuant to part 40 of this

chapter rules establishing such levels

and/or exemptions. To the extent any

such 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, and 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.

■22. 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 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].

■23. Add and reserve § 150.7.

■24. 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.

■25. Add § 150.9 to read as follows:

§ 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 § 150.3(a)(1)(ii), shall submit an

application to the Commission,

pursuant to § 150.3(b), or submit an

application 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

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facility maintains rules, consistent with

the requirements of this section and

approved by the Commission pursuant

to § 40.5 of this chapter, that establish

application processes and conditions for

recognizing bona fide hedging

transactions or positions.

(b) Prerequisites for a designated

contract market or swap execution

facility to recognize bona fide hedging

transactions or positions 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 transactions or

positions in section 4a(c)(2) of the Act

and the definition of bona fide hedging

transactions or positions 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

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 to enable the

designated contract market or swap

execution facility to determine, and the

Commission to verify, 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) Information to demonstrate why

the position satisfies the requirements of

section 4a(c)(2) of the Act and the

definition of bona fide hedging

transaction or position in § 150.1,

including factual and legal analysis;

(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 verify 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 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, however,

adopt rules that allow a person to, due

to demonstrated sudden or unforeseen

increases in its bona fide hedging needs,

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 designated contract market,

swap execution facility, or Commission

will not determine that the person

holding the position has committed a

position limits violation during the

period of the designated contract

market, swap execution facility, or

Commission’s review nor once a

determination has been issued.

(3) Renewal of applications. The

designated contract market or swap

execution facility requires each

applicant to reapply for such

recognition or exemption at least on an

annual basis by updating the original

application, and to receive a notice of

approval of the renewal from the

designated contract market or swap

execution facility prior to the date that

such position would be in excess of the

applicable federal speculative position

limits.

(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

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 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,

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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;

(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 ten 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) 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)

of this section, before the two business

day period expires.

(5) Commission stay of pending

applications and requests for additional

information. If the Commission

determines to stay an application that

requires additional time to analyze, or

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 applicant of the

Commission’s determination or request

for any supplemental information

required, and provide an opportunity

for the applicant to respond with any

supplemental information.

(6) Commission determination. If 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

applicant, and, after providing an

opportunity for the applicant to

respond, the Commission may, in its

discretion, reject the exchange’s

determination 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

(ii) The Commission will not

determine that the person holding the

position has committed a position limits

violation during the period of the

Commission’s review nor once the

Commission has issued its

determination.

(f) Commission revocation of

approved applications. (1) If a

designated contract market or swap

execution facility limits, conditions, or

revokes any recognition of a bona fide

hedging transaction or position for

purposes of the designated contract

market 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 has been granted

for a position that, 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, after

providing an opportunity to respond,

the Commission may, in its discretion,

revoke the exchange’s 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 the applicant and the

applicable 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 shall not

determine that the person holding the

position has committed a position limits

violation during the period of the

Commission’s review nor once the

Commission has issued its

determination, provided the person

reduced 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

came 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 in paragraph (e)(5) of

this section, to request additional

information from the applicable

designated contract market or swap

execution facility and applicant;

(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.

■26. Add appendices A through F to

read as follows:

Appendix A to Part 150—List of

Enumerated Hedges

Persons that follow specific practices

outlined in the enumerated hedges in this

appendix shall establish compliance with the

bona fide hedging transactions or positions

definition in § 150.1 and with §150.3(a)(1)(i)

without being required to request approval

under § 150.3 or §150.9 prior to exceeding

the applicable federal speculative position

limit. All other persons must request

approval pursuant to § 150.3 or §150.9 prior

to exceeding the applicable federal

speculative position limit.

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Compliance with an enumerated bona fide

hedge listed below does not, however,

diminish or replace, in any event, the

obligations and requirements of the person to

comply with the regulations provided under

this part 150. The enumerated bona fide

hedges do not state the exclusive means for

establishing compliance with the bona fide

hedging transactions or positions definition

in § 150.1 or with the requirements of

§ 150.3(a)(1).

(a) Enumerated hedges. The following

positions comply with the bona fide hedging

transactions or positions definition in

§ 150.1:

(1) 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 contract’s underlying cash

commodity.

(2) 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 contract’s underlying cash

commodity that has been both bought and

sold by the same person at unfixed prices:

(A) Basis different delivery months in the

same commodity derivative contract; or

(B) Basis different commodity derivative

contracts in the same commodity, regardless

of whether the commodity derivative

contracts are in the same calendar month.

(3) 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 contract.

(4) 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 contract.

(5) Cross-commodity hedges. Positions in

commodity derivative contracts described in

paragraph (2) of the bona fide hedging

transactions or positions definition in § 150.1

or in paragraphs (a)(1) through (a)(4) and

paragraphs (a)(6) through (a)(9) of this

appendix A may also be used to offset the

risks arising from a commodity other than the

cash commodity underlying a commodity

derivative contract, provided that the

fluctuations in value of the position in the

commodity derivative contract, or the

commodity underlying the commodity

derivative contract, shall be substantially

related to the fluctuations in value of the

actual or anticipated cash position or pass-

through swap.

(6) 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

contract’s underlying cash commodity.

(7) 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 contract’s underlying

cash commodity and the quantity equivalent

of fixed-price sales contracts of the cash

products and by-products of such

commodity.

(8) 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 contract’s 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.

(9) 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

purposes of complying with this paragraph

(a)(9) of this appendix A, a cash commodity

purchase or sales contract as set forth in

paragraphs (a)(6) or (a)(7) of this appendix A,

as applicable.

(10) 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 contract’s 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.

(11) 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:

(A) The position in the commodity

derivative contract 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; and

(B) 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.

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 transactions or positions definition

in § 150.1, 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:

(A) The manner in which the person

measures risk is consistent and follows

historical practice for that person;

(B) 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;

(C) The person is able to demonstrate

compliance with paragraphs (A) and (B)

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;

and

(D) A designated contract market or swap

execution facility that recognizes a particular

gross hedging position as bona fide pursuant

to § 150.9 documents the justifications for

doing so, and maintains records of such

justifications in accordance with § 150.9(d).

(b) Guidance regarding positions held

during the spot period. Section

150.5(a)(2)(ii)(D) confirms the existing

authority of designated contract markets and

swap execution facilities to maintain rules

that subject positions that comply with the

bona fide hedging position or transaction

definition in § 150.1 to a restriction that no

such position is maintained in any physical-

delivery commodity derivative contract

during the lesser of the last five days of

trading or the time period for the spot month

in such physical-delivery contract (the ‘‘spot

period’’). Any such designated contract

market or swap execution facility may waive

any such restriction, including if:

(1) The position complies with the bona

fide hedging transaction or position

definition in § 150.1;

(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:

(A) Intends to make or take delivery during

that time period;

(B) Provides materials to the designated

contract market or swap execution facility

supporting a classification of the position as

a bona fide hedging transaction or position

and demonstrating facts and circumstances

that would warrant holding such position in

excess of limits during the spot period;

(C) Demonstrates cash-market exposure in-

hand that is verified by the designated

contract market or swap execution facility

and that supports holding the position during

the spot period;

(D) Demonstrates that, for short positions,

the delivery is feasible, meaning that the

person has the ability to deliver against the

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

(E) Demonstrates that, for long positions,

the delivery is feasible, meaning that the

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person has the ability to take delivery 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 cheapest source for that

commodity).

Appendix C to Part 150—Guidance

Regarding the Referenced Contract

Definition in § 150.1

This appendix C provides guidance

regarding the ‘‘referenced contract’’

definition in § 150.1, which provides in

paragraph (3) that the definition of referenced

contract does not include a location basis

contract, a commodity index contract, or a

trade option that meets the requirements of

§ 32.3 of this chapter. The term referenced

contract is used throughout part 150 of the

Commission’s regulations to refer to contracts

that are subject to federal limits. A position

in a contract that is not a referenced contract

is not subject to federal limits, and, as a

consequence, cannot be netted with positions

in referenced contracts for purposes of

federal limits. This guidance is intended to

clarify the types of contracts that would

qualify as a location basis contract or

commodity 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 § 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

limits and cannot be netted with positions in

referenced contracts for purposes of federal

limits: location basis contracts; commodity

index contracts; swap guarantees; and trade

options that meet the requirements of § 32.3

of this chapter.

(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

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.

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 core referenced

futures contracts and 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 used in the

referenced contract definition under § 150.1,

and as discussed in the associated appendix,

Appendix C—Guidance Regarding the

Referenced Contract Definition in § 150.1.

L

OCATION

B

ASIS

C

ONTRACT

L

IST OF

S

UBSTANTIALLY THE

S

AME

C

OMMODITIES

Core referenced futures contract Commodities considered

substantially the same

(regardless of location) Source(s) for specification of quality

NYMEX Light Sweet Crude Oil fu-

tures contract (CL): 1. Light Louisiana Sweet (LLS)

Crude Oil. NYMEX Argus LLS vs. WTI (Argus) Trade Month futures contract

(E5).

NYMEX LLS (Argus) vs. WTI Financial futures contract (WJ).

ICE Futures Europe Crude Diff—Argus LLS vs WTI 1st Line Swap fu-

tures contract (ARK).

ICE Futures Europe Crude Diff—Argus LLS vs WTI Trade Month

Swap futures contract (ARL).

NYMEX New York Harbor ULSD

Heating Oil futures contract (HO): 1. Chicago ULSD ........................... NYMEX Chicago ULSD (Platts) vs. NY Harbor ULSD Heating Oil fu-

tures contract (5C).

2. Gulf Coast ULSD ....................... NYMEX Group Three ULSD (Platts) vs. NY Harbor ULSD Heating Oil

futures contract (A6).

NYMEX Gulf Coast ULSD (Argus) Up-Down futures contract (US).

NYMEX Gulf Coast ULSD (Argus) Up-Down BALMO futures contract

(GUD).

NYMEX Gulf Coast ULSD (Platts) Up-Down BALMO futures contract

(1L).

NYMEX Gulf Coast ULSD (Platts) Up-Down Spread futures contract

(LT).

ICE Futures Europe Diesel Diff- Gulf Coast vs Heating Oil 1st Line

Swap futures contract (GOH).

CME Clearing Europe Gulf Coast ULSD( Platts) vs. New York Heat-

ing Oil (NYMEX) Spread Calendar swap (ELT).

CME Clearing Europe New York Heating Oil (NYMEX) vs. European

Gasoil (IC) Spread Calendar swap (EHA).

3. California Air Resources Board

Spec ULSD (CARB no. 2 oil). NYMEX Los Angeles CARB Diesel (OPIS) vs. NY Harbor ULSD

Heating Oil futures contract (KL).

4. Gas Oil Deliverable in Antwerp,

Rotterdam, or Amsterdam Area. ICE Futures Europe Gasoil futures contract (G).

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L

OCATION

B

ASIS

C

ONTRACT

L

IST OF

S

UBSTANTIALLY THE

S

AME

C

OMMODITIES

—Continued

Core referenced futures contract Commodities considered

substantially the same

(regardless of location) Source(s) for specification of quality

ICE Futures Europe Heating Oil Arb—Heating Oil 1st Line vs Gasoil

1st Line Swap futures contract (HOT).

ICE Futures Europe Heating Oil Arb—Heating Oil 1st Line vs Low

Sulphur Gasoil 1st Line Swap futures contract (ULL).

NYMEX NY Harbor ULSD Heating Oil vs. Gasoil futures contract

(HA).

NYMEX RBOB Gasoline futures

contract (RB): 1. Chicago Unleaded 87 gasoline NYMEX Chicago Unleaded Gasoline (Platts) vs. RBOB Gasoline fu-

tures contract (3C).

NYMEX Group Three Unleaded Gasoline (Platts) vs. RBOB Gasoline

futures contract (A8).

2. Gulf Coast Conventional

Blendstock for Oxygenated

Blending (CBOB) 87.

NYMEX Gulf Coast CBOB Gasoline A1 (Platts) vs. RBOB Gasoline

futures contract (CBA).

NYMEX Gulf Coast Unl 87 (Argus) Up-Down futures contract (UZ).

3. Gulf Coast CBOB 87 (Summer

Assessment). NYMEX Gulf Coast CBOB Gasoline A2 (Platts) vs. RBOB Gasoline

futures contract (CRB).

4. Gulf Coast Unleaded 87 (Sum-

mer Assessment). NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB Gasoline fu-

tures contract (RVG).

NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB Gasoline

BALMO futures contract (GBB).

NYMEX Gulf Coast 87 Gasoline M2 (Argus) vs. RBOB Gasoline

BALMO futures contract (RBG).

5. Gulf Coast Unleaded 87 ............ NYMEX Gulf Coast Unl 87 (Platts) Up-Down BALMO futures contract

(1K).

NYMEX Gulf Coast Unl 87 Gasoline M1 (Platts) vs. RBOB Gasoline

futures contract (RV).

CME Clearing Europe Gulf Coast Unleaded 87 Gasoline M1 (Platts)

vs. New York RBOB Gasoline (NYMEX) Spread Calendar swap

(ERV).

6. Los Angeles California Refor-

mulated Blendstock for Oxygen-

ate Blending (CARBOB) Regular.

NYMEX Los Angeles CARBOB Gasoline (OPIS) vs. RBOB Gasoline

futures contract (JL).

7. Los Angeles California Refor-

mulated Blendstock for Oxygen-

ate Blending (CARBOB) Pre-

mium.

NYMEX Los Angeles CARBOB Gasoline (OPIS) vs. RBOB Gasoline

futures contract (JL).

8. Euro-BOB OXY NWE Barges ... NYMEX RBOB Gasoline vs. Euro-bob Oxy NWE Barges (Argus)

(1000mt) futures contract (EXR).

CME Clearing Europe New York RBOB Gasoline (NYMEX) vs. Euro-

pean Gasoline Euro-bob Oxy Barges NWE (Argus) (1000mt)

Spread Calendar swap (EEXR).

9. Euro-BOB OXY FOB Rotterdam ICE Futures Europe Gasoline Diff—RBOB Gasoline 1st Line vs.

Argus Euro-BOB OXY FOB Rotterdam Barge Swap futures con-

tract (ROE).

Appendix E to Part 150—Speculative

Position Limit Levels

Contract Spot month

Single-month

and

all months

Legacy Agricultural:

Chicago Board of Trade Corn (C) ........................................................................................................... 1,200 57,800.

Chicago Board of Trade Oats (O) ........................................................................................................... 600 2,000.

Chicago Board of Trade Soybeans (S) ................................................................................................... 1,200 27,300.

Chicago Board of Trade Soybean Meal (SM) ......................................................................................... 1,500 16,900.

Chicago Board of Trade Soybean Oil (SO) ............................................................................................. 1,100 17,400.

Chicago Board of Trade Wheat (W) ........................................................................................................ 1,200 19,300.

Chicago Board of Trade KC HRW Wheat (KW) ...................................................................................... 1,200 12,000.

Minneapolis Grain Exchange Hard Red Spring Wheat (MWE) ............................................................... 1,200 12,000.

ICE Futures U.S. Cotton No. 2 (CT) ........................................................................................................ 1,800 11,900.

Other Agricultural:

Chicago Board of Trade Rough Rice (RR) .............................................................................................. 800 Not Applicable.

Chicago Mercantile Exchange Live Cattle (LC) .......................................................................................

1

600/300/200 Not Applicable.

ICE Futures U.S. Cocoa (CC) ................................................................................................................. 4,900 Not Applicable.

ICE Futures U.S. Coffee C (KC) .............................................................................................................. 1,700 Not Applicable.

ICE Futures U.S. FCOJ–A (OJ) ............................................................................................................... 2,200 Not Applicable.

ICE Futures U.S. Sugar No. 11 (SB) ....................................................................................................... 25,800 Not Applicable.

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1

Step-down spot month limits would be for

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

See §150.3 regarding the conditional spot

month limit exemption for cash-settled positions in

natural gas.

3

Step-down spot month limits would be for

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.

Contract Spot month

Single-month

and

all months

ICE Futures U.S. Sugar No. 16 (SF) ....................................................................................................... 6,400 Not Applicable.

Energy:

New York Mercantile Exchange Henry Hub Natural Gas (NG) ..............................................................

2

2,000 Not Applicable.

New York Mercantile Exchange Light Sweet Crude Oil (CL) ..................................................................

3

6,000/5,000/

4,000 Not Applicable.

New York Mercantile Exchange NY Harbor ULSD (HO) ........................................................................ 2,000 Not Applicable.

New York Mercantile Exchange RBOB Gasoline (RB) ........................................................................... 2,000 Not Applicable.

Metal:

Commodity Exchange, Inc. Copper (HG) ................................................................................................ 1,000 Not Applicable.

Commodity Exchange, Inc. Gold (GC) .................................................................................................... 6,000 Not Applicable.

Commodity Exchange, Inc. Silver (SI) ..................................................................................................... 3,000 Not Applicable.

New York Mercantile Exchange Palladium (PA) ..................................................................................... 50 Not Applicable.

New York Mercantile Exchange Platinum (PL) ....................................................................................... 500 Not Applicable.

Appendix F to Part 150—Guidance on,

and Acceptable Practices in,

Compliance With § 150.5

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

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

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]

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 January 31,

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—Supporting Statement of

Chairman Heath Tarbert

I am pleased to support the Commission’s

proposed rule on limits for speculative

positions in futures and derivatives markets.

Today’s proposal is a pragmatic approach

that will protect our agricultural, energy, and

metals markets from excessive speculation.

But just as importantly, it will ensure fair and

easy access to these markets for businesses

producing, consuming, and wholesaling

commodities under our jurisdiction.

When I came to the Commission, I set out

several strategic goals. Among them is to

regulate our derivatives markets to promote

the interests of all Americans. Another goal

is to enhance the regulatory experience of

market participants. The proposal we are

issuing today will deliver on both. We also

drew from each of our agency core values to

craft it—commitment, forward-thinking,

teamwork, and clarity. Clarity is of particular

importance here because, ultimately, markets

and their participants deserve regulatory

certainty. We provide that today.

Making Our Markets Work for the American

Economy

If adopted, our proposal will help ensure

that futures markets in agricultural, energy

and metals commodities work for American

households and businesses. Farmers,

ranchers, energy producers, utilities, and

manufacturers are the backbone of the

American economy. Our derivatives markets

generally, and in particular the markets

addressed in this proposal, are designed

specifically to allow these businesses to

hedge their exposure to price changes.

This Commission’s proposal will protect

Americans from some of the most nefarious

machinations in our derivatives markets.

First, capping speculative positions in the

covered derivatives contracts will help

prevent cornering and squeezing. Such

manipulative schemes can cause artificial

prices and can injure the users of

commodities linked to the futures markets.

Limiting speculative positions can also

reduce the likelihood of chaotic price swings

caused by speculative gamesmanship. In

effect, position limits should help ensure that

prices in our markets reflect real supply and

demand.

Position limits are not a solution born

inside the Washington Beltway and imposed

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https://www.cftc.gov/PressRoom/

SpeechesTestimony/dunnstatement101811.

2

The proposal would not set non-spot month

limits on the 16 contracts that are not currently

subject to federal position limits.

3

Int’l Swap Dealers Assoc. v. CFTC, 887

F.Supp.2d 259, 281 (D.D.C. 2012).

4

The proposal would also impose limits on

approximately 400 other futures contracts that are

linked, directly or indirectly, to the 25 core

physically delivered contracts.

on the market from afar. Instead, they are one

of many tools that exchanges have used since

the 19th century to mitigate the potentially

damaging effects of excessive speculation.

They are a pragmatic, Midwestern solution to

a real-world problem. Recognizing the

usefulness of exchange-set limits, the

Commission has worked collaboratively with

our exchanges since 1981 to put sensible

position limits and accountability levels on

speculative positions in all physical

commodity futures markets.

Our proposal would also end the ‘‘risk

management’’ exemption that has allowed

banks, hedge funds, and trading firms to take

large and purely speculative positions in

agricultural markets. Nearly a decade ago,

Congress directed the Commission to address

this issue. Today we are acting.

Some observers have gone so far as to call

position limits ‘‘at best, a cure for a disease

that does not exist or a placebo for one that

does.’’

1

I respectfully disagree. To be sure,

position limits are not a silver bullet against

the damaging impact of excessive speculative

activity. But I also believe, as did Congress

when it amended the Commodity Exchange

Act, that position limits can help to

‘‘diminish, eliminate, or prevent’’ potential

damage to the commodities markets that are

so critical to our real economy.

Still, setting limits requires balancing the

competing need for liquidity in our markets

against the potential for disruptive

speculative positions. I believe that the spot

month levels we are proposing are reasonably

calibrated. They are based on the current rule

of thumb that limits should be no more than

25 percent of the deliverable supply of the

referenced commodity, in order to prevent

corners and squeezes that everyone can agree

are bad for the market.

For the nine grain futures contracts

currently subject to position limits,

2

revising

non-spot limits required the Commission to

consider an additional complication.

Eliminating the risk management exemption

could potentially take away a source of

liquidity further out the curve. For a farmer

who needs to hedge the price risk on crops

that are still in the ground, a bank with a risk

management exemption may be the only

willing buyer. To mitigate the impact of

eliminating the risk management exemption,

we have raised the non-spot month limits for

the grain contracts. This should allow a

broader set of market participants to provide

liquidity and help farmers hedge their crop

risk as far in advance as they need.

Ensuring Access for Bona Fide Hedgers

Position limits is the rare rule where the

exception is as important as the rule itself.

It cannot be said too often that these limits

are on speculative activity. Congress has

always intended that positions that are a

bona fide hedge of price risk should not be

subject to limits.

It is critical, therefore, that we not disrupt

the regulatory experience of American

producers, middlemen, and end-users of

commodities. The greatest risk of a position

limits rule is that hedgers are caught in the

limits aimed at speculators. This could

reduce their ability to protect themselves

from risk, which could in turn negatively

impact the broader economy. If a farmer

cannot offset a risk on next year’s crop—if a

refiner cannot offset a risk on crude oil for

a new plant—or if a wholesaler cannot offset

risks on inventory it is buying, those

businesses will not expand their operations.

Any position limits rule must therefore be

written with those hedging needs in mind.

Congress and the American people expect

nothing less. The proposal addresses those

needs through (i) a broad exemption for

‘‘bona fide’’ hedging, and (ii) a streamlined

and non-intrusive process for recognizing

those exemptions.

On the first point, the proposal will expand

the types of hedging strategies that are

presumed to meet the bona fide hedging

definition—and therefore be eligible for an

exemption from position limits. For the first

time, we have included anticipated

merchandising, meaning that wholesalers

and middlemen connecting producers and

consumers could more readily hedge their

risks. We have also expanded the definition

to conform to the hedging strategies that are

common in energy markets. This will ensure

that the new federal speculative limits on

energy markets do not inadvertently

undermine the producers, refiners, pipeline

operators, and utilities that keep this country

running.

On the second point, we have built on

prior proposals to create a practical and

efficient way for hedgers to avail themselves

of the bona fide hedging exemption. Creating

burdensome red tape or slowing down

approvals to take on hedging positions could

result in lost business opportunities for the

participants we are called to protect.

For parties whose hedging needs fit within

the enumerated list, they could exceed

federal position limits without requesting

approval from the Commission. They also

would not need to submit information on

their cash market positions—a duplicative

and burdensome exercise that is better

handled by the exchanges.

For parties whose hedging needs do not fit

within the enumerated list, we are offering a

process whereby an exchange could evaluate

that hedging need. If the exchange finds that

the need is a bona fide hedge not captured

by our list, the exchange would notify the

Commission. Unless the Commission votes to

reject it within 10 business days, the

exchange’s recognition would be deemed

effective for purposes of federal position

limits. Given our expanded definition of

bona fide hedging, I anticipate that it would

be a rare case that a market participant finds

its legitimate hedging needs are not already

covered in the list of enumerated

exemptions. Still, this process would provide

flexibility and legal certainty, without

excessive red tape.

Striking the Right Balance

The Commission has grappled with

position limits for a decade. The 2011

proposal was finalized, but struck down by

a court because of concerns over its legal

justification. Subsequent proposals in 2013

and 2016 were never finalized, following

pushback from market participants about

access to bona fide hedge exemptions. The

Commission and staff have worked with

diligence and good faith to solve this puzzle.

There are difficult, often competing interests

to address in this seemingly simple rule. If

an easy solution exists, I have no doubt that

the Commission would have found it.

Today’s proposal is the culmination of ten

years of effort across four Chairmen’s tenures.

I sincerely thank my predecessors, as well as

the Commission staff, who have worked so

hard for so long to strike the right balance.

Each proposal and every piece of feedback

has helped improve the proposal before the

Commission today. I believe that the

proposal offers the pragmatic, workable

solution that would protect markets from

corners and squeezes while preserving the

ability of American businesses to manage

their risks.

Putting the Burden in the Right Place

Finally, I want to draw attention to one

fundamental shift in approach between prior

position limits rules and the present

proposal. Previously, the Commission had

read the Commodity Exchange Act to require

federal limits to be placed on every futures

contract for a physical commodity. This

would have required the Commission to

evaluate approximately 1,200 individual

contracts to determine the appropriate levels.

The 2011 position limits rule was

challenged in court on this ground and was

struck down. The court found that the statute

was ambiguous about whether the

Commission must impose limits on all

futures, or whether it should impose limits

only ‘‘as the Commission finds are

necessary[.]’’ The court said that ‘‘it is

incumbent upon the agency not to rest

simply on its parsing of the statutory

language. It must bring its experience and

expertise to bear in light of competing

interests at stake to resolve the ambiguities in

the statute.’’

3

The Commission is now bringing its

experience and expertise to bear on this

matter. We have taken a big picture approach

to determine when position limits are in fact

necessary. In short, we are proposing that

speculative limits are necessary for those

futures contracts that are physically

delivered and where the futures market is

important in the price discovery process for

the underlying commodity. The Commission

also examined whether a disruption in the

distribution of that commodity would have a

significant impact on our economy. This has

led us to propose limits on 25 physically

delivered futures contracts,

4

which covers

the vast majority of trading volume and open

interest in physically delivered derivatives.

In addition to the nine grain futures contracts

currently subject to federal limits, this

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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 CEA addresses position limits in

section (sec.) 4a (7 U.S.C. 6a).

2

Sec. 4a(a)(3).

3

Sec. 4a(1).

4

ISDA et al. v CFTC, 887 F. Supp. 2d 259, 278

and 283–84 (D.D.C. Sept. 28, 2012).

5

Id. at 280.

6

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.’’)

7

H.R. Rep. 74–421, at 5 (1935).

8

887 F. Supp. 2d 259, 269 (fn 4).

9

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/emactranscript

022615.pdf.

10

BAHATTIN BUYUKSAHIN & 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 http://

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

includes the largest energy, metals, and other

agricultural futures contracts.

Position limits are like medicine; they can

help cure a symptom but can have

undesirable side effects. And like medicine,

position limits should be prescribed only

when necessary. I believe this change in the

underlying rationale for the proposal will

require thoughtful reflection before imposing

additional position limits on additional

contracts in the future. Position limits will

always create a burden on someone in the

market—whether a compliance burden on

parties having to track their positions relative

to limits, or potentially the loss of a business

opportunity because the risks cannot be

hedged.

The statutory provisions on position limits

can reasonably be read in two ways. The first

reading would put the burden on the

Commission to find position limits to be

necessary before imposing them on new

contracts. The second reading would

mandate federal limits on all futures

contracts irrespective of any need, reflexively

putting placing a burden on all markets and

all market participants. Given the choice of

burdening a government agency or private

enterprise, I think it is more prudent to put

the burden on the government. That is what

today’s proposal does. As Thomas Jefferson

said, ‘‘Government exists for the interests of

the governed, not for the governors.’’

Appendix 3—Supporting Statement of

Commissioner Brian Quintenz

I am pleased to support the agency’s

revitalized approach to position limits.

Today’s iteration marks the CFTC’s fifth

proposed position limits rule since the Dodd-

Frank Act

1

amended the Commodity

Exchange Act’s (CEA) section on position

limits. This proposal is, by far, the strongest

of them all.

Today’s proposed 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 proposal

includes an expansive list of enumerated and

self-effectuating bona fide hedge exemptions,

and a streamlined, exchange-centered

process to adjudicate non-enumerated bona

fide hedge exemption requests.

Of the five proposed rules, this proposal is

the most true to the CEA in many significant

respects: By requiring, as has long been the

Commission’s practice, a necessity finding

before imposing limits, by including

economically equivalent swaps, and, perhaps

most importantly, by following Congress’

instruction that, ‘‘to the maximum extent

practicable,’’ any limits set by the

Commission balance the interests among

promoting liquidity, deterring manipulation,

squeezes, and corners, and ensuring the price

discovery function of the underlying market

is not disrupted.

2

The confluence of these

factors occurs most acutely in the spot month

for physically-settled contracts where the

delivery process and price convergence is

most vulnerable to potential manipulation or

disruption due to outsized positions. By

focusing exclusively on spot month position

limits in the new set of physically-settled

(and closely related cash-settled) contracts,

the proposal elegantly balances the

countervailing policy interests enumerated in

the statute.

Necessity Finding

Today’s proposal, unlike the recent prior

proposals, 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.

3

I am

pleased that the proposal 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.

4

As the District Court

noted, ‘‘the Dodd-Frank amendments do not

constitute a clear and unambiguous mandate

to set position limits.’’

5

I agree with the

proposal’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.’’

6

Paragraph

(1) establishes the Commission’s 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 . . .’’

7

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.’’

8

I support the proposal’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 proposal preliminarily 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. 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.

9

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.

10

In contrast, still

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global crude supply. Speculation had nothing to do

with the price rise.’’), available athttps://

www.cftc.gov/sites/default/files/idc/groups/public/

@newsroom/documents/file/hearing080509_

verleger.pdf.

11

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).

12

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.

13

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=Product

TermsandConditions.

14

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.

15

78 FR 75694 (Dec. 12, 2013).

16

64 FR 24038 (May 5, 1999).

17

Proposed Appendix B, paragraph (a).

18

Proposed Appendix A, paragraph (a)(11).

19

Preamble discussion of Proposed Enumerated

Bona Fide Hedges for Physical Commodities.

20

Elimination of CFTC Form 204.

21

78 FR 75,717 (Dec. 12, 2013).

22

Id.

23

Proposed Appendix A, paragraph (a)(5).

24

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).

25

Proposed regulation 150.9.

26

Preamble discussion of proposed regulation

150.9, including references to cases pointing out the

extent to which an agency can delegate to persons

outside of the agency.

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.

11

In my opinion, 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. It is worth

noting that the physically-settled contract

which has seen the largest sustained price

increase recently is palladium,

12

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.

13

Nevertheless,

between the start of 2018 and the end of

2019, palladium futures prices rose 76%.

14

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.

15

With that healthy dose of skepticism, I

think the proposal 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

proposed today are higher than in the past,

notably because the proposal utilizes current

estimates of deliverable supply—numbers

which haven’t been updated since 1999.

16

I

am interested to hear feedback from

commenters about whether the estimates of

deliverable supply, and the calibrated limits

based off of them, are sufficiently tailored for

the individual contracts.

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 proposal takes into

account many of the serious concerns that

end-users voiced in response to the CFTC’s

previous five unsuccessful position limits

proposals.

Importantly, and in response to many

comments, this proposal, for the first time,

expands the possibility for enterprise-wide

hedging,

17

proposes an enumerated

anticipated merchandising exemption,

18

eliminates the ‘‘five-day rule’’ for enumerated

hedges,

19

and no longer requires the filing of

certain cash market information with the

Commission that the CFTC can obtain from

exchanges.

20

Regarding enterprise-wide

hedging—otherwise known as ‘‘gross

hedging’’—the proposal would provide an

energy company, for example, with increased

flexibility to hedge different units of its

business separately if those units face

different economic realities.

With respect to cross-commodity hedging,

today’s proposal completely rejects the

arbitrary, unworkable, ill-informed, and

frankly, ludicrous ‘‘quantitative test’’ from

the 2013 proposal.

21

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.

22

Under this test, longstanding hedging

practices in the electric power generation and

transmission markets would have been

prohibited. Today’s proposal not only shuns

this Government-Knows-Best approach, it

also proposes new flexibility for the cross-

commodity hedging exemption, allowing it to

be used in conjunction with other

enumerated hedges.

23

For example, a

commodity merchant could rely on the

enumerated hedge for unsold anticipated

production to exceed limits in a futures

contract subject to the CFTC’s limits in order

to hedge exposure in a commodity for which

there is no futures contract, provided that the

two commodities share substantially related

fluctuations in value.

Bona Fide Hedges and Coordination With

Exchanges

For those market participants who employ

non-enumerated bona fide hedging practices

in the marketplace, this proposal creates a

streamlined, exchange-focused process to

approve those requests for purposes of both

exchange-set and federal limits. 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.

24

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

limits. Today’s proposal provides what I

believe is a workable framework to utilize

exchanges’ long standing expertise in

granting exemptions that are not enumerated

by CFTC rules.

25

This proposed 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.

26

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.

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 proposal

expand that approach to non-enumerated

hedge exemption requests that will limit the

uncertainty for bone fide commercial market

participants.

I look forward to hearing from end-users

about whether this proposal provides them

the flexibility and certainty they need to

manage their exposures in a way that reflects

the complexities and realities of their

physical businesses. In particular, I am

interested to hear if the list of enumerated

bona fide hedging exemptions should be

broadened to recognize other types of

common, legitimate commercial hedging

activity.

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Sec. 4a(5).

28

Proposed regulation 150.1.

1

Ford v Ferrari (Twentieth Century Fox 2019).

2

Ford v Ferrari, Fox Movies, https://

www.foxmovies.com/movies/ford-v-ferrari (Last

visited Jan. 28, 2020, 1:55 p.m.).

3

See Position Limits for Derivatives, 76 FR 4752

(proposed Jan. 26, 2011) (the ‘‘2011 Proposal’’).

4

The Dodd-Frank Wall Street Reform and

Consumer Protection Act, Public Law 111–203

section 737, 124 Stat. 1376, 1722–25 (2010) (the

‘‘Dodd-Frank Act’’).

5

As in the Proposal, unless otherwise indicated,

the use of the term ‘‘exchanges’’ throughout this

statement refers to designated contract markets

(‘‘DCMs’’) and swap execution facilities (‘‘SEFs’’).

6

See Proposal at III.

Proposed 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.

27

Today’s

proposal provides the market with far greater

certainty on the universe of such swaps than

the previous proposals. 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 proposed rule narrows the scope of

‘‘economically equivalent’’ swaps to those

with material contractual specifications,

terms, and conditions that are identical to

exchange-traded contracts.

28

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

proposed narrowly-tailored definition will

provide market participants with clarity over

those contracts subject to position limits. I

also welcome suggestions from commenters

regarding ways in which the definition can

be further refined to complement limits on

exchange-traded contracts.

Conclusion

Section 2a(10) of the CEA is not an often

cited passage of text. It describes the Seal of

the United States Commodity Futures

Trading Commission, and in particular, lists

a number of symbols on the seal which

represent the mission and legacy of our

agency: The plough showing the agricultural

origin of futures markets; the wheel of

commerce illuminating the importance of

hedging markets to the broader economy;

and, the scale of balanced interests,

proposing a fair weighing of competing or

contradicting forces.

As I think about the proposal in front of

us today, I believe it speaks to all of those

elements enshrined in our agency’s legacy,

but the scale of balanced interests comes

most to mind with this rule: new flexibility

combined with new regulation, the removal

of a few exemptions with the expansion or

addition of others, the reliance on exchange

expertise but with Commission review and

oversight, and the balance of liquidity and

price discovery against the threat of corners

and squeezes. I am very pleased to support

today’s revitalized, confined, and tempered

approach to position limits and look forward

to comment letters, particularly from the end-

user community.

Appendix 4—Dissenting Statement of

Commissioner Rostin Behnam

Introduction

The ceremony for the 92nd Academy

Awards will air in a little over a week. I

haven’t seen too many movies this year given

my two young girls and hectic work

schedule, but I did see ‘‘Ford v Ferrari.’’

1

‘‘Ford v Ferrari’’ earned four award

nominations, including best motion picture

of the year. The film 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 and

competed with Enzo Ferrari’s dominating

and iconic red racing cars at the 1966 24

Hours of Le Mans.

2

This high drama action

film focuses foremost on the relationship

between Shelby and Miles—the co-designers

and driver of Ford’s own iconic GT40—and

their triumph over the competition, the

course, the rulebook, and the bureaucracy.

Even if you aren’t a car enthusiast, the action,

acting, and accuracy of the story are well

worth your time. However, there is a lot more

to this movie than racing.

There is a great scene where Miles is

talking to his son about achieving the

‘‘perfect lap’’—no mistakes, every gear

change, and every corner perfect. In response

to his son’s observation that you can’t just

‘‘push the car hard’’ the whole time, Miles

agrees, pensively staring down the track

towards the setting sun. He says, ‘‘If you are

going to push a piece of machinery to the

limit, and expect it to hold together, you have

to have some sense of where that limit is.’’

It’s 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’’),

3

under the Dodd-Frank Wall

Street Reform and Consumer Protection Act

of 2010.

4

While I would like to be in a

position to say that today’s proposed rule

addressing Position Limits for Derivatives

(the ‘‘Proposal’’) is leading us towards that

‘‘perfect lap,’’ I cannot. While the Proposal

purports to respect Congressional intent and

the purpose and language of CEA section 4a,

in reality, it pushes the bounds of reasonable

interpretation by deferring to the exchanges

5

and setting the Commission on a course

where it will remain perpetually in the draft,

unable to acquire the necessary experience to

retake the lead in administering a position

limits regime.

In 2010 and the decades leading up to it,

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 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.

Right now, we are pushing to go faster and

just get to the finish line, making real-time

adjustments without regard for even trying

for that ‘‘perfect lap.’’ It is unfortunate, but

despite the Chairman’s leadership and the

talented staff’s hard work, I do not believe

that this Proposal will hold itself together. I

must therefore, with all due respect, dissent.

Deference to Our Detriment

While I have a number of concerns with

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. 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 the Commission believes it can

withdraw and continue to maintain access to

information that is critical to oversight, I fear

that giving way absent sufficient

understanding of what we are giving up, and

planning for ad hoc Commission (and staff)

determinations on key issues that are certain

to come up, will let loose a different set of

responsibilities that we have yet to consider.

I believe the Proposal has many flaws that

could be the subject of dissent. I am focusing

my comments on those issues that I think are

most critical for the public’s review. 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 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 propose 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 proposing to (a)

significantly broaden the bona fide hedging

definition, (b) codify an expanded list of self-

effectuating enumerated bona fide hedges, (c)

provide for exchange recognition of non-

enumerated bona fide hedge exemptions with

respect to federal limits, and (d)

simultaneously eliminate notice and

reporting mechanisms, is both inexplicably

complicated to parse and inconsistent with

Congressional intent.

The Commission Is Required To Establish

Position Limits

The Proposal goes to great lengths to

reconcile whether the CEA section

4a(a)(2)(A) requires the Commission to make

an antecedent necessity finding before

establishing any position limit,

6

with the

implication that if a necessity finding is

required, then the Commission could

rationalize imposing no limits at all. I do not

believe it was necessary to rehash the

legislative and regulatory histories to

determine the Commission’s authority with

respect to CEA section 4a. Nor do I believe

it was worthwhile here to reply in such great

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Int’l Swaps & Derivatives Ass’n v. CFTC, 887 F.

Supp. 2d 259 (D.D.C. 2012).

8

Id. at 284.

9

The Proposal’s analysis in support of its denial

of a mandate misconstrues form over substance and

assumes the answer it is looking for by providing

a misleading recitation of Michigan v. EPA, 135

S.Ct. 2699 (2015). In doing so, the Proposal seems

to suggest that the Commission is free to ignore a

Congressional mandate if it determines that

Congress is wrong about the underlying policy. See

Proposal at III.D.

10

76 FR at 4752–54.

11

Id. at 4753.

12

Id. at 4754–55.

13

See 76 FR at 4755.

14

Id.

15

Proposal at II.B.2.d.

16

See 7 U.S.C. 7(d)(5) and 7b–3(f)(6).

17

See, e.g., 7 U.S.C. 6a(e).

18

Proposal at II.B.2.d.

19

See id.

20

See id.

depth to the U.S. District Court for the

District of Columbia’s opinion vacating the

Commission’s 2011 final rulemaking on

Position Limits for Futures and Swaps.

7

The

Proposal uses a tremendous amount of text

to try and flesh out what is meant by

‘‘necessary’’, and yet I fear it does not

demonstrate the Commission’s ‘‘bringing its

expertise and experience to bear when

interpreting the statute,’’ giving effect to the

meaning of each word in the statute, and

providing an explanation for how any

interpretation comports with the policy

objectives of the Act as amended by the

Dodd-Frank Act, as directed by the District

Court.

8

The Commission ought to avoid the

temptation to retract when doing so requires

the torture of strawmen. Not only do we look

complacent, but we invite criticism for our

unnecessary affront to the sensibilities of the

public we serve.

Looking back at the record, what is

necessary is that the Commission complies

with the mandate.

9

In response to the District

Court’s directive, the Commission could have

gone back through its own records to the

2011 Proposal. If it had done so, it would

have found that 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.

10

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.’ ’’

11

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.’’

12

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.

13

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.

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.’’

14

Unsupportable Deference

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 only proposes to maintain

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.’’

15

Essentially, in

the Commission’s reasoned judgment, ‘‘if it

ain’t broke, don’t fix it.’’ And so, the

Commission, in keeping with this relatively

riskless course of action, similarly was able

to conclude that federal non-spot month

limits are not necessary for the remaining 16

proposed core referenced futures contracts

identified in the Proposal.

The Commission provides two reasons in

support of its determination, and neither

sufficiently demonstrates that the

Commission utilized its experience and

expertise. Rather, the Commission backs into

deferring to the exchanges’ authority to

establish position limits or accountability

levels. This course of action ignores the

reality that Commission-set position limits

serve a higher purpose than just addressing

threats of market manipulation

16

or creating

parameters for exchanges in establishing

their own limits.

17

The Proposal advocates

that there is no need to disturb the status

quo, despite the fact that we have nothing to

compare it to. The Commission places a

higher value on minimizing the impact on

industry—which it appears to have not

quantified for purposes of the Proposal—than

actually evaluating the appropriateness of

limits in light of the purposes of the Act and

as described in CEA section 4a(a)(3).

The first reason the Commission submits in

defense of not proposing federal limits

outside of the spot month for the 16

aforementioned contracts is that ‘‘corners and

squeezes cannot occur outside the spot

month . . . and there are other tools other

than federal position limits for deterring and

preventing manipulation outside of the spot

month.’’

18

The ‘‘other tools’’ include

surveillance by the Commission and

exchanges, coupled with exchange-set limits

and/or accountability levels. As laid out in

several paragraphs of the Proposal, the

Commission would maintain a window into

the setting of any limits or accountability

levels that in its view are ‘‘an equally robust’’

alternative to federal non-spot month

speculative position limits. In describing

how accountability levels implemented by

exchanges work, the Commission touts the

flexibility in application because they

provide exchanges—and not the

Commission—the ability to ask questions

about positions, determine if a position raises

any concerns, provide an opportunity to

intervene—or not—etc.

19

While all of this reads well, it ignores

Congressional intent. The Proposal never

considers that Congress directed the

Commission to establish limits—not

accountability levels. Given the

Commission’s ‘‘decades of experience in

overseeing accountability levels

implemented by the exchanges,’’ Congress

would have been well aware that this

alternative path would be a viable option if

it were truly as robust in choosing the

legislative language. But the Commission has

failed to make that case. Foremost, federal

position limits are aimed at diminishing,

eliminating, and preventing sudden and

unwarranted price changes. These sudden

price changes may occur regardless of

manipulative, intentional or reckless

activity—both within and outside of the spot

month. The Commission provides no

explanation regarding how exchange-set

limits or accountability levels would

compare, in terms of effectiveness, to federal

position limits, which among other things,

must apply in the aggregate as mandated by

CEA section 4a(a)(6). It is difficult to measure

the robustness of a regime when there is

nothing to compare it to. As well, the

Commission’s observation that exchange-set

accountability levels have ‘‘functioned as-

intended’’ until this point 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. Not to belabor the

point, but 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.

The Commission’s second reason is that

layering federal non-spot limits for the 16

contracts on top of existing exchange-set

limit/accountability levels may only provide

minimal benefits—if any—while sacrificing

the benefits associated with flexible

accountability levels.

20

The Commission,

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See, e.g., 7 U.S.C. 6a(e) (providing, among other

things and consistent with core principles for DCMs

and SEFs, that exchange-set position limits shall

not be higher that the limits fixed by the

Commission).

22

See Proposed part 150.9(e).

23

See Proposed Commission regulation

150.5(a)(4).

24

See Proposal at II.D.4.

25

See Proposal at I.B.7.a. and b.

26

Id. As well, the Proposal opines that the

Commission’s reliance on the ‘‘limited

circumstances’’ set forth in proposed part 150.9(f)

under which it would revoke a bona fide hedge

recognition granted by an exchange would be rarely

exercised, suggesting a preference to defer to the

judgment of the exchange. See Proposal at II.G.3.f.

again, ignores that Congress was clearly

aware of the possible layering effect, and did

not find it to be comparable let alone as

robust.

21

Moreover, the Commission fails to

support or otherwise quantify its argument

with data. Presumably, the Commission

could calculate anticipated non-spot month

position limits—based on the formula in the

proposed part 150.2(e) (and described in

section II.B.2. e. of the Proposal)—for the 16

proposed core referenced futures contracts

that have never been subject to such limits.

The Commission could have based its

determination on aggregate position data it

collects through surveillance, and it could

have provided a rough estimate of the

potential impact that limits may have, absent

consideration of any of the proposed

enumerated bona fide hedges or spread

exemptions. While I am not sure such

evidence if presented would have changed

my mind, it certainly would have been

helpful in determining the reasonableness of

the Commission’s determination.

What if?

When muscles are overly flexible, they

require appropriate strength to ensure that

they can perform under stress. In addition to

largely deferring to the exchanges in

addressing excessive speculation outside of

the spot-month for the majority of the 25 core

referenced futures contracts, the Proposal

also incorporates flexibility in a multitude of

other ways. The Proposal would provide for

significantly broader bona fide hedging

opportunities that will be largely self-

effectuating; it would defer to the exchanges

in recognizing non-enumerated bona fide

hedging; and it would eliminate longstanding

notice and reporting mechanisms. In

proposing these various provisions, the

Proposal flexes and contorts to accommodate

each piece. In doing so, it seems the

Commission will be left insufficient strength

to accomplish its mandated role of exercising

appropriate surveillance, monitoring, and

enforcement authorities—and this will be to

the detriment of the derivatives markets and

the public we serve.

The main point to get across here is that

while I support enhancing the cooperation

between the Commission and the exchanges,

the Commission here is cooperating by

dropping back and promising to remain in

the draft—never able to fully compete, or

take advantage of a ‘‘slingshot effect.’’ We

will simply never gain the necessary direct

experience with the new regime. The

Commission lacks experience in

administering spot month limits for 16 of the

25 core referenced futures contracts and lacks

familiarity with both common commercial

hedging practices for the 16 contracts and the

proliferation of the use of the dozen or so

self-effectuating enumerated hedges and

spread exemptions (also largely self-

effectuating) being proposed. While prior

drafts of the Proposal admitted this as

recently as two weeks ago, the Commission

determined to change course and quickly let

go of the line. The Commission’s decision to

essentially give up primary authority to

recognize non-enumerated bona fide hedges,

and to rely on the exchanges to collect and

hold relevant cash market data for the

Commission’s use only after requesting it,

seems both careless and inconsistent with

Congressional intent.

For example, while the Proposal provides

the Commission with the authority to reject

an exchange’s granting of a non-enumerated

bona fide hedge recognition, this

determination must be in the form of a

‘‘Commission action,’’ and it must take place

in the span of ten business days (or two in

the case of sudden or unforeseen

circumstances). Furthermore, the Proposal

offers no guidance as to what factors the

Commission may consider, or the criteria it

may use to make the determination. This

narrow window of time likely will not

provide Commission staff with a reasonable

timeframe to prepare the necessary

documentation for the full Commission to

deliberate and either request additional

information, stay the application, or vote to

accept the recognition.

22

It seems more likely

that the Commission will be unable to act

within the ten or two-day window and the

recognition will default to being approved.

Regardless of what the Commission

determines—even if it ultimately determines

that a position for which an application for

a bona fide hedge recognition does not meet

the CEA definition of a bona fide hedge or

the requirements in proposed part 150.9(b)—

the Commission could not determine that the

person holding the position has committed a

position limits violation during the

Commission’s ongoing review or upon

issuing its determination. I have so many

‘‘what ifs’’ in response to this set up that I

feel trapped.

In the Proposal, the Commission requires

exchanges to collect cash-market information

from market participants requesting bona fide

hedges, and to provide it to the Commission

only upon request. The Proposal also

eliminates Commission Form 204, which

market participants currently file each month

when they have bona fide hedging positions

in excess of the federal limits. This form is

a necessary mechanism by which market

participants demonstrate cash-market

positions justifying such overages. These

changes may be well-intentioned, but they

are ill-conceived in consideration of the

various changes being proposed to the federal

position limits regime.

Foremost, under the Proposal, the

Commission would receive a monthly report

showing the exchange’s disposition of any

applications 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 of a prior

recognition or exemption).

23

While the

Proposal argues that the monthly report

would be a critical element of the

Commission’s surveillance program by

facilitating its ability to track bona fide

hedging positions and spread exemptions

approved by the exchanges,

24

it would not

itself appear to be useful in discerning any

market participants ongoing justification for,

or compliance with, self-effectuating or

approved bona fide hedge, spread, or other

exemption requirements. While the contents

of the report may prompt the Commission to

request records from the exchange, it is

unclear what may be involved in the making

of, and response to, such requests—including

time and resources on both sides. Not to

mention that the Proposal opines that

exchanges would only collect responsive

information on an annual basis,

25

and part

150.9(e) does not require exchanges to notify

the Commission of any renewal applications.

Of course, the Proposal posits that the

Commission would likely only need to make

such requests ‘‘in the event that it noticed an

issue that could cause market disruptions.’’

26

My guess is that our surveillance staff and

Division of Enforcement may have other

ideas, but I will leave that with the ‘‘what

ifs.’’

Conclusion

The 24 Hours of Le Mans awards the

victory to the car that covers the greatest

distance in 24 hours. While the Proposal

shoots for victory by similarly attempting to

achieve a great amount over a short time

period, I am concerned that all of it will not

hold together. The Proposal attempts to

justify deferring to the exchanges on just

about everything, and in-so-doing it pushes

to the back any earnest interpretation of the

Commission’s mandate or the guiding

Congressional intent. This is not cooperation,

this is stepping-aside, backing down, giving

way, and getting comfortable in the draft. I

am not comfortable in this or any draft. It’s

my understanding that the Commission has

the tools and resources to develop a better

sense of where federal position limits ought

to be in order to achieve the purposes for

which they were designed, while

maintaining our natural, Congressionally-

mandated lead. The Proposal fails to

recognize that Congress already set the

course in directing us that our derivatives

markets will operate optimally with limits—

we just need to provide a sense of where they

are. Perhaps the Proposal was just never

aiming for the ‘‘perfect lap.’’

Appendix 5—Statement of

Commissioner Dawn D. Stump

Reasonably designed. Balanced in

approach. And workable in practice—both

for market participants and for the

Commission. These are the 3 guideposts by

which I have evaluated the proposal before

us to update the Commission’s rules

regarding position limits for derivatives. Is it

reasonable in its design? Is it balanced in its

approach? And is it workable in practice for

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CEA section 4a(a), 7 U.S.C. 6a(a).

2

Section 4a(c) of the CEA further requires that the

Commission’s position limit rules ‘‘permit

producers, purchasers, sellers, middlemen, and

users of a commodity or a product derived

therefrom to hedge their legitimate anticipated

business needs . . .’’ CEA section 4a(c), 7 U.S.C.

6a(c).

3

CEA section 3(b), 7 U.S.C. 5(b).

4

See Dodd-Frank Wall Street Reform and

Consumer Protection Act, Public Law 111–203, 124

Stat. 1376 (2010) (‘‘Dodd-Frank Act’’).

5

‘‘Position Limits and the Hedge Exemption,

Brief Legislative History,’’ Testimony of General

Counsel Dan M. Berkovitz, Commodity Futures

Trading Commission, before Hearing on Speculative

Position Limits in Energy Futures Markets at 1 (July

28, 2009) (‘‘Today, I will provide a brief legislative

history of the mandate in the CEA concerning

position limits and the exemption from those limits

for bona fide hedging transactions.... Since its

enactment in 1936, the Commodity Exchange Act

(CEA) . . . has directed the Commodity Futures

Trading Commission (CFTC) to establish such

limits on trading ‘as the Commission finds are

necessary to diminish, eliminate, or prevent such

burden [on interstate commerce].’ The basic

statutory mandate in Section 4a of the CEA to

establish position limits to prevent such burdens

has remained unchanged over the past seven

decades) (emphasis added), available at https://

www.cftc.gov/PressRoom/SpeechesTestimony/

berkovitzstatement072809; see also, id. at 5 (‘‘By the

mid-1930s . . . Congress finally provided a federal

regulatory authority with the mandate and

authority to establish and enforce limits on

speculative trading. In Section 4a of the 1936 Act

(CEA), the Congress .... directed the Commodity

Exchange Commission [the CFTC’s predecessor

agency] to establish such limits on trading ‘as the

commission finds is [sic] necessary to diminish,

eliminate, or prevent’ such burdens . . .’’)

(emphasis added).

6

Isaac Marion, Warm Bodies and The New

Hunger: A Special 5th Anniversary Edition, 97,

Simon and Schuster (2016).

7

International Swaps and Derivatives Association

v. U.S. Commodity Futures Trading Commission,

887 F.Supp. 2d 259, 281–282 (D.D.C. 2012)

(emphasis in the original) (‘‘ISDA v. CFTC’’), citing

PDK Labs. Inc. v. U.S. DEA, 362 F.3d 786, 794, 797–

98 (D.C. Cir. 2004).

8

Position Limits for Derivatives, 78 FR 75680,

75685 (proposed Dec. 12, 2013) (‘‘2013 Proposal’’).

9

Position Limits for Derivatives, 81 FR 96704,

96716 (proposed Dec. 30, 2016) (‘‘2016 Re-

Proposal’’).

both market participants and the

Commission? Overall, I believe the answer to

each of these questions is yes, and I therefore

support the publication of this proposal for

public comment.

There is one question that I have not asked:

Is it perfect? It is not. There are two

particular areas discussed below that I

believe can be improved—the list of

enumerated hedging transactions and

positions, and the process for reviewing

hedging practices outside of that list.

But in reality, how could a position limits

proposal ever achieve perfection? In section

4a(a) of the Commodity Exchange Act

(‘‘CEA’’),

1

Congress has given the

Commission the herculean task of adopting

position limits that:

•It finds necessary to diminish, eliminate,

or prevent an undue and unnecessary burden

on interstate commerce as a result of

excessive speculation in derivatives;

•Deter and prevent market manipulation,

squeezes, and corners;

•Ensure sufficient market liquidity for

bona fide hedgers;

2

•Ensure that the price discovery function

of the underlying market is not disrupted;

•Do not cause price discovery to shift to

trading on foreign boards of trade; and

•Include economically equivalent swaps.

And it must do so, according to the CEA’s

purposes set out in section 3(b), through a

system of effective self-regulation of trading

facilities.

3

These statutory objectives are not only

numerous, but in many instances they are in

tension with one another. As a result, it is not

surprising that each of us will have a

different view of the perfect position limits

framework. Perfection simply cannot be the

standard by which this proposal is judged.

But after nearly a decade of false starts, I

believe the proposal before us brings us close

to the end of that long journey. It is

reasonably designed. It is balanced in its

approach. And it is workable in practice. I

am pleased to support putting it before the

public for comment.

The Commission Has a Mandate To Impose

Position Limits It Finds Are Necessary

Background

Before digging into the substantive

provisions of the proposal, let me offer my

view on a legal issue that has been debated

seemingly without end throughout the past

decade in the Commission’s rulemaking

proceedings and in federal court. As noted in

testimony by the CFTC’s General Counsel in

July 2009, a year before the Dodd-Frank Act

4

became law, the CEA has always given the

Commission a mandate to impose federal

position limits—that is, a mandate to impose

federal position limits that it finds are

necessary.

5

The issue that has consumed the

agency, the industry, and the bar is this: Did

the amendments to the CEA’s position limits

provisions that were enacted as part of the

Dodd-Frank Act strip the Commission of its

discretion not to impose limits if it does not

find them to be necessary?

I consider it unfortunate that the

Commission has spent so much time, energy,

and resources on this debate. That time,

energy, and resources would have been much

better spent focusing on the development of

a position limits framework that is

reasonably designed, balanced in approach,

and workable in practice for both market

participants and the Commission—which

simply cannot be said of the Commission’s

prior efforts in this area. But, in the words

of American writer Isaac Marion in his

‘‘zombie romance’’ novel Warm Bodies: ‘‘We

are where we are, however we got here.’’

6

And so, a few thoughts on necessity and

mandates.

In the ISDA v. CFTC case, a federal district

court in 2012 vacated the Commission’s first

post-Dodd-Frank Act attempt to adopt a

position limits rulemaking. The court

concluded that the Dodd-Frank Act

amendments to the position limits provisions

of the CEA ‘‘are ambiguous and lend

themselves to more than one plausible

interpretation.’’ Accordingly, it remanded the

position limits rulemaking to the

Commission to ‘‘bring its experience and

expertise to bear in light of competing

interests at stake’’ in order to ‘‘fill in the gaps

and resolve the ambiguities.’’

7

The Commission attempted to follow the

court’s directive in a proposed position limits

rulemaking published in 2013. There, the

Commission concluded that the Dodd-Frank

Act required the agency to adopt position

limits even in the absence of finding them

necessary but, ‘‘in an abundance of caution,’’

also made a finding of necessity with respect

to the position limits that it was proposing.

8

The Commission promulgated this same

analysis when, three years later, it re-

proposed its position limits rulemaking in

2016.

9

The proposal before us today, by

contrast, bases its proposed limits solely on

finding them to be necessary—albeit a

finding of necessity that is different from the

one relied upon in the 2013 Proposal and the

2016 Re-Proposal.

Practical Considerations

I find the analysis put forward by our

General Counsel’s Office in the proposed

rulemaking before us today—which explains

the Commission’s legal interpretation that its

mandate to impose position limits under the

CEA exists only when it finds the limits are

necessary—to be well-reasoned and

compelling. I add two practical

considerations in support of that conclusion.

First, if Congress in the Dodd-Frank Act

had wanted to eliminate a necessity finding

as a prerequisite to the imposition of position

limits, it could simply have removed the

requirement to find necessity that already

existed in the CEA. That it did not do so

indicates that on this point, the CEA both

before and after the Dodd-Frank Act provides

that the Commission has a mandate to

impose position limits that it finds are

necessary.

Second, I do not believe that Congress

would have directed the Commission to

spend its limited resources developing and

administering position limits that are not

necessary. We must be careful stewards of

the taxpayer dollars entrusted to us, and

absent a clear statement of Congressional

intent to do so, I do not believe those dollars

should be spent on position limits that the

Commission does not find to be necessary to

achieve the objectives of the CEA.

Statutory Analysis

This section walks through some of the

statutory text in CEA section 4a(a) that is

relevant to the question of whether a finding

of necessity is a prerequisite to the

Commission’s mandate of imposing position

limits. A diagram entitled ‘‘Commodity

Exchange Act Section 4a(a): Finding Position

Limits Necessary is a Prerequisite to the

Mandate for Establishing Such’’ accompanies

this statement on the Commission’s website,

which may aid in reading the discussion.

Subsection (1) of section 4a(a) is legacy text

that has been in the CEA for decades. As

noted above, it has long mandated that the

Commission impose position limits that it

finds necessary to diminish, eliminate, or

prevent the burden on interstate commerce

resulting from excessive speculation in

derivatives. Subsection (2) of section 4a(a),

on the other hand, was added to the CEA by

the Dodd-Frank Act.

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10

Rebeka Kebede, Oil Hits Record Above $147,

Reuters Business News, July 10, 2008, available at

https://www.reuters.com/article/us-markets-oil/oil-

hits-record-above-147-idUST14048520080711.

11

Leigh Ann Caldwell, Face the Facts: A Fact

Check on Gas Prices, CBS News Face the Nation,

March 21, 2012, available at https://

www.cbsnews.com/news/face-the-facts-a-fact-

check-on-gas-prices/.

12

Commodity Markets Transparency and

Accountability Act of 2008, H.R. 6604, 110th Cong.

sec. 8 (2008).

13

Tom DiChristopher, US to Become a Net Energy

Exporter in 2020 for First Time in Nearly 70 Years,

Energy Dept. Says, CNBC Business News, Energy,

Jan. 24, 2019, available at https://www.cnbc.com/

2019/01/24/us-becomes-a-net-energy-exporter-in-

2020-energy-dept-says.html.

14

Futures Industry Association, Global Futures

and Options Trading Reaches Record Level in 2019,

Jan. 16, 2020, available at https://fia.org/articles/

global-futures-and-options-trading-reaches-record-

level-2019.

15

See fn. 6, supra, at 97.

16

The 2016 Re-Proposal did not propose that

federal position limits be imposed on three cash-

settled futures contracts (Class III Milk, Feeder

Cattle, and Lean Hogs) that were included as core

referenced futures contracts in the 2013 Proposal.

See 2016 Re-Proposal, 81 FR at 96740 n.368.

In my view, subsections (1) and (2) are

linked, and cannot each be considered in

isolation, because the Dodd-Frank Act

specifically tied them together. First,

subparagraph (A) of subsection (2) links the

Commission’s obligation to set position

limits to the ‘‘standards’’ set forth in

subsection (1)—including the standard of

finding necessity as a prerequisite to the

mandate of imposing position limits. Then,

subparagraph (B) of subsection (2) links the

timing of issuing position limits to the limits

required under subparagraph (A)—which, as

noted, is connected to the standards set forth

in subsection (1), including the standard of

finding necessity.

In sum, the new timing provisions in

subparagraph (2)(B) apply to the requirement

in subparagraph (2)(A). Subparagraph (2)(A),

in turn, informs how Congress intended the

Commission to establish limits, i.e., in

specific accordance with the standards in

subsection (1)—which includes the necessity

standard. They are all linked.

Yet, some have relied in isolation on the

‘‘shall . . . establish limits’’ wording in

subparagraph (A) of subsection (2) to argue

that the Dodd-Frank Act imposed a mandate

on the Commission to establish position

limits even in the absence of a finding of

necessity. Some also have pointed to the

timing provisions in subparagraph (B) of

subsection (2) to argue that the Dodd-Frank

Act imposed a mandate on the Commission

to establish position limits because

subparagraph (B) twice says that position

limits ‘‘shall be established.’’ I agree that,

under subparagraph (B), position limits

‘‘shall be established’’ as required under

subparagraph (A)—but as noted,

subparagraph (A) states that the Commission

shall establish limits ‘‘[i]n accordance with

the standards set forth in [subsection (1)].’’

This latter point cannot be overlooked or

ignored.

Some also have asked why Congress would

add all this new language to CEA section

4a(a) if not to impose a new mandate. Yet,

it makes perfect sense to me that while

expanding the Commission’s authority to

regulate swaps in the Dodd-Frank Act,

Congress took the opportunity to review and

enhance the Commission’s position limit

authorities to ensure they were fit for

purpose considering the addition of the new

expanded authorities, including how swaps

would be considered in the context of

position limits. The timing of the review

period was spelled out and the manner in

which the Commission would go about

establishing limits was refined to account for

this massive change in oversight.

But never did anyone suggest that the

legacy language in subsection (1) of section

4a(a), including the required prerequisite of

a necessity finding, had effectively been

eliminated and replaced with a new mandate

that would apply even in the absence of a

necessity finding.

Subsequent History

Finally, as noted above, the court in ISDA

v. CFTC instructed the Commission to use its

‘‘experience and expertise’’ to resolve the

ambiguity it found in the statute. That

experience and expertise cannot look only to

the era in which these position limit

provisions were enacted. We are where we

are, and so the application of the

Commission’s experience and expertise must

include a consideration of the substantial

changes in the markets since that time.

Given the intervention of a global financial

crisis, it is hard to recall that the Dodd-Frank

Act amendments to the CEA’s position limit

provisions were borne at a time of

skyrocketing energy prices during 2007–

2008. The price of oil climbed to over $147

a barrel in July 2008, which represented a

50% increase in one year and a seven-fold

increase since 2002.

10

Gas prices at the pump

peaked at over $4 a gallon in June and July

of 2008.

11

Some at the time charged that these price

spikes were caused by excessive speculation

in futures contracts on energy commodities

traded on U.S. futures exchanges—another

topic of debate on which I will save my

views for another day. But not surprisingly,

legislation soon followed. By the end of 2008,

the House of Representatives had passed

amendments to the CEA’s position limit

provisions,

12

and after the Senate failed to

act, the issue was subsequently addressed in

the Dodd-Frank Act.

How times have changed. The United

States, due to a boom in oil and natural gas

production relating to shale drilling and the

development of liquefied natural gas, will

soon become a net energy exporter.

13

Although no new federal position limits have

been imposed, prices of energy commodities

have generally dropped and stabilized, and

cries of excessive speculation in the

derivatives markets are rare. Also, our

derivatives markets have grown substantially.

Global trading in listed futures and options

increased from 22.4 billion contracts in 2010

to a record 34.47 billion contracts in 2019.

Global open interest increased to a record

900 million contracts from 718.5 million in

2010.

14

Applying our experience and expertise,

what these developments teach us is that

economic conditions change over time.

Technology marches on. Markets evolve. And

prices fluctuate in response to a myriad of

influences. Having lived through the energy

price increases of the mid-2000s, I do not

minimize the pain they caused, or the

importance of the Commission taking

appropriate steps to prevent excessive

speculation in derivatives markets that can

contribute to a burden on interstate

commerce. Given the history of the past

decade, however, I do not believe Congress

intended, based on the moment in time of

2007–2008, to forever lock our derivatives

markets into a straightjacket, or to deny the

Commission the flexibility to draw

conclusions of necessity based on particular

circumstances.

Returning to our zombie romance, I’m

afraid I have not been fair to its author. That

is because there is a second line to the

quotation, which reads: ‘‘We are where we

are, however we got here. What matters is

where we go next.’’

15

It is my fervent hope that the majority of

comment letters we receive on today’s

proposal provide constructive input on

where the proposal would take us next with

respect to position limits—and not simply

fan the flames of the necessity debate. And

it is the topic of where we go next that I will

now turn.

What position limits are necessary?

Having concluded that the CEA mandates

the Commission to impose position limits

that it finds are necessary, the question then

becomes: What position limits are necessary?

In the 2013 Proposal, the Commission’s

necessity finding determined that federal

spot month position limits were necessary for

28 core referenced futures contracts on

various agricultural, energy, and metals

commodities. In the 2016 Re-Proposal, the

Commission utilized the same necessity

finding to determine that federal spot month

limits were necessary for 25 of the 28 core

referenced futures contracts for which they

had been found necessary in 2013.

16

And

today’s proposal, although utilizing a

different approach to the necessity finding,

determines that federal spot month limits are

necessary for the same 25 core referenced

futures contracts for which they were found

to be necessary in the 2016 Re-Proposal.

In other words, three different iterations of

the Commission have found federal spot

month position limits to be necessary for

these 25 core referenced futures contracts.

That degree of consistency alone

demonstrates the reasonableness of this

determination.

To be sure, both the 2013 Proposal and the

2016 Re-Proposal found federal position

limits for non-spot months to be necessary

for these 25 contracts, whereas today’s

proposal does so for only the nine legacy

agricultural contracts that are currently

subject to federal non-spot month limits. Yet,

the necessity findings in the 2013 Proposal

and the 2016 Re-Proposal were based largely,

if not entirely, on just two episodes: (1) The

activity of the Hunt Brothers in the silver

market in 1979–1980; and (2) the activity of

the Amaranth hedge fund in the natural gas

market in the mid-2000s.

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The 2016 Re-Proposal acknowledged that ‘‘both

episodes involved manipulative intent.’’ 2016 Re-

Proposal, 81 FR at 96716.

18

The use of position accountability in lieu of

hard limits is expressly permitted by the CEA for

both designated contract markets, CEA section

5(d)(5), 7 U.S.C. 7(d)(5), and swap execution

facilities, CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6).

19

CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1).

20

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)).

The Hunt Brothers silver episode and

Amaranth natural gas episode occurred over

30 and over 15 years ago, respectively. It also

should be noted that the Commission settled

enforcement actions against both the Hunt

Brothers and Amaranth charging that they

had engaged in manipulation and/or

attempted manipulation.

17

Since that time,

Congress has provided the Commission with

enhanced anti-manipulation enforcement

authority as part of the Dodd-Frank Act,

which the Commission has used aggressively

and serves as an effective tool to deter and

combat potential manipulation involving

trading in non-spot months.

Again, I do not minimize the seriousness

of the Hunt Brothers and Amaranth episodes,

both of which had significant ramifications.

But I am comfortable with the proposal’s

determination that two dated episodes of

manipulation during the past 30 years do not

establish that it is necessary to take the

drastic step of restricting trading (and

liquidity) in non-spot months by imposing

position limits for the core referenced futures

contracts in these two commodities—let

alone for the other 14 contracts at issue. I

therefore support publishing the necessity

finding in the proposal before us—including

the limitation on proposed non-spot month

limits to the nine legacy agricultural

contracts—for public comment.

Setting Limit Levels

With respect to setting position limit

levels, the Commission’s historical practice

has been to set federal spot month levels at

or below 25 percent of deliverable supply

based on estimates provided by the

exchanges and verified by the Commission.

Yet, some of the deliverable supply estimates

underlying the existing federal spot month

limits on the nine legacy agricultural futures

contracts have remained the same for

decades, notwithstanding the revolutionary

changes in U.S. futures markets and the

explosive growth in trading volume over the

years. These outdated delivery supply

estimates require updating.

The proposal adheres to the Commission’s

historical approach, which is reasonable

given the Commission’s years of experience

administering federal spot month limits on

the legacy agricultural contracts. And it

provides a long-overdue update to

deliverable supply estimates for those legacy

contracts to reflect the realities of today’s

markets. The proposed spot month limits for

the 25 core referenced futures contracts are

based on deliverable supply estimates of the

exchanges that know their markets best, but

that have been carefully analyzed by

Commission staff to assure that they strike an

appropriate balance between protecting

market integrity and restricting liquidity for

bona fide hedgers.

For limit levels outside the spot month, the

Commission historically has used a formula

based on 10% of open interest for the first

25,000 contracts, with a marginal increase of

2.5% of open interest thereafter. Again, the

proposal reasonably adheres to this general

formula with which the Commission is

familiar in proposing non-spot month limits

for the nine legacy agricultural contracts, but

it would apply the 2.5% calculation to open

interest above 50,000 contracts rather than

the current level of 25,000 contracts.

Open interest has roughly doubled since

federal limits were set for these markets,

which has made the current non-spot month

limits significantly more restrictive as the

years have gone by. Nevertheless, I

appreciate that such a change to established

limits may raise concern. I am therefore

pleased that the proposal includes a question

asking whether the proposed increases in

federal non-spot month limits should be

implemented incrementally over a period of

time, rather than immediately at the effective

date. (There is additionally a question

seeking input on the impact of increases in

non-spot month limits for convergence that is

of great interest to me.)

Finally, it is important to remember that

the 16 core referenced futures contracts for

which federal non-spot month limits are not

being proposed remain subject to exchange-

set position limit levels or position

accountability levels.

18

The Commission has

decades of experience overseeing

accountability levels implemented by

exchanges, including for all 16 contracts that

would not be subject to federal limits outside

the spot month under this proposal. Position

accountability enables the exchange to obtain

information about a potentially problematic

position while it is at a relatively low level,

and to require a trader to halt increasing that

position or to reduce the position if the

exchange considers it warranted. Exchange

position accountability rules, in combination

with market surveillance by both the

exchanges and the Commission and the

Commission’s enhanced anti-manipulation

authority granted by the Dodd-Frank Act,

provide a robust means of detecting and

deterring problems in the outer months of a

contract. The proposal reasonably continues

to rely on these tools in the non-legacy

contracts.

Undoubtedly, there will be those who

believe the proposed spot and non-spot

month limits are too high, and others who

consider them too low. I look forward to

receiving public comments along these lines,

but expect that any such comments will

include market data and analysis for the

Commission to consider in developing final

rules.

Bona Fide Hedging Transactions and

Positions

The CEA provides that the Commission’s

position limit rules shall not apply to bona

fide hedging transactions or positions. It

gives the Commission the authority to define

‘‘bona fide hedging transactions and

positions’’ with the purpose of ‘‘permit[ting]

producers, purchasers, sellers, middlemen,

and users of a commodity or a product

derived therefrom to hedge their legitimate

anticipated business needs . . .’’

19

This

serves as a statutory reminder of the

fundamental point that the Commission is

imposing speculative position limits, and

since bona fide hedging is outside the scope

of speculative activity, it is by definition

outside the scope of the position limit rules.

The Commission’s current definition of the

term ‘‘bona fide hedging transactions and

positions’’ is set out in what is referred to as

‘‘Rule 1.3(z).’’ In addition to providing a

definition, Rule 1.3(z) also identifies certain

specific ‘‘enumerated’’ hedging practices that

the Commission recognizes as falling within

the scope of that definition and therefore not

subject to position limits. Other ‘‘non-

enumerated’’ hedging practices can still be

recognized as bona fide hedging, but only

after a Commission review process.

I am delighted that the proposal before us

recognizes an expanded list of enumerated

bona fide hedging practices than are

currently recognized in Rule 1.3(z). This is

entirely appropriate. Hedging practices at

companies that produce, process, trade, and

use agricultural, energy, and metals

commodities are far more sophisticated,

complex, and global than when the

Commission last considered Rule 1.3(z). This

is yet one more instance where the

Commission’s position limit rules simply

have not kept pace with developments in,

and the realities of, the marketplace. In

addition, the proposal would expand federal

limits to contracts in commodities not

previously subject to federal limits, and thus

common hedging practices in the markets for

those commodities must be considered for

inclusion in the list of enumerated bona fide

hedges.

I am particularly pleased that, at my

request, the proposal recognizes anticipatory

merchandising as an enumerated bona fide

hedge. After all, the CEA itself identifies

anticipatory merchandising as bona fide

hedging activity,

20

and the Commission has

previously granted non-enumerated hedge

recognitions for anticipatory merchandising.

There is no policy basis for distinguishing

merchandising or anticipated merchandising

from other activities in the physical supply

chain. Although there must be appropriate

safeguards against abuse, where

merchandisers anticipate taking price risk,

they should have the same opportunity as

others in the physical supply chain to

manage their risk through recognized risk-

reducing transactions that qualify as bona

fide hedging.

Although the proposal refers to

enumerated bona fide hedges as ‘‘self-

effectuating’’ for purposes of federal limits,

this is a bit of a misnomer. Even if a hedge

is enumerated, the trader still must receive

approval from the relevant exchange to

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Further, the absence of Commission approval of

an enumerated bona fide hedge does not mean that

the Commission has no access to data about the

position or insight into the hedger’s trading activity.

22

See fn. 3, supra.

23

CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5).

1

See Position Limits for Derivatives (‘‘Proposal’’)

at rule text section 150.9(e).

exceed the exchange-set limits.

21

This, too, is

entirely appropriate. The exchanges know

their markets, and they are very familiar with

current hedging practices in agricultural,

energy, and metals commodities, and thus

are well-suited to apply the enumerated bona

fide hedges in real-time. And, as noted above,

Congress has declared it a purpose of the

CEA to serve the public interest with respect

to derivatives trading ‘‘through a system of

effective self-regulation of trading facilities

. . .’’

22

I find perplexing what the proposal refers

to as a ‘‘streamlined’’ process for recognizing

non-enumerated bona fide hedging practices

with respect to federal position limits.

Pursuant to proposed 150.9, if an exchange

recognizes a non-enumerated practice as a

bona fide hedge for purposes of the

exchange’s position limits, that recognition

would apply to the federal limits as well,

unless the Commission notifies the exchange

and market participant otherwise. The

Commission would have 10 business days for

an initial application, or 2 business days in

the case of a sudden or unforeseen increase

in the applicant’s bona fide hedging needs,

to approve or reject the exchange’s bona fide

hedging recognition.

I do not believe this ‘‘10/2-Day Rule’’ is

workable in practice for either market

participants or the Commission because it is

both too long and too short. It is too long to

be workable for market participants that may

need to take a hedging position quickly, and

it is too short for the Commission to

meaningfully review the relevant

circumstances and make a reasoned

determination related to the exchange’s

recognition of the hedge as bona fide.

My preference would have been to propose

that recognition of non-enumerated hedges

be the responsibility of the exchanges that,

again, are most familiar both with their own

markets and with the hedging practices of

participants in those markets. The

Commission would monitor this process

through our routine, ongoing review of the

exchanges. I welcome public comment on the

proposal’s legal discussion of the sub-

delegation of agency decision making

authority as relevant to this question, and on

how the proposed 10/2-Day Rule might be

improved in a final rulemaking to make the

process workable for market participants and

the Commission alike.

A Word About Economically Equivalent

Swaps

CEA section 4a(a)(5) provides that

‘‘[n]otwithstanding any other provision’’ in

section 4a, the Commission’s position limit

rules shall establish limits, ‘‘as appropriate,’’

with respect to economically equivalent

swaps, and that such limits must be

‘‘develop[ed] concurrently’’ and

‘‘establish[ed] simultaneously’’ with the

limits imposed on futures contracts and

options on futures contracts.

23

I share the

view that section 4a(a)(5) thereby requires

that this rulemaking encompass

economically equivalent swaps, although I

invite public comment from those who

believe another interpretation may be

permissible and appropriate.

The proposal sets forth a narrow definition

of the term ‘‘economically equivalent swap,’’

which I believe is appropriate. A measured

approach is reasonable given that: (1) The

Commission’s regulatory regime for swaps

remains in its relative infancy; (2) swaps

have never been subject to position limits, be

it federal or exchange-set limits; and (3) the

implications of imposing position limits on

economically equivalent swaps cannot be

predicted with any degree of confidence at

this time. Further, a measured approach is

more workable because it is the Commission,

rather than an exchange, that will be

responsible for administering the new

position limits regime for swaps given that:

(1) Many swaps trade over-the-counter

(‘‘OTC’’) so there is no exchange to fulfill this

responsibility; and (2) for swaps traded on

swap execution facilities (‘‘SEFs’’), those

SEFs lack the information about a trader’s

swap positions on other SEFs and OTC that

would be necessary to fulfill this

responsibility.

That said, the proposed definition of an

‘‘economically equivalent swap’’ is broader

than that used in the European position

limits regime. In Europe, economic

equivalence requires identical terms; the

proposal, by contrast, requires only that

material terms be identical. I look forward to

receiving comment on this distinction, and

the experience that market participants have

had with the European application of

position limits to swaps.

Conclusion

The fact that the Commission has been

trying to update these rules for nearly a

decade demonstrates the challenge presented

by position limits. I am extremely grateful to

the many members of our staff in the

Division of Market Oversight, the Office of

General Counsel, and the Chief Economist’s

Office who have dedicated a significant

portion of their lives to helping us try to meet

that challenge. I also appreciate the efforts of

my fellow Commissioners as well.

Each of us has committed that we would

work to finish a position limits rulemaking.

The time has come. Overall, today’s proposal

is reasonable in design, balanced in

approach, and workable for both market

participants and the Commission. I therefore

support it.

I ask market participants to view the

proposal in that spirit. Please provide us with

your constructive input on how we can make

a good proposal even better.

Appendix 6—Dissenting Statement of

Commissioner Dan M. Berkovitz

Introduction

I dissent from today’s position limits

proposal (‘‘Proposal’’). The Proposal would

create an uncertain and unwieldy process

with the Commission demoted from head

coach over the hedge exemption process to

Monday-morning quarterback for exchange

determinations.

1

The Proposal would

abruptly increase position limits in many

physical delivery agricultural, metals, and

energy commodities, in some instances to

multiples of their current levels. It would

provide no opportunity for the Commission

to monitor the effect of these increases, or to

act if necessary to preserve market integrity.

The Proposal provides inadequate

explanation for other key approaches in the

document, including the use of position

accountability rather than numerical limits

for energy and metals commodities in non-

spot months. The Proposal also ignores

Congress’s mandate in the Dodd-Frank Act,

and reverses decades of legal interpretations

of the Commodity Exchange Act (‘‘CEA’’) by

the Commission and the courts regarding the

Commission’s authority and responsibility to

impose position limits. It would require, for

the first time, the Commission to find that

position limits are necessary for each

commodity prior to imposing limits.

I Support an Effective Position Limits

Framework With Transparency and Certainty

Position limits is one of the last remaining

items in the Commission’s reform agenda

arising from the Dodd-Frank Act. In the wake

of the 2008 oil price spike to $147 per barrel,

the Amaranth hedge fund’s dominance of the

natural gas futures and swaps market, the rise

of commodity index funds, and the financial

crisis, Congress mandated that the

Commission promptly establish, as

appropriate, position limits and hedge

exemptions for exempt and agricultural

commodities and economically equivalent

swaps. We must not forget the lessons from

the financial crisis or prior episodes of

excessive speculation, nor be lulled back into

the belief that unfettered markets yield

optimal outcomes. A meaningful, effective

position limits regime was important to the

reform agenda in 2010, and it must remain

our goal today.

I support an effective position limits

regime that includes both effective limits on

speculative positions and appropriate bona

fide hedge exemptions to meet market

participants’ legitimate commercial needs.

Position limits are critical to preventing

market manipulation or distortion due to

excessively large speculative positions.

Together, position limits and bona fide hedge

exemptions promote the market integrity and

the price discovery process, while enabling

producers, end-users, merchants, and others

to use the futures and swaps markets to

manage their commercial risks. The Dodd-

Frank Act, adopted by Congress in 2010 in

the midst of the financial crisis, affirmed

Congress’s commitment to federal

speculative position limits and its

determination that the Commission should

act decisively to address excessive

speculation in physical commodity markets.

Since joining the Commission, I have

traveled the country to meet with market

participants in many segments of the

physical commodity markets. I have been to

soybean farms and rice mills in Arkansas,

feedlots in Colorado, dairy co-ops and

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See Proposal at preamble section

II(A)(1)(c)(ii)(1). This change comports with

amendments to the definition of bona fide hedging

in CEA section 4a(c)(2) made by the Dodd-Frank

Act.

3

Proposal at preamble section II(A)(1)(c)(ii)(1).

4

See, e.g., Ke Tang & Wei Xiong, Index

Investment and Financialization of Commodities,

68 Financial Analysts Journal 54, 55 (2012);

Luciana Juvenal & Ivan Petrella, Speculation in the

Oil Market, Federal Reserve Bank of St. Louis,

Working Paper 2011–027E (June 2012), available at

http://research.stlouisfed.org/wp/2011/2011-

027.pdf.

5

See CEA section 4a(c); 7 U.S.C. 6a(c).

6

Proposal at preamble section II(A)(1)(c)(i)

(emphasis added).

7

The Proposal would establish two distinct

processes for recognition of non-enumerated

hedges. One process would be Commission-based,

but the Proposal anticipates that this process would

rarely, if ever, be used by market participants. See

Proposal at rule text section 150.3. The other, in

proposed §150.9(e), would require the Commission

to retroactively review bona fide hedge exemptions

approved by an exchange. See Proposal at rule text

section 150.9(e). Such review would need to be

conducted within business10 days, would involve

the five-member Commission itself, and could be

stayed for a longer period.

8

Proposal at preamble section III(F)(3).

9

See Proposal at preamble section I(B).

cornfields in Minnesota, and grain mills and

elevators in Kansas, Arkansas, Colorado, and

Minnesota. I have met with coffee and cocoa

graders in New York, energy companies in

Texas, cotton merchandisers from Tennessee,

and many others to understand how end-

users participate in our markets. I have

visited the CME in Chicago, ICE in New

York, and the Minneapolis Grain Exchange in

Minneapolis. The fundamental purpose of

the commodity markets we oversee is to

enable end-users to manage the price risks

they face in their businesses. I am committed

to ensuring that this rule is workable for end-

users and provides them with sufficient

clarity, predictability, and transparency.

In my view, a position limits rule must

meet three basic criteria. First, the rule must

provide effective limits on speculative

positions. Second, the rule must recognize

legitimate bona fide hedging activities. The

Commission should provide market

participants with certainty regarding which

activities constitute bona fide hedging and

establish a workable, transparent process for

qualifying additional types of activities as

bona fide hedging. Such a process should

recognize both the traditional role of the

Commission in determining, generally,

which activities constitute bona fide hedging,

and the role of the exchanges in determining

whether the specific activities of particular

commercial market participants fall within

such bona fide hedging categories as

determined by the Commission.

Third, from a legal perspective, a final rule

must recognize that Congress has authorized

and directed the Commission to promulgate

position limits—without a predicate finding

that position limits are necessary to prevent

excessive speculation—and that the

Commission has the flexibility to determine

the appropriate tools and limits to

accomplish that Congressional directive.

Unfortunately, the Proposal fails to satisfy

any of these criteria. The Proposal would

greatly increase position limits in many

physical delivery agricultural, metals, and

energy commodities in spot and individual

non-spot months, with no opportunity to

monitor for or guard against adverse market

impacts. Although I am pleased that the

Proposal would no longer recognize risk

management exemptions as bona fide hedges

for physical commodities,

2

the higher limits

allowed under the Proposal could

accommodate substantially more speculative

positions,

3

with potentially adverse impacts

on markets. There is solid evidence that the

financialization and growth of commodity

index investments can raise commodity

prices and negatively affect end-users in the

real economy.

4

The Proposal departs from the well-

established roles of the Commission and

exchanges in the bona fide hedge framework.

As affirmed by the Dodd-Frank Act, it is the

Commission’s responsibility to define what

constitutes a bona fide hedge.

5

For practical

reasons, including limited Commission

resources, I support delegating to exchanges

the authority to determine whether a

particular position, under the particular facts

and circumstances presented, constitutes a

bona fide hedge as defined by the

Commission. The exchanges are well suited

for this role and have decades of experience

in making such determinations. However, the

initial legal and policy determination of what

types of positions constitute bona fide hedges

must remain the Commission’s

responsibility.

The Proposal carries forward all of the

bona fide hedges currently enumerated in the

Commission’s rules, adds several additional

categories to the list of enumerated hedges,

and opens the door to an unlimited number

of additional, undefined non-enumerated

exemptions. The Proposal states, ‘‘the

proposed enumerated hedges are in no way

intended to limit the universe of hedging

practices which could otherwise be

recognized as bona fide.’’

6

The ‘‘universe’’ is

a very large place indeed.

On the other hand, the Proposal does not

address practices that market participants

have urged the Commission to recognize as

bona fide hedges, including practices

currently recognized by the exchanges. The

Proposal thus deprives end-users and other

market participants of legal certainty

regarding what constitutes a bona fide hedge

for various practices currently permitted by

the exchanges as bona fide hedges.

Rather than determine whether to

recognize these practices as bona fide hedges

through notice and comment in today’s

rulemaking, the Proposal contemplates that

additional non-enumerated bona fide hedges

should first be considered by the exchanges,

and then reviewed by the Commission during

a cramped 10-day retrospective review

period.

7

Determination of what constitutes a

bona fide hedge for non-enumerated hedges

would begin anew each time that an

exchange must decide whether a purported

bona fide hedge held by a market participant

is consistent with the CEA, and then await

the Commission’s retrospective review.

Market participants should be able to discern

whether particular types of practices qualify

as bona fide hedging by reading the

Commission’s rules and regulations rather

than by engaging lawyers and lobbyists to

guide them through an opaque, non-public

process through the halls of the

Commission’s headquarters in Washington,

DC.

The Commission has almost 40 years of

experience with exchange implementation of

position limits for energy and metals

commodities, and more for agricultural

commodities. Based on this experience, I

support many of the types of bona fide

hedges that exchanges recognize in these

markets today. However, the Commission

should recognize these exemptions in its own

rules through prospective, notice and

comment rulemaking, not delegate these

determinations to the exchanges.

The legal analysis in this Proposal is a

convoluted and confusing legal interpretation

of the Dodd-Frank Act that defies

Congressional intent. It is implausible that in

the aftermath of the financial crisis and the

run-up to oil at $147 per barrel, Congress

made it more difficult for the Commission to

impose position limits. Yet that is the result

of the Commission’s revisionist

interpretation that a predicate finding of

necessity (i.e., that position limits are

necessary) is required for the imposition of

a position limit for each commodity.

Moreover, the Proposal’s finding of necessity

for the 25 core reference futures contracts

subject to the rule is unpersuasive both

economically and legally, and is highly

unlikely to survive legal challenge. The

necessity finding largely consists of general

economic statistics about the importance of

the physical commodities underlying these

futures contracts to commerce, together with

statistics about open interest and trading

volume in those futures contracts. These

statistics bear little rational relationship to

why position limits are necessary to prevent

excessive speculation in derivative contracts

for these commodities. For example, the

imposition of limits on cocoa futures is

justified on the basis that ‘‘in 2010 the United

States exported chocolate and chocolate-type

confectionary products worth $799 million to

more than 50 countries around the world.’’

8

There is a simpler, more logical, and

defensible path forward, as I will outline

later in this statement.

I thank the Commission staff for working

with my office on the Proposal. Although I

am not able to support it as currently

formulated, I look forward to working with

my colleagues and staff to improve the

Proposal so that it effectively protects our

markets from excessive speculation and

provides end-users and other market

participants with the regulatory certainty

they need. I encourage market participants to

comment on the Proposal.

Additional Flaws in the Proposal

No Phase-In for Large Increase in Speculative

Position Limits

The Proposal would generally increase

existing federal or exchange spot month

position limits for 25 physical delivery

agricultural, metals, and energy commodities

by a factor of two or more.

9

It would

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Id. Other notable examples include increased

spot limits for ICE U.S. Sugar No. 11 (SB) from

5,000 to 25,800 contracts; increased spot month

limits for ICE Cotton No. 2 (CT) from 300 to 1,800

contracts; increased single month and all months

combined limits for CBOT Soybean Oil (SO) from

8,000 to 17,400 contracts; and increased single

month and all months combined limits for ICE

Cotton No. 2 (CT) from 5,000 to 11,900 contracts.

11

Id. Although the proposed new limit for CBOT

Corn (C) is less than twice the current limit (57,800

contracts proposed versus 33,000 contracts

currently), it would still be a significantly larger

position limit and the largest single month and all

months combined limit in the Proposal.

12

See Proposal at rule text section 150.2 and

Appendix E.

13

See Proposal at rule text section 150.5(b)(2),

providing for exchange-set position limits or

position accountability in non-spot months

contracts not subject to federal speculative position

limits.

14

CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3).

15

See Excessive Speculation In the Natural Gas

Market, Staff Report with Additional Minority Staff

Views, Permanent Subcommittee on Investigations,

United States Senate (2007).

16

Proposal at preamble section (II)(A)(4) and

proposed rule text section 150.1.

17

Proposal at preamble section III(D). The

Proposal also states that ‘‘[t]he Commission will

therefore determine whether position limits are

necessary for a given contract, in light of those

premises, considering facts and circumstances and

economic factors.’’ Proposal at preamble section

III(F)(1).

18

The Proposal acknowledges ‘‘this approach

differs from that taken in earlier necessity

findings.’’ Proposal at preamble section III(F)(1).

Specifically, the Proposal identifies different

approaches taken in position limit rulemaking

undertaken by the Commission’s predecessor

agency, the Commodity Exchange Commission

(‘‘CEC’’) from 1938 through 1951, the Commission’s

1981 rulemaking that required exchanges to impose

position limits for each contract not already subject

to a federal limit, and the proposed rulemakings in

2013 and 2016. Id.

19

Int’l Swaps and Derivatives Ass’n (‘‘ISDA’’) v.

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

20

CEA section 4a(a)(2)(A); 7 U.S.C. 6a(a)(2)(A).

21

ISDA, 887 F. Supp. 2d at 281.

22

Commodity Exchange Act of 1936, P.O. 76–

675, 49 Stat. 1491 section 5.

substantially increase existing federal single

month and all months combined limits for

the nine legacy agricultural commodities. As

examples, spot month limits on ICE’s frozen

concentrated orange juice contract would

increase from 300 to 2,200 contracts, and

single month and all months combined limits

on CBOT soybean meal would increase from

6,500 to 16,900 contracts.

10

Single month

and all months combined limits for CBOT

corn would increase to 57,800 contracts.

11

The proposed increases are largely due to

increases in deliverable supply, and the new

spot and non-spot month limits continue to

reflect the Commission’s 25% and 10%/2.5%

of deliverable supply formulas.

The Proposal does not provide for phasing

in the new, higher limits or for otherwise

providing a transition period.

12

It presents no

analysis of the market’s ability to absorb

these large increases without disruption, and

no analysis of how large new speculative

positions may affect the price discovery

process.

Large increases in the amounts of

speculative activity in individual non-spot

months have the potential to disrupt the

convergence process and distort market

signals regarding storage of commodities. The

Proposal provides no analysis of whether

these potential price distortions and their

attendant detrimental consequences could be

avoided by distributing the large increases in

the numerical limits across several non-spot

months, rather than permit such large

positions in individual months. Instead, the

Proposal would codify an abrupt increase

365 days after publication of any final rule

in the Federal Register. A transition period

or lower individual spot month limits would

give the Commission the time and ability to

mitigate any issues that may arise if markets

are unable to absorb the higher limits in an

orderly manner, and prevent disruption if

necessary. It is a prudent measure that the

Commission should adopt in any final rule.

2. Absence of Non-Spot Month Limits for

Exempt and Certain Agricultural

Commodities

I am concerned with the Proposal’s failure

to adopt federal non-spot limits for 16

energy, metals, and certain agricultural

commodities included in the Proposal.

13

CEA section 4a(a)(3) directs that the

Commission ‘‘shall set limits’’ on positions

held not only in the spot month, but also

‘‘each other month’’ and ‘‘for all months,’’

‘‘as appropriate.’’

14

Despite this directive,

the Proposal does not adopt non-spot month

limits for these commodities. It includes

virtually no analysis of why the Commission

believes that non-spot limits are not

appropriate.

Exchanges have demonstrated an ability to

manage speculation and maintain orderly

markets with position accountability in non-

spot months. However, experiences such as

the collapse of the Amaranth hedge fund in

2006 demonstrate how large trades in the

non-spot month can also distort markets,

widen spreads, and increase volatility.

15

I

believe the exchanges have learned from the

Amaranth experience and that position

accountability can be an effective tool, where

appropriate. The Proposal, however, also

fails to demonstrate why accountability

levels, rather than numerical limits, are

appropriate in light of the statutory directives

in the CEA. It provides no discussion of the

effect of applying the 10/2.5% formula to the

energy and metals contracts covered by the

Proposal, and why the application of this

traditional formula would not be appropriate.

Similarly, there is no analysis regarding the

numerical limits that could result from

applying the four factors specified in 4a(a)(3),

and why such numerical limits would not be

appropriate.

3. Definition of Economically Equivalent

Swap

The Proposal would define an

economically equivalent swap as a swap that

‘‘shares identical material contractual

specifications, terms, and conditions with the

referenced contract ....’’

16

The Proposal

offers several rationales for this narrow

definition that could potentially lend itself to

evasion through financial engineering. One

such rationale is that it would reduce market

participants’ ability to net down their

speculative positions through swaps that are

not materially identical. While this and other

rationales proffered in the Proposal have

merit, the Commission must also ensure that

economically equivalent swaps are not

structured in a manner to evade federal or

exchange regulation through minor

modifications to material terms. I invite

public comment on this issue.

4. The Proposal’s Necessity Finding

Misconstrues the CEA as Amended by the

Dodd-Frank Act

The Proposal states that, for any particular

commodity, ‘‘prior to imposing position

limits, [the Commission] must make a finding

that they are necessary.’’

17

This is a reversal

of prior Commission determinations.

18

Neither the statutory language of CEA section

4a(a)(2), nor the district court’s decision in

ISDA v. CFTC, compels this outcome.

19

The

Commission should not adopt it.

Title VII of the Dodd-Frank Act amended

CEA section 4a and directed in 4a(a)(2)(A)

that ‘‘the Commission shall’’ establish

position limits for agricultural and exempt

physical commodities ‘‘as appropriate.’’

20

In

ISDA v. CFTC, the district court directed the

Commission to resolve a perceived ambiguity

in section 4a(a)(2)(A) by bringing the

Commission’s ‘‘experience and expertise to

bear in light of the competing interests at

stake ....’’

21

That experience includes

over 80 years of position limits rulemakings,

as described below. It provides ample

practical and legal bases to determine that

Congress intended the Commission to adopt

federal position limits for certain

commodities pursuant to CEA section

4a(a)(2).

Starting in 1936, and across multiple

iterations of the CEA and its predecessors,

the CEA has consistently and continuously

reflected Congress’s finding that excessive

speculation in a commodity can cause

sudden, unreasonable, and unwarranted

movements in commodity prices that are

undue burden on interstate commerce.

22

Congress also has declared that ‘‘[f]or the

purpose of diminishing, eliminating, or

preventing such burden,’’ the Commission

shall . . . proclaim and fix such [position]

limits’’ that the Commission finds ‘‘are

necessary to diminish, eliminate, or prevent

such burden.’’ In plain English, Congress has

found that excessive speculation is a burden

on interstate commerce, and the CFTC is

directed to impose position limits that are

necessary to prevent that burden. Congress

did not direct the Commission to study

excessive speculation, to prepare any reports

on excessive speculation, or to second-guess

Congress’s finding that excessive speculation

was a problem that needed to be prevented.

Rather, Congress directed the Commission to

impose position limits that the Commission

believed were necessary to accomplish the

statutory objectives.

Following the passage of the 1936 Act, the

Commission set position limits for grains in

1938, cotton in 1940, and soybeans in 1951.

As the Proposal recognizes, in these

rulemakings the Commission did not publish

any analyses or make any ‘‘necessity

finding,’’ other than to include a ‘‘recitation’’

of the statutory findings regarding the undue

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232 F.2d 554 (2d Cir. 1956).

24

Id. at 560 (emphasis added).

25

448 F.2d 1224 (2d Cir. 1971).

26

Id. at 1225–6 (emphasis added).

27

Id. at 1227 (emphasis added).

28

591 F.2d 1211 (7th Cir. 1979).

29

Id. at 1216.

30

Id.

31

Id. at 1218 (emphasis added).

32

5 U.S.C. 706(2)(A).

33

Hunt, 591 F.2d at 1216. In the proposed

regulation increasing the speculative position limits

for soybeans from 2 million to 3 million bushels,

the Commission’s predecessor, the Commodity

Exchange Authority (‘‘Authority’’), did not make a

soybean-specific finding that the limit of three

million bushels was necessary to prevent undue

burdens on commerce. Rather, the Authority relied

on its 1938 and 1951 position limit rulemakings for

the general principle that ‘‘the larger the net trades

by large speculators, the more certain it becomes

that prices will respond directly to trading.’’ Corn

and Soybeans, Limits on Position and Daily Trading

for Future Delivery, 36 FR 1340 (Jan. 28, 1971). The

Authority then stated that its analysis of speculative

trading between 1966 and 1969 ‘‘did not show that

undue price fluctuations resulted from speculative

trading as the trading by individual traders grew

larger.’’ Id. Following a public hearing, the

Authority adopted the proposed increase. See 36 FR

12163 (June 26, 1971). For the past 82 years, the

Commission has relied on this general principle to

justify its position limits regime.

34

During the silver crisis, the Hunt brothers and

others attempted to corner the silver market through

large physical and futures positions. The price of

silver rose more than five-fold from August 1979 to

January 1980.

35

See Establishment of Speculative Positon

Limits, 46 FR 50938, 50940 (Oct. 16, 1981) (‘‘1981

Position Limits Rule’’).

36

1981 Position Limits Rule at 50941.

37

In the proposed regulation, the Commission

noted that as of April 1975, position limits were in

effect for ‘‘almost all’’ actively traded commodities

then under regulation. Speculative Position Limits,

45 FR 79831, 79832 (Dec. 2, 1980).

38

1981 Position Limits Rule at 50940.

39

Proposal at preamble section III(F)(1).

burdens on commerce that can be caused by

excessively large positions. These

rulemakings then set numerical limits on the

amounts of commodity futures contracts that

could be held.

Court decisions from the 1950s through the

1970s in cases involving the application of

the position limits rules reflect a common-

sense reading: The statute mandates that the

Commission establish position limits, while

providing the Commission with discretion as

to how to craft those limits. In Corn Refining

Products v. Benson,

23

defendants challenged

the suspension by the Secretary of

Agriculture of their trading privileges on the

Chicago Board of Trade for violating position

limits in corn futures on the grounds that the

statutory prohibition only applied to

speculative positions. The U.S. Court of

Appeals for the Second Circuit denied the

appeal, stating in part:

The discretionary powers of the

Commission and the exemptions from the

‘trading limits’ established under the Act are

carefully delineated in [section] 4a. The

Commission is given discretionary power to

prescribe ’ * * * different trading limits for

different commodities, markets futures, or

delivery months, or different trading limits

for the purposes of buying and selling

operations, or different limits for the

purposes of subparagraphs (A) (i.e., with

respect to trading during one business day)

and (B) (i.e., with respect to the net long or

net short position held at any one time) of

this section * * * ’ ....

Although [section] 4a expresses an

intention to curb ‘excessive speculation,’ we

think that the unequivocal reference to

‘trading,’ coupled with a specific and well-

defined exemption for bona-fide hedging,

clearly indicates that all trading in

commodity futures was intended to be

subject to trading limits unless within the

terms of the exemptions.

24

In United States v. Cohen,

25

the defendant

challenged his criminal conviction for

violating CEC trading limits in potato futures

contracts. In upholding the conviction, the

court of appeals stated that ‘‘[t]rading in

potato futures, as for other commodities, is

limited by statute and by regulations issued

by the Commission. The statute here requires

the Commission to fix a trading limit

....’’

26

The court of appeals further

observed: ‘‘Congress expressed in the statute

a clear intention to eliminate excessive

futures trading that can cause sudden or

unreasonable fluctuations.’’

27

In CFTC v. Hunt,

28

the Hunt brothers

challenged the validity of the agency’s

position limit on soybeans of three million

bushels on the basis that the agency ‘‘made

no analysis of the relationship between the

size of soybean price changes and the size of

the change in the net position of large

traders. They argue[d] that there is no direct

relationship between these phenomena, and,

therefore, the regulation limiting the

positions and the trading of the large soybean

traders is unreasonable.’’

29

Fundamentally,

the Hunts alleged that the agency failed to

demonstrate that the limits were a reasonable

means—or, alternatively put, ‘‘necessary’’—

to prevent unwarranted price fluctuations in

soybeans. ‘‘The essence of the Hunts’ attack

on the validity of the regulation is their

substantive contention that there is no

connection between large scale speculation

by individual traders and fluctuations in the

soybean trading market.’’

30

The U.S. Court of Appeals for the Seventh

Circuit denied the Hunt brothers’ challenge.

It held, ‘‘[t]he Commodity Exchange

Authority, operating under an express

congressional mandate to formulate limits on

trading in order to forestall the evils of large

scale speculation, was deciding on whether

to raise its then existing limit on

soybeans.... There is ample evidence in

the record to support the regulation.’’

31

The Hunt case also illustrates the

difference between the requirement for a

predicate finding of necessity and the

requirement that the Commission’s

rulemakings be supported by sufficient

evidence. Under the Administrative

Procedure Act (‘‘APA’’), the Commission’s

regulations must not be ‘‘arbitrary,

capricious, an abuse of discretion, or

otherwise not in accordance with law.’’

32

To

make this finding, ‘‘the court must consider

whether the decision was based on a

consideration of the relevant factors and

whether there has been a clear error of

judgment.’’

33

In 1981, following the silver crisis of 1979–

1980, the Commission adopted a seminal

final rule requiring exchanges to establish

position limits for all commodities that did

not have federal limits.

34

In the final

rulemaking, the Commission determined that

predicate findings are not necessary in

position limits rulemakings. It affirmed its

long-standing statutory mandate going back

to 1936: ‘‘Section 4a(1) represents an express

Congressional finding that excessive

speculation is harmful to the market, and a

finding that speculative limits are an

effective prophylactic measure.’’

35

The 1981

final rule found that ‘‘speculative position

limits are appropriate for all contract markets

irrespective of the characteristics of the

underlying market.’’

36

It required exchanges

to adopt position limits for all listed

contracts, and it did so based on statutory

language that is nearly identical to CEA

section 4a(a)(1).

37

In the 1981 rulemaking, the Commission

also responded to comments that the

Commission had failed to ‘‘demonstrate[ ]

that position limits provided necessary

market protection,’’ or were appropriate for

futures markets in ‘‘international soft’’

commodities, such as coffee, sugar, and

cocoa. The Commission rejected comments

that it was required to make predicate

necessity findings for particular

commodities. The Commission stated:

The Commission believes that the

observations concerning the general

desirability of limits are contrary to

Congressional findings in sections 3 and 4a

of the Act and considerable years of Federal

and contract market regulatory

experience....

***

As stated in the proposal, the prevention

of large and/or abrupt price movements

which are attributable to extraordinarily large

speculative positions is a Congressionally

endorsed regulatory objective of the

Commission. Further, it is the Commission’s

view that this objective is enhanced by

speculative limits since 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.

38

In the ‘‘Legal Matters’’ section of the

preamble, the Proposal would jettison the

interpretation that has prevailed over the past

four decades as the basis for the

Commission’s position limits regime. Relying

on a non sequitur incorporating a double

negative, the Preamble brushes off nearly

forty years of Commission jurisprudence:

[B]ecause the Commission has

preliminarily determined that section 4a(a)(2)

does not mandate federal speculative limits

for all commodities, it cannot be that federal

position limits are ‘necessary’ for all physical

commodities, within the meaning of section

4a(a)(1), on the basis of a property shared by

all of them, i.e., a limited capacity to absorb

the establishment and liquidation of large

speculative positions in an orderly fashion.

39

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Federal Register / Vol. 85, No. 39 / Thursday, February 27, 2020 / Proposed Rules

40

See CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2); CEA

section 4a(a)(5); 7 U.S.C. 6a(a)(5).

41

See CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3).

42

Proposal at preamble section III(F)(2).

In 2010, Congress enacted Title VII of the

Dodd-Frank Act and amended CEA section

4a by directing the Commission to establish

speculative position limits for agricultural

and exempt commodities and economically

equivalent swaps.

40

Congress also set forth

criteria for the Commission to consider in

establishing limits, including diminishing,

eliminating, or preventing excessive

speculation; deterring and preventing market

manipulation; ensuring sufficient liquidity

for bona fide hedgers; and ensuring that price

discovery in the underlying market is not

disrupted.

41

Congress directed the

Commission to establish the required

speculative limits within tight deadlines of

180 days for exempt commodities and 270

days for agricultural commodities.

It defies history and common sense to

assert that the amendments to section 4a

enacted by Congress in the Dodd-Frank Act

made it more difficult for the Commission to

impose position limits, such as by requiring

predicate necessity findings on a commodity-

by-commodity basis. This is particularly true

given Congress’s repeated use of mandatory

words like ‘‘shall’’ and ‘‘required’’ and the

tight timeframe to respond to the new

Congressional directives. In light of the run

up in the price of oil and the financial crisis

that precipitated the legislation, it is

unreasonable to interpret the Dodd-Frank

amendments as creating new obstacles for the

Commission to establish position limits for

oil, natural gas, and other commodities

whose significant price fluctuations had

caused economic harm to consumers and

businesses across the nation. The

Commission’s interpretation is revisionist

history.

The Commission’s necessity finding that

follows its legal analysis is sure to persuade

no one. Unless substantially modified in the

final rulemaking, it will likely doom this

regulation as ‘‘arbitrary, capricious, or an

abuse of discretion’’ under the APA. The

necessity finding for the 25 core referenced

futures contracts selected for this rulemaking

boils down to simplistic assertions that the

futures contracts and economically

equivalent swaps for these contracts ‘‘are

large and critically important to the

underlying cash markets.’’

42

As part of the

necessity finding for these 25 commodities,

the Proposal presents general economic

measures, such as production, trade, and

manufacturing statistics, to illustrate the

importance of these commodities to interstate

commerce, and therefore for the need for

position limits. On the other hand, the

Proposal fails to present any rational reason

as to why the economic trade, production,

and value statistics for commodities other

than the 25 core referenced futures contracts

are insufficient to support a similar finding

that position limits are necessary for futures

contracts in those other commodities.

For example, the Proposal justifies the

exclusion of aluminum, lead, random length

lumber, and ethanol as examples of contracts

for which a necessity finding was not made

on the basis that the open interest in these

contracts is less than the open interest in the

oat futures contracts. This comparison has no

basis in rationality. The need for position

limits for commodity futures contracts in

aluminum, lead, lumber, and ethanol is not

in any way rationally related to the open

interest in those commodity futures contracts

relative to the open interest in oat futures.

The Proposal is rife with other such illogical

statements.

Fundamentally, general economic

measures of commodity production, trade,

and value are irrelevant with respect to the

need for position limits to prevent excessive

speculation. The Congress has found that

position limits are an effective prophylactic

tool to prevent excessive speculation for all

commodities. The Congressional findings in

CEA section 4a regarding the need for

position limits are not limited to only the

most important or the largest commodity

markets. General economic data regarding a

commodity in interstate commerce is

irrelevant to the need for position limits for

futures contracts for that commodity.

The collapse of the Amaranth hedge fund

in 2006 is another strong example of why a

position limits regime is necessary to prevent

excessive speculation, in this case in non-

spot months. Amaranth was a large

speculative hedge fund that at one point held

some 100,000 natural gas contracts, or

approximately 5% of all natural gas used in

the U.S. in a year. As the Commission has

explained in other position limits proposals

since 2011, the collapse of Amaranth was a

factor in the Dodd-Frank’s amendments to

CEA section 4a.

The Commission has ample practical

experience and legal precedent to resolve the

perceived ambiguity in CEA section 4a(a)(2)

as instructed by the district court in ISDA v.

CFTC without making the antecedent

necessity finding now incorporated in the

Proposal. Our remaining task is to design the

overall position limits framework, including

determining the appropriate limit levels,

defining bona fide hedges through

prospective rulemaking, and appropriately

considering other options such as position

accountability and exchange-set limits.

Conclusion

In CEA section 4a, Congress directed the

Commission to establish position limits and

appropriate hedge exemptions to prevent the

undue burdens on interstate commerce that

result from excessive speculation. Congress

has also entrusted to the Commission’s

discretion the appropriate regulatory tools to

meet this mandate. Congress’ overarching

policy directive for position limits is

straightforward and has been remarkably

consistent for 84 years. The Commission has

had ten years, three prior proposals, one

supplemental proposal, and hundreds of

pages of comment letters to define bona fide

hedge exemptions. Now is the time to finish

the job, and to do it the right way.

[FR Doc. 2020–02320 Filed 2–26–20; 8:45 am]

BILLING CODE 6351–01–P

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Published date	27 February 2020
Citation	85 FR 11596
Record Number	2020-02320
Section	Proposed rules
Court	Commodity Futures Trading Commission

Position Limits for Derivatives

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