Federal Register, Volume 76 Issue 223 (Friday, November 18, 2011)[Federal Register Volume 76, Number 223 (Friday, November 18, 2011)]
[Rules and Regulations]
[Pages 71626-71706]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28809]

[[Page 71625]]

Vol. 76

Friday,

No. 223

November 18, 2011

Part II

Commodity Futures Trading Commission

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17 CFR Parts 1, 150 and 151

 Position Limits for Futures and Swaps; Final Rule and Interim Final 
Rule

Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / 
Rules and Regulations

[[Page 71626]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 150 and 151

RIN 3038-AD17

Position Limits for Futures and Swaps

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule and interim final rule.

———————————————————————–

SUMMARY: On January 26, 2011, the Commodity Futures Trading Commission 
(“Commission” or “CFTC”) published in the Federal Register a notice 
of proposed rulemaking (“proposal” or “Proposed Rules”), which 
establishes a position limits regime for 28 exempt and agricultural 
commodity futures and options contracts and the physical commodity 
swaps that are economically equivalent to such contracts. The 
Commission is adopting the Proposed Rules, with modifications.

DATES: Effective date: The effective date for this final rule and the 
interim rule at Sec.  151.4(a)(2) is January 17, 2012.
    Comment date: The comment period for the interim final rule will 
close January 17, 2012.
    Compliance dates: For compliance dates for these final rules, see 
SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist, 
Division of Market Oversight, at (202) 418-5452, [email protected]; B. 
Salman Banaei, Attorney, Division of Market Oversight, at (202) 418-
5198, [email protected], Neal Kumar, Attorney, Office of General 
Counsel, at (202) 418-5353, [email protected], Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (“Dodd-Frank Act”).1 Title VII 
of the Dodd-Frank Act 2 amended the Commodity Exchange Act (“CEA”) 
3 to establish a comprehensive new regulatory framework for swaps and 
security-based swaps. The legislation was enacted to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission’s rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission’s oversight.
—————————————————————————

    1 See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    2 Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the “Wall Street Transparency and Accountability Act of 
2010.”
    3 7 U.S.C. 1 et seq.
—————————————————————————

    As amended by the Dodd-Frank Act, section 4a(a)(2) of the CEA 
mandates that the Commission establish position limits for futures and 
options contracts traded on a designated contract market (“DCM”) 
within 180 days from the date of enactment for exempt commodities and 
270 days from the date of enactment for agricultural commodities.4 
Under section 4a(a)(5), Congress required the Commission to 
concurrently establish limits for swaps that are economically 
equivalent to such futures or options contracts traded on a DCM. In 
addition, the Commission must establish aggregate position limits for 
contracts based on the same underlying commodity that include, in 
addition to the futures and options contracts: (1) Contracts listed by 
DCMs; (2) swaps that are not traded on a registered entity but which 
are determined to perform or affect a “significant price discovery 
function”; and (3) foreign board of trade (“FBOT”) contracts that 
are price-linked to a DCM or swap execution facility (“SEF”) contract 
and made available for trading on the FBOT by direct access from within 
the United States.
—————————————————————————

    4 Section 1a(20) of the CEA defines the term “exempt 
commodity” to mean a commodity that is not an excluded or an 
agricultural commodity. 7 U.S.C. 1a(20). Section 1a(19) defines the 
term “excluded commodity” to mean, among other things, an interest 
rate, exchange rate, currency, credit risk or measure, debt or 
equity instrument, measure of inflation, or other macroeconomic 
index or measure. 7 U.S.C. 1a(19). Although the CEA does not 
specifically define the term “agricultural commodity,” section 
1a(9) of the CEA, 7 U.S.C. 1a(9), enumerates a non-exclusive list of 
agricultural commodities, and the Commission recently added section 
1.3(zz) to the Commission’s regulations defining the term 
“agricultural commodity.” See 76 FR 41048, Jul. 13, 2011.
—————————————————————————

    To implement the expanded mandate under the Dodd-Frank Act, the 
Commission issued Proposed Rules that would establish federal position 
limits and limit formulas for 28 physical commodity futures and option 
contracts (“Core Referenced Futures Contracts”) and physical 
commodity swaps that are economically equivalent to such contracts 
(collectively, “Referenced Contracts”).5 The Commission also 
proposed aggregate position limits that would apply across different 
trading venues to contracts based on the same underlying commodity. In 
addition to developing position limits for the Referenced Contracts, 
the Proposed Rules would implement a new statutory definition of bona 
fide hedging transactions, revise the standards for aggregation of 
positions, and establish position visibility reporting requirements. 
The Proposed Rules would require DCMs and SEFs that are trading 
facilities to set position limits for exempt and agricultural commodity 
contracts and establish acceptable practices for position limits and 
position accountability rules in other commodities.
—————————————————————————

    5 See Position Limits for Derivatives, 76 FR 4752, 4753 Jan. 
26, 2011. Specifically, the Commission proposed to withdraw its part 
150 regulations, which set out the current position limit and 
aggregation policies, and replace them with new part 151 
regulations.
—————————————————————————

B. Overview of Public Comments

    The Commission received 15,116 comments from a broad range of the 
industry and other interested persons, including DCMs, trade 
organizations, banks, investment companies, commercial end-users, 
academics, and the general public. Of the total comments received, 
approximately 100 comment letters provided detailed comments and 
recommendations concerning whether, and how, the Commission should 
exercise its authority to set position limits pursuant to amended 
section 4a, as well as other specific aspects of the proposal. The 
majority of the over 15,000 comment letters received were generally 
supportive of the proposal. Many urged the Commission promptly to 
“restore balance to commodities markets.” 6 On the other hand, 
approximately 55 commenters requested that the Commission either 
significantly alter or withdraw the proposal. The Commission considered 
all of the comments received in formulating the final regulations.
—————————————————————————

    6 See e.g., Letter from Professor Greenberger, University of 
Maryland School of Law on March 28, 2011 (“CL-Prof. Greenberger”) 
at 6-7; and Petroleum Marketers Association of America (“PMAA”) 
and New England Fuel Institute (“NEFI”) on March 28, 2011 (“CL-
PMAA/NEFI”) at 5. Also, over 6,000 comment letters urged the 
Commission to “act quickly” to adopt position limits.

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[[Page 71627]]

II. The Final Rules

A. Statutory Framework

    In the proposal, the Commission provided general background on the 
scope of its statutory authority under section 4a (as amended by the 
Dodd-Frank Act), together with the related legislative history, in 
support of the Proposed Rules.7 Many commenters responded with their 
views and interpretations of the Commission’s mandate under the CEA, 
and in particular whether the Commission must first make findings that 
position limits are “necessary” to diminish, eliminate, or prevent 
undue burdens on interstate commerce resulting from excessive 
speculation before imposing them.8
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    7 A more detailed background on the statutory and legislative 
history is provided in the proposal. See 76 FR at 4753-4755.
    8 See e.g., CME Group, Inc. (“CME I”) on March 28, 2011 
(“CL-CME I”) at 4, 7.
—————————————————————————

    As discussed in the proposal, CEA section 4a states that 
“excessive speculation” in any commodity traded on a futures exchange 
“causing sudden or unreasonable fluctuations or unwarranted changes in 
the price of such commodity is an undue and unnecessary burden on 
interstate commerce” and directs the Commission to establish such 
limits on trading “as the Commission finds necessary to diminish, 
eliminate, or prevent such burden.” 9 This basic statutory mandate 
has remained unchanged since its original enactment in 1936 and through 
subsequent amendments to section 4a, including the Dodd-Frank Act.10
—————————————————————————

    9 See section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).
    10 As further detailed in the Proposed Rules, this long-
standing statutory mandate is based on Congressional findings that 
market disruptions can result from excessive speculative trading. In 
the 1920s and into the 1930s, a series of studies and reports found 
that large speculative positions in the futures markets for grain, 
even without manipulative intent, can cause “disturbances” and 
“wild and erratic” price fluctuations. To address such market 
disturbances, Congress was urged to adopt position limits to 
restrict speculative trading notwithstanding the absence of 
manipulation. In 1936, based upon such reports and testimony, 
Congress provided the Commodity Exchange Authority (the predecessor 
of the Commission) with the authority to impose Federal speculative 
position limits. In doing so, Congress expressly observed the 
potential for market disruptions resulting from excessive 
speculative trading alone and the need for measures to prevent or 
minimize such occurrences. This mandate and underlying Congressional 
determination of its need has been re-affirmed through successive 
amendments to the CEA. See 76 FR at 4754-55.
—————————————————————————

    In section 737 of the Dodd-Frank Act, Congress made major changes 
to CEA section 4a; among other things, Congress extended the 
Commission’s reach to the heretofore unregulated swaps market.11 In 
doing so, Congress reinforced and reaffirmed the Commission’s broad 
authority to set position limits to prevent undue and unnecessary 
burdens associated with excessive speculation. Specifically, section 
4a, as amended by the Dodd-Frank Act, provides that the Commission 
“shall” set position limits “as appropriate” and “to the maximum 
extent practicable, in its discretion” in order to protect against 
excessive speculation and manipulation while ensuring that the markets 
retain sufficient liquidity for bona fide hedgers and that their price 
discovery functions are not disrupted.12 Further, the Dodd-Frank Act 
amended the CEA to direct the Commission to define the relevant factors 
to be considered in identifying swaps that serve a “significant price 
discovery” function and thus become subject to position limits.13 
Congress also authorized the Commission to exempt persons or 
transactions “conditionally or unconditionally” from position 
limits.14
—————————————————————————

    11 In particular, Congress expanded the scope of transactions 
that could be subject to position limits to include swaps traded on 
a DCM or SEF, and swaps not traded on a DCM or SEF, but that perform 
or affect a significant price discovery function with respect to 
registered entities. See section 4a(a)(1) of the CEA, 7 U.S.C. 
6a(a)(1). Congress also directed the Commission to establish 
aggregate limits on the amount of positions held in the same 
underlying commodity across markets for DCM contracts, FBOTs (with 
respect to certain linked contracts) and swaps that perform a 
“significant price discovery function.” section 4a(a)(6) of the 
CEA, 7 U.S.C. 6a(a)(6).
    12 See sections 4a(a)(3) to 4a(a)(5) of the CEA, 7 U.S.C. 
6a(a)(3) to 6a(a)(5). Additionally, new section 4a(a)(2)(c) states 
that, in establishing limits, the Commission “shall strive to 
ensure” that FBOTs trading in the same commodity will be subject to 
“comparable” limits and that any limits imposed by the Commission 
will not cause the price discovery in the commodity to shift to 
FBOTs.
    13 See section 4a(a)(4) of the CEA, 7 U.S.C. 6a(a)(4).
    14 See section 4a(a)(7) of the CEA, 7 U.S.C. 6a(a)(7).
—————————————————————————

    In reaffirming the Commission’s broad authority to set position 
limits, Congress also made clear that the Commission must impose them 
expeditiously. Under amended section 4a(a)(2), Congress directed that 
the Commission “shall” establish limits on the amount of positions, 
as appropriate, that may be held by any person in physical commodity 
futures and options contracts traded on a DCM. In section 4a(a)(5), 
Congress directed the Commission to establish, concurrently with the 
limits established under section 4a(a)(2), limits on the amount of 
positions, as appropriate, that may be held by any person with respect 
to swaps that are economically equivalent to the DCM contracts subject 
to the required limits under section 4a(a)(2). The Commission was 
directed to establish the limits within 180 days after enactment for 
exempt commodities and 270 days after enactment for agricultural 
commodities.
    As discussed in the proposal, the Commission construes the amended 
CEA to mandate the Commission to impose position limits at the level it 
determines to be appropriate to diminish, eliminate, or prevent 
excessive speculation and market manipulation.15 In setting such 
limits, the Commission is not required to find that an undue burden on 
interstate commerce resulting from excessive speculation exists or is 
likely to occur. Nor is the Commission required to make an affirmative 
finding that position limits are necessary to prevent sudden or 
unreasonable fluctuations in prices. Instead, the Commission must set 
position limits prophylactically, according to Congress’ mandate in 
section 4a(a)(2), and, in establishing the limits Congress has 
required, exercise its discretion to set a limit that, to the maximum 
extent practicable, will, among other things, “diminish, eliminate, or 
prevent excessive speculation.” 16
—————————————————————————

    15 See 76 FR at 4754.
    16 Section 4a(a)(3)(B)(i) of the CEA, 7 U.S.C. 6a(a)(3)(B)(i).
—————————————————————————

    Commenters were divided on the scope of the Commission’s authority 
under CEA section 4a. A number of commenters supported the view that 
the Dodd-Frank Act, in extending the Commission’s authority to swaps, 
imposed on the Commission a mandatory obligation to impose position 
limits.17 For example, Professor Michael Greenberger stated that 
“[s]ection 737 emphatically provides that 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[.]’ The language could not be clearer. The Commission is 
required to establish position limits as Congress intentionally used 
the word, `shall,’ to impose the mandatory obligation.” 18 Professor 
Greenberger further noted, “the plain reading of the phrase `as 
appropriate’ modifies only those position limits mandated to be 
imposed, i.e., the mandatory position limits must be promulgated `as 
appropriate.’ The term `as appropriate’ does not modify the heavily 
emphasized

[[Page 71628]]

mandate that there `shall’ be position limits.” 19
—————————————————————————

    17 See e.g., American Public Gas Association (“APGA”) on 
March 28, 2011 (“CL-APGA”) at 2-3; Americans for Financial Reform 
(“AFR”) on March 28, 2011 (“CL-AFR”) at 5; U.S. Senator Harkin 
on December 15, 2010 (“CL-Sen. Harkin”). See also CL-PMAA/NEFI 
supra note 6 at 4-5.
    18 CL-Prof. Greenberger supra note 6 at 4 (emphasis added).
    19 Id. at 5. In addition, Professor Greenberger noted that
    Section 719 of the Dodd-Frank Act specifically requires the 
Commission `to conduct a study of the effects of the position limits 
imposed pursuant to the other provisions of this title on excessive 
speculation and on the movement of transactions.’ The Commission is 
required to submit the report `within 12 months after the imposition 
of position limits pursuant to the other provisions of this title.’ 
Why would Congress specifically require the Commission to submit a 
report after imposing position limits if it had provided by statute 
(as opponents of position limits mistakenly argue) that the data 
must be available before the position limit rule is finally 
promulgated? The short answer is that Congress clearly understood 
the imminent danger excessive speculation and passive betting on 
price direction had caused by uncontrollable increases in the prices 
of energy and agricultural commodities. Therefore, the Commission is 
statutorily obligated to impose the `appropriate’ position limits.
    Id. at 6-7.
—————————————————————————

    Other commenters expressed similar views, asserting that the 
Commission is not required to demonstrate price fluctuations caused by 
excessive speculation or the efficacy of position limits in reducing 
excessive speculation or market manipulation. The Petroleum Marketers 
Association of America and the New England Fuel Institute (“PMAA/
NEFI”) in a joint comment letter argued, for example, that

the purpose of position limits is not to punish past wrongdoing, but 
rather to deter and prevent potential future dysfunctions in the 
commodity staples derivatives markets and to prevent harm to market 
participants and burdens on interstate commerce. Because the purpose 
of position limits is to prevent future violations, the Commission 
should not be required to appreciate the complete and precise level 
of excessive speculation prior to taking action.”20
—————————————————————————

    20 CL-PMAA/NEFI supra note 6 at 5. See also Delta Airlines, 
Inc. (“Delta”) on March 28, 2011 (“CL-Delta”) at 11. Delta 
believes that the Commission should instead strive to establish 
meaningful speculative position limits using sampling and other 
statistical techniques to make reasonable, working assumptions about 
positions in various market segments and refining the speculative 
limits based upon market experience and better data as it is 
developed. See also CL-Sen. Harkin supra note 17 at 1 (opposing any 
delay in the implementation of position limits); and 56 National 
coalitions and organizations and 28 International coalitions and 
organizations from 16 countries (“ICPO”) on March 28, 2011 (“CL-
ICPO”) at 1 (stating that the proposal regarding position limits 
should be implemented fully).

    On the other hand, numerous commenters posited that the Commission 
did not adequately demonstrate, or perform sufficient analysis 
establishing, the need for or appropriateness of the proposed limits 
and related requirements.21 For example, according to the CME Group, 
Inc. (“CME”),
—————————————————————————

    21 See e.g., CL-CME I supra note 8; Commodity Markets Council 
(“CMC”) on March 28, 2011 (“CL-CMC”); PIMCO on March 28, 2011 
(“CL-PIMCO”); Edison Electric Institute (“EEI”) and Electric 
Power Supply Association (“EPSA”) on March 28, 2011 (“CL-EEI/
EPSA”); BlackRock, Inc. (“BlackRock”) on March 28, 2011 (“CL-
BlackRock”); International Working Group on Trade-Finance Linkages 
(“IWGTFL”) on March 28, 2011(“CL-IWGTFL”); Coalition of Physical 
Energy Companies (“COPE”) on March 28, 2011 (“CL-COPE”); Utility 
Group on March 28, 2011 (“CL-Utility Group”);ISDA/SIFMA on March 
28, 2011 (“CL-ISDA/SIFMA”); Futures Industry Association (“FIA 
I”) on March 25, 2011 (“CL-FIA I”); Katten Muchin Rosenman LLP 
(“Katten”) on March 31, 2011 (“CL-Katten”); Colorado Public 
Employees’ Retirement (“PERA”) on March28, 2011 (“CL-PERA”); 
American Petroleum Institute (“API”) on March 28, 2011 (“CL-
API”); Sullivan & Cromwell LLP (“Centaurus Energy”) on March 28, 
2011 (“CL-Centaurus Energy”); ICI on March 28, 2011 (“CL-ICI”); 
Morgan Stanley on March 28, 2011 (“CL-Morgan Stanley”); Asset 
Management Group (“AMG”), Securities Industry and Financial 
Markets Association (“SIFMA”) on April 5, 2011(“CL-SIFMA AMG 
I”); World Gold Council (“WGC”) on March 28, 2011 (“CL-WGC”); 
and Managed Funds Association (“MFA”) on March 28, 2011 (“CL-
MFA”).

the CEA sets up a two-pronged approach for imposing limits on 
speculative positions. First, [under CEA section 4a(a)(1)] the 
Commission must `find’ that any position limits are `necessary’–a 
directive that Congress reaffirmed in [the Dodd-Frank Act]. Second, 
once the Commission makes the `necessary’ finding, [CEA sections 
4a(a)(2)(A) and 4a(a)(3) provide that the Commission] must establish 
a particular position limit regime only `as appropriate’–a 
statutory requirement added by Dodd-Frank.”22
—————————————————————————

    22 CME argued the Commission’s interpretation of section 
4a(a)(1) of the CEA would render the “as the Commission finds are 
necessary” language a nullity, effectively replacing it with 
statutory language imposing a lower threshold than is found 
elsewhere in the CEA. See CL-CME I supra note 8 at 3, citing Keene 
Corp. v. United States, 508 U.S. 200, 208 (1993) (“where Congress 
includes particular language in one section of a statute but omits 
it in another * * *, it is generally presumed that Congress acts 
intentionally and purposely in the disparate inclusion or 
exclusion” quoting Russello v. United States, 464 U.S. 16, 23 
(1983).

In this connection, CME and many other commenters asserted that because 
the Commission did not make a finding that position limits are 
necessary to prevent undue burdens on interstate commerce resulting 
from excessive speculation, it did not satisfy the pre-condition to 
establishing position limits.
    Some of these commenters, such as the International Swaps and 
Derivatives Association and the Securities Industry and Financial 
Markets Association (“ISDA/SIFMA”) (in a joint comment letter) and 
the Futures Industry Association (“FIA”), argued that the Commission 
is directed to set position limits “as appropriate,” and “as 
appropriate” requires empirical evidence demonstrating that such 
limits would diminish, eliminate, or prevent excessive speculation. FIA 
claimed that in the absence of evidence concerning the impact of 
excessive speculation, it would be impossible to set position limits 
that comply with the statutory objectives of section 4a(a)(3). 
Similarly, Centaurus Energy Master Fund, LP (“Centaurus”) and ISDA/
SIFMA commented that the “as appropriate” language in section 
4a(a)(2)(A) requires factual support before imposing position limits, 
and that “the imposition of position limits `prophylactically’ is not 
mandated by Dodd-Frank and is not supported by the facts.” 23
—————————————————————————

    23 CL-ISDA/SIFMA, supra note 21 at 3; and CL-Centaurus Energy, 
supra note 21 at 2. See also CL-COPE supra note 21 at 2-3; and CL-
Utility Group supra note 21 at 3. Along similar lines, COPE and the 
Utility Group opined that “the deadline of 180 days after the date 
of enactment in clause (B)(i) is only triggered upon a determination 
that such limits are appropriate. Congress unambiguously modified 
the word `shall’ with the requirement that limits only be 
established `as appropriate.” Id.
—————————————————————————

    CME also contended that imposing position limits on “economically 
equivalent swaps” would be counter to Dodd-Frank because it will 
encourage market participants to enter into bespoke, uncleared, non-DCM 
or SEF-traded swaps.24 Finally, CME and other commenters, suggested 
that position limits and position accountability levels should be set 
and administered by futures exchanges.
—————————————————————————

    24 CL-CME I, supra note 8 at 11.
—————————————————————————

    Upon careful consideration of the commenters’ views, the Commission 
reaffirms its interpretation of amended section 4a. The Commission 
disagrees that it must first determine that position limits are 
necessary before imposing them or that it may set limits only after it 
has conducted a complete study of the swaps market. Congress did not 
give the Commission a choice. Congress directed the Commission to 
impose position limits and to do so expeditiously.25 Section 
4a(a)(2)(B) states that the limits for physical commodity futures and 
options contracts “shall” be established within the specified 
timeframes, and section 4a(a)(2)(5) states that the limits for 
economically equivalent swaps “shall” be established concurrently 
with the limits required by section 4a(a)(2). The congressional 
directive that the Commission set position limits is further reflected 
in the repeated references to the limits “required” under section 
4a(a)(2)(A).26 Section 4a(a)(6) similarly states, without 
qualification, that the Commission “shall” establish aggregate 
position

[[Page 71629]]

limits.27 While some commenters seize on the phrase “as 
appropriate,” which appears in sections 4a(a)(2)(A), 4a(a)(3), and 
4a(a)(5), that phrase, when considered in the context of the position 
limits provisions as a whole, is most sensibly read as directing the 
Commission to exercise its discretion in determining the extent of the 
limits that Congress required the Commission to impose.28
—————————————————————————

    25 See also CL-Sen. Harkin, supra note 17 at 1 (opposing any 
delay in the implementation of position limits); and CL-ICPO, supra 
note 20 at 1 (stating that the Proposed Rules regarding position 
limits should be implemented fully).
    26 See sections 4a(a)(2)(B)(i)-(ii), 4a(a)(2)(C), and 4a(a)(3) 
of the CEA, 7 U.S.C. 6a(a)(2)(B)(i)-(ii), 6a(a)(2)(C), 6a(a)(3).
    27 Section 4a(a)(6) of the CEA directs the Commission to 
impose aggregate limits for contracts based on the same underlying 
commodity across: (a) DCM contracts, (b) FBOT contracts offered via 
direct access from inside the United States that are linked to 
contracts listed on a registered entity; and (c) swap contracts that 
perform or affect a significant price discovery function (“SPDF”) 
with respect to registered entities. 7 U.S.C. 6a(a)(6). Although the 
scope of SPDF swaps is currently limited to economically equivalent 
swaps discussed herein, the Commission intends to address in a 
subsequent rulemaking, as was discussed in the proposal, a process 
by which SPDF swaps can be identified. See Position Limits for 
Derivatives, 76 FR 4752, 4753, Jan. 26, 2011.
    28 Section 719 of the Dodd-Frank Act requires the Commission 
to submit a report on the effects of the position limits imposed 
pursuant to the other provisions of this title. Such a provision 
gives further support to the Commission’s view that Congress 
mandated that the Commission impose position limits, setting levels 
as appropriate, because the reporting requirement presupposes that 
limits will be imposed. Congress did not intend the Commission to 
have to demonstrate that such limits are “necessary” or that 
position limits in general are “appropriate” before imposing them 
and reporting on their operation. See also CL-Prof. Greenberger 
supra note 6 at 6-7.
—————————————————————————

    In accordance with the statutory mandate, the Commission has 
established position limits and has exercised its discretion to set 
position limit levels to further the congressional objectives set out 
in section 4a(a)(3)(B) based upon the Commission’s experience with 
existing position limits.29 In adding section 4a(a)(3)(B), Congress 
reaffirmed the Commission’s broad discretion to fix position limit 
levels (and to adopt related requirements) aimed at combating excessive 
speculation and market manipulation, while also protecting market 
liquidity (for bona fide hedgers) and price discovery. The provision 
reflects the Commission’s historical approach to setting position 
limits, and it is consistent with the longstanding congressional 
directive in section 4a(a)(1) that the Commission set position limits 
in its discretion to prevent or minimize burdens that could result from 
excessive speculative trading.30
—————————————————————————

    29 The Commission has applied those limits to specified 
Referenced Contracts based on their high levels of open interest and 
significant notional value or their capacity to serve as a reference 
price for a significant number of cash market transactions.
    30 Consistent with the congressional findings and objectives, 
the Commission has previously set position limits without finding 
excessive speculation or an undue burden on interstate commerce, and 
in so doing has expressly stated that such additional determinations 
by the Commission were not necessary in light of the congressional 
findings in section 4a of the Act. In its 1981 rulemaking to require 
all exchanges to adopt position limits for commodities for which the 
Commission itself had not established limits, the Commission stated, 
in response to similar comments that it had not made any factual 
determinations that excessive speculation had occurred or 
analytically demonstrated that the proposed limits were necessary to 
prevent excessive speculation in the future:
    [T]he prevention of large or abrupt price movements which are 
attributable to the 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 the speculative position limits since it appears that the 
capacity of any contract 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.
    Establishment of Speculative Position Limits, 46 FR 50938, Oct. 
16, 1981 (adopting then Sec.  1.61 (now part of Sec.  150.5)). The 
Commission reiterated this point in the proposed rulemaking in early 
2010, before enactment of the Dodd-Frank Act. Federal Speculative 
Position Limits for Referenced Energy Contracts and Associated 
Regulations,75 FR 4144, at 4146, 4148-49, Jan. 26, 2010 (“[t] he 
Congressional endorsement [in section 4a] of the Commission’s 
prophylactic use of position limits rendered unnecessary a specific 
finding that an undue burden on interstate commerce had actually 
occurred” because section 4a(a) represents an explicit 
Congressional finding that extreme or abrupt price fluctuations 
attributable to unchecked speculative positions are harmful to the 
futures markets and that position limits can be an effective 
prophylactic regulatory tool to diminish, eliminate or prevent such 
activity”); withdrawn, 75 FR 50950, Aug. 18, 2010. During the 
consideration of the Dodd-Frank Act–as well as in the nearly three 
decades since the Commission issued its interpretation of section 4a 
in 1981–Congress was aware of the Commission’s longstanding 
approach to position limits, including its interpretation that the 
Commission is not required to make a predicate finding prior to 
establishing limits. Congress did not disturb the language under 
which the Commission previously acted to impose position limits, and 
added new language that makes clear that the types of limits 
described in sections 4a(a)(2), (a)(5), and (a)(6) are required.
—————————————————————————

    In sum, the contention that the Commission is required to 
demonstrate that position limits (or position limit levels) are 
necessary is contrary not only to the language of, and congressional 
objectives underlying, amended section 4a, but also to the regulatory 
history of position limits and to the choices Congress made in the 
Dodd-Frank Act in light of that history.31
—————————————————————————

    31 The Commission also notes that Congress has reauthorized 
the Commission several times, both before and after the Commission 
established a position limit regime, without making a finding that 
position limits were “necessary” to combat excessive speculation. 
In this regard, Congress was aware of the Commission’s historical 
interpretation of section 4a and has not elected to amend the 
relevant text, including in the Dodd-Frank Act, of that section. If 
Congress intended a different interpretation, Congress would have 
amended the language of section 4a. See Commodity Futures Trading 
Commission v. Schor, 478 U.S. 833, 846 (1986) (“It is well 
established that when Congress revisits a statute giving rise to a 
longstanding administrative interpretation without pertinent change, 
the `congressional failure to revise or repeal the agency’s 
interpretation is persuasive evidence that the interpretation is the 
one intended by Congress”’) citing NLRB v. Bell Aerospace Co., 416 
U.S. 267, 274-275 (1974).
—————————————————————————

    For the reasons stated above, and for the reasons provided in the 
proposal, the Commission finds that it has authority under CEA section 
4a, as amended by the Dodd-Frank Act, to impose the position limits 
herein.32
—————————————————————————

    32 Some commenters submitted a number of studies and reports 
addressing the issue of whether position limits are effective or 
necessary to address excessive speculation. For the reasons 
explained above, the Commission is not required to make a finding as 
to whether position limits are effective or necessary to address 
excessive speculation. Accordingly, these studies and reports do not 
present facts or analyses that are material to the Commission’s 
determinations in finalizing the Proposed Rules. A discussion of 
these studies is provided in section III A infra.
—————————————————————————

B. Referenced Contracts

    The Commission identified 28 Core Referenced Futures Contracts and 
proposed to apply aggregate limits on a futures equivalent basis across 
all derivatives that are (i) Directly or indirectly linked to the price 
of a Core Referenced Futures Contract; or (ii) based on the price of 
the same underlying commodity for delivery at the same delivery 
location as that of a Core Referenced Futures Contract, or another 
delivery location having substantially the same supply and demand 
fundamentals (such derivative products are collectively defined as 
“Referenced Contracts”).33 These Core Referenced Futures Contracts 
were selected on the basis that such contracts: (1) Have high levels of 
open interest and significant notional value; or (2) serve as a 
reference price for a significant number of cash market transactions.
—————————————————————————

    33 76 FR at 4752, 4753. These Core Referenced Futures 
Contracts are: Chicago Board of Trade (“CBOT”) Corn, Oats, Rough 
Rice, Soybeans, Soybean Meal, Soybean Oil and Wheat; Chicago 
Mercantile Exchange Feeder Cattle, Lean Hogs, Live Cattle and Class 
III Milk; Commodity Exchange, Inc. Gold, Silver and Copper; ICE 
Futures U.S. Cocoa, Coffee C, FCOJ-A, Cotton No.2, Sugar No. 11 and 
Sugar No. 16; Kansas City Board of Trade (“KCBT”) Hard Winter 
Wheat; Minneapolis Grain Exchange Hard Red Spring Wheat; and New 
York Mercantile Exchange Palladium, Platinum, Light Sweet Crude Oil, 
New York Harbor No. 2 Heating Oil, New York Harbor Gasoline 
Blendstock and Henry Hub Natural Gas.
—————————————————————————

    Edison Electric Institute and the Electric Power Supply Association 
argued that the Commission did not provide a reasoned explanation for 
selecting the 28 Referenced Contracts.34 Other commenters requested 
that the Commission clarify the definition of Referenced Contracts or 
restrict it to

[[Page 71630]]

those contracts sharing a common delivery point.35
—————————————————————————

    34 CL-EEI/EPSA, supra note 21 at 5.
    35 Alternative Investment Management Association (“AIMA”) on 
March 28, 2011 (“CL-AIMA”) at 2; CL-API supra note 21 at 5; BG 
Americas & Global LNG (“BGA”) on March 28, 2011 (“CL-BGA”) at 
18; Chris Barnard on March 28, 2011 at 1; CL-COPE supra note 21 at 
6; CL-ISDA/SIFMA supra note 21 at 20; Shell Trading (“Shell”) on 
March 28, 2011 (“CL-Shell”) at 7-8; CL-Utility Group supra note 21 
at 7; and Working Group of Commercial Energy Firms (“WGCEF”) on 
March 28, 2011 (“CL-WGCEF”) at 22.
—————————————————————————

    Some commenters argued that the Commission should narrow the 
definition of economically equivalent swaps to cleared swaps.36 
Conversely, other commenters asked the Commission to broaden its 
definition of Referenced Contracts. For example, Better Markets asked 
the Commission to consider a “market-based approach” to determine 
whether to include a contract within a Referenced Contract category, 
including hedging relationships used by market participants, cross-
contract netting practices of clearing organizations, enduring price 
relationships, and physical characteristics.37
—————————————————————————

    36 CL-API, supra note 21 at 13; and CL-BGA, supra note 35 at 
18. American Petroleum Institute explained that extending the 
definition of “Referenced Contract” beyond standardized cleared 
contracts would not be cost-effective. Similarly, BGA argued that 
because the Commission cannot identify uncleared contracts until 
they are executed, the scope of economically equivalent swaps should 
be limited to only those that are cleared.
    37 Better Markets, Inc. (“Better Markets”) on March 28, 2011 
(“CL-Better Markets”) at 68-69.
—————————————————————————

    The Edison Electric Institute and Electrical Power Suppliers 
Association opined that the Commission should allow market participants 
to define what constitutes an economically equivalent contract 
consistent with commercial practices and to allow for a good-faith 
exemption for market participants relying on their own determination 
consistent with Commission guidance.38 ISDA/SIFMA argued that the 
Commission should ensure that the concept of an economically equivalent 
derivative contract covers contracts whose correlation with futures can 
be established through accepted models that address features such as 
maturity, payout structure, locations basis, product basis, etc.39
—————————————————————————

    38 CL-EEI/EPSA, supra note 21 at 12.
    39 CL-ISDA/SIFMA supra note 21 at 23.
—————————————————————————

    The proposed Sec.  151.1 definition of Referenced Contract excluded 
basis contracts and commodity index contracts.40 Proposed Sec.  151.1 
defined basis contract as those contracts that are “cash settled based 
on the difference in price of the same commodity (or substantially the 
same commodity) at different delivery points.” Commodity index 
contracts were defined in the proposal as contracts that are “based on 
an index comprised of prices of commodities that are not the same nor 
[sic] substantially the same.” The proposal further excluded 
intercommodity spread contracts,41 calendar spread contracts, and 
basis contracts from the definition of “commodity index contract.” 
Many commenters appeared to interpret the proposal as subjecting 
positions in basis contracts or commodity index contracts to the 
position limits set forth in proposed Sec.  151.4.42 The Coalition of 
Physical Energy Companies and the Utility Group found that the 
definition of Referenced Contract was “vague” and “clearly 
extraordinarily broad” because, inter alia, it appeared to include 
some over-the-counter (“OTC”) swaps that utilized a Core Referenced 
Futures Contract price as a component of a floating price 
calculation.43 The Coalition of Physical Energy Companies and the 
Utility Group opined that even if the proposed class of Referenced 
Contracts that are priced based on “locations with substantially the 
same supply and demand fundamentals, as that of any Core Referenced 
Futures Contract” it is unclear whether the definition of Referenced 
Contract extends to “those [swaps] that are actually economically 
equivalent, e.g., look alikes.” 44
—————————————————————————

    40 The proposed definition of a Referenced Contract included 
contracts (i) Directly or indirectly linked, including being 
partially or fully settled on, or priced at a differential to, the 
price of any Core Referenced Futures Contract; or (ii) directly or 
indirectly linked, including being partially or fully settled on, or 
priced at a differential to, the price of the same commodity for 
delivery at the same location, or at locations with substantially 
the same supply and demand fundamentals, as that of any Core 
Referenced Futures Contract.
    41 Proposed Sec.  151.1 defined “intercommodity spread” 
contracts as those contracts that “represent[] 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.”
    42 See e.g., CL-Utility Group supra note 21 at 7-8; CL-COPE 
supra note 21 at 6; Commercial Alliance (“Commercial Alliance I”) 
on June 5, 2011 (“CL-Commercial Alliance I”) at 5-10 (arguing for 
the extension of the bona fide hedge exemption for physical market 
transactions and anticipated physical market transactions that could 
be hedged with a basis contract position).
    43 CL-Utility Group supra note 21 at 7-8 (arguing that 
“virtual tolling swaps” that utilize a Referenced Contract-derived 
price series as a component of a floating price appear to be covered 
by the definition of “Referenced Contract”); and CL-COPE supra 
note 21 at 6.
    44 Id.
—————————————————————————

    The Commission is adopting the proposal regarding Referenced 
Contracts with modifications and clarifications responsive to the 
comments. The Commission clarifies that the term “Referenced 
Contract” includes: (1) The Core Referenced Futures Contract; (2) 
“look-alike” contracts (i.e., those that settle off of the Core 
Referenced Futures Contract and contracts that are based on the same 
commodity for the same delivery location as the Core Referenced Futures 
Contract); (3) contracts with a reference price based only on the 
combination of at least one Referenced Contract price and one or more 
prices in the same or substantially the same commodity as that 
underlying the relevant Core Referenced Futures Contract;45 and (4) 
intercommodity spreads with two components, one or both of which are 
Referenced Contracts. These criteria capture contracts with prices that 
are or should be closely correlated to the prices of the Core 
Referenced Futures Contract.46
—————————————————————————

    45 E.g., a swap with a floating price based on the average of 
the settlement price of the New York Mercantile Exchange (“NYMEX”) 
Light, Sweet Crude Oil futures contract and the settlement price of 
the IntercontinentalExchange (“ICE”) Brent Crude futures contract.
    46 Under amended section 4a(a)(1), the Commission is required 
to establish aggregate position limits on contracts based on the 
same underlying commodity, including those swaps that are not traded 
on a DCM or SEF but which are determined to perform or affect a 
significant price discovery function (“SPDF”). 7 U.S.C. 6a(a)(1). 
The Commission currently lacks the data necessary to evaluate the 
pricing relationships between potential SPDF swaps and Referenced 
Contracts and therefore has determined not to set forth, at this 
time, standards for determining significant price discovery function 
swaps. As the Commission gathers additional data on the effect of 
position limits on the 28 Referenced Contracts and these contracts’ 
relationship with other contracts, it could, in its discretion, 
extend position limits to additional contracts beyond the current 
set of Referenced Contracts. The Commission could determine, for 
example, that a contract, due to certain shared qualitative or 
quantitative characteristics with Referenced Contracts, performs a 
SPDF with respect to Referenced Contracts.
—————————————————————————

    In response to commenters, the Commission is eliminating a proposed 
category of Referenced Contracts, namely, those based on 
“substantially the same supply and demand fundamentals.” The 
Commission notes that the “substantially the same supply and demand 
fundamentals” criterion would require individualized evaluation of 
certain trading data to determine whether the price of a commodity may 
or may not be substantially related to a Core Referenced Futures 
Contract. Such analysis may require access to, among other things, data 
concerning bids and offers and transaction information regarding the 
cash market, which are not readily available to the Commission at this 
time.
    The remaining categories of Referenced Contract, i.e., derivatives 
that are directly or indirectly linked to or based on the same 
commodity for delivery at the same delivery location as

[[Page 71631]]

a Core Referenced Futures Contract, are based on objective criteria and 
readily available data, which should provide market participants with 
clarity as to the scope of economically equivalent contracts.47 The 
Commission clarifies that if a swap contract that utilizes as its sole 
floating reference price the prices generated directly or indirectly 
48 from the price of a single Core Referenced Futures Contract, then 
it is a look-alike Referenced Contract and subject to the limits set 
forth in Sec.  151.4.49 If such a swap is priced based on a fixed 
differential to a Core Referenced Futures Contract, it is similarly a 
Referenced Contract.50
—————————————————————————

    47 In finalizing the Commission’s Large Trader Reporting for 
Physical Commodity Swaps rulemaking, and also in response to 
comments, the Commission modified the proposed definition of 
“paired swap” to exclude contracts based on the same commodity at 
different locations with substantially the same supply and demand 
fundamentals as that of any Core Referenced Futures Contract. See 76 
FR 43855, Jul. 22, 2011.
    48 An “indirect” price link to a Core Referenced Futures 
Contract includes situations where the swap reference price is 
linked to prices of a cash-settled Referenced Contract that itself 
is cash-settled based on a physical-delivery Referenced Contract 
settlement price.
    49 The Commission clarifies, by way of example, that a swap 
based on the difference in price of a commodity (or substantially 
the same commodity) at different delivery locations is a “basis 
contract” and therefore not subject to the limits set forth in 
Sec.  151.4. In addition, if a swap is based on prices of multiple 
different commodities comprising an index, it is a “commodity index 
contract” and therefore is not subject to the limits set forth in 
Sec.  151.4. In contrast, if a swap is based on the difference 
between two prices of two different commodities, with one linked to 
a Core Referenced Futures Contract price (and the other either not 
linked to the price of a Core Referenced Futures Contract or linked 
to the price of a different Core Referenced Futures Contract), then 
the swap is an “intercommodity spread contract,” is not a 
commodity index contract, and is a Referenced Contract subject to 
the position limits specified in Sec.  151.4. The Commission further 
clarifies that a contract based on the prices of a Referenced 
Contract and the same or substantially the same commodity (and not 
based on the difference between such prices) is not a commodity 
index contract and is a Referenced Contract subject to position 
limits specified in Sec.  151.4.
    50 The Commission has clarified in its definition of 
“Referenced Contract” that position limits extend to contracts 
traded at a fixed differential to a Core Referenced Futures Contract 
(e.g., a swap with the commodity reference price NYMEX Light, Sweet 
Crude Oil +$3 per barrel is a Referenced Contract) or based on the 
same commodity at the same delivery location as that covered by the 
Core Referenced Futures Contract, and not to unfixed differential 
contracts (e.g., a swap with the commodity reference price Argus 
Sour Crude Index is not a Referenced Contract because that index is 
computed using a variable differential to a Referenced Contract).
—————————————————————————

    With respect to comments that the Commission should broaden the 
scope of Referenced Contracts, the Commission notes that expanding the 
scope of position limits based, for example, on cross-hedging 
relationships or other historical price analysis would be problematic. 
Historical relationships may change over time and, additionally, would 
require individualized determinations. For example, if the standard for 
determining economic equivalence was some level of historical 
correlation, then a commodity derivative might have met the correlation 
metric yesterday, fail it today, and again meet the metric 
tomorrow.51 Under these circumstances, the Commission does not 
believe that it is necessary to expand the scope of position limits 
beyond those proposed. In this regard, the Commission notes that the 
commenters did not provide specific criteria or thresholds for making 
determinations as to which price-correlated commodity contracts should 
be subject to limits.52 The Commission further notes that it would 
consider amending the scope of economically equivalent contracts (and 
the relevant identifying criteria) as it gains experience in this area. 
For clarity, the Commission has deleted the definition of the proposed 
term “Referenced paired futures contract, option contract, swap, or 
swaption” since that term was only used in the definitions section and 
incorporated the relevant provisions of that proposed term into the 
definition of Referenced Contracts. Lastly, the Commission has made 
amendments in Sec.  151.2 that clarify that “Core Referenced Futures 
Contracts” include options that expire into outright positions in such 
contracts.
—————————————————————————

    51 Nevertheless, a trader may decide to assume the risk that 
the historical price relationship might not hold and enter into a 
cross-hedging transaction in a derivative that has been and is 
expected to be price-fluctuation-related to that trader’s cash 
market commodity and seek (and obtain) a bona fide hedge exemption.
    52 For example, the commenters did not address whether a 
derivatives contract on a commodity should be included if there were 
observed historical associated price correlations but no identified 
causation relationship.
—————————————————————————

C. Phased Implementation

    The Commission proposed to implement the position limit rule in two 
phases. In the first phase, the spot-month limits for Referenced 
Contracts would be set at a level based on existing limits determined 
by the appropriate DCM. In the second phase, the spot-month limits 
would be adjusted on a regular schedule, set to 25 percent of the 
Commission’s determination of estimated deliverable supply, which would 
be based on DCM-provided estimates or the Commission’s own estimates. 
The Commission believes that spot-month position limits can be 
implemented on an advanced schedule, because such limits will initially 
be based on existing DCM limits or on estimates of deliverable supply 
for which data is available.
    In the proposal, non-spot-month energy, metal, and “non-
enumerated” 53 agricultural Referenced Contract limits would be 
based on open interest and would be set in the second phase pending the 
availability of certain positional data on physical commodity 
swaps.54
—————————————————————————

    53 In the final rulemaking, the term “legacy” replaced the 
term “enumerated” used in the proposal. The Commission has made 
this change in order to avoid unnecessary confusion.
    54 As discussed in the proposal, the Commission retained the 
position limits for the enumerated agricultural Referenced Contracts 
“as an exception to the general open interest based formula.” 76 
FR at 4752, 4760.
—————————————————————————

    In general, commenters were divided on whether the Commission 
should, in whole or in part, delay the imposition of position limits. 
Some commenters stated that the Commission should stay or withdraw its 
proposal until such time that the Commission has gathered and analyzed 
data to determine if position limits are necessary or appropriate.55 
CME asserted that the Commission cannot impose spot-month limits until 
it has received and analyzed data on economically equivalent swaps 
since the limits cover such swaps.56 Conversely, some commenters 
rejected the phased implementation of non-spot-month position limits 
and urged the Commission to implement such limits on a more expedited 
timeframe. One such commenter, Delta, argued “that the Commission 
should instead strive to establish meaningful speculative position 
limits using sampling and other statistical techniques to make 
reasonable, working assumptions about positions in various market 
segments and refining the speculative limits based upon market 
experience and better data as it is developed.” 57 The Commission 
also received many letters requesting that the Commission impose 
position limits generally on an expedited basis.58
—————————————————————————

    55 CL-FIA I, supra note 21 at 8; CL-COPE, supra note 21 at 4; 
CL-Utility Group, supra note 21 at 5; CL-EEI/EPSA supra note 21 at 
2; CL-Centaurus Energy, supra note 21 at 3; CL-PIMCO supra note 21 
at 6; CL-SIFMA AMG I, supra note 21 at 15-16; CL-PERA, supra note 21 
at 2; CL-Morgan Stanley, supra note 21 at 1; and CL-CMC, supra note 
21 at 2.
    56 CL-CME I, supra note 8 at 7-8.
    57 CL-Delta, supra note 20 at 11.
    58 See e.g., Gary Krasilovsky on February 6, 2011 (“CL-
Krasilovsky”); and Alan Murphy (“Murphy”) on January 6, 2011 
(“CL-Murphy”).
—————————————————————————

    The Commission is finalizing the phased implementation schedule 
generally as proposed and in furtherance of the congressional directive 
that the Commission establishes position limits on an

[[Page 71632]]

expedited timeframe. As stated above, spot-month limits, which are 
based on existing DCM limits and data that is available, can be 
implemented on an expedited timeframe. In addition, non-spot-month 
legacy limits do not require swap positional data to set the limits, 
and, thus, can be set on an expedited timeframe.59 With respect to 
non-spot-month limits for non-legacy Referenced Contracts, which are 
dependent on open interest levels and thus dependent on swaps 
positional data, the Commission will initially set such limits 
following the collection of approximately 12 months of swaps positional 
data.60
—————————————————————————

    59 Non-spot-month limits for agricultural contracts currently 
subject to Federal position limits under part 150 are referred to 
herein as “legacy limits.” As noted earlier, such Referenced 
Contracts are generally referred to as “enumerated” agricultural 
contracts. 17 CFR 150.2.
    60 The Commission recently adopted reporting regulations that 
require routine position reports from clearing organizations, 
clearing members, and swap dealers. See 76 FR 43851, Jul. 22, 2011. 
The swaps positional data obtained through these reports are 
expected to serve as a primary source for determining open 
interests.
—————————————————————————

1. Compliance Dates
    In light of the above referenced timeframe for implementation, the 
compliance date for all spot-month limits and non-spot-month legacy 
limits shall be 60 days after the term “swap” is further defined 
pursuant to section 721 of the Dodd-Frank Act (i.e., 60 days after the 
further definition of “swap” as adopted by the Commission and the 
Securities and Exchange Commission is published by the Federal 
Register). Prior to the Commission further defining the term swap, 
market participants shall continue to comply with the existing position 
limits regime contained in part 150 and any applicable DCM position 
limits or accountability levels. After the compliance date, the 
Commission will revoke part 150, and persons will be required to comply 
with all the provisions of this part 151, including Sec.  151.5 for 
bona fide hedging and Sec.  151.7 related to the aggregation of 
accounts. For non-spot-month non-legacy Referenced Contracts, the 
compliance date shall be set forth by Commission order establishing 
such limits approximately 12 months after the collection of swap 
positional data.61
—————————————————————————

    61 Prior to the compliance date, persons shall continue to 
comply with applicable exchange-set position limits and 
accountability levels.
—————————————————————————

    Although the Commission proposed to revoke part 150 in the Proposed 
Rules, the Commission is retaining this provision until the compliance 
dates set forth above.
2. Transitional Compliance
    As discussed below in detail in section II.B. of this release, 
Sec.  151.1 excludes “basis contracts” and “commodity index 
contracts” from the definition of Referenced Contract. However, part 
20 of the Commission’s regulations requires reporting entities to 
report commodity reference price data sufficient to distinguish between 
basis and non-basis swaps and between commodity index contract and non-
commodity index contract positions in covered contracts.62 Therefore, 
the Commission intends to rely on the data elements in Sec.  20.4(b) to 
distinguish data records subject to Sec.  151.4 position limits from 
those contracts that are excluded from Sec.  151.4. This will enable 
the Commission to set position limits using the narrower data set 
(i.e., Referenced Contracts subject to Sec.  151.4 position limits) as 
well as conduct surveillance using the broader data set.
—————————————————————————

    62 See Sec.  20.2, 17 CFR 20.11 for a list of covered 
contracts.
—————————————————————————

    In addition, Sec.  151.9 provides that traders may determine to 
either exclude (i.e., not aggregate) or net their pre-existing swap 
positions (as discussed below), while part 20 does not require a 
distinction to be made for reporting pre-existing swap positions. The 
Commission believes it is appropriate to include pre-existing swap 
positions in the basis for setting position limits and, thus, the part 
20 data collection will provide this broader data set. This is because 
limits based on a narrower data set (that is, excluding pre-existing 
swaps) may be overly restrictive and, thus, may not provide adequate 
liquidity for bona fide hedgers, in light of the biennial reset of most 
non-spot-month position limits under Sec.  151.4(d)(3). Nonetheless, 
and consistent with the statutory exclusion of swaps pre-existing the 
Dodd-Frank Act, position limits will not apply to such pre-existing 
swap positions.63
—————————————————————————

    63 While requiring reporting entities to submit data 
sufficient to allow the Commission to distinguish pre-existing 
positions from other positions would be helpful to the Commission, 
the Commission does not currently believe it would be cost-effective 
to impose this requirement broadly as it would require reporting 
entities to revisit transaction trade confirmation records that may 
or may not be readily linked to position-tracking databases. 
Moreover, the Commission could develop a reasonable estimate of the 
extent of a trader’s pre-existing positions by comparing their 
positions as of the effective date with the positions held on a date 
in interest (e.g., when a trader appears to establish a position 
exceeding a position limit).
—————————————————————————

    The Commission understands that most uncleared swaps are executed 
opposite a clearing member or swap dealer and would therefore result in 
positions reportable to the Commission under part 20. Part 20 reports 
will not provide data on positions where neither party to a swap is a 
clearing member or swap dealer, but these positions represent a small 
fraction of all uncleared swaps. Since most uncleared swaps will be 
reportable under part 20, the Commission believes the swaps’ data set 
will be adequate to set position limits.64
—————————————————————————

    64 Proposed Sec.  151.4(e)(3) based the uncleared swap 
component of the open interest figure used to set non-spot-month 
position limits on open interest attributed to swap dealers. Section 
20.4 requires position reporting from swap dealers as well as 
clearing organizations and clearing members. Final rule Sec.  
151.4(b)(2)(ii) permits estimation of the uncleared swap component 
using clearing organization or clearing member data obtained under 
Sec.  20.4 reports.
—————————————————————————

    In order to determine a trader’s compliance with position limits in 
light of the pre-existing position exemption and the sampling inherent 
in requiring swap position data reporting from clearing members and 
swap dealers, the Commission will utilize one existing and one new 
means to conduct the necessary market surveillance. First, the 
Commission may issue special calls under Sec.  20.6(b) in instances 
where traders appear to have positions exceeding part 151 position 
limits. Traders subject to these special calls would then be afforded 
an opportunity to provide information on their positions demonstrating 
compliance with a part 151 position limit. Second, the Commission notes 
that traders are required to provide position visibility on their 
uncleared swaps positions under Sec.  151.6(c) in 401 filings that 
would reflect all of their uncleared swap positions in Referenced 
Contracts as well as their total positions in Referenced Contracts, 
irrespective of whether these swaps were executed opposite a clearing 
member or swap dealer. These filings would allow the Commission to 
determine whether the trader is in compliance with part 151 position 
limits. The Commission clarifies that such 401 filings require the 
reporting of gross long and gross short positions in Referenced 
Contracts, excluding those positions that are not included in the 
definition of Referenced Contracts (e.g., excluding those positions 
arising from basis contract positions, pre-existing swap positions, and 
diversified commodity index positions).65
—————————————————————————

    65 See supra under II.B. discussing the definition of 
Referenced Contract.
—————————————————————————

D. Spot-Month Limits

    Proposed Sec.  151.4 would apply spot-month position limits 
separately for physically-delivered contracts and cash-settled 
contracts (i.e., cash-settled

[[Page 71633]]

futures and swaps).66 A trader could therefore hold positions up to 
the spot-month position limit in both the physical-delivery and cash-
settled contracts but a trader could not net cash-settled contracts 
with the physical-delivery contracts.67 The proposed spot-month 
position limits for physical-delivery Core Referenced Futures Contracts 
initially would be set at existing DCM levels; cash-settled Referenced 
Contracts would be subject to limits set at the same level. As 
discussed above, during the second phase of implementation, the spot-
month limits would be based on 25 percent of estimated deliverable 
supply, as determined by the Commission in consultation with DCMs. The 
Commission has determined to adopt the spot-month limits substantially 
as proposed but with certain changes to address commenters’ concerns.
—————————————————————————

    66 For the ICE Futures U.S. Sugar No. 16 (SF) and CME Class 
III Milk (DA), the Commission proposed to adopt the DCM single-month 
limits for the nearby month or first-to-expire Referenced Contract 
as spot-month limits. These contracts currently have single-month 
limits that are enforced in the spot month.
    67 Thus, for example, if the spot-month limit for a Referenced 
Contract is 1,000 contracts, then a trader could hold up to 1,000 
contracts long in the physical-delivery contract and 1,000 contracts 
long in the cash-settled contract. However, the same trader could 
not hold 1,001 contracts long in the physical-delivery contract and 
hold 1 contract short in the cash-settled and remain under the limit 
for the physical-delivery contract. A trader’s cash-settled contract 
position would be a function of the trader’s position in Referenced 
Contracts based on the same commodity that are cash-settled futures 
and swaps. For purposes of applying the limits, a trader shall 
convert and aggregate positions in swaps on a futures equivalent 
basis consistent with the guidance in the Commission’s Appendix A to 
Part 20, Large Trader Reporting for Physical Commodity Swaps. See 76 
FR 43851, 43865 Jul. 22, 2011.
—————————————————————————

1. Definition of “Deliverable Supply”
    In the proposal, the Commission defined “deliverable supply” 
generally as “the quantity of the commodity meeting a derivative 
contract’s delivery specifications that can reasonably be expected to 
be readily available to short traders and saleable by long traders at 
its market value in normal cash marketing channels at the derivative 
contract’s delivery points during the specified delivery period, 
barring abnormal movement in interstate commerce.” 68 Several 
commenters supported “deliverable supply” as an appropriate basis for 
spot-month limits for physical-delivery contracts.69 Other commenters 
disagreed, stating that “deliverable supply” was inappropriate, even 
for physical-delivery contracts, because it would result in overly 
stringent limits.70 ISDA/SIFMA suggested that the Commission instead 
base spot-month limits on “available deliverable supply,” a broader 
measure of physical supply.71
—————————————————————————

    68 76 FR at 4752, 4757.
    69 See CL-AFR supra note 17 at 7-8; CL-AIMA supra note 35 at 
2; CL-Prof. Greenberger supra note 6 at 17; InterContinental 
Exchange, Inc. (“ICE I”) on March 28, 2011 (“CL-ICE I”) at 5; 
and Natural Gas Exchange (“NGX”) on March 28, 2011 (“CL-NGX”) at 
3.
    70 CL-ISDA/SIFMA supra note 21 at 21; and CL-FIA I supra note 
21 at 9.
    71 “Available deliverable supply” includes: (1) All 
available local supply (including supply committed to long-term 
commitments); (2) all deliverable non-local supply; and (3) all 
comparable supply (based on factors such as product and location). 
See CL-ISDA/SIFMA supra note 21 at 21. Another commenter, the 
Alternative Investment Management Association, similarly advocated a 
more expansive definition of “deliverable supply.” CL-AIMA supra 
note 35 at 3 (“This may include all supplies available in the 
market at all prices and at all locations, as if a party were 
seeking to buy a commodity in the market these factors would be 
relevant to the price.”)
—————————————————————————

    Similarly, two commenters suggested that the Commission include 
supply committed to long-term supply contracts in its definition of 
“deliverable supply” to avoid artificially reduced spot-month 
position limits.72 In the Commission’s experience overseeing the 
position limits established at the exchanges as well as federally-set 
position limits, “spot-month speculative position limits levels are 
`based most appropriately on an analysis of current deliverable 
supplies and the history of various spot-month expirations.’ ” 73
—————————————————————————

    72 National Grain and Feed Association (“NGFA”) on March 28, 
2011 (“CL-NGFA”) at 5; and CL-CME I supra note 8 at 9 (suggesting 
that if the Commission decides to retain this exclusion, it should 
define what it understands a “long-term” agreement to be and 
ensure consistency with the deliverable supply definition in the 
Core Principles and Other Requirements for Designated Contract 
Markets proposed rulemaking). Id. citing Appendix C of Part 38, 75 
FR 80572, 80631, Dec. 22, 2010. (In Appendix C, the Commission 
states that commodity supplies that are “committed to some 
commercial use” should be excluded from deliverable supply, and 
requires DCMs to consult with market participants to estimate these 
supplies on a monthly basis).
    73 64 FR 24038, 24039, May 5, 1999.
—————————————————————————

    Other commenters argued that “deliverable supply” should not be 
the basis for position limits on cash-settled Referenced Contracts.74 
Niska, for example, asked the Commission to explain why spot-month 
limits for cash-settled contracts should be linked to deliverable 
supply.75 Another commenter, BGA, opined that the Commission should 
set position limits for cash-settled swap Referenced Contracts based on 
the size of the swap market because swap contracts do not contemplate 
delivery of the underlying contract and therefore are not “tied to the 
physical limits of the market.” 76
—————————————————————————

    74 Minneapolis Grain Exchange, Inc. (“MGEX”) on March 28, 
2011 (“CL-MGEX”) at 4; CL-MFA supra note 21 at 16; Niska Gas 
Storage LLC (“Niska”) on March 28, 2011 (“CL-Niska”) at 2. See 
also CL-AIMA supra note 35 at 2 (asking the Commission to reconsider 
position limits on cash-settled contracts).
    75 CL-Niska supra note 75 at 2.
    76 CL-BGA supra note 35 at 19. See also Cargill, Incorporated 
(“Cargill”) on March 28, 2011 (“CL-Cargill”) at 13 (urging the 
Commission to study the impact of applying any position limit based 
on “deliverable supply” to the swaps market).
—————————————————————————

    The Commission finds that the use of deliverable supply to set 
spot-month limits is wholly consistent with its historical approach to 
setting spot-month limits and overseeing DCMs’ compliance with Core 
Principles 3 and 5.77 Currently, in determining whether a physical-
delivery contract complies with Core Principle 3, the Commission staff 
considers whether the specified contract terms and conditions may 
result in a deliverable supply that is sufficient to ensure that the 
contract is not conducive to price manipulation or distortion. In this 
context, the term “deliverable supply” generally means the quantity 
of the commodity meeting a derivative contract’s delivery 
specifications that can reasonably be expected to be readily available 
to short traders and saleable by long traders at its market value in 
normal cash marketing channels at the derivative contract’s delivery 
points during the specified delivery period, barring abnormal movement 
in interstate commerce.78 The spot-month limit pursuant to Core 
Principle 5 is similarly established based on the analysis of 
deliverable supplies. The Acceptable Practices for Core Principle 5 
state that, with respect to physical-delivery contracts, the spot-month 
limit should not exceed 25 percent of the estimated deliverable 
supply.79 Lastly, with

[[Page 71634]]

respect to cash-settled contracts on agricultural and exempt 
commodities, the spot-month limit is set at some percentage of 
calculated deliverable supply. Accordingly, the Commission is adopting 
deliverable supply as the basis of setting spot-month limits. In 
response to commenters, the Commission added Sec.  151.4(d)(2)(iv) to 
clarify that, for purposes of estimating deliverable supply, DCMs may 
use any guidance issued by the Commission set forth in the Acceptable 
Practices for Core Principle 3.
—————————————————————————

    77 Core Principle 3 specifies that a board of trade shall list 
only contracts that are not readily susceptible to manipulation, 
while Core Principle 5 obligates a DCM to establish position limits 
or position accountability provisions where necessary and 
appropriate “to reduce the threat of market manipulation or 
congestion, especially during the delivery month.”
    78 See e.g., the discussion of deliverable supply in Guideline 
No. 1. 17 CFR part 40, app. A. See also the discussion of 
deliverable supply in the first publication of Guideline No. 1. 47 
FR 49832, 49838, Nov. 3, 1982.
    79 Indeed, with three exceptions, the Sec.  151.2-listed 
contracts with DCM-defined spot months are currently subject to 
exchange-set spot-month position limits, which would have been 
established in this manner. The only contracts based on a physical 
commodity that currently do not have spot-month limits are the COMEX 
mini-sized gold, silver, and copper contracts that are cash settled 
based on the futures settlement prices of the physical-delivery 
contracts. The cash-settled contracts have position accountability 
provisions in the spot month, rather than outright spot-month 
limits. These cash-settled contracts have relatively small levels of 
open interest.
—————————————————————————

2. Twenty-Five Percent as the Deliverable Supply Formula
    ICE commented that spot-month limits for physical-delivery 
contracts (but not cash-settled contracts) set at 25 percent of 
deliverable supply are necessary to prevent corners and squeezes.80 
Other commenters, however, opined that spot-month position limits based 
on 25 percent of deliverable supply are insufficient to prevent 
excessive speculation.81 Americans for Financial Reform (“AFR”), 
for example, argued that while “deliverable supply” is an appropriate 
basis for setting spot-month limits,82 the proposed spot-month limit 
addresses manipulation by a single actor and would not be set low 
enough to combat excessive speculation in the market as a whole and the 
volatility and delinking of commodities prices from economic 
fundamentals caused by excessive speculation.83 Some commenters 
recommended that the Commission set the spot-month limits based on the 
“individual characteristics” of each Core Referenced Futures 
Contract, and not necessarily an exchange’s deliverable supply 
estimate.84
—————————————————————————

    80 CL-ICE I supra note 69 at 5.
    81 CL-AFR supra note 17 at 5; American Trucking Association 
(“ATA”) on March 28, 2011 (“CL-ATA”) at 3; Food & Water Watch 
(“FWW”) on March 28, 2011 (“CL-FWW”) at 10; National Farmers 
Union (“NFU”) on March 28, 2011 (“CL-NFU”) at 2; and CL-PMAA/
NEFI supra note 6 at 7.
    82 CL-AFR supra note 17 at 7-8.
    83 See CL-AFR supra note 17 at 5, 7.
    84 CL-FIA I supra note 21 at 9; CL-ISDA/SIFMA supra note 21 at 
21; and CL-MFA supra note 21 at 18.
—————————————————————————

    The Commission has determined to adopt the 25 percent level of 
deliverable supply for setting spot-month limits. This formula is 
consistent with the long-standing Acceptable Practices for Core 
Principle 5,85 which provides that, for physical-delivery contracts, 
the spot-month limit should not exceed 25 percent of the estimated 
deliverable supply. The use of the existing industry standard would 
provide clarity concerning the underlying methodology. Further, the 
Commission believes that, based on its experience, the formula has 
appeared to work effectively as a prophylactic tool to reduce the 
threat of corners and squeezes and promote convergence without 
compromising market liquidity.86 In making an estimate of deliverable 
supply, the Commission reminds DCMs to take into consideration the 
individual characteristics of the underlying commodity’s supply and the 
specific delivery features of the futures contract.87
—————————————————————————

    85 Core Principle 5 obligates a DCM to establish position 
limits and position accountability provisions where necessary and 
appropriate “to reduce the threat of market manipulation or 
congestion, especially during the delivery month.”
    86 In this respect, the proposed limits formula is not 
intended to address speculation by a class or group of traders.
    87 As under current practice, DCM estimates of deliverable 
supplies (and the supporting data and analysis) will be subject to 
Commission staff review.
—————————————————————————

3. Cash-Settled Contracts
    With respect to cash-settled contracts, proposed Sec.  151.4 
incorporated a conditional spot-month limit permitting traders without 
a hedge exemption to acquire position levels that are five times the 
spot-month limit if such positions are exclusively in cash-settled 
contracts (i.e., the trader does not hold positions in the physical-
delivery Referenced Contract) and the trader holds physical commodity 
positions that are less than or equal to 25 percent of the estimated 
deliverable supply. The proposed conditional-spot-month position limits 
generally tracked exchange-set position limits currently implemented 
for certain cash-settled energy futures and swaps.88
—————————————————————————

    88 For example, the NYMEX Henry Hub Natural Gas Last Day 
Financial Swap, the NYMEX Henry Hub Natural Gas Look-Alike Last Day 
Financial Futures, and the ICE Henry LD1 swap are all cash-settled 
contracts subject to a conditional-spot-month limit that, with the 
exception of the requirement that a trader not hold large cash 
commodity positions, is identical in structure to the proposed 
limit.
—————————————————————————

    Currently, with the exception of significant price discovery 
contracts, traders’ swaps positions are not subject to position limit 
restrictions. The Commission is aware that counterparties to uncleared 
swaps may impose prudential credit restrictions that may directly (for 
example, by one party setting a maximum notional amount restriction 
that it will execute with a particular counterparty) or indirectly (for 
example, by one party setting a credit annex requirement such as 
posting of initial collateral by a counterparty) restrict the amount of 
bilateral transactions between the parties. However, the proposed spot 
month limits would be the first broad position limit r[eacute]gime 
imposed on swaps.
    Several commenters questioned the application of proposed spot-
month position limits to cash-settled contracts.89 Some of these 
commenters suggested that cash-settled contracts, if subject to any 
spot-month position limits at all, should be subject to relatively less 
restrictive limits that are not based on estimated deliverable 
supply.90 BGA, for example, argued that position limits on swaps 
should be set based on the size of the open interest in the swaps 
market because swap contracts do not provide for physical delivery.91 
Further, certain commenters argued that imposing a single speculative 
limit on all cash-settled contracts would substantially reduce the 
cash-settled positions that a trader can hold because currently, each 
cash-settled contract is subject to a separate limit.92 Other 
commenters urged the Commission to eliminate class limits and allow for 
netting across futures and swaps contracts so as not to impact 
liquidity.93
—————————————————————————

    89 CL-ISDA/SIFMA supra note 21 at 6-7, 19; Goldman, Sachs & 
Co. (“Goldman”) on March 28, 2011 (“CL-Goldman”) at 5; CL-ICI 
supra note 21 at 10; CL-MGEX supra note 74 at 4 (particularly 
current MGEX Index Contracts that do not settle to a Referenced 
Contract should be considered exempt from position limits because 
cash-settled index contracts are not subject to potential market 
manipulation or creation of market disruption in the way that 
physical-delivery contracts might be); CL-WGCEF supra note 35 at 20 
(“the Commission should reconsider setting a limit on cash-settled 
contracts as a function of deliverable supply and establish a much 
higher, more appropriate spot-month limit, if any, on cash-settled 
contracts”); CL-MFA supra note 21 at 16-17; and CL-SIFMA AMG I 
supra note 21 at 7.
    90 CL-BGA supra note 35 at 19; CL-ICI supra note 21 at 10; CL-
MFA supra note 21 at 16-17; CL-WGCEF supra note 35 at 20; CL-Cargill 
supra note 76 at 13; CL-EEI/EPSA supra note 21 at 9; and CL-AIMA 
supra note 35 at 2.
    91 CL-BGA supra note 35 at 10.
    92 See e.g., CL-FIA I supra note 21 at 10; and CL-ICE I supra 
note 69 at 6
    93 See e.g., CL-ISDA/SIFMA supra note 21 at 8.
—————————————————————————

    A number of commenters objected to limiting the availability of a 
higher limit in the cash-settled contract to traders not holding any 
physical-delivery contract.94 For example, CME argued that the 
proposed conditional limits would encourage price discovery to migrate 
to the cash-settled contracts, rendering the physical-delivery contract 
“more susceptible to sudden price

[[Page 71635]]

movements during the critical expiration period.” 95 AIMA commented 
that the prohibition against holding positions in the physical-delivery 
Referenced Contract will cause investors to trade in the physical 
commodity markets themselves, resulting in greater price pressure in 
the physical commodity.96
—————————————————————————

    94 American Feed Industry Association (“AFIA”) on March 28, 
2011 (“CL-AFIA”) at 3; CL-AFR supra note 17 at 6; Air Transport 
Association of America (“ATAA”) on March 28, 2011 (“CL-ATAA”) at 
7; CL-BGA supra note 35 at 11-12; CL-Centaurus Energy supra note 21 
at 3; CL-CME I supra note 8 at 10; CL-WGCEF supra note 35 at 21-22; 
and CL-PMAA/NEFI supra note 6 at 14.
    95 CL-CME I supra note 8 at 10. Similarly, BGA argued that 
conditional limits incentivize the migration of price discovery from 
the physical contracts to the financial contracts and have the 
unintended effect of driving participants from the market and 
thereby increasing the potential for market manipulation with a very 
small volume of trades. CL-BGA supra note 35 at 12.
    96 CL-AIMA supra note 35 at 2.
—————————————————————————

    Some of these commenters, including the CME and the KCBT, argued 
against the proposed restriction with respect to cash-settled contracts 
and recommended that cash-settled Referenced Contracts and physical-
delivery contracts should be subject to the same position limits.97 
Two commenters opined that if the conditional limits are adopted, they 
should be increased from five times 25 percent of deliverable 
supply.98 ICE recommended that they be increased to at least ten 
times 25 percent of deliverable supply.99
—————————————————————————

    97 CL-CME I supra note 8 at 10; Kansas City Board of Trade 
(“KCBT I”) on March 28, 2011 (“CL-KCBT I”) at 4; and CL-APGA 
supra note 17 at 6, 8. Specifically, KCBT argued that parity should 
exist in all position limits (including spot-month limits) between 
physical-delivery and cash-settled Referenced Contracts; otherwise, 
these limits would unfairly advantage the look-alike cash-settled 
contracts and result in the cash-settled contract unduly influencing 
price discovery. Moreover, the higher spot-month limit for the 
financial contract unduly restricts the physical market’s ability to 
compete for spot-month trading, which provides additional liquidity 
to commercial market participants that roll their positions forward. 
CL-KCBT I at 4.
    98 CL-AIMA supra note 35 at 2; and CL-ICE I supra note 70 at 
8.
    99 CL-ICE I supra note 69 at 8. ICE also recommended that the 
Commission remove the prohibition on holding a position in the 
physical-delivery contract or shorten the duration to a narrower 
window of trading than the final three days of trading.
—————————————————————————

    In support of their view, the CME submitted data concerning its 
natural gas physical-delivery contract.100 The data, however, 
generally indicates that the trading volume in the contract in the spot 
month has increased since the implementation of a conditional-spot-
month limit, suggesting little (if any) adverse impact on market 
liquidity for the contract. Moreover, according to the same data set, 
both the outright volume and the average price range in the settlement 
period on the last trade day in the closing range have declined.101 
Other measures of average price range in the spot period also have 
declined.
—————————————————————————

    100 CME Group, Inc. (“CME III”) on August 15, 2011 (“CL-CME 
III”).
    101 “Outright volume” means the volume of electronic 
outright transactions that the DCM used for purposes of calculating 
settlement prices and excludes, for example, spread exemptions 
executed at a differential.
—————————————————————————

    The CME also submitted, for the same physical-delivery contract, a 
measure of the relative closing range as a ratio to volatility 
(“RCR”)–that is, the ratio of the closing range to the 20-day 
standard deviation of settlement prices. The RCR measure has declined 
on average after implementation of the conditional limits across 17 
expirations, while the RCR on two individual expirations was higher 
after implementation of the conditional limits, indicating a higher 
relative price volatility on those two days. However, during one of 
those two days, certain traders were active in the physical-delivery 
futures contracts and concurrently held cash-settled contracts, in 
excess of one times the limit on the physical-delivery contract; in the 
other day, this was not the case. In summary, the Commission does not 
believe that the data submitted by CME supports the assertion that 
setting the existing conditional limits on cash-settled contracts in 
the natural gas market has materially diminished the price discovery 
function of physical-delivery contracts.
    Considering the comments that were received, the Commission is 
adopting, on an interim final rule basis, the proposed spot-month 
position limit provisions with modifications. Under the interim final 
rule, the Commission will apply spot-month position limits for cash-
settled contracts using the same methodology as applied to the 
physical-delivery Core Referenced Future Contracts, with the exception 
of natural gas contracts, which will have a class limit and aggregate 
limit of five times the level of the limit for the physical-delivery 
Core Referenced Futures Contract. As further described below, the 
Commission is adopting these spot-month limit methodologies as interim 
final rules in order to solicit additional comments on the appropriate 
level of spot-month position limits for cash-settled contracts.
    Specifically, the Commission is adopting, on an interim final rule 
basis, a spot-month position limit for cash-settled contracts (other 
than natural gas) that will be set at 25 percent of estimated 
deliverable supply, in parity with the methodology for setting spot-
month limit levels for the physical-delivery Core Referenced Futures 
Contracts. The Commission believes, consistent with the comments, that 
parity should exist in all position limits (including spot-month 
limits) between physical-delivery and cash-settled Referenced Contracts 
(other than in natural gas); otherwise, these limits would permit 
larger position in look-alike cash-settled contracts that may provide 
an incentive to manipulate and undermine price discovery in the 
underlying physical-delivery futures contract. However, the Commission 
has a reasonable basis to believe that the cash-settled market in 
natural gas is sufficiently different from the cash-settled markets in 
other physical commodities to warrant a different spot-month limit 
methodology.
    With respect to NYMEX Light, Sweet Crude Oil (“WTI crude oil”), 
NYMEX New York Harbor Gasoline Blendstock (“RBOB”), and NYMEX New 
York Harbor Heating Oil (“heating oil”) contracts, administrative 
experience, available data, and trade interviews indicate that the 
sizes of the markets in cash-settled Referenced Contracts (as measured 
in notional value) are likely to be no greater in size than the related 
physical-delivery Core Referenced Futures Contracts. This is because 
there are alternative markets which may satisfy much of the demand by 
commercial participants to engage in cash-settled contracts for crude 
oil. These include a market for generally short-dated WTI crude oil 
forward contracts, as well as a well-developed forward market for Brent 
oil and an active cash-settled WTI futures contract (the cash-settled 
ICE Futures (Europe) West Texas Intermediate Light Sweet Crude Oil 
futures contract). That futures contract had, as of October 4, 2011, an 
open interest of less than one-third that of the physical-delivery 
NYMEX Light Sweet Crude Oil futures contract, as reported in the 
Commission’s Commitment of Traders Report. That contract is subject to 
a spot-month limit equal to the spot-month limit imposed by NYMEX on 
the relevant physical-delivery futures contract, as a condition of a 
Division of Market Oversight no-action letter issued on June 17, 2008, 
CFTC Letter No. 08-09. A review of the Commission’s large trader 
reporting system data indicated fewer than five traders recently held a 
position in that cash-settled ICE contract in excess of 3,000 contracts 
in the spot month, pursuant to exemptions granted by the exchange. 
Accordingly, given that the size of the cash-settled swaps market 
involving WTI does not appear to be materially larger than that of the 
physical-delivery Core Referenced Futures Contract, parity in spot 
month limits in WTI crude oil between physical-delivery and cash-
settled contracts should ensure sufficient

[[Page 71636]]

liquidity for bona fide hedgers in the cash-settled contracts.
    With respect to the other energy commodities, based on 
administrative experience, available data, and trade interviews, the 
Commission understands the swaps markets in RBOB and heating oil are 
small relative to the relevant Core Referenced Futures Contracts. In 
this regard, unlike natural gas, there has been a small amount of 
trading in exempt commercial markets in RBOB and heating oil. Thus, 
parity in spot month limits in RBOB and heating oil between physical-
delivery and cash-settled contracts should ensure sufficient liquidity 
for bona fide hedgers in the cash-settled contracts.
    With respect to agricultural commodities, administrative 
experience, available data, and trade interviews indicate that the 
sizes of the markets in cash-settled Referenced Contracts (as measured 
in notional value) are small and not as large as the related Core 
Referenced Futures Contracts. This is likely due to the fact that, 
currently, off-exchange agricultural commodity swaps (that are not 
options) may only be transacted pursuant to part 35 of the Commission’s 
regulations. Under current rules, exempt commercial markets and exempt 
boards of trade have not been permitted to, and have not, listed 
agricultural swaps (although the Commission has repealed and replaced 
part 35, effective December 31, 2011, at which point the Commission 
regulations would permit agricultural commodity swaps to be transacted 
under the same requirements governing other commodity swaps). Regarding 
off-exchange agricultural trade options, part 35 is not available; such 
transactions must be pursuant to the Commission’s agricultural trade 
option rules found in Commission regulation 32.13. Under regulation 
32.13, parties to the agricultural trade option must have a net worth 
of at least $10 million and the offeree must be a producer, processor, 
commercial user of, or merchant handling the agricultural commodity 
which is the subject of the trade option. Based on interviews with 
offerors of agricultural trade options believed to be the largest 
participants, administrative experience is that the off-exchange 
markets are smaller than the relevant Core Referenced Futures 
Contracts. Accordingly, parity in spot month limits in agricultural 
commodities between physical-delivery and cash-settled contracts should 
ensure sufficient liquidity for bona fide hedgers in the cash-settled 
contracts.
    With respect to the metal commodities, based on administrative 
experience, available data, and trade interviews, the Commission 
understands the cash-settled swaps markets also are small. Based on 
interviews with market participants, the Commission understands there 
is an active cash forward market and lending market in metals, 
particularly in gold and silver, which may satisfy some of the demand 
by commercial participants to engage in cash-settled contracts. The 
cash-settled metals contracts listed on DCMs generally are 
characterized by a low level of open interest relative to the physical-
delivery metals contracts. Moreover, as is the case for RBOB and 
heating oil, there has not been appreciable trading in exempt 
commercial markets in metals. Accordingly, parity in spot month limits 
in metals commodities between physical-delivery and cash-settled 
contracts should ensure sufficient liquidity for bona fide hedgers in 
the cash-settled contracts.
    In contrast, regarding natural gas, there are very active cash-
settled markets both at DCMs and exempt commercial markets. NYMEX lists 
a cash-settled natural gas futures contract linked to its physical-
delivery futures contract that has significant open interest. 
Similarly, ICE, an exempt commercial market, lists natural gas swaps 
contracts linked to the NYMEX physical-delivery futures contract. 
Moreover, both NYMEX and ICE have gained experience with conditional 
spot-month limits in natural gas where the cash-settled limit is five 
times the limit for the physical-delivery futures contract. In this 
regard, NYMEX imposed the same limit on its cash-settled natural 
contract as ICE imposed on its cash-settled natural gas contract when 
ICE complied with the requirements of part 36 of the Commission’s 
regulations regarding SPDCs. As discussed above, the Commission 
believes the existing conditional limits on cash-settled natural gas 
contracts have not materially diminished the price discovery function 
of physical-delivery contracts. The final rules relax the conditional 
limits by removing the condition, but impose a tighter limit on cash-
settled contracts by aggregating all economically similar cash-settled 
natural gas contracts.102
—————————————————————————

    102 The Commission is removing the proposed restrictions for 
claiming the higher limit in cash-settled Referenced Contracts in 
the spot month. Unlike the proposed conditional limit, under the 
aggregate limit, a trader in natural gas can utilize the five times 
limit for the cash-settled Referenced Contract and still hold 
positions in the physical-delivery Referenced Contract. In addition, 
there is no requirement that the trader not hold cash or forward 
positions in the spot month in excess of 25 percent of deliverable 
supply of natural gas. Although the Commission’s experience with 
DCMs using the more restrictive conditional limit in natural gas has 
been generally positive, the Commission, in agreeing with 
commenters, will wait to impose similar conditions until the 
Commission gains additional experience with the limits in the 
interim final rule. In this regard, the Commission will monitor 
closely the spot-month limits in these final rules and may revert to 
a conditional limit in the future in response to market 
developments.
—————————————————————————

    Thus, the Commission has determined that the one-to-one ratio 
(between the level of spot-month limits on physical-delivery contracts 
and the level of the spot-month limits on cash-settled contracts in the 
agricultural, metals, and energy commodities other than natural gas) 
maximizes the objectives enumerated in section 4a(a)(3). Specifically, 
such limits ensure market liquidity for bona fide hedgers and protect 
price discovery, while deterring excessive speculation and the 
potential for market manipulation, squeezes, and corners. The 
Commission further notes that the formula is consistent with the level 
the Commission staff has historically deemed acceptable for cash-
settled contracts, as well as the formula for physical-delivery 
contracts under Acceptable Practices for Core Principle 5 in part 38. 
Nevertheless, the Commission recognizes that after experience with the 
one-to-one ratio and additional reporting of swap transactions, it may 
be possible to maximize further these objectives with a different ratio 
and therefore will revisit the issue after it evaluates the effects of 
the interim final rule.
    In addition to the spot-month limit for cash-settled natural gas 
contracts, the interim final rule also provides for an aggregate spot-
month limit set at five times the level of the spot-month limit in the 
relevant physical-delivery natural gas Core Referenced Futures 
Contract. A trader therefore must at all times fall within the class 
limit for the physical-delivery natural gas Core Referenced Futures 
Contract, the five-times limit for cash-settled Referenced Contracts in 
natural gas, and the five-times aggregate limit.
    To illustrate the application of the spot-month limits in natural 
gas contracts, assume a physical-delivery Core Referenced Futures 
Contract limit on a particular commodity is set to a level of 100. 
Thus, a trader may hold a net position (long or short) of 100 contracts 
in that Core Referenced Futures Contract and a net position (long or 
short) of 500 contracts in the cash-settled Referenced Contracts on 
that same commodity, provided that the total directional position of 
both contracts is below the aggregate limit. Therefore, to comply with 
the aggregate

[[Page 71637]]

limit, if a trader wanted to hold the maximum directional position of 
100 contracts in the physical-delivery contract, the trader could hold 
only 400 contracts on the same side of the market in cash-settled 
contracts.103 Thus, while the aggregate limit in isolation may appear 
to allow a trader to establish a position of 600 contracts in cash-
settled contracts and 100 contracts on the opposite side of the market 
in the physical-delivery contract (that is, an aggregate net position 
of 500 contracts), the class limits restrict that trader to no more 
than 500 contracts net in cash-settled contracts. The aggregate limit 
is less restrictive than the proposed conditional limit in that a 
trader may elect to hold positions in both physical-delivery and cash-
settled contracts, subject to the aggregate limit.
—————————————————————————

    103 Further to this example, if a trader wanted to hold 100 
contracts in the physical-delivery contract in one direction, the 
trader could hold 500 cash-settled contracts in the opposite 
direction as the physical-delivery contract.
—————————————————————————

    The Commission believes that, based on current experience with 
existing DCM and exempt commercial market (“ECM”) conditional limits, 
the one-to-five ratio for natural gas contracts maximizes the statutory 
objectives, as set forth in section 4a(a)(3)(B) of the CEA, of 
preventing excessive speculation and market manipulation, ensuring 
market liquidity for bona fide hedgers, and promoting efficient price 
discovery. Nevertheless, the Commission recognizes that after 
experience with the one-to-five ratio and additional reporting of swap 
transactions, it may be possible to maximize further these objectives 
with a different ratio and therefore will revisit the issue after it 
evaluates the effects of the interim final rule. Accordingly, the 
Commission is implementing the one-to-five ratio in natural gas 
contracts on an interim final rule basis and is seeking comments on 
whether a different ratio can further maximize the statutory objectives 
in section 4a(a)(3)(B) of the CEA.
    The Commission notes that, as would have been the case with the 
proposed conditional limits, the spot-month limits on cash-settled 
natural gas contracts will be more restrictive than the current natural 
gas conditional spot-month limits. The NYMEX Henry Hub Natural Gas 
(“NG”) physical-delivery futures contract has a spot-month limit of 
1,000 contracts. Both the NYMEX cash-settled natural gas futures 
contract (“NN”) and the ICE Henry Hub Physical Basis LD1 contract 
(“LD1”) have conditional-spot-month limits equivalent to 5,000 
contracts in the NG futures contract. In contrast to the LD1 contract, 
swap contracts that are not significant price discovery contracts 
(“SPDCs”) have not been subject to any position limits. However, the 
final rule aggregates the related cash-settled contracts, whether swaps 
or futures. For example, a trader under current rules may hold a 
position equivalent to 5,000 NG contracts in each of the NN and LD1 
contracts (10,000 in total), but under the final rule, a speculative 
trader may hold only 5,000 cash-settled contracts net under the 
aggregate spot month limit (since a trader must add its NN position to 
its LD1 position). Further, other economically-equivalent contracts 
would be aggregated with a trader’s cash-settled contracts in NN and 
LD1.
    Proposed Sec.  151.11(a)(2) required that a DCM or SEF that is a 
trading facility adopt spot-month limits on cash-settled contracts for 
which no federal limits apply, based on the methodology in proposed 
Sec.  151.4 (i.e., 25 percent of deliverable supply). Proposed Sec.  
151.4(a) did not establish spot-month limits in the cash-settled Core 
Referenced Futures Contracts (i.e., Class III Milk, Feeder Cattle, and 
Lean Hog contracts). Thus, under the proposal, a DCM or SEF that is a 
trading facility would be required to set a spot-month limit on such 
contracts at a level no greater than 25 percent of deliverable supply.
    The final rules provide that the spot-month position limit for 
cash-settled Core Referenced Futures Contracts (i.e., Class III Milk, 
Feeder Cattle, and Lean Hog contracts) and related cash-settled 
Referenced Contracts will be set by the Commission at a level equal to 
25 percent of deliverable supply.104
—————————————————————————

    104 See Sec.  151.4(a).
—————————————————————————

    The Commission is also retaining class limits in the spot month for 
physical-delivery and cash-settled contracts. Under the class limit 
restriction, a trader may hold positions up to the spot-month limit in 
the physical-delivery contracts, as well as positions up to the 
applicable spot-month limit in cash-settled contracts (i.e., cash-
settled futures and swaps), but a trader in the spot month may not net 
across physical-delivery and cash-settled contracts.105 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.106
—————————————————————————

    105 As discussed above, the Commission is eliminating the 
conditional spot-month limit.
    106 As will be discussed further below, the Commission is 
eliminating class limits outside of the spot month.
—————————————————————————

    In the Commission’s view, the aggregate limit for natural gas will 
ensure that no trader amasses a speculative position greater than five 
times the level of the physical-delivery Referenced Contract position 
limit and thereby, the limit “diminishes the incentive to exert market 
power to manipulate the cash-settlement price or index to advantage a 
trader’s position in the cash-settlement contract.” 107
—————————————————————————

    107 76 FR at 4752, 4758.
—————————————————————————

    As noted above, the Commission has developed the limits on 
economically equivalent swaps concurrently with limits established for 
physical commodity futures contracts and has established aggregate 
requirements for cash-settled futures and swaps. In establishing the 
spot-month limits for cash-settled futures, options, and swaps, the 
Commission seeks to ensure, to the maximum extent practicable, that 
there will be sufficient market liquidity for bona fide hedgers in 
swaps, especially those seeking to offset open positions in such 
contracts. Permitting traders to hold larger positions in natural gas 
cash-settled contracts near expiration should not materially affect the 
potential for market abuses, as the current Commission surveillance 
system serves to detect and prevent market manipulation, squeezes, and 
corners in the physical-delivery futures contracts as well as market 
abuses in cash-settled contracts on which position information is 
collected. In this regard, the Swaps Large Trader Reporting system will 
enhance the Commission’s surveillance efforts by providing the 
Commission with transparency for the positions of traders holding large 
swap positions. The Commission will monitor closely the effects of its 
spot-month position limits to ensure that they do not disrupt the price 
discovery function of the underlying market and that they are effective 
in addressing the potential for market abuses in cash-settled 
contracts.
4. Interim Final Rule
    The Commission believes that, based on administrative experience, 
available data, and trade interviews, the spot month limits formulas 
for energy, agricultural and metals contracts, as described above, at 
this time best maximizes the statutory objectives set forth in CEA 
section 4a(a)(3)(B) of preventing excessive speculation and market 
manipulation, ensuring market liquidity for bona fide hedgers, and 
promoting efficient price discovery. However, commenters presented a 
range of views as to the appropriate formula with respect to cash 
settled contracts. Some commenters believed that either a

[[Page 71638]]

larger ratio was appropriate or there should be no limit on cash-
settled contracts at all.108 Other commenters believed there should 
be parity in the limits between physical-delivery contracts and cash-
settled contracts.109 Accordingly, the Commission is implementing the 
spot month limits on an interim rule basis and is seeking comments on 
whether a different ratio (e.g., one-to-three or one-to-four) can 
maximize further the statutory objectives in section 4a(a)(3)(B).
—————————————————————————

    108 See e.g., CL-ICE I, supra note 69 at 8, CL-Centaurus, 
supra note 21 at 3; CL-BGA, supra note 35 at 12.
    109 See e.g., CL-CME I, supra note 8 at 10; CL-KCBT, supra 
note 97 at 4; CL-APGA, supra note 17 at 6,8.
—————————————————————————

    Specifically, the Commission invites commenters to address whether 
the interim final rule best maximizes the four objectives in section 
4a(a)(3)(B). The Commission also seeks comments on whether it should 
set a different ratio for different commodities. Should the Commission 
consider setting the ratio higher than one-to-one and, if so, in which 
commodities? Commenters are encouraged, to the extent feasible, to be 
comprehensive and detailed in providing their approach and rationale. 
Commenters are requested to address how their suggested approach would 
better maximize the four objectives in section 4a(a)(3).
    Additionally, commenters are encouraged to address the following 
questions:
    Should the Commission consider the relationship between the open 
interest in cash-settled contracts in the spot month and open interest 
in the physical-delivery contract in the spot month in setting an 
appropriate ratio?
    Are there other metrics that are relevant to the setting of a spot-
month limit on cash-settled contracts (e.g., volume of trading in the 
physical-delivery futures contract during the period of time the cash-
settlement price is determined)?
    What criteria, if any, could the Commission use to distinguish 
among physical commodities for purposes of setting spot-month limits 
(e.g., agricultural contracts of relatively limited supplies 
constrained by crop years and limited storage life) and how would those 
criteria be related to the levels of limits?
    The Commission also invites comments on the costs and benefits 
considerations under CEA section 15a. The Commission further requests 
commenters to submit additional quantitative and qualitative data 
regarding the costs and benefits of the interim final rule and any 
suggested alternatives. Thus, the Commission is seeking comments on the 
impact of the interim final rule or any alternative ratio on: (1) The 
protection of market participants and the public; (2) the efficiency, 
competitiveness, and financial integrity of the futures markets; (3) 
the market’s price discovery functions; (4) sound risk management 
practices; and (5) other public interest considerations.
    The comment period for the interim final rule will close January 
17, 2012.
    After the Commission gains some experience with the interim final 
rule and has reviewed swaps data obtained through the Swaps Large 
Trader Reports, the Commission may further reevaluate the appropriate 
ratio between physical-delivery and cash-settled spot-month position 
limits and, in that connection, seek additional comments from the 
public.
5. Resetting Spot-Month Limits
    The Proposed Rules required that DCMs submit estimates of 
deliverable supply to the Commission by the 31st of December of each 
calendar year. The Proposed Rules also provided that the Commission 
would rely on either these DCM estimates or its own estimates to revise 
spot-month position limits on an annual basis.110 Two commenters 
commented that the Commission’s proposed process for DCMs providing 
their deliverable supply estimates within the proposed timeframe was 
operationally infeasible.111
—————————————————————————

    110 See Sec.  151.4(c). Under the Proposed Rules, spot-month 
legacy limits would not be subject to periodic resets.
    111 CL-CME I supra note 8 at 9; and CL-MGEX supra note 75 at 
2. In addition, the MGEX stated that it is impractical to try to 
ascertain an accurate estimate of deliverable supply because there 
are too many variable and unknown factors that affect an 
agricultural commodity’s production and the amount that is sent to 
delivery points. CL-MGEX supra note 74 at 2.
—————————————————————————

    Others criticized the setting of spot-month limits on an annual 
basis. MFA commented that the limits should reflect seasonal 
deliverable supply by using either data based on the prior year’s 
deliverable supply estimates or more frequent re-setting.112 The 
Institute for Agriculture and Trade Policy (“IATP”) commented that 
the spot-month position limits for legacy agricultural commodities will 
likely require more than annual revision due to the effects of climate 
change on the estimated deliverable supply for each Referenced 
Contract.113 IATP also urged the Commission to amend the proposal to 
provide for emergency meetings to estimate deliverable supply if prices 
or supply become volatile.114
—————————————————————————

    112 CL-MFA supra note 21 at 18.
    113 IATP on March 28, 2011 (“CL-IATP”) at 5.
    114 Id. at 3.
—————————————————————————

    Two commenters expressed concern about the potential volatility in 
the limit levels introduced by the Commission’s proposed annual process 
for setting spot-month limits. BGA commented that spot-month limits 
that are changed too frequently (annually would be too frequent in 
their view) could result in a “flash crash” as traders make large 
position changes in order to comply with a potentially new lower 
limit.115 BGA suggested that this concern could be addressed through, 
among other things, less frequent changes to the spot-month position 
limit levels and by providing the market a several-month “cure 
period.” 116 ISDA/SIFMA suggested that year-to-year spot-month limit 
level volatility could be addressed by using a five-year rolling 
average of estimated deliverable supply.117
—————————————————————————

    115 CL-BGA supra note 35 at 20.
    116 Id.
    117 CL-ISDA/SIFMA supra note 21 at 22.
—————————————————————————

    The Commission recognizes the concerns regarding the necessity and 
desirability of an annual updating of the deliverable supply 
calculations on a single anniversary date, and that under normal market 
conditions, agricultural, energy, and metal commodities typically do 
not exhibit dramatic and sustained changes in their supply and demand 
fundamentals from year-to-year. Accordingly, the Commission has 
determined to update spot-month limits biennially (every two years) for 
energy and metal Referenced Contracts instead of annually, and to 
stagger the dates on which estimates of deliverable supply shall be 
submitted by DCMs. These changes should mitigate the costs of 
compliance for DCMs to prepare and submit estimates of deliverable 
supply to the Commission. Under the final rule, DCMs may petition the 
Commission to update the limits on a more frequent basis should supply 
and demand fundamentals warrant it.
    Finally, in response to comments, the Commission has made minor 
modifications to the definition of the “spot month” to provide for 
consistency with DCMs’ current practices in the administration of spot-
month limits for the Referenced Contracts.

E. Non-Spot-Month Limits

    The Commission proposed to impose aggregate position limits outside 
of the spot month in order to prevent a speculative trader from 
acquiring excessively large positions and, thereby, to help prevent 
excessive speculation and deter and prevent market

[[Page 71639]]

manipulations, squeezes, and corners.118 Furthermore, the Commission 
provided that the “resultant limits are purposely designed to be high 
in order to ensure sufficient liquidity for bona fide hedgers and avoid 
disrupting the price discovery process given the limited information 
the Commission has with respect to the size of the physical commodity 
swap markets.” 119
—————————————————————————

    118 76 FR at 4752, 4759.
    119 Id.
—————————————————————————

    In the proposal, the formula for the non-spot-month position limits 
is based on total open interest for all Referenced Contracts in a 
commodity. The actual position limit is based on a formula: 10 percent 
of the open interest for the first 25,000 contracts and 2.5 percent of 
the open interest thereafter.120 The limits for each Referenced 
Contracts included class limits with one class comprised of all futures 
and option contracts and the second class comprised of all swap 
contracts. A trader could net positions within the same class, but 
could not net its position across classes. The limits also included an 
aggregate all-months-combined limit and a single month limit; however, 
the limit for the single month would be the same size as the limit for 
all months.
—————————————————————————

    120 By way of example, assuming a Referenced Contract has 
average all-months-combined aggregate open interest of 1 million 
contracts, the level of the non-spot-month position limits would 
equal 26,900 contracts. This level is calculated as the sum of 2,500 
(i.e., 10 percent times the first 25,000 contracts open interest) 
and 24,375 (i.e., 2.5 percent of the 975,000 contracts remaining 
open interest), which equals 26,875 (rounded up to the nearest 100 
under the rules (i.e., 26,900)).
—————————————————————————

    The Commission received many comments about the rationale for and 
design of the proposed non-spot-month limits. Many commenters opined 
that the proposed aggregate non-spot-month limits would not be 
sufficiently restrictive to prevent excessive speculation.121 Better 
Markets explained, for example, that the proposed non-spot-month limits 
address manipulation by limiting the position size of a single 
individual while position limits intended to reduce excessive 
speculation should aim to reduce total speculative participation in the 
market.122 These commenters recommended that, in order to address 
excessive speculation, the Commission should set limits designed to 
limit speculative activity to a target level.123
—————————————————————————

    121 CL-ATA supra note 81 at 3-4; CL-ATAA supra note 94 at 7; 
CL-Better Markets supra note 37 at 70-71; CL-Delta supra note 20 at 
2-6; CL-FWW supra note 81 at 11; and CL-PMAA/NEFI supra note 6 at 7, 
10. 3,178 form comment letters asked the Commission to impose a 
limit of 1,500 contracts on Referenced Contracts in silver.
    122 See e.g., CL-Better Markets supra note 37 at 61-64.
    123 CL-ATA supra note 81 at 4-5; CL-AFR supra note 17 at 5-6; 
CL-ATAA supra note 94 at 3, 6, 9-10, 12; CL-Better Markets supra 
note 37 at 70-71 (recommending the Commission to limit non-commodity 
index and commodity index speculative participation in the market to 
30 percent and 10 percent of open interest, respectively); CL-Delta 
supra note 20 at 5; and CL-PMAA/NEFI supra note 6 at 7. See also 
Daniel McKenzie on March 28, 2011 (“CL-McKenzie”) at 3. The 
Petroleum Marketers Association of America and the New England Fuel 
Institute, for example, suggested that the distribution of large 
speculative traders’ positions in the market may be an appropriate 
factor to be considered in developing these speculative target 
limits.
—————————————————————————

    Other commenters questioned the utility of non-spot-month limits 
generally.124 AIMA, for example, opined that “[a]lthough * * * 
limits within the spot-month may be effective to prevent `corners and 
squeezes’ at settlement, the case for placing position limits in non-
spot-months is less convincing and has not been made by the 
Commission.” 125 The FIA commented that non-spot-month position 
limits are not necessary to prevent excessive speculation.126
—————————————————————————

    124 American Gas Association (“AGA”) on March 28, 2011 
(“CL-AGA”) at 13; CL-AIMA supra note 35 at 3; CL-BlackRock supra 
note 21 at 18; CL-CME I supra note 8 at 21; CL-FIA I supra note 21 
at 11 (Commission’s prior guidance does not provide a basis today 
for an exemption from hard speculative position limits for markets 
with large open-interest, high trading volumes and liquid cash 
markets); CL-Goldman supra note 89 at 6; CL-ISDA/SIFMA supra note 21 
at 18; CL-MGEX supra note 74 at 1 (Commission’s proposed formulaic 
approach to non-spot-month position limits seems arbitrary); Natural 
Gas Supply Association (“NGSA”) and National Corn Growers 
Association (“NCGA”) on March 28, 2011, (“CL-NGSA/NCGA”) at 4-5 
(position limits outside the spot month should be eliminated or be 
increased substantially because threats of manipulation and 
excessive speculation are primarily of concern in the physical-
delivery spot month contract); CL-PIMCO supra note 21 at 6; Global 
Energy Management Institute, Bauer College of Business, University 
of Houston (“Prof. Pirrong”) on January 27, 2011 (“CL-Prof. 
Pirrong”) at para. 21 (Commission has provided no evidence that the 
limits it has proposed are necessary to reduce the Hunt-like risk 
that the Commission uses as a justification for its limits); CL-
SIFMA AMG I supra note 21 at 8; Teucrium Trading LLC (“Teucrium”) 
on March 28, 2011 (“CL-Teucrium”) at 2 (limiting the size of 
positions that a non-commercial market participant can hold in 
forward (non-spot) futures contracts or financially-settled swaps, 
the Commission will restrict the flow of capital into an area where 
it is needed most–the longer term price curve); and CL-WGCEF supra 
note 35 at 4.
    125 CL-AIMA supra note 35 at 3.
    126 CL-FIA I supra note 21 at 11.
—————————————————————————

    A number of commenters opined that the Commission should increase 
the open interest multipliers in the formula used in determining the 
non-spot-month position limits.127 Other commenters opined that the 
Commission should decrease the open interest multipliers to 5 percent 
of open interest for first 25,000 contracts and then 2.5 percent.128 
PMAA and the NEFI commented that the formula, which was developed in 
1992 in the context of agricultural commodities, is inappropriate for 
current markets with larger open interest relative to the agricultural 
markets.129
—————————————————————————

    127 See CL-AIMA supra note 35 at 3; CL-CME I supra note 8 at 
12 (for energy and metals); CL-FIA I supra note 21 at 12 (10 percent 
of open interest for first 25,000 contracts and then 5 percent); CL-
ICI supra note 21 at 10 (10 percent of open interest until requisite 
market data is available); CL-ISDA/SIFMA supra note 21 at 20; CL-
NGSA/NCGA supra note 125 at 5 (25 percent of open interest); and CL-
PIMCO supra note 21 at 11.
    128 See CL-Prof. Greenberger supra note 6 at 13; and CL-FWW 
supra note 82 at 12.
    129 CL-PMAA/NEFI supra note 6 at 9 (PMAA/NEFI commented that 
as open interest in markets has grown well beyond the open interest 
assumptions made in 1992, the size of large speculative positions 
has not grown commensurately and that therefore the Commission 
should decrease the marginal multiplier in the position limit 
formula as open interest increases. PMAA/NEFI commented further that 
the Commission should look at the actual positions by traders and 
set limits to constrain the largest positions in the resulting 
distribution).
—————————————————————————

    Goldman Sachs recommended that the Commission use a longer 
observation period than one year for setting position limits and 
provided as an example five years in order to reduce pro-cyclical 
effects (e.g., a decrease in open interest due to decreased speculative 
activity in one period results in a limit in the subsequent period that 
is excessively restrictive or vice-versa).130
—————————————————————————

    130 See CL-Goldman supra note 90 at 6-7.
—————————————————————————

    As stated in the proposal, the non-spot-month position limits are 
intended to maximize the CEA section 4a(a)(3)(B) objectives, consistent 
with the Commission’s historical approach to setting non-spot-month 
speculative position limits.131 Such a limits formula, in the 
Commission’s view, prevents a speculative trader from acquiring 
excessively large positions and thereby would help prevent excessive 
speculation and deter and prevent market manipulations, squeezes, and 
corners. The Commission also believes, based on its experience under 
part 150, that the 10 and 2.5 percent formula will ensure sufficient 
liquidity for bona fide hedgers and avoids disruption to the price 
discovery process.
—————————————————————————

    131 The Commission has used the 10 and 2.5 percent formula in 
administering the level of the legacy all-months position limits 
since 1999. See e.g., 64 FR 24038, 24039, May 5, 1999. See also 17 
CFR 150.5(c)(2).
—————————————————————————

    The Commission notes that Congress implicitly recognized the 
inherent uncertainty regarding future effects associated with setting 
limits prophylactically and therefore directed the Commission, under 
section 719(a) of the Dodd-Frank Act, to study on a

[[Page 71640]]

retrospective basis the effects (if any) of the position limits imposed 
pursuant to section 4a on excessive speculation and on the movement of 
transactions from DCMs to foreign venues.132 This study will be 
conducted in consultation with DCMs and is to be completed within 12 
months after the imposition of position limits. Following Congress’ 
direction, the Commission will conduct an evaluation of position limits 
in performing this study and, thereafter, the Commission plans to 
continue monitoring these limits, considering the statutory objectives 
under section 4a(a)(3), and, if warranted, amend by rulemaking, after 
notice and comment, the formula adopted herein to determine non-spot-
month position limits. The Commission may determine to reassess the 
formula used to set non-spot-month position limits based on the study’s 
findings.
—————————————————————————

    132 Dodd-Frank Act, supra note 1, section 719(a).
—————————————————————————

1. Single-Month, Non-Spot Position Limits
    Under proposed Sec.  151.4(d)(1), the Commission proposed to set 
the single-month limit at the same level as the all-months-combined 
position limit. Several commenters requested that the Commission 
reconsider this approach.133 The Air Transportation Association of 
America, for example, argued that the proposed level would exacerbate 
the problem of speculative trading in the nearby (next to expire) 
futures month, the month upon which energy prices typically are 
determined.134
—————————————————————————

    133 CL-APGA supra note 17 at 2-3; CL-ATAA supra note 94 at 6, 
13; CL-PMAA/NEFI supra note 6 at 11. 6,074 form comment letters 
asked the Commission to adopt “single-month limits that are no 
higher than two-thirds of the all-months-combined levels.”
    134 CL-ATAA supra note 94 at 6. They also asserted that the 
Commission did not provide adequate justification for substantially 
raising the single month limit to the same level as the all-months 
combined limit. Id. at 13.
—————————————————————————

    Three commenters, including ICE, cautioned the Commission not to 
impose position limits that constrain speculative liquidity in the 
outer month expirations of Referenced Contracts, that is, in contracts 
that expire in distant years, as opposed to nearby contract 
expirations.135 ICE further asked the Commission to consider whether 
all-months-combined limits are necessary or appropriate in energy 
markets in the outer months. ICE stated that such limits would decrease 
liquidity for hedgers in the outer months and, moreover, all-months 
limits are not appropriate for energy markets where hedging is done on 
a much longer term basis relative to the agricultural markets where 
hedging is primarily conducted to hedge the next year’s crops.136 
Teucrium Trading argued that by limiting the size of positions that a 
non-commercial market participant can hold in forward (non-spot) 
futures contracts or financially-settled swaps, the Commission would 
restrict the flow of capital into an area where it is needed most–the 
longer term price curve, that is, contracts that expire in distant 
years.137
—————————————————————————

    135 CL-ICE I supra note 69 at 9-10; CL-ISDA/SIFMA supra note 
21 at 19; and CL-Teucrium supra note 124 at 2.
    136 CL-ICE I supra note 69 at 9-10.
    137 CL-Teucrium supra note 124 at 2.
—————————————————————————

    The Commission has determined to set the single-month position 
limit levels at the same level as the all-months-combined limits, 
consistent with the proposal. Under current part 150, the Commission 
sets a single-month limit at a level that is lower than the all-months-
combined limit; it also provides a limited exemption for calendar 
spread positions to exceed that single-month limit under Sec.  
150.4(a)(3), as long as the single month position (including calendar 
spread positions) is no greater than the level of the all-months-
combined limit. Further, the Commission does not have a standard 
methodology for determining how much smaller the level of the single-
month limit is set in comparison to the level of the all-months-
combined limit.
    The Commission has made this determination for two reasons. First, 
setting the single-month limit to the same level as that of the all-
months-combined limit simplifies the compliance burden on market 
participants and renders the calendar spread exemption unnecessary. 
Second, setting the limits at the same level for both spreaders and 
other speculative traders will permit parity in position size between 
these speculative traders in a single calendar month and, thus, may 
serve to diminish unwarranted price fluctuations.138
—————————————————————————

    138 The Commission notes that commenters arguing for more 
restrictive individual month limits did not provide any supporting 
data.
—————————————————————————

    With respect to objections to deferred-month limits, the Commission 
notes that Congress instructed the Commission to set limits on the spot 
month, each other month, and the aggregate number of positions that may 
be held by any person for all months.139
—————————————————————————

    139 CEA section 4a(a)(3)(A), 7 U.S.C. 6a(a)(3)(A).
—————————————————————————

    Finally, the Commission will continually monitor the size, 
behavior, and impact of large speculative positions in single contract 
months in order to determine whether it should adjust the single-month 
limit levels.
2. “Step-Down” Position Limit
    Three commenters recommended that the Commission adopt, in addition 
to the spot-month limit and the single-month and all-months-combined 
limits, an intermediate “step-down” limit between the spot-month 
position limit and the single-month non-spot-month position limit.140 
This “step-down” limit would be less restrictive than the spot-month 
limit, but more restrictive than the single-month limit. BGA 
recommended that the single-month limit should be scaled down 
rationally before it reaches the spot month so that the market will not 
be disrupted by panic selling on the day before the spot-month limit 
becomes effective.141 The commenters did not propose alternative 
criteria for imposing a step-down provision.
—————————————————————————

    140 CL-BGA supra note 35 at 11; GFI Group (“GFI”) on January 
31, 2011 (“CL-GFI”) at 2 (progressively tighter limits should 
apply for physically-delivered energy contracts as they near 
expiration/delivery); and CL-PMAA/NEFI supra note 6 at 11.
    141 CL-BGA supra note 35 at 11.
—————————————————————————

    Currently, the Commission and DCMs establish a single date when the 
spot-month limit becomes effective. DCMs publicly disseminate this date 
as part of their contracts’ rules. The advance notice provides 
sufficient time for market participants to reduce their positions as 
necessary. The Commission is not aware of material issues related to 
these provisions regarding the implementation of spot month limits. The 
Commission further believes this practice ensures sufficient market 
liquidity for bona fide hedgers and helps to deter and prevent squeezes 
and corners in the spot period while providing trader flexibility to 
manage positions and remain in compliance with the limits. The 
Commission notes, however, that it will monitor trading activity and 
resulting changes in prices in the transition period into the spot 
month in order to determine whether it should impose a new “step-
down” limit for Referenced Contracts nearing the spot-month period.
3. Setting and Resetting Non-Spot-Month Limits
    The Commission proposed all-months-combined aggregate limits and 
single-month aggregate limits in proposed Sec.  151.4(d)(1). The 
Commission is adopting those proposed limits in final Sec.  
151.4(b)(1), which sets forth single-month and all-months-combined 
position limits for non-legacy Referenced Contracts (i.e., those 
agricultural contracts that currently are not subject to Federal 
position limits as well as energy and metal contracts).

[[Page 71641]]

These limits would be fixed based on the following formula: 10 percent 
of the first 25,000 contracts of average all-months-combined aggregated 
open interest and 2.5 percent of the open interest for any amounts 
above 25,000 contracts of average all-months-combined aggregated open 
interest.
    Under proposed Sec.  151.4(b)(1)(i), aggregated open interest is 
derived from month-end open interest values for a 12-month time period. 
The Commission would use open interest to determine the average all-
months-combined open interest for the relevant period, which, in turn, 
will form the basis for the non-spot-month position limits.
    Under the Proposed Rules, the Commission would calculate, for all 
Referenced Contracts, open interest on an annual basis for a 12-month 
period, January to December, and then, based on those calculations, 
publish the updated non-spot-month position limits by January 31st of 
the following calendar year. The updated limits would become effective 
30 business days after such publication. With respect to the initial 
limits, they would become effective pursuant to a Commission order 
under proposed Sec.  151.4(h)(3) and would be based on 12 months of 
open interest data.
    Several commenters urged the Commission to use a transparent and 
accessible methodology to determine non-spot-month position 
limits.142 Some of these commenters recommended that updated non-
spot-month limits be determined through rulemaking, and not through 
automatic annual recalculations as proposed.143
—————————————————————————

    142 CL-FIA I supra note 21 at 12; CL-BlackRock supra note 21 
at 18; CL-CME I supra note 8 at 12; CL-EEI/EPSA supra note 21 at 11; 
CL-KCBT I supra note 97 at 3; CL-NGFA supra note 72 at 3; CL-WGC 
supra note 21 at 5; and CL-ISDA/SIFMA supra note 21 at 21.
    143 CL-BlackRock supra note 21 at 18; CL-CME I supra note 8 at 
12; CL-EEI/EPSA supra note 21 at 11; CL-KCBT I supra note 97 at 3; 
CL-NGFA supra note 70 at 3; and CL-WGC supra note 21 at 5. BlackRock 
argued that a formal rulemaking process for adjusting position limit 
levels would provide market participants with advanced notice of any 
potential changes and an opportunity to express their views on such 
changes.
—————————————————————————

    The World Gold Council argued that uncertainty associated with 
floating, annually-set position limits may inadvertently discourage 
market participants from providing the requisite long-term hedges.144 
Encana asked the Commission to consider adopting procedures for a 
periodic reevaluation of the formulas to ensure that they do not reduce 
liquidity or impair the price discovery function of the markets.145
—————————————————————————

    144 CL-WGC supra note 21 at 5.
    145 Encana Marketing (USA) Inc. (“Encana”) on March 28, 2011 
(“CL-Encana”) at 2.
—————————————————————————

    Many commenters objected to the proposed timeline for setting 
initial limits.146 For example, many comments urged the Commission to 
act “expeditiously.” Delta recommended the Commission should use 
sampling and other statistical techniques to make reasonable, working 
assumptions about positions in various market segments to set initial 
limits.
—————————————————————————

    146 See e.g., CL-Delta supra note 20 at 11.
—————————————————————————

    In response to comments, the Commission has determined to amend the 
proposed process for setting initial and subsequent non-spot-month 
position limits. With respect to initial non-spot-month position 
limits, under Sec.  151.4(d)(3)(i) the initial non-spot-month limits 
for non-legacy Referenced Contracts will be calculated and published 
after the Commission has received data sufficient to determine average 
all-months-combined aggregate open interest for a full 12-month period. 
The aggregate open interest will be derived from various sources, 
including data received from DCMs pursuant to part 16, swaps data under 
part 20, and data regarding linked, direct access FBOT contracts under 
a condition of a no-action letter and subsequently under part 48 
regarding FBOT registration with the Commission, when finalized and 
made effective. The Commission accepts part of Delta’s recommendation 
to utilize reasonable, working assumptions about positions in various 
market segments to set initial limits. In this regard, the Commission 
will strive to establish non-spot-month position limits in an expedited 
manner that complies with the directives of Congress, while ensuring 
that it has sufficient swaps data to properly estimate open interest 
levels for Referenced Contracts.
    To compute 12 months of open interest data in uncleared all-months-
combined swaps open interest, prior to the timely reporting of all swap 
dealers’ net uncleared open swaps and swaptions positions by 
counterparty, the Commission may estimate uncleared open swaps 
positions, based upon uncleared open interest data submitted by 
clearing organizations or clearing members under part 20, in lieu of 
the aggregate of swap dealers’ net uncleared open swaps. In developing 
accurate estimates of aggregate open interest under Sec.  
151.4(b)(2)(i), the Commission will adjust such uncleared open interest 
data submitted by clearing organizations or clearing members by an 
appropriate ratio if it determines, using data regarding later periods 
submitted by swap dealers and clearing members, that the uncleared open 
interest data submitted by clearing members differ significantly from 
the open interest data submitted by swap dealers.147 The Commission 
has accordingly provided, under Sec.  151.4(b)(2)(ii), that, based on 
data provided to the Commission under part 20, it may estimate 
uncleared swaps open positions for the purpose of setting initial non-
spot-month position limits.
—————————————————————————

    147 An appropriate ratio is the ratio of uncleared open 
interest submitted by swap dealers in such later periods to the 
uncleared open interest submitted by clearing members in such later 
periods.
—————————————————————————

    Under final Sec.  151.4(d)(3)(i), the Commission will review the 
staff computations, including the assumptions made in estimating 12 
months of uncleared all-months-combined swap open interest, for 
consistency with the formula in the final rules. Once the Commission 
determines that the staff computations conform to the established 
formula, the Commission will approve and issue an order under final 
Sec.  151.4(d)(3)(iii), publishing the initial levels of the non-spot-
month position limits.
    Under final Sec.  151.4(d)(3)(ii), subsequent non-spot-month limits 
for non-legacy Referenced Contracts will be updated and published every 
two years, commencing two years after the initial determinations. These 
subsequent position limits would be based on the higher of the most 
recent 12 months average all-months-combined aggregate open interest or 
24 months average all-months-combined aggregate open interest.148 
Under Sec.  151.4(e), these limits would be made effective on the first 
calendar day of the third calendar month after the date of publication 
on the Commission’s Web site.
—————————————————————————

    148 For example, assume in a particular Referenced Contract 
that open interest has declined over a 24-month period; the average 
all-months-combined aggregate open interest levels are 900,000 
contracts for the most recent 12 months and 1,000,000 contracts for 
the most recent 24 months. Position limits would be based on the 
higher 24-month average level of 1,000,000 contracts. Thereby, the 
higher level of the position limit may serve to ensure sufficient 
market liquidity for bona fide hedgers in the event, for example, a 
decline in use of derivatives occurred in the historical measurement 
period that may be associated with a recession. Because position 
limits apply to prospective time periods, the use of the higher 
level may be appropriate, for example, with a subsequent 
expansionary period.
—————————————————————————

    This procedure may provide for limits that would be generally less 
restrictive than the proposed limits, since, by way of example, a 
continued decline in open interest over two years under the Proposed 
Rule would result in a lower

[[Page 71642]]

limit each year, whereas under the final rule the limit for the first 
year would not decline and the limit for the second year would be based 
on the higher 24-month average open interest. The Commission also notes 
that under Sec.  151.4(e) the public would have notice of updated 
position limit levels at least two months in advance of the effective 
date of such limits (i.e., such limits would be made effective on the 
first calendar day of the third calendar month immediately following 
the publication of new limit levels).149 Final Sec.  151.5(e) 
requires the Commission to provide all relevant open interest data used 
to derive updated position limit levels. By making public this open 
interest data, the public can monitor and anticipate future position 
limit levels, consistent with the transparency suggestions made by 
several commenters.
—————————————————————————

    149 For example, any limits fixed during the month of October 
would take effect on January 1.
—————————————————————————

    In addition, Sec.  151.4(b)(2)(i)(C) provides that, upon the entry 
of an order under Commission regulation 20.9 of the Commission’s 
regulations determining that operating swap data repositories 
(“SDRs”) are processing positional data that will enable the 
Commission to conduct surveillance in the relevant swaps markets, the 
Commission shall rely on such data in order to determine all-months-
combined swaps open interest.
4. “Legacy Limits” for Certain Agricultural Commodities
    The Proposed Rule would set non-spot-month limits for Reference 
Contracts in legacy agricultural commodities at the Federal levels 
currently in place (referred to herein as “legacy limits”). Several 
commenters recommended that the Commission should keep the legacy 
limits.150 The American Bakers Association argued that raising these 
legacy limits would increase hedging margins and increase volatility 
which would ultimately undermine commodity producers’ ability to sell 
their product to consumers.151 Amcot opined that the Commission need 
not proceed with phased implementation for the legacy agricultural 
markets because it could set their limits based on existing legacy 
limits.152
—————————————————————————

    150 American Bakers Association (“ABA”) on March 28, 2011 
(“CL-ABA”) at 3-4; CL-AFIA supra note 94 at 3; Amcot on March 28, 
2011 (“CL-Amcot”) at 2; CL-FWW supra note 81 at 13; CL-IATP supra 
note 113 at 5; and CL-NGFA supra note 72 at 1-2.
    151 CL-ABA supra note 150 at 3-4.
    152 CL-Amcot supra note 150 at 3.
—————————————————————————

    Several other commenters recommended that the Commission abandon 
the legacy limits.153 U.S. Commodity Funds argued that the Commission 
offered no justification for treating legacy agricultural contracts 
differently than other Referenced Contract commodities.154 Some of 
these commenters endorsed the limits proposed by CME.155 Other 
commenters recommended the use of the open interest formula proposed by 
the Commission in determining the position limits applicable to the 
legacy agricultural Referenced Contract markets.156 Finally, four 
commenters expressed their preference that non-spot position limits be 
kept consistent for the three wheat Core Referenced Futures 
Contracts.157
—————————————————————————

    153 CL-AIMA supra note 35 at 4; Bunge on March 28, 2011 (“CL-
Bunge”) at 1-2; Deutsche Bank AG (“DB”) on March 28, 2011 (“CL-
DB”) at 6; Gresham Investment Management LLC (“Gresham”) on 
February 15, 2011 (“CL-Gresham”) at 4-5; CL-FIA I supra note 21 at 
12; CL-MGEX supra note 74 at 2; CL-MFA supra note 21 at 18-19; and 
United States Commodity Funds LLC (“USCF”) on March 25, 2011 
(“CL-USCF”) at 10-11.
    154 CL-USCF supra note 153 at 10-11.
    155 CL-Bunge supra note 153 at 1-2; CL-FIA I supra note 21 at 
12; and CL-Gresham supra note 153 at 5. See CME Petition for 
Amendment of Commodity Futures Trading Commission Regulation 150.2 
(April 6, 2010), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/df26_cmepetition.pdf.
    156 CL-CMC supra note 21 at 3; CL-DB supra note 153 at 10; and 
CL-MFA supra note 21 at 19.
    157 CL-CMC supra note 21 at 3; CL-KCBT I supra note 97 at 1-2; 
CL-MGEX supra note 74 at 2; and CL-NGFA supra note 72 at 4.
—————————————————————————

    The Commission has determined to adopt the position limit levels 
proposed by the CME for the legacy Core Referenced Futures Contracts. 
Such levels would be effective 60 days after the publication date of 
this rulemaking and those levels would be subject to the existing 
provisions of current part 150 until the compliance date of these 
rules, which is 60 days after the Commission further defines the term 
“swap” under the Dodd-Frank Act. At that point, the relevant 
provisions of this part 151, including those relating to bona-fide 
hedging and account aggregation, would also apply. In the Commission’s 
judgment, the CME proposal represents a measured approach to increasing 
legacy limits, similar to that previously implemented.158 The 
Commission will use the CME’s all-months-combined petition levels as 
the basis to increase the levels of the non-spot-month limits for 
legacy Referenced Contracts. The petition levels were based on 2009 
average month-end open interest. Adoption of the petition levels 
results in increases in limit levels that range from 23 to 85 percent 
higher than the levels in existing Sec.  150.2.
—————————————————————————

    158 58 FR 18057, April 7, 1993.
—————————————————————————

    The Commission has determined to maintain the current approach to 
setting and resetting legacy limits because it is consistent with the 
Commission’s historical approach to setting such limits. To ensure the 
continuation of maintaining a parity of limit levels for the major 
wheat contracts at DCMs and in response to comments supporting this 
approach, the Commission will also increase the levels of the limits on 
wheat at the MGEX and the KCBT to the level for the wheat contract at 
the CBOT.159
—————————————————————————

    159 For a discussion of the historical approach, see 64 FR 
24038, 24039, May 5, 1999.
—————————————————————————

5. Non-Spot Month Class Limits
    The Commission proposed to create two classes of contracts for non-
spot-month limits: (1) Futures and options on futures contracts and (2) 
swaps. The Proposed Rule would apply single-month and all-months-
combined position limits to each class separately.160 The aggregate 
position limits across contract classes are in addition to the position 
limits within each contract class. Therefore, a trader could hold 
positions up to the allowed limit in each class (futures and options 
and swaps), provided that their overall position remains within the 
applicable position limits. Under the proposal, a trader could net 
positions within a class, such as a long swap position with a short 
swap position, but could not net positions in different classes, such 
as a long futures position with a short swap position. The class limits 
were designed to diminish the possibility that a trader could have 
market power as a result of a concentration in any one submarket and to 
prevent a trader that had a flat net aggregate position in futures and 
swaps combined from establishing extraordinarily large offsetting 
positions.
—————————————————————————

    160 Within a contract class, the limits would be set at an 
amount equal to 10 percent of the first 25,000 contracts of average 
all-months-combined aggregate open interest in the contract and 2.5 
percent of the open interest for any amounts above 25,000 contracts. 
The aggregate all-months-combined limits across contract classes 
would be set at 10 percent of the first 25,000 contracts of average 
all-months-combined aggregated open interests, and 2.5 percent of 
the open interest thereafter. The average all-months-combined 
aggregate open interest, which is the basis of these calculations, 
is determined annually by adding the all-months futures open 
interest and the all-month-combined swaps open interest for each of 
the 12 months prior to the effective date and dividing that amount 
by 12. Each trader’s positions would be netted for the purpose of 
determining compliance with position limits.
—————————————————————————

    Several commenters stated that the class limits proposal was flawed 
and therefore should not be adopted.161 For

[[Page 71643]]

example, the CME argued that because the class limits would not permit 
netting across contract classes (that is, across futures and swaps), 
the class limits would not appropriately limit a trader’s actual (net) 
speculative positions. CME further objected to this proposal by stating 
that the Commission provided no rationale as to why the positions in 
two futures contracts could be netted but positions in swaps and 
futures could not be netted.162 Another commenter similarly argued 
that economically equivalent contracts (futures or swaps) are simply 
two components of a broader derivatives market for a particular 
commodity and, therefore, the concept of establishing limits on a class 
of economically equivalent derivatives was logically flawed.163
—————————————————————————

    161 CL-AIMA supra note 35 at 3 (they add “an unnecessary 
level of complexity”); CL-BlackRock supra note 21 at 17; CL-Cargill 
supra note 76 at 10; CL-CME I supra note 8 at 13; CL-DB supra note 
153 at 8-9; CL-Goldman supra note 89 at 6; CL-ICE I supra note 69 at 
9; CL-ISDA/SIFMA supra note 21 at 23; CL-MFA supra note 21 at 18; 
CL-Prof. Pirrong supra note 124 at paras. 24-30; and CL-Shell supra 
note 35 at 6.
    162 CL-Shell supra note 35 at 6; CL-BlackRock supra note 21 at 
17 (arguing that the Commission failed to demonstrate that large 
positions in a submarket implies market power). See also CL-Cargill 
supra note 76 at 10; CL-AIMA supra note 35 (commenting that the 
proposed class limits add “an unnecessary level of complexity”); 
CL-ISDA/SIFMA supra note 21 at 23; CL-ICE I supra note 69 at 9; CL-
CME I supra note 8 at 13; CL-DB supra note 153 at 8-9; CL-Goldman 
supra note 89 at 6; CL-MFA supra note 21 at 18; and CL-Prof. Pirrong 
supra note 124 at paras. 24-30.
    163 CL-ICE I supra note 69 at pg. 9.
—————————————————————————

    In response to the comments, the Commission has determined to 
eliminate class limits from the final rules. The Commission believes 
that comments regarding the ability of market participants to net swaps 
and future positions that are economically equivalent have merit. The 
Commission believes that concerns regarding the potential for market 
abuses through the use of futures and swaps positions can be addressed 
adequately, for the time being, by the Commission’s large trader 
surveillance program. The Commission will closely monitor speculative 
positions in Referenced Contracts and may revisit this issue as 
appropriate.

F. Intraday Compliance With Position Limits

    The Commission proposed to apply position limits on an intraday 
basis, and some commenters urged the Commission to reconsider such a 
requirement.164 Barclays commented that the Commission should 
recognize intraday violations of aggregate limits as a form of 
excusable overage because of the challenge of sharing and collating 
position information on a real-time basis.
—————————————————————————

    164 CL-Shell supra note 35 at 6-7; CL-API supra note 21 at 14 
(Commission should engage in a rigorous analysis of the regulatory 
burdens of intraday limits and ultimately clarify that position 
limits will only apply at the end of each trading day); Barclays 
Capital (“Barclays I”) on March 28, 2011 (“CL-Barclays I”) at 4-
5 (Commission should reconsider requiring intraday compliance for 
non-spot-month position limits).
—————————————————————————

    In the Commission’s judgment, intraday compliance would constitute 
a marginal compliance cost and not be overly-burdensome. The Commission 
notes that firms may impose risk limits (i.e., position limits 
determined by the internal risk management department or equivalent 
unit) on individual traders and among related entities required to 
aggregate positions under Sec.  151.7 to mitigate the need to create 
systems to ensure intraday compliance. Moreover, the expected levels of 
limits outside of the spot-month are not expected to affect many firms 
and those affected firms should have the capability to establish 
internal risk limits or real-time position reporting to ensure intraday 
compliance with position limits. Finally, the Commission notes that 
intraday compliance with position limits is consistent with existing 
Commission 165 and DCM 166 policy. The Commission’s policy on 
intraday compliance reflects its concerns with very large speculative 
positions, whether or not they persist through the end of a trading 
day.
—————————————————————————

    165 Commodity Futures Trading Commission Division of Market 
Oversight, Advisory Regarding Compliance with Speculative Position 
Limits (May 7, 2010), available at http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/specpositionlimitsadvisory0510.pdf.
    166 See e.g., CME Rulebook, Rule 443, available at http://
www.cmegroup.com/rulebook/files/CME_Group_RA0909-5.pdf”) (amended 
Sept. 14, 2009); ICE OTC Advisory, Updated Notice Regarding Position 
Limit Exemption Request Form for Significant Price Discovery 
Contracts, available at https://www.theice.com/publicdocs/otc/advisory_notices/ICE_OTC_Advisory_0110001.pdf (Jan. 4, 2010).
—————————————————————————

G. Bona Fide Hedging and Other Exemptions

    The new statutory definition of bona fide hedging transactions or 
positions in section 4a(c)(2) of the CEA generally follows the 
definition of bona fide hedging in current Commission regulation 
1.3(z)(1), with two significant differences. First, the new statutory 
definition recognizes a position in a futures contract established to 
reduce the risks of a swap position as a bona fide hedge, provided that 
either: (1) The counterparty to such swap transaction would have 
qualified for a bona fide hedging transaction exemption, i.e., the 
“pass-through” of the bona fides of one swap counterparty to another 
(such swaps may be termed “pass-through swaps”); or (2) the swap 
meets the requirements of a bona fide hedging transaction. Second, a 
bona fide hedging transaction or position must represent a substitute 
for a physical market transaction.167
—————————————————————————

    167 In 1977, the Commission proposed a general or conceptual 
definition of bona fide hedging that did not include the modifying 
adverb “normally” to the verb “represent.” 42 FR 14832, Mar. 17, 
1977. The Commission introduced the adverb normally in the 
subsequent final rulemaking in order to accommodate balance sheet 
hedging that would otherwise not have met the general definition of 
bona fide hedging. 42 FR 42748, Aug. 24, 1977. The Commission noted 
that, for example, hedges of asset value volatility associated with 
depreciable capital assets might not represent a substitute for 
subsequent transactions in a physical marketing channel. Id. at 
42749.
—————————————————————————

    Section 4a(c)(1) of the CEA authorizes the Commission to define 
bona fide hedging transactions or positions “consistent with the 
purposes of this Act.” Congress directed the Commission, in amended 
CEA section 4a(c)(2), to adopt a definition of bona fide hedging 
transactions or positions for futures contracts (and options) for 
purposes of setting the position limits mandated by CEA section 
4a(a)(2)(A). Pursuant to this authority, the Commission proposed a new 
regulatory definition of bona fide hedging transactions or positions in 
proposed Sec.  151.5(a).168 The Commission also proposed Sec.  151.5 
to establish five enumerated exemptions from position limits for bona 
fide hedging transactions or positions for exempt and agricultural 
commodities.
—————————————————————————

    168 By its terms, the definition of bona fide hedging applies 
only to futures (and options). Pursuant to section 4a(c), the 
Commission proposed to extend the definition of bona fide hedging 
transactions and positions to all Referenced Contracts, including 
swaps. The Commission is adopting the definition of bona fide 
hedging substantially as proposed. The Commission believes that 
applying the statutory definition of bona fide hedging to swaps is 
consistent with congressional intent as embodied in the expansion of 
the Commission’s authority to swaps (i.e., those that are 
economically-equivalent and SPDFs). In granting the Commission 
authority over such swaps, Congress recognized that such swaps 
warrant similar treatment to their economically equivalent futures 
for purposes of position limits and therefore, intended that the 
statutory definition of bona fide hedging also be extended to swaps.
—————————————————————————

    Under the proposal, a trader must meet the general requirements for 
a bona fide hedging transaction or position in proposed Sec.  
151.5(a)(1) and also meet the requirements for an enumerated hedging 
transaction in proposed Sec.  151.5(a)(2). The general requirements 
call for the bona fide hedging transaction or position to represent a 
substitute for transactions in a physical marketing channel (that is, 
the cash market for a physical commodity), to be economically 
appropriate to the reduction of risks in

[[Page 71644]]

the conduct and management of a commercial enterprise, and to arise 
from the potential change in the value of certain assets, liabilities, 
or services. The five proposed enumerated hedging transactions are 
discussed below. The proposed section did not provide for non-
enumerated hedging transactions or positions, which current Commission 
regulations 1.3(z)(3) and 1.47 permit. Under the proposal, Commission 
regulation 1.3(z) would be retained only for excluded commodities.
    Proposed Sec.  151.5(b) established reporting requirements for a 
trader upon exceeding a position limit. The trader would be required to 
submit information not later than 9 a.m. on the business day following 
the day the limit was exceeded. Proposed Sec.  151.5(c) specified 
application and approval requirements for traders seeking an 
anticipatory hedge exemption, incorporating the current requirements of 
Commission regulation 1.48. Proposed Sec.  151.5(d) established 
additional reporting requirements for a trader who exceeded the 
position limits in order to reduce the risks of certain swap 
transactions, discussed above.
    Proposed Sec.  151.5(e) specified recordkeeping requirements for 
traders that acquire positions in reliance on bona fide hedge 
exemptions, as well as for swap counterparties for which a counterparty 
represents that the transaction would qualify as a bona fide hedging 
transaction. Swap dealers availing themselves of a hedge exemption 
would be required to maintain a list of such counterparties and make 
that list available to the Commission upon request. Proposed Sec. Sec.  
151.5(g) and (h) provided procedural documentation requirements for 
such swap participants.
    Proposed Sec.  151.5(f) required a cross-commodity hedger to 
provide conversion information, as well as an explanation of the 
methodology used to determine such conversion information, between the 
commodity exposure and the Referenced Contracts used in hedging. 
Proposed Sec.  151.5(i) required reports by bona fide hedgers to be 
filed for each business day, up to and including the day the trader’s 
position level first falls below the position limit that was exceeded.
    The Commission has responded to the many comments received by 
making substantial changes to the Proposed Rules. A full discussion of 
the comments received and of the Commission’s responses is found below. 
In summary, in the final rules, the Commission: (1) Clarifies that a 
transaction qualifies as a bona fide hedging transaction without regard 
to whether the hedger’s position would otherwise exceed applicable 
position limits; (2) expands the list of enumerated hedging 
transactions to include hedging of anticipated merchandising activity, 
royalty payments, and service contracts; (3) clarifies the conditions 
under which swaps executed opposite a commercial counterparty would be 
recognized as the basis for bona fide hedging; (4) reduces the burden 
of claiming a pass-through swap exemption; (5) introduces new Sec.  
151.5(b) to make the aggregation and bona fide hedging provisions of 
part 151 consistent; (6) clarifies that cash market risk can be hedged 
on a one-to-one transactional basis or can be hedged as a portfolio of 
risk; (7) eliminates the restriction on holding hedges in cash-settled 
contracts up through the last trading day; (8) reduces the daily filing 
requirement for cash market information on the Form 404 and Form 404S 
to a monthly filing of daily reports; (9) allows for self-effectuating 
notice filings for those hedge exemptions that require such a filing; 
and (10) provides an exemption for situations involving “financial 
distress.”
1. Enumerated Hedges
    Under proposed Sec.  151.5(a)(1), no transaction or position would 
be classified as a bona fide hedging transaction unless it also 
satisfies the requirements for one of five categories of enumerated 
hedging transactions.169
—————————————————————————

    169 Thus, for example, an anticipatory merchandising 
transaction could only serve as a basis of an enumerated hedge if 
it, inter alia, reduces the risks attendant to transactions 
anticipated to be made in the physical marketing channel.
—————————————————————————

    The Commission received many comment letters regarding the proposed 
definition of bona fide hedging, with a number of commenters expressing 
concern that the proposed definition was ambiguous and overly 
restrictive.170 Morgan Stanley, for example, opined that the “very 
narrow” definition of bona fide hedging in the Proposed Rule would 
unnecessarily limit the ability of many market participants to engage 
in “many well-established risk reducing activities.” 171 Several 
commenters requested bona fide hedging recognition for transactions 
beyond those expressly enumerated.172 In this respect, some 
commenters, including the FIA and Morgan Stanley, urged the Commission 
to exercise its broad exemptive authority under CEA section 4a(a)(7) to 
accommodate a wider range of legitimate hedging activities, including 
the hedging of general swap position risk, otherwise known as a risk 
management exemption.173
—————————————————————————

    170 See e.g., CL-FIA I supra note 21 at 14-15; CL-Morgan 
Stanley supra note 21 at 4, 5; and CL-ISDA/SIFMA supra note 21 at 9.
    171 CL-Morgan Stanley supra note 21 at 5. According to Morgan 
Stanley, the proposed definition may preclude market participants 
from (i) netting exposure across different categories of related 
futures and swaps; (ii) hedging long-term risks in illiquid markets, 
common in the development of large infrastructure projects; and 
(iii) assuming the positions of a less stable market participant 
during times of market distress.
    172 See e.g., CL-Commercial Alliance I supra note 42 at 2-3; 
CL-FIA I supra note 21 at 13; and Economists Inc. on March 28, 2011 
(“CL-Economists Inc.”) at 2.
    173 See e.g., CL-FIA I supra note 21 at 13; CL-ISDA/SIFMA 
supra note 21 at 8; CL-BlackRock supra note 21 at 16; CL-Barclays I 
supra note 164 at 3; and CL-ICI supra note 21 at 9.
—————————————————————————

    Several commenters argued that not permitting a risk management 
exemption would be inconsistent with other parts of the Act and 
Commission rulemakings.174 For example, CME argued that the hedging 
standard under the major swap participant (“MSP”) definition includes 
swap positions “maintained by [pension plans] for the primary purpose 
of hedging or mitigating any risk directly associated with the 
operation of the plan.” 175 CME also pointed to the commercial end-
user exception to mandatory clearing requirements, where the 
Commission’s proposed definition of hedging “covers swaps used to 
hedge or mitigate any of a person’s business risks.” 176
—————————————————————————

    174 See e.g., CL-CME I supra note 8 at 18.
    175 See id. at 18 citing New CEA section 1a(33), 7 U.S.C. 
1a(33).
    176 See id. at 18 citing 75 FR 80747 (Dec. 23, 2010).
—————————————————————————

    As discussed above, the Commission is authorized to define bona 
fide hedging for swaps. The Commission, however, does not believe that 
including a risk management provision is necessary or appropriate given 
that the elimination of the class limits outside of the spot-month will 
allow entities, including swap dealers, to net Referenced Contracts 
whether futures or economically equivalent swaps. As such, under the 
final rules, positions in Referenced Contracts entered to reduce the 
general risk of a swap portfolio will be netted with the positions in 
the portfolio.
    Some commenters also objected to the Commission’s failure to 
recognize as bona fide hedging swap transactions that qualify for the 
end-user clearing exception. Such omission, these commenters added, 
will lead to unnecessary disruption to commercial hedgers’ legitimate 
business practices.177 The end-user clearing exception is available 
for swap transactions used to hedge or mitigate

[[Page 71645]]

commercial risk. When Congress inserted a general definition of bona 
fide hedging in CEA section 4a(c)(2), Congress did not include language 
that paralleled the end-user clearing exception; rather, Congress 
included different criteria for bona fide hedging transactions or 
positions.178 Accordingly, the Commission believes that the end-user 
exception’s broader sweep, that the swap be used for “hedg[ing] or 
mitigat[ing] commercial risk,” is not appropriate for a definition of 
a bona fide hedging transaction.179
—————————————————————————

    177 See e.g., CL-FIA I supra note 21 at 15l and CL-EEI/EPSA 
supra note 21 at 15.
    178 The Commission notes that Congress also referred to 
positions held “for hedging or mitigating commercial risk” in the 
definition of major swap participant. CEA section 1a(33), 7 U.S.C. 
1a(33). Due to the nearly identical wording, the Commission has 
proposed to interpret this phrase in the implementation of the end-
user exception in a near-identical manner in the further definition 
of major swap participant. CFTC, Notice of Proposed Rulemaking, End-
User Exception to Mandatory Clearing of Swaps, 75 FR 80747, 80752-3, 
Dec. 23, 2010. In light of Congress’s nearly identical use of this 
language in two separate provisions of the Dodd-Frank Act, but not 
within the definition of bona fide hedging, the Commission does not 
believe that Congress intended that the different wording in section 
4a(c)(2) should be interpreted in an identical manner to these 
differently worded provisions.
    179 Under the new statutory definition of a bona fide hedge, 
positions must meet the following requirements: (1) They must 
represent a substitute for transactions made or to be made or 
positions taken or to be taken at a later time in the physical 
marketing channel; (2) they must be economically appropriate to the 
reduction of risk in the conduct and management of a commercial 
enterprise; and (3) the hedge must manage price risks associated 
with specific types of activities in the physical marketing channel 
(e.g., the production of commodity assets). CEA section 4a(c)(2), 7 
U.S.C. 6a(c)(2). The conditions for the end-user exception may 
overlap with the general statutory definition of bona fide hedging 
on one of the latter’s three prongs. Similarly, the statutory 
direction to define bona fide hedging does address whether at least 
one counterparty is not a financial entity and does not address how 
one meets its financial obligations, which are conditions for 
claiming the end-user exception.
—————————————————————————

    Several commenters expressed concern that exemptions were not 
provided for arbitrage or spread positions in the list of enumerated 
bona fide hedges.180 Some commenters, such as ISDA/SIFMA, argued that 
the Commission should use its exemptive authority under CEA section 
4a(a)(7) to include an exemption for inter-commodity spread and 
arbitrage transactions, “which reflect a relationship between two 
commodities rather than an outright directional position in the spread 
components * * *. Arbitrage and inter-commodity spreads do not raise 
the same price volatility concerns as outright positions. On the 
contrary, they constitute a standard investment practice that minimizes 
exposure while capturing inefficiencies in an established relationship 
and aiding price discovery in each contract.” 181
—————————————————————————

    180 See e.g., CL-CME I supra note 8 at 18; CL-Commercial 
Alliance I supra note 42 at 3, 7, 9, CL-ISDA/SIFMA supra note 21 at 
11; and CL-MFA supra note 21 at 18.
    181 CL-ISDA/SIFMA supra note 21 at 17.
—————————————————————————

    With regard to spread exemptions, under current Sec.  150.3(a)(3), 
a trader may use this exemption to exceed the single-month limit 
outside the spot month in a single futures contract or options thereon, 
but not to exceed the all-months limit in any single month. As 
explained in the proposal, the Commission proposed to set the single-
month limit at the level of the all-months limit, making the “spread” 
exemption no longer necessary. Since the final rule retains the 
individual-month limit at the same level as the all-months-combined 
limit, it remains unnecessary to extend an exemption to spread 
positions.
    With respect to the existing DCM arbitrage exemptions, under 
existing DCM rules a trader may receive an arbitrage exemption to the 
extent that the trader has offsetting positions at a separate trading 
venue. The Commission does not believe that it is necessary to provide 
for such an exemption from aggregate position limits because the 
Commission has eliminated class limits in these final rules for non-
spot-month position limits. As such, a trader’s offsetting positions 
among Referenced Contracts outside of the spot month, whether futures 
or economically-equivalent swaps, would be netted for purposes of 
applying the position limits and, therefore, there is no need for 
arbitrage exemptions. As discussed in further detail under II.N.3. 
below, however, the Commission has provided for an arbitrage exemption 
from DCM or SEF position limits under certain circumstances.
    With regard to inter-commodity spreads, traders would not be able 
to net such positions unless the positions fall within the same 
category of Referenced Contracts. However, a trader offsetting multiple 
risks in the physical marketing channel may be eligible for a bona fide 
hedging exemption. For example, a processor seeking to hedge the price 
risk associated with anticipated processing activity may receive bona 
fide hedging treatment for an inter-commodity spread economically 
appropriate to the reduction of its anticipated price risks under final 
Sec.  151.5(a)(ii)(C).
    As discussed above, the final rules retain the class limits within 
the spot-month. Otherwise, if a trader were permitted to claim an 
arbitrage exemption in the spot-month across physically-delivered and 
cash-settled spot-month class limits, then that trader would be able to 
amass an extraordinarily large long position in the physically-
delivered Referenced Contract with an offsetting short position in a 
cash-settled Referenced Contract, effectively cornering the market at 
the entry prices to the contracts. In the proposal, the Commission 
asked whether it should grant a bona fide hedge exemption to an agent 
that is not responsible for the merchandising of the cash positions, 
but is linked to the production of the physical commodity, e.g., if the 
agent is the provider of crop insurance. Amcot recommended that the 
Commission deny exemptions to crop insurance providers.182 Similarly, 
Food and Water Watch questioned whether agents merely linked to 
production should be allowed to claim bona fide hedges.183 CME, in 
contrast, argued that extending the bona fide hedge exemption to these 
entities would be appropriate.184 The Commission notes that 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 Referenced Contract under Sec.  151.5(a)(2)(vii).
—————————————————————————

    182 CL-Amcot supra note 150 at 2.
    183 CL-FWW supra note 81 at 2.
    184 CL-CME I supra note 8 at 8.
—————————————————————————

    In response to comments, the Commission clarifies in the final rule 
that whether a transaction qualifies as a bona fide hedging transaction 
or position is determined without regard to whether the hedger’s 
position would otherwise exceed applicable position limits.185 
Accordingly, a person who uses a swap to reduce risks attendant to a 
position that qualifies for a bona fide hedging transaction may pass-
through those bona fides to the counterparty, even if the person’s swap 
position is not in excess of a position limit.
—————————————————————————

    185 The Commission also notes that the bona fide hedge 
definition in new CEA section 4a(c)(2), 7 U.S.C. 6a(c)(2), deals 
with an entity’s transaction and not the entity itself. As such, the 
Commission declines to provide bona fide hedge status to an entity 
without reference to the underlying transaction.
—————————————————————————

    Proposed Sec.  151.5(a)(2)(ii) stated that purchases of Referenced 
Contracts may qualify as bona fide hedges. However, the language in 
proposed Sec.  151.5(a)(2)(i) provided that sales of any commodity 
underlying Referenced Contracts may qualify as bona fide hedges. 
Existing Commission regulation 1.3(z) treats equally purchases and 
sales of futures contracts (and does not explicitly cover sales or 
purchases of any commodity

[[Page 71646]]

underlying). BGA requested that the Commission harmonize the perceived 
difference between the current and Proposed Rule texts.186 The 
Commission has deleted the phrase “any commodity underlying” from 
“sales of any commodity underlying Referenced Contracts” in Sec.  
151.5(a)(2)(i) in order to clarify that it does not intend to treat 
hedges involving the sales of Referenced Contracts any differently than 
hedges involving the purchases of Referenced Contracts.
—————————————————————————

    186 CL-BGA supra note 35 at 15. See also CL-FIA I supra note 
21 at 15; and CL-Morgan Stanley supra note 21 at 5.
—————————————————————————

    The Commission received many comments describing transactions that 
the commenters believed would not be covered by the Commission’s 
proposed bona fide hedging provisions. Appendix B to part 151 has been 
added to list some of the transactions or positions that the Commission 
deems to qualify for the bona fide hedging exemption.187 The appendix 
includes an analysis of each fact pattern to assist market participants 
in understanding the enumerated hedging transactions in final Sec.  
151.5(a)(2). As discussed in section II.G.4. and provided for in Sec.  
151.5(a)(5), if any person is engaging in other risk-reducing practices 
commonly used in the market which the person believes may not be 
specifically enumerated above, such person may ask for relief regarding 
the applicability of the bona fide hedging exemption from the staff 
under Sec.  140.99 or the Commission under section 4a(a)(7) of the CEA.
—————————————————————————

    187 Many of these transactions were described in comment 
letters. See e.g., CL-Economists Inc. supra note 172 at 10-17; CL-
Commercial Alliance I supra note 42 at 5-10; and CL-FIA I supra note 
21 at 14-15.
—————————————————————————

    Further, to provide transparency to the public, the Commission is 
considering publishing periodically general statistical information 
gathered from the bona fide hedging exemptions to inform the public of 
the extent of commercial firms’ use of exemptions. This summary data 
may include the number of persons and extent to which such persons have 
availed themselves of cash-market, anticipatory, and pass-through-swaps 
bona fide hedge exemptions.
2. Anticipatory Hedging
    As discussed in II.G.1. above, some commenters objected that 
proposed Sec.  151.5(a)(1) included the anticipated ownership or 
merchandising of an exempt or agricultural commodity, but such 
transactions were not included in the list of enumerated hedges.188 
Commenters pointed out that, while the statutory definition of bona 
fide hedging appears to contemplate hedges of asset price risk,189 
including royalty or volumetric production payments,190 hedges of 
liabilities or services,191 and anticipatory ownership and 
merchandising,192 these types of hedge transactions are not 
recognized among enumerated hedge transactions in the proposal.
—————————————————————————

    188 See e.g., CL-FIA I supra note 21 at 15; CL-BGA supra note 
35 at 14; CL-ISDA/SIFMA supra note 21 at 11; and CL-EEI/EPSA supra 
note 21 at 15.
    189 See CL-Commercial Alliance I supra note 42 at 3. See also 
CL-Bunge supra note 153 at 3-4 (describing “enterprise hedging” 
needs arising from, inter alia, investments in operating assets and 
forward contract relationships with farmers and consumers that 
create timing mismatches between the cash flow associated with the 
physical commodity commitment and the hedge’s cash flow).
    190 See e.g., CL-FIA I supra note 21 at 15.
    191 See e.g., CL-FIA I supra note 21 at 14; CL-Commercial 
Alliance I supra note 42 at 3; CL-BGA supra note 35 at 14; CL-ISDA/
SIFMA supra note 21 at 11; and CL-EEI/EPSA supra note 21 at 14.
    192 See e.g., CL-FIA I supra note 21 at 15; CL-BGA supra note 
35 at 14; CL-ISDA/SIFMA supra note 21 at 11; and CL-EEI/EPSA supra 
note 21 at 15.
—————————————————————————

    In response to commenters, the Commission is expanding the list of 
enumerated hedging transactions to recognize, in final Sec. Sec.  
151.5(a)(2)(v)-(vii), the hedging of anticipated merchandising 
activity, royalty payments (a type of asset), and service contracts, 
respectively, under certain circumstances as discussed below in detail. 
The Commission has determined that the transactions fall within the 
statutory definition of bona fide hedging transactions and are 
otherwise consistent with the purposes of section 4a of the Act.
    The Commission had never recognized anticipated ownership and 
merchandising transactions as bona fide hedging transactions,193 due 
to its historical view that anticipatory ownership and merchandising 
transactions generally fail to meet the second “appropriateness” 
prong of the Commission’s definition of a bona fide hedging 
transaction, 194 which requires that a hedge be economically 
appropriate and that it reduce risks in the conduct and management of a 
commercial enterprise. For example, a merchant may anticipate that it 
will purchase and sell a certain amount of a commodity, but has not 
acquired any inventory or entered into fixed-price purchase or sales 
contracts. Although the merchant may anticipate such activity, the 
price risk from merchandising activity is yet to be assumed and 
therefore a transaction in Referenced Contracts could not reduce this 
yet-to-be-assumed risk. Such a merchant would not meet the second prong 
of the bona fide hedging definition. To the extent that a merchant 
acquires inventory or enters into fixed-price purchase or sales 
contracts, the merchant would have established a position of risk and 
may meet the requirements of the second prong and the long-standing 
enumerated provisions to hedge those risks.
—————————————————————————

    193 The Commission historically has recognized a merchandising 
transaction as a bona fide hedge in the narrow circumstances of an 
agent responsible for merchandising a cash market position which is 
being offset. 17 CFR 1.3(z)(3).
    194 The “appropriateness” test was contained in Commission 
regulation 1.3(z)(1). Congress incorporated that provision in the 
new statutory definition in 4a(c)(2)(A)(ii), 7 U.S.C. 
6a(c)(2)(A)(ii).
—————————————————————————

    In response to comments, the Commission recognizes that in some 
circumstances, such as when a market participant owns or leases an 
asset in the form of storage capacity, the market participant could 
establish market positions to reduce the risk associated with returns 
anticipated from owning or leasing that capacity. In these narrow 
circumstances, the transactions in question may meet the statutory 
definition of a bona fide hedging transaction. However, to address 
Commission concerns about unintended consequences (e.g., creating a 
potential loophole that may result in granting hedge exemptions for 
types of speculative activity), the Commission will recognize 
anticipatory merchandising transactions as a bona fide hedge, provided 
the following conditions are met: (1) The hedger owns or leases storage 
capacity; (2) the hedge is no larger than the amount of unfilled 
storage capacity currently, or the amount of reasonably anticipated 
unfilled storage capacity during the hedging period; (3) the hedge is 
in the form of a calendar spread (and utilizing a calendar spread is 
economically appropriate to the reduction of risk associated with the 
anticipated merchandising activity) with component contract months that 
settle in not more than twelve months; and (4) no such position is 
maintained in any physical-delivery Referenced Contract during the last 
five days of trading of the Core Referenced Futures Contract for 
agricultural or metal contracts or during the spot month for other 
commodities.195 In addition, the anticipatory merchandiser must meet 
specific new filing requirements under Sec.  151.5(d)(1). As is the 
case with other anticipated hedges, the Commission clarifies in the 
final rule that such a hedge can only be maintained so long as

[[Page 71647]]

the trader is reasonably certain that he or she will engage in the 
anticipated merchandising activity.
—————————————————————————

    195 A specific example of this type of anticipated 
merchandising is described in Appendix B to the final rule.
—————————————————————————

    New Sec. Sec.  151.5(a)(2)(vi)-(vii) provide for royalty and 
services hedges that are available only if: (1) The royalty or services 
contract arises out of the production, manufacturing, processing, use, 
or transportation of the commodity underlying the Referenced Contract; 
and (2) the hedge’s value is “substantially related” to anticipated 
receipts or payments from a royalty or services contract. Specific 
examples of what types of royalties or service contracts would comply 
with Sec.  151.5(a)(1) and would therefore be eligible as a basis for a 
bona fide hedge transaction are described in Appendix B to the final 
rule.
    Under proposed Sec.  151.5(c), the Commission also limited the 
availability of an anticipatory hedge to a period of one year after the 
request date, in contrast to proposed Sec.  151.5(a)(2), which only 
imposed this requirement for Referenced Contracts in agricultural 
commodities. Several commenters requested that the Commission expand 
the scope of anticipatory hedging to include hedging periods beyond one 
year.196 These commenters opined that limiting anticipatory hedging 
to one year may make sense in the agricultural context because the 
risks are typically associated with an annual crop cycle; however, this 
same analysis does not apply to other commodities, particularly for 
electricity generators, utilities, and other energy companies.197 For 
example, this restriction would be commercially unworkable for 
infrastructure projects that require multi-year hedges in order to 
secure financing.198
—————————————————————————

    196 CL-Cargill supra note 76 at 5; CL-FIA I supra note 21 at 
16; CL-AGA supra note 124 at 7-8; and CL-EEI/EPSA supra note 21 at 
5.
    197 See CL-EEI/EPSA supra note 21 at 18.
    198 See CL-FIA supra note 21 at 6; and CL-Morgan Stanley supra 
note 21 at 6.
—————————————————————————

    The Commission has amended the appropriate exemptions for 
anticipatory activities under Sec.  151.5(a)(2) to clarify that the 
one-year limitation for production, requirements, royalty rights, and 
service contracts applies only to Referenced Contracts in an 
agricultural commodity, except that a one-year limitation for 
anticipatory merchandising, applies to all Referenced Contracts.
    The Commission proposed in Sec.  151.5(a)(2)(i) to recognize the 
hedging of unsold anticipated production as an enumerated hedge. The 
Commission clarifies in the final rule that anticipated production 
includes anticipated agricultural production, e.g., the anticipated 
production of corn in advance of a harvest.
3. Pass-Through Swaps
    In the proposal, the Commission explained that under CEA section 
4a(c)(2)(B), pass-through swaps are recognized as the basis for bona 
fide hedges if the swap was executed opposite a counterparty for whom 
the transaction would qualify as a bona fide hedging transaction 
pursuant to CEA section 4a(c)(2)(A). Further, a swap in a Referenced 
Contract may be used as a bona fide hedging transaction if that swap 
itself meets the requirements of CEA section 4a(c)(2)(A). CEA section 
4a(c)(2)(A) provides the general definition of a bona fide hedge 
transaction.
    Several commenters requested clarification concerning the so-called 
pass-through provision.199 For example, Cargill maintained that the 
rule is not clear on whether the non-hedging counterparty may claim a 
hedge exemption for the swap, and without such an exemption there would 
be less liquidity available to hedgers using swaps because potential 
counterparties would be subject to position limits for the swap 
itself.200
—————————————————————————

    199 See e.g., CL-Cargill supra note 76 at 6; and CL-FIA I 
supra note 21 at 17.
    200 See CL-Cargill supra note 76 at 6; and CL-EEI/EPSA supra 
note 21 at 17.
—————————————————————————

    The Commission clarifies through new Sec.  151.5(a)(3) (entitled 
“Pass-through swaps”) that positions in futures or swaps Referenced 
Contracts that reduce the risk of pass-through swaps qualify as a bona 
fide hedging transaction. In response to comments regarding the bona 
fide hedging status of the pass-through swap itself, 201 the 
Commission also clarifies that the non-bona-fide counterparty (e.g., a 
swap-dealer) may classify this swap as a bona fide hedging transaction 
only if that non-bona-fide counterparty enters risk reducing positions, 
including in futures or other swap contracts, which offset the risk of 
the pass-through swap. For example, if a person entered a pass-through 
swap opposite a bona fide hedger, either within or outside of the spot-
month, that resulted in a directional exposure of 100 long positions in 
a Referenced Contract, that person could treat those 100 long positions 
as a bona fide hedging transaction only if that person also entered 
into 100 short positions to reduce the risk of the pass-through swap. 
Absent this restriction, a non-bona-fide counterparty could create a 
large speculative directional position in excess of limits simply by 
entering into pass-through swaps.
—————————————————————————

    201 See e.g., CL-Cargill supra note 76 at 6.
—————————————————————————

    The Commission notes that regardless of the bona fide status of the 
pass-through swap, outside of the spot-month the risk-reducing 
positions in a Referenced Contract will net with the positions from the 
pass-through swap. Similarly, within the spot-month, if the non-bona-
fide counterparty to a pass-through swap reduces the risk of that swap 
with cash-settled Referenced Contracts, the risk reducing positions in 
cash-settled contracts would net with the pass-through swap for 
purposes of the spot-month position limit.
    Because the spot-month limits include class limits for physical-
delivery futures contracts and cash-settled contracts, the bona fide 
hedging status of the pass-through swap would impact spot-month 
compliance if the non-bona-fide counterparty reduced the risk of the 
pass-through swap with physical-delivery futures contracts in the spot-
month. However, as discussed above, so long as the risk of the pass-
through swap is offset, these final rules would treat both the pass-
through swap and the risk reducing positions as bona fide hedges. In 
this connection, the Commission notes that the non-bona-fide 
counterparty would still be subject to 151.5(a)(1)(v), and must exit 
the physical delivery futures contract in an orderly manner as the 
person “lifts” the hedge of the pass-through swap. Similarly, as with 
all transactions in Referenced Contracts, the person would be subject 
to the intra-day application of position limits. Therefore, as the 
person “lifts” the hedge of the pass-through swap, if the pass-
through swap is no longer offset, only the extent of the pass-through 
swap that is offset would qualify as a bona fide hedge.
    The Commission clarifies through new Sec.  151.5(a)(4) (entitled 
“Pass-through swap offsets”) that a pass-through swap position will 
be classified as a bona fide hedging transaction for the counterparty 
for whom the swap would not otherwise qualify as a bona fide hedging 
transaction pursuant to paragraph (a)(2) of this section (the “non-
hedging counterparty”), provided that the non-hedging counterparty 
purchases or sells Referenced Contracts that reduce the risks attendant 
to such pass-through swaps.
    Commenters also requested further clarity concerning proposed Sec.  
151.5(g), which set forth certain procedural requirements for pass-
through swap counterparties. FIA and ISDA, for example, stated that it 
was unclear whether the pass-through provision is limited to 
transactions where the swap counterparty is relying on an exemption

[[Page 71648]]

to exceed the limits, and not simply entering a swap with a 
counterparty that is a bona fide hedger.202 Other commenters 
requested clarification as to whether the hedger must wait until all 
written communications have been exchanged before it can enter into a 
hedging transaction.203 According to these commenters, such a 
requirement could delay entering a swap for hours if not days,204 
forcing the hedger to assume the risk of price changes during the 
period between when it enters the swap and when the parties complete 
the written documentation process.205 Finally, commenters believed 
the rule was unclear on the type of representation that must be 
provided by an end-user and may be relied upon by dealers.206
—————————————————————————

    202 See e.g., CL-FIA I supra note 21 at 19; and CL-ISDA/SIFMA 
supra note 21 at 10.
    203 See CL-FIA I supra note 21 at 18.
    204 See CL-EEI/EPSA supra note 21 at 17.
    205 See CL-FIA I supra note 21 at 19.
    206 See e.g., CL-BGA supra note 35 at 16.
—————————————————————————

    Some commenters recommended a less-costly verification regime that 
would allow parties to rely upon a one-time representation concerning 
eligibility for the bona fide hedging exemption.207 ISDA/SIFMA also 
argued that the Commission should confirm the bona fide hedger status 
of a party in order to prevent, among other things, unwarranted 
disclosure of confidential information from an end-user to a 
dealer.208 Further, ISDA/SIFMA argued that the determination should 
be on an entity-by-entity basis, and not on a transaction-by-
transaction basis, in order to promote certainty for bona fide hedgers 
and their swap counterparties.209 BGA argued that the proposal to 
require a dealer to continuously monitor whether the underlying swap 
continues to offset the cash commodity risk of the hedging counterparty 
would result in significant and costly burdens on end-users and other 
hedgers.210
—————————————————————————

    207 See e.g., CL-EEI/EPSA supra note 21 at 17; CL-ISDA/SIFMA 
supra note 21 at 12; and CL-FIA I supra note 21 at 19.
    208 See CL-ISDA/SIFMA supra note 21 at 13.
    209 See id.
    210 See e.g., CL-BGA supra note 35 at 17; and ISDA/SIFMA supra 
note 21 at 12.
—————————————————————————

    In response to these comments, the Commission has determined to 
reduce the burden of claiming a pass-through swap exemption. Under new 
Sec.  151.5(i), in order to rely on a pass-through exemption, a 
counterparty would be required to obtain from its counterparty a 
representation that the swap, in its good-faith belief, would qualify 
as an enumerated hedge under Sec.  151.5(a)(2). Such representation 
must be provided at the inception (i.e., execution) of the swap 
transaction and the parties to the swap must keep records of the 
representation. This representation, which may be made in a trade 
confirmation, must be kept for a period of at least two years following 
the expiration of the swap and furnished to the Commission upon 
request.
    Deutsche Bank also requested clarification as to whether the 
immediate counterparty to the swap must be a bona fide hedger or 
whether the Commission will look to a series of transactions to 
determine if it was connected to a bona fide hedger.211 Deutsche Bank 
argued that given the complexity of the swaps marketplace, market 
participants often hedge their risk through multiple combinations of 
intermediaries; hence, the Commission should not require that the 
immediate counterparty be a bona fide hedger, but rather part of a 
network of transactions connected to a bona fide hedger.212
—————————————————————————

    211 See CL-DB supra note 153 at 8.
    212 See id. Barclays similarly noted that it should not matter 
whether the original holder of a pass-through swap risk manages the 
risk itself or asks another to manage it for them and that overall 
systemic risk would increase if risk transfer is made more 
difficult. CL-Barclays I supra note 164 at 4.
—————————————————————————

    The Commission rejects extending the pass-through exemption to a 
series of swap transactions. Rather, consistent with this Congressional 
direction, a pass-through swap will be recognized as a bona fide hedge 
only to the extent it is executed opposite a counterparty eligible to 
claim an enumerated hedge exemption.213
—————————————————————————

    213 See CEA section 4a(c)(2)(B)(i), 7 U.S.C. 6a(c)(2)(B)(i). 
The Commission notes that the same restrictions on holding a 
position in the spot month or the last five days of trading of 
physical-delivery Core Referenced Futures Contracts that would apply 
to the swap counterparty with the underlying bona fide risk also 
apply to the holder of the pass-through swap. For example, if a swap 
dealer enters into a crude oil swap with an anticipatory production 
hedger, then it would be subject to the same restrictions on holding 
the hedge of that pass-through swap into the spot month of the 
appropriate physical-delivery Referenced Contract.
—————————————————————————

    The Commission clarifies that the pass-through swap exemption will 
allow non-hedging counterparties to such swaps to offset non-Referenced 
Contract swap risk in Referenced Contracts.214
—————————————————————————

    214 For example, Company A owns cash market inventory in a 
non-Referenced Contract commodity and enters into a Swap N with Bank 
B. Swap N would be an enumerated bona fide hedging transaction for 
Company A under the rules of a DCM or SEF. Because Swap N is not a 
Referenced Contract, Bank B does include Swap H in measuring 
compliance with position limits. However, Bank B, as is economically 
appropriate, may enter into a cross-commodity hedge to reduce the 
risk associated with Swap N. That risk reducing transaction is a 
bona fide hedging transaction for Bank B.
—————————————————————————

    Some commenters recommended that the Commission exclude inter-
affiliate swaps from any calculation of a trader’s position for 
position limit compliance purposes.215 API, for example, argued that 
swaps among affiliates would have no net effect on the positions of 
affiliated entities and the final rule should therefore make it clear 
that the Commission will not consider such swaps for purposes of 
position limits.216 API commented further that this approach would be 
consistent with the Commission’s treatment of inter-affiliate swaps in 
other proposed rulemakings, for example, the proposed rulemaking 
further defining, inter alia, swap dealer.217
—————————————————————————

    215 CL-COPE supra note 21 at 13; CL-API supra note 21 at 11; 
CL-Shell supra note 35 at 4-5; and CL-WGCEF supra note 35 at 23.
    216 CL-API supra note 21 at 11.
    217 Id.
—————————————————————————

    In light of the structure of the aggregation rules regarding the 
treatment of a single person or a group of entities under common 
ownership or control, as provided for under Sec.  151.7, the Commission 
has introduced Sec.  151.5(b). This subsection clarifies that entities 
required to aggregate accounts or positions under Sec.  151.7 shall be 
considered the same person for the purpose of determining whether a 
person or persons are eligible for a bona fide hedge exemption under 
Sec.  151.5(a) to the extent that such positions are attributed among 
these entities. The Commission’s intention in introducing new Sec.  
151.5(b) is to make the aggregation and bona fide hedging provisions of 
part 151 consistent. For example, a holding company that owns a 
sufficient amount of equity in an operating company would need to 
aggregate the operating company’s positions with those of the holding 
company in order to determine compliance with position limits. 
Commission regulation 151.5(b) would clarify that the holding company 
could enter into bona fide hedge transactions related to the operating 
company’s cash market activities, provided that the operating company 
has itself not entered into such hedge transactions with another person 
with whom it is not aggregated (i.e., the holding company’s hedge 
activity must comply with the appropriateness requirement of Sec.  
151.5(a)(1)). Appendix B to the final regulations provides an 
illustrative example as to how this provision would operate.
4. Non-Enumerated Hedges
    Many of the commenters objecting to the proposed definition of bona 
fide

[[Page 71649]]

hedging requested that the Commission reintroduce a process for 
claiming non-enumerated hedging exemptions.218 The Working Group of 
Commercial Energy Firms (“Working Group”), for example, argued that 
the Commission should maintain its current flexibility and preserve its 
ability to allow exemptions.219 FIA commented further that such a 
provision is expressly authorized under CEA section 4a(a)(7).220 The 
Commission has considered the comments and has expanded the list of 
enumerated hedge transactions, consistent with the statutory definition 
of bona fide hedging.
—————————————————————————

    218 See e.g., CL-FIA I supra note 21 at 15; CL-EEI/EPSA supra 
note 21 at 15; CL-CME I supra note 8 at 19; CL-Morgan Stanley supra 
note 21 at 6; and CL-WGCEF supra note 35 at 5. It should be noted, 
however, that at least 184 comment letters opined that the 
Commission should define the bona fide hedge exemption “in the 
strictest sense possible” and that “[b]anks, hedge funds, private 
equity and all passive investors in commodities should not be deemed 
as bona fide hedgers.”
    219 CL-WGCEF supra note 35 at 5.
    220 CL-FIA I supra note 21 at 15.
—————————————————————————

    In response to questions raised by commenters, the Commission notes 
that market participants may request interpretive guidance (under Sec.  
140.99(a)(3)) regarding the applicability of any of the provisions of 
this part, including whether a transaction or class of transactions 
qualify as enumerated hedges under Sec.  151.5(a)(2). Market 
participants may also petition the Commission to amend the current list 
of enumerated hedges or the conditions therein. Such a petition should 
set forth the general facts surrounding such class of transactions, the 
reasons why such transactions conform to the requirements of the 
general definition of bona fide hedging in Sec.  151.5(a)(1), and the 
policy purposes furthered by the recognition of this class of 
transactions as the basis for enumerated bona fide hedges.
5. Portfolio Hedging
    Some commenters requested clarification as to whether the new bona 
fide hedging exemption would require one-to-one tracking, and argued 
that portfolio hedging should be allowed because the combination of 
hedging instruments, such as futures, swaps and options, generally 
cannot be individually identified to particular physical 
transactions.221 Some of these commenters argued that if the 
Commission does not permit portfolio hedging, the requirement to one-
to-one track physical commodity transactions with corresponding hedge 
transactions will increase risk by preventing end-users from 
effectively hedging their commercial exposure.222
—————————————————————————

    221 See e.g., CL-Cargill supra note 76 at 2-3; CL-BGA supra 
note 35 at 15; and CL-ISDA/SIFMA supra note 21 at 10-11.
    222 See e.g., CL-BGA supra note 35 at 15.
—————————————————————————

    The Commission notes that the final Sec.  151.5(a)(2) provides for 
bona fide hedging transactions and positions. The Commission intends to 
allow market participants either to hedge their cash market risk on a 
one-to-one transactional basis or to combine the risk associated with a 
number of enumerated cash market transactions in establishing a bona 
fide hedge, provided that the hedge is economically appropriate to the 
reduction of risk in the conduct and management of a commercial 
enterprise, as required under Sec.  151.5(a)(1)(ii). The Commission has 
clarified this intention by adding after “potential change in the 
value of” in Sec.  151.5(a)(1)(iii) the phrase “one or several.” 
223
—————————————————————————

    223 Similarly, and in light of comments, the Commission has 
elected not to adopt proposed Sec.  151.5(j) in recognition of the 
confusion this provision could have caused to market participants 
who hedge on a portfolio basis and to reduce the burden of requiring 
a continuing representation of bona fides by the swap counterparty. 
The proposed Sec.  151.5(j) provided that a party to a swap opposite 
a bona fide hedging counterparty could establish a position in 
excess of the position limits, offset that position, and then re-
establish a position in excess of the position limits, so long as 
the swap continued to offset the cash market commodity risk of a 
bona fide hedging counterparty.
—————————————————————————

6. Restrictions on Hedge Exemptions
    Proposed Sec.  151.5(a)(2)(v) generally followed the Commission’s 
existing agricultural commodity position limits regime, which restricts 
cross-commodity hedge transactions from being classified as a bona fide 
hedge during the last five days of trading on a DCM.224 Some 
commenters recommended that the Commission eliminate this prohibition, 
otherwise market participants will have to assume risks during that 
time period instead of shifting risks to those willing to assume 
them.225 According to the FIA, unhedged risk, such as a commercial 
company unable to hedge jet fuel price exposure with heating oil 
futures or swap contracts in the last five days of trading, would 
reduce market liquidity and increase the risk of operating a commercial 
business.226 Further, ISDA opined that the Commission did not 
adequately justify the purpose of applying a prohibition from the 
Commission’s agricultural commodity position limits to other 
commodities.227
—————————————————————————

    224 See Sec.  1.3(z)(2)(iv). In the proposal, anticipatory 
hedge transactions could not be held during the five last trading 
days of any Referenced Contract. This restriction has been clarified 
to be aligned with the trading calendar of the Core Referenced 
Futures Contract and applies to all anticipatory transaction hedges.
    225 See e.g., CL-FIA I supra note 21 at 16l and CL-ISDA/SIFMA 
supra note 21 at 11.
    226 See CL-FIA I supra note 21 at 16.
    227 See CL-ISDA/SIFMA supra note 21 at 11.
—————————————————————————

    The Commission recognizes the restriction on holding cross-
commodity hedges in the last five days of trading may increase tracking 
risk if the trader were forced out of the Referenced Contract into a 
lesser correlated contract, or into a deferred contract month that was 
less correlated with the relevant cash market risk than the spot month. 
However, the Commission also continues to believe that such cross-
commodity hedges are not appropriately recognized as bona fide in the 
physical-delivery contracts in the last five days of trading for 
agricultural and metal Referenced Contracts or the spot month for 
energy Referenced Contracts since the trader does not hold the 
underlying commodity for delivery against, or have a need to take 
delivery on, the underlying commodity The Commission agrees with the 
comments regarding the elimination of the restriction on holding a 
cross-commodity hedge in cash-settled contracts during the last five 
days of trading for agricultural and metal contracts and the spot month 
for other contracts and has relaxed this restriction for hedge 
positions established in cash-settled contracts. Under the final rules, 
traders may maintain their cross-commodity hedge positions in a cash-
settled Referenced Contract through the final day of trading.
    The Commission received a number of comments on similar 
restrictions proposed to apply to other enumerated hedge 
transactions.228 The National Milk Producers Federation, for example, 
argued that the restriction on holding a hedge position through the 
last days of trading for cash-settled contracts should be eliminated 
because if a trader carried positions through the last days of trading 
in a cash-settled contract then it could not impact the orderly 
liquidation of the market.229
—————————————————————————

    228 See e.g., CL-Commercial Alliance I supra note 42 at 9; and 
National Milk Producers Federation (“NMPF”) on July 25, 2011 
(“CL-NMPF”) at 3-4.
    229 CL-NMPF, supra note 228 at 3-4.
—————————————————————————

    In response to these comments, the Commission has eliminated all 
restrictions on holding a bona fide hedge position for cash-settled 
contracts and narrowed the restriction on holding a bona fide hedge 
position in physical-delivery contracts. Specifically, a bona fide 
hedge position for anticipatory hedges for production, requirements, 
merchandising, royalty rights, and service contract, and unfixed-price 
calendar spread risk hedges

[[Page 71650]]

(Sec.  151.5(a)(2)(iii), and, as discussed above, cross-commodity 
hedges in all bona fide hedge circumstances will not retain bona fide 
hedge status if held, for physical-delivery agricultural and metal 
contracts, in the last five trading days and in the spot month for all 
other physical-delivery contracts. The Commission has modified the 
Proposed Rule in recognition of potential circumstances where 
inefficient hedging would be required if the restriction were 
maintained as proposed, the reduced concerns with a negative impact on 
the market of maintaining such a hedge if held in a cash-settled 
contract (as opposed to a physical-delivery contract), and a generally 
cautious approach to imposing new restrictions on the ability of 
traders active in the physical marketing channel to enter into cash-
settled transactions to meet their hedging needs.
7. Financial Distress Exemption
    Some commenters requested that the Commission introduce an 
exemption for market participants in financial distress scenarios. 
Morgan Stanley, for example, commented that during periods of financial 
distress, it may be beneficial for a financially sound entity to assume 
the positions (and corresponding risk) of a less stable market 
participant.230 Morgan Stanley argued that not providing for an 
exemption in these types of situations could reduce liquidity and 
increase systemic risk. Similarly, Barclays argued that the Commission 
should preserve the flexibility to accommodate situations involving, 
for example, the exit of a line of business by an entity, a customer 
default at a futures commission merchant (“FCM”), or in the context 
of potential bankruptcy.231
—————————————————————————

    230 CL-Morgan Stanley supra note 21 at 16.
    231 CL-Barclays I supra note 164 at 5.
—————————————————————————

    In recognition of the public policy benefits of including such an 
exemption, the Commission has provided, in Sec.  151.5(j), for an 
exemption for situations involving financial distress. The Commission’s 
authority to provide for this exemption is derived from CEA section 
4a(a)(7).232 In this regard, the Commission clarifies that this 
exemption for financial distress situations does not establish or 
otherwise represent a form of hedging exemption.
—————————————————————————

    232 New CEA section 4a(a)(7) provides that the Commission may 
“by rule, regulation, or order * * * exempt * * * any person or 
class of persons” from any requirement it may establish under 
section 4a. 7 U.S.C. 6a(a)(7). This provision requires that any 
exemption, general or bona fide, to position limits granted by the 
Commission, be done by Commission action.
—————————————————————————

8. Filing Requirements
    Under the proposal, once an entity’s total position exceeds a 
position limit, the entity must file daily reports on Form 404 for cash 
commodity transactions and corresponding hedge transactions and on Form 
404S for information on swaps used for hedging.233 Several commenters 
argued that bona fide hedgers should only be required to file monthly 
reports to the Commission because daily reporting is onerous and 
unnecessary.234 In addition, the commenters pointed out that daily 
reporting will also be costly for the Commission,235 and argued that 
the Commission should instead utilize its special call authority on top 
of monthly reporting to ensure that it has sufficient information.236
—————————————————————————

    233 See Sec. Sec.  151.5(b) and (d).
    234 See e.g., CL-Cargill supra note 76 at 3; CL-FIA I supra 
note 21 at 20; CL-Commercial Alliance I supra note 42 at 3-4; CL-BGA 
supra note 35 at 17; CL-EEI/EPSA supra note 21 at 15-16; and CL-
Utility Group supra note 21 at 14. See also CL-ISDA/SIFMA supra note 
21 at 12 (opposing daily reporting).
    235 See CL-FIA I supra note 21 at 21; and CL-ISDA/SIFMA supra 
note 21 at 12.
    236 See e.g., CL-Cargill supra note 76 at 4.
—————————————————————————

    The Commission has determined to address these concerns by 
requiring that a trader file a Form 404 three business days following 
the day that a position limit is exceeded and thereafter file daily 
data on a monthly basis. These monthly reports would, under Sec.  
151.5(c)(1), provide cash market positions for each day that the trader 
exceeded the position limits during the monthly reporting period. This 
amendment would reduce the filing burden on market participants. The 
Commission believes the monthly reports, though less timely, would 
generally provide information sufficient to determine a trader’s daily 
compliance with position limits, without requiring a trader to file 
additional information under a special call or, as discussed below, 
follow-up information on his or her notice filings. The Commission has 
also reduced the filing burden by allowing all such reports of cash 
market positions to be filed by the third business day following the 
day that a position limit is exceeded, rather than on the next business 
day.
    Final Sec.  151.5(d) asks for information relevant to the three new 
anticipatory hedging exemptions–for merchandising, royalties, and 
services contracts–that would be helpful for the Commission in 
evaluating the validity of such claims. For anticipated merchandising 
hedge exemptions, the Commission is most interested in understanding 
the storage capacity relating to the anticipated and historical 
merchandising activity. For anticipated royalty hedge exemptions, the 
Commission is interested in understanding the basis for the projected 
royalties. For anticipated services, the Commission is interested in 
understanding what types of service contracts have given rise to the 
trader’s anticipated hedging exemption request.
    The Commercial Alliance recommended that Form 404A filings for 
anticipatory hedgers be modified to require descriptions of activity, 
as opposed to calling for the submission of data reflecting a one-for-
one correlation between an anticipated market risk and a hedge 
position.237 The Commercial Alliance stated that companies are not 
managed in this manner and the data could not be collated and provided 
to the Commission in this way.238 The Commercial Alliance provided 
recommended amendments to the requirements for Form 404A filers to 
reflect that information concerning anticipated activities would be 
appropriate to justify a hedge position, in accordance with regulations 
151.5(a)(1) and (a)(2).
—————————————————————————

    237 Commercial Alliance (“Commercial Alliance II”) on July 
20, 2011 (“CL-Commercial Alliance II ”) at 1.
    238 Id.
—————————————————————————

    The Commission agrees with many of the Commercial Alliance’s 
suggestions. For example, Sec.  151.5(c)(2) closely tracks the 
Commercial Alliance’s suggested language revisions. The information 
required by this section should allow the Commission to understand 
whether the trader’s bona fide hedging activity complies with the 
requirements of Sec.  151.5(a)(1). Final Sec.  151.5(c)(2) clarifies 
that the 404 filing is a notice filing made effective upon submission.
    Many commenters opined that the application and approval process 
for receiving an anticipatory hedge exemption set forth in proposed 
Sec.  151.5(c) would impose an unnecessary compliance burden on 
hedgers.239 In response to such comments, the Commission has amended 
the process for claiming an anticipatory hedge in Sec.  151.5(d)(2) to 
allow market participants to claim an exemption by notice filing. The 
notice must be filed at least ten days in advance of the date the 
person expects to exceed the position limits and is effective after 
that ten-day period unless so notified by the Commission.
—————————————————————————

    239 See e.g., CL-ICE I supra note 69 at 12; and CL-WGCEF supra 
note 35 at 2-3.
—————————————————————————

    In response to commenters seeking greater procedural certainty for 
obtaining bona fide hedge

[[Page 71651]]

exemptions,240 Sec.  151.5(e) clarifies the conditions of the 
Commission’s review of 404 and 404A notice filings submitted under 
Sec. Sec.  151.5(c) and 151.5(d), respectively. Traders submitting 
these filings may be notified to submit additional information to the 
Commission in order to support a determination that the statement filed 
complies with the requirements for bona fide hedging exemptions under 
paragraph (a) of Sec.  151.5.
—————————————————————————

    240 See e.g., CL-WGCEF supra note 35 at 2-3.
—————————————————————————

H. Aggregation of Accounts

    The proposed part 151 regulations would significantly alter the 
existing position aggregation rules and exemptions currently available 
in part 150. Specifically, the aggregation standards under proposed 
Sec.  151.7 would eliminate the independent account controller 
(“IAC”) exemption under Sec.  150.3(a)(4), restrict many of the 
disaggregation provisions currently available under Sec.  150.4, and 
create a new owned-financial entity exemption. The proposal would also 
require a trader to aggregate positions in multiple accounts or pools, 
including passively-managed index funds, if those accounts or pools 
have identical trading strategies. Lastly, disaggregation exemptions 
would no longer be available on a self-executing basis; rather, an 
entity seeking an exemption from aggregation would need to apply to the 
Commission, with the relief being effective only upon Commission 
approval.241
—————————————————————————

    241 The Commission did not propose any substantive changes to 
existing Sec.  150.4(d), which allows an FCM to disaggregate 
positions in discretionary accounts participating in its customer 
trading programs provided that the FCM does not, among other things, 
control trading of such accounts and the trading decisions are made 
independently of the trading for the FCM’s other accounts. As 
further described below, however, the FCM disaggregation exemption 
would no longer be self-executing; rather, such relief would be 
contingent upon the FCM applying to the Commission for relief.
—————————————————————————

    Some commenters supported the proposed aggregation standards, 
contending that the revised standards would enhance the Commission’s 
ability to monitor and enforce position limits by preventing 
institutional investors, including hedge funds, from evading 
application of position limits by creating multiple smaller investment 
funds.242 However, many of the commenters on the account aggregation 
rules objected to the change in the aggregation policy and, in 
particular, the proposed elimination of the IAC exemption.243 
Generally, these commenters expressed concern that the proposed 
aggregation standards would result in an inappropriate aggregation of 
independently controlled accounts, potentially cause harmful 
consequences to investors and investment managers, and potentially 
reduce liquidity in the commodities markets.
—————————————————————————

    242 See e.g., CL-PMAA/NEFI supra note 6 at 16-17; CL-Prof. 
Greenberger supra note 6 at 18; CL-AFR supra note 17 at 8; and CL-
FWW supra note 81 at 16.
    243 See e.g., CL-FIA I supra note 21; CL-Commercial Alliance 
II supra note 237 at 1; CL-DB supra note 153 at 6; CL-CME I supra 
note 8 at 15-16; ICI supra note 21 at 8; CL-BlackRock supra note 21 
at 9; New York City Bar Association–Committee on Futures and 
Derivatives (“NYCBA”) on April 11, 2011 (“CL-NYCBA”) at 2; and 
CL-SIFMA AMG supra note 21 at 10. One commenter did ask that the 
Commission allow for a significant amount of time for an orderly 
transition from the IAC to the more limited account aggregation 
exemptions in the proposed rules. See CL-Cargill supra note 76 at 7.
—————————————————————————

    In response to comments, the Commission is adopting the proposed 
aggregation standard, with modifications as discussed below. In brief, 
the final rules largely retain the provisions of the existing IAC 
exemption and pool aggregation standards under current part 150. The 
final rules reaffirm the Commission’s current requirements to aggregate 
positions that a trader owns in more than one account, including 
accounts held by entities in which that trader owns a 10 percent or 
greater equity interest. Thus, for example, a financial holding company 
is required to aggregate house accounts (that is, proprietary trading 
positions of the company) across all wholly-owned subsidiaries.
1. Ownership or Control Standard
    Under proposed Sec.  151.7, a trader would be required to aggregate 
all positions in accounts in which the trader, directly or indirectly, 
holds an ownership or equity interest of 10 percent or greater, as well 
as accounts over which the trader controls trading.244 The Proposed 
Rule also treats positions held by two or more traders acting pursuant 
to an express or implied agreement or understanding the same as if the 
positions were held by a single trader.
—————————————————————————

    244 In this regard, the Commission interprets the “hold” or 
“control” criterion as applying separately to ownership of 
positions and to control of trading decisions.
—————————————————————————

    As proposed, a trader also would be required to aggregate interests 
in funds or accounts with identical trading strategies. Proposed Sec.  
151.7 would require a trader to aggregate any positions in multiple 
accounts or pools, including passively-managed index funds, if those 
accounts or pools had identical trading strategies. The Commission is 
finalizing this provision as proposed.245
—————————————————————————

    245 Barclays requested that, in light of the fundamental 
changes to the aggregation policy, the Commission should reconsider 
the 10 percent ownership standard. Specifically, Barclays stated 
that the ownership test should be tied to a “meaningful actual 
economic interest in the result of the trading of the positions in 
question,” and that 10 percent ownership, in absence of control, is 
no longer a “viable” standard. See CL-Barclays I supra note 164 at 
3. In view of the fact that the Commission is finalizing the 
aggregation provisions with modifications to the proposal that will 
substantially address the concerns of the comments, the Commission 
has determined to retain the long-standing 10 percent ownership 
standard that has worked effectively to date. In response to a point 
raised by Commissioner O’Malia in his dissent, the Commission 
clarifies that it will continue to use the 10 percent ownership 
standard and apply a 100 percent position aggregation standard, and 
therefore will not adopt Barclays’ recommendation that “only an 
entity’s pro rata share of the position that are actually controlled 
by it or in which it has ownership interest” be aggregated. Id. at 
3. In the future, the Commission may reconsider whether to adopt 
Barclays’ recommendation.
—————————————————————————

2. Independent Account Controller Exemption
    The Commission proposed to eliminate the IAC exemption in part 150. 
Numerous commenters asserted that the Commission failed to provide a 
reasoned explanation for the departure from its long-standing exception 
from aggregation for independently controlled accounts.246 These 
commenters also asserted that the elimination of the IAC exemption 
would force aggregation of accounts that are under the control of 
independent managers subject to meaningful information barriers and, 
hence, do not entail risk of coordinated excessive speculation or 
market manipulation.247 Morgan Stanley asserted that the rationale 
for permitting disaggregation for separately controlled accounts is 
that “the correct application of speculative position limits hinges on 
attributing speculative positions to those actually making trading 
decisions for a particular account.” 248 In absence of the IAC

[[Page 71652]]

exemption, commenters further noted that otherwise independent trading 
operations would be required to communicate with each other as to their 
trading positions so as to avoid violating position limits, raising the 
risk for concerted trading.249
—————————————————————————

    246 See e.g., CL-FIA I supra note 21 at 22-23; CL-CME I supra 
note 8 at 15; and CL-CMC supra note 21 at 4; CL-ISDA/SIFMA supra 
note 21 at 14-16; CL-Katten supra note 21 at 3; CL-MFA supra note 21 
at 13; CL-Morgan Stanley supra note 21 at 7; CL-NYCBA supra note 243 
at 2; Barclays Capital (“Barclays II”) on June 14, 2011 (“CL-
Barclays II”) at 1; and U.S. Chamber of Commerce (“USCOC”) on 
March 28, 2011 (“CL-USCOC”) at 6.
    247 See e.g., CL-CME I supra note 8 at 15; CL-ICI supra note 
21 at 9; CL-BlackRock supra note 21 at 4, 9; CL-Katten supra note 21 
at 3; CL-ISDA/SIFMA supra note 21 at 14; CL-AIMA supra note 35 at 5-
6; DB Commodity Services LLC (“DBCS”) on March 28, 2011 (“CL-
DBCS”) at 7; and CL-Barclays I supra note 164 at 2.
    248 CL-Morgan Stanley supra note 21 at 7. Morgan Stanley added 
that the resulting inability to disaggregate separately controlled 
accounts of its various affiliates will have “[a] significantly 
adverse effect on Morgan Stanley’s ability to provide risk 
management services to its clients and will reduce market 
liquidity.”
    249 See e.g., CL-MFA supra note 21 at 13.
—————————————————————————

    The Commission has carefully considered the views expressed by 
commenters and has determined to retain the IAC exemption largely as 
currently in effect, with clarifications to make explicit the 
Commission’s long-standing position that the IAC exemption is limited 
to client positions, that is, only to the extent one trades 
professionally for others can one avail him or herself of this IAC 
exemption. Such a person has a fiduciary relationship to those clients 
for whom he or she trades.250 Accordingly, eligible entities may 
continue to rely upon the IAC exemption to disaggregate client 
positions held by an IAC. This means that the IAC exemption does not 
extend to proprietary positions in accounts which a trader owns.
—————————————————————————

    250 See e.g., 56 FR 14308, 14312 (Apr. 9, 1991) (clarifying, 
among other things, that the IAC exemption is limited to those who 
trade professionally for others, and who have a fiduciary 
relationship to those for whom they trade).
—————————————————————————

    After reviewing the comments in connection with the terms of the 
proposal, the Commission believes that retaining the IAC exemption for 
independently managed client accounts is in accord with the purposes of 
the aggregation policy. The fundamental rationale for the aggregation 
of positions or accounts is the concern that a single trader, through 
common ownership or control of multiple accounts, may establish 
positions in excess of the position limits and thereby increase the 
risk of market manipulation or disruption. Such concern is mitigated in 
circumstances involving client accounts managed under the discretion 
and control of an independent trader and subject to effective 
information barriers. The Commission also recognizes the wide variety 
of commodity trading programs available for market participants. To the 
extent that such accounts and programs are traded independently and for 
different purposes, such trading may enhance market liquidity for bona 
fide hedgers and promote efficient price discovery.
    Under the current IAC exemption provision, an eligible entity, 
which includes banks, CPOs, commodity trading advisors (“CTAs”), and 
insurance companies, may disaggregate customer positions or accounts 
managed by an IAC from its proprietary positions (outside of the spot 
months), subject to the conditions specified therein. Specifically, an 
IAC must trade independently of the eligible entity and of any other 
IAC trading for the eligible entity and have no knowledge of trading 
decisions by any other IAC.251
—————————————————————————

    251 If the IAC is affiliated with the eligible entity or 
another IAC trading on behalf of the eligible entity, each of the 
affiliated entities must, among other things, maintain written 
procedures to preclude them from having knowledge of, or gaining 
access to data about trades of the other, and each must trade such 
accounts pursuant to separately developed and independent trading 
systems. See Sec.  150.3(a)(4)(i).
—————————————————————————

    A central feature of the IAC exemption is the requirement that the 
IAC trades independently of the eligible entity and of any other IAC 
trading for the eligible entity. The determination of whether a trader 
exercises independent control over the trading decisions of the 
customer discretionary accounts or trading programs within the meaning 
of the IAC exemption must be decided case-by-case based on the 
particular underlying facts and circumstances. In this respect, the 
Commission will look to certain factors or indicia of control in 
determining whether a trader has control over certain positions or 
accounts for aggregation purposes.252
—————————————————————————

    252 64 FR 33839, Jun. 13, 1979 (“1979 Aggregation Policy 
Statement”). In that release, the Commission provided certain 
indicia of independence, which included appropriate screening 
procedures, separate registration and marketing, and a separate 
trading system.
—————————————————————————

    A non-exclusive list of such indicia of control includes existence 
of a proper firewall separating the trading functions of the IAC and 
the eligible entity. That is, the Commission will consider, in 
determining whether the IAC trades independently, the degree to which 
there is a functional separation between the proprietary trading desk 
of the eligible entity and the desk responsible for trading on behalf 
of the managed client accounts. Similarly, the Commission will consider 
the degree of separation between the research functions supporting a 
firm’s proprietary trading desk and the client trading desk. For 
example, a firm’s research information concerning fundamental demand 
and supply factors and other data may be available to an IAC who 
directs trading for a client account of the firm. However, specific 
trading recommendations of the firm contained in such information may 
not be substituted for independently derived trading decisions. If the 
person who directs trading in an account regularly follows the trading 
suggestions disseminated by the firm, such trading activity will be 
evidence that the account is controlled by the firm. In the absence of 
a proper firewall separating the trading or research functions, among 
other things, an eligible entity may not avail itself of the IAC 
exemption.
3. Exemptions From Aggregation
    Several commenters expressed concern that forced aggregation of 
independently controlled and managed accounts would effectively require 
independent trading operations of commonly-owned entities to coordinate 
trading activities and commercial hedging opportunities, in potential 
violation of contractual and legal obligations, such as FERC affiliate 
rules,253 bank regulatory restrictions, and antitrust 
provisions.254 Some commenters also asserted that asset managers and 
advisers may be required to violate their fiduciary duty to clients by 
sharing confidential information with third parties, and which could 
also lead to anti-competitive activity if two unrelated entities, such 
as competitors in a joint-venture, are required to share such 
confidential information.255 FIA also added that a company with an 
affiliate underwriter may not be aware that its affiliate has acquired 
a temporary, passive interest in another company trading commodities. 
Under the aggregation proposal, the first company would be required to 
share trading information with a temporary affiliate. In such instance, 
FIA concludes, the cost of aggregation “greatly outweighs the 
unarticulated regulatory benefits.” 256
—————————————————————————

    253 See e.g., CL-FIA I supra note 21 at 23-24; CL-EEI/ESPA 
supra note 21 at 20; CL-ISDA/SIFMA supra note 21 at 16; and CL-AGA 
supra note 124 at 9.
    254 See e.g., CL-FIA I supra note 21 at 24; CL-API supra note 
21 at 11; CL-DBCS supra note 247 at 3; CL-CME I supra note 8 at 17; 
CL-ISDA/SIFMA supra note 21 at 16; CL-MFA supra note 21 at 13; CL-
Morgan Stanley supra note 21 at 8; CL-SIFMA AMG I supra note 21 at 
11; and CL-Barclays I supra note 164 at 2. See e.g., CL-Morgan 
Stanley supra note 21 at 8 (For example, advisors to private 
investment funds may not be able to permit certain investors to view 
position information unless the information is made available to all 
of the fund’s investors on an equal basis).
    255 See e.g., CL-CME I supra note 8 at 17; CL-Barclays II 
supra note 2468 at 2; CL-MFA supra note 21 at 13; CL-Morgan Stanley 
supra note 21 at 9; and CL-SIFMA AMG I supra note 21 at 11. See also 
CL-NYCBA supra note 243 at 4.
    256 CL-FIA I supra note 21 at 24.
—————————————————————————

    According to commenters, this problem is exacerbated if aggregate 
limits are applied intraday as it requires real-time sharing of 
information, and, when added to the attendant dismantling of 
information barriers and restructuring of information systems, would 
impose significant operational

[[Page 71653]]

challenges and massive costly infrastructure changes.257
—————————————————————————

    257 See e.g., CL-DBCS supra note 247 at 3; CL-CME I supra note 
8 at 17; CL-FIA I supra note 21 at 24; CL-ICI supra note 21 at 8-9; 
CL-ISDA/SIFMA supra note 21 at 17; CL-Barclays II supra note 246 at 
2; and CL-Morgan Stanley supra note 21 at 8.
—————————————————————————

    In view of these considerations, and as discussed above, the 
Commission is reinstating the IAC exemption. The majority of the 
contentions from the commenters stemmed from the removal of the IAC 
exemption, and therefore, incorporating this exemption into the final 
rules should address these concerns. In response to comments,258 and 
to further mitigate the impact of the aggregation requirements that 
apply to commonly-owned entities or accounts, the Commission is 
adopting new Sec.  151.7(g), which will allow a person to disaggregate 
when ownership above the 10 percent threshold also is associated with 
the underwriting of securities. In addition to a limited exemption for 
the underwriting of securities, new Sec.  151.7(i) will provide for 
disaggregation relief, subject to notice filing and opinion of counsel, 
in instances where aggregation across commonly-owned affiliates (i.e., 
above the 10 percent ownership threshold) would require position 
information sharing that, in turn, would result in the violation of 
Federal law.259 The Commission notes, however, when a trader has 
actual knowledge of the positions of an affiliate, that trader is 
required to aggregate all such positions.
—————————————————————————

    258 See e.g., CL-FIA I supra note 21 at 24.
    259 Assume, for example, that Company A owns 10 percent of 
Company B. Company B may not share with Company A information 
regarding its positions unless it makes such data public. In this 
instance, Company A would file a notice with the Commission, along 
with opinion of counsel, that requiring the aggregation of such 
positions will require Company A to obtain information from Company 
B that would violate federal law.
—————————————————————————

4. Ownership in Commodity Pools Exemption
    Under current Sec.  150.4(b), a trader who is a limited partner or 
shareholder in a commodity pool (other than the pool’s commodity pool 
operator (“CPO”)) generally need not aggregate so long as the trader 
does not control the pool’s trading decisions. Under Sec.  150.4(c)(2), 
if the trader is also a principal or affiliate of the pool’s CPO, the 
trader need not aggregate provided that the trader does not control or 
supervise the pool’s trading and the pool operator has proper 
informational barriers. In addition, mandatory aggregation based on a 
25 percent ownership interest is only triggered with respect to a pool 
exempt from CPO registration under existing Sec.  4.13.
    The Commission’s proposal would eliminate the disaggregation 
exemption for passive pool participants (i.e., participants who are not 
principals or affiliates of the pool’s CPO). Under the Commission’s 
proposal, all passive pool participants (with a 10 percent or greater 
ownership or equity interest and regardless of whether they are a 
principal or affiliate) would be subject to the aggregation requirement 
unless they meet certain exemption criteria. These criteria include: 
(i) An inability to acquire knowledge of the pool’s positions or 
trading due to informational barriers maintained by the CPO, and (ii) a 
lack of control over the pool’s trading decisions. The proposal would 
also require aggregation for an investor with a 25 percent or greater 
ownership interest in any pool, without regard to whether the operator 
operates a small pool exempt from CPO registration.
    Commenters objected to the changes to the disaggregation provision 
applicable to interests in commodity pools, arguing that forcing 
aggregation of independent traders would increase concentration, limit 
investment opportunities, and thus potentially reduce liquidity in the 
U.S. futures markets.260 Morgan Stanley stated that the current 
disaggregation exemption for interests in commodity pools “reflect the 
current reality of investing in commodity pools structured as private 
investment funds.” 261 It would be, Morgan Stanley explained, 
“extraordinarily difficult to monitor and limit ownership thresholds 
given that an investor’s stake in a fund may rise due to actions of 
third parties, e.g., redemptions.” 262 MFA likewise noted that 
“monitoring of ownership percentages of investors in a commodity pool 
is burdensome, difficult to manage, and creates a potential trap for 
investors who may unintentionally violate limits.” 263
—————————————————————————

    260 See e.g., CL-MFA supra note 21 at 14-15; and CL-BlackRock 
supra note 21 at 6-7.
    261 CL-Morgan Stanley supra note 21 at 8.
    262 Id.
    263 CL-MFA supra note 21 at 14.
—————————————————————————

    Upon further consideration, and in response to the comments, the 
Commission has determined to retain the current disaggregation 
exemption for interests in commodity pools. The exemption was 
originally intended in part to respond to the growth of professionally 
managed futures trading accounts and pooled futures investment. The 
Commission finds that disaggregation for ownership in commodity pools, 
subject to appropriate safeguards, may continue to provide the 
necessary flexibility to the markets, while at the same time protecting 
the markets from the undue accumulation of large speculative positions 
owned by a single person or entity.
5. Owned Non-Financial Entity Exemption
    The Commission proposed a limited disaggregation exemption for an 
entity that owns 10 percent or more of a non-financial entity 
(generally, a non-financial, operating company) if the entity can 
demonstrate that the owned non-financial entity is independently 
controlled and managed.264 The Commission explained that this limited 
exemption was intended to allow disaggregation primarily in the case of 
a conglomerate or holding company that “merely has a passive ownership 
interest in one or more non-financial operating companies. In such 
cases, the operating companies may have complete trading and management 
independence and operate at such a distance from the holding company 
that it would not be appropriate to aggregate positions.” 265 
Several commenters argued that the non-financial entity provision was 
too narrow to provide meaningful disaggregation relief and supported 
its extension to financial entities.266 These commenters also 
asserted that the failure to extend the exemption was discriminatory 
against financial entities without a proper basis.267 Other 
commenters asked for guidance from the Commission on whether business 
units of a company could qualify as owned non-financial

[[Page 71654]]

entities for aggregation purposes.268 These commenters argued that 
functionally these business units operate the same as separately 
organized entities, and should not be forced to undergo the costs and 
inefficiencies of becoming separately organized for position limit 
purposes.269
—————————————————————————

    264 The proposed regulations included a non-exclusive list of 
indicia of independence for purposes of this exemption, including 
that the two entities have no knowledge of each other’s trading 
decisions, that the owned non-financial entity have written policies 
and procedures in place to preclude such knowledge, and that the 
entities have separate employees and risk management systems.
    265 76 FR 4752, at 4762.
    266 See e.g., CL-FIA I supra note 21 at 23-24; CL-DBCS supra 
note 238 at 6; CL-PIMCO supra note 21 at 3; National Rural Electric 
Cooperative (“NREC”), Association American Public Power 
(“AAPP”), and Association Large Public Power Council (“ALLPC”) 
on March 28, 2011 (“CL-NREC/AAPP/ALLPC”) at 20; CL-MFA supra note 
21 at 14; CL-CME I supra note 8 at 16; CL-ISDA/SIFMA supra note 21 
at 15; CL-BlackRock supra note 21 at 9; CL-Morgan Stanley supra note 
21 at 9; and CL-NYCBA supra note 243 at 4.
    267 See e.g., CL-FIA I supra note 21 at 22-23; CL-CME I supra 
note 8 at 16-17; CL-ISDA/SIFMA supra note 21 at 15; CL-Morgan 
Stanley supra note 21 at 9; CL-USCOC supra note 246 at 6; CL-DBCS 
supra note 247 at 6; CL-PIMCO supra note 21 at 5 (position limits 
are not high enough to offset elimination of IAC as explained in the 
proposed Sec.  ); CL-MFA supra note 21 at 14; Akin Gump Strauss 
Hauer & Field LLP (“Akin Gump”) on March 25, 2011 (“CL-Akin 
Gump”) at 4; and CL-CMC supra note 21 at 4.
    268 See e.g., CL-BGA supra note 35 at 21; and CL-Cargill supra 
note 76 at 7.
    269 See e.g., CL-Cargill supra note 76 at 7.
—————————————————————————

    In view of the Commission’s determination to retain the IAC 
exemption and the aggregation policy in general (which the Commission 
believes has worked effectively to date), provide an exemption for 
Federal law information sharing restrictions in final Sec.  151.7(i) 
and provide an exemption for underwriting in final Sec.  151.7(g), the 
Commission believes that it would not be appropriate, at this time, to 
expand further the scope of disaggregation exemptions to owned non-
financial or financial entities. As described above, the final rules 
include express disaggregation exemptions to mitigate the impact of the 
aggregation requirements that apply to commonly-owned entities or 
accounts. These disaggregation exemptions are appropriately limited to 
situations that do not present the same concerns as those underlying 
the aggregation policy, namely, the sharing of transaction or position 
information that may facilitate coordinated trading; as such, the 
Commission does not believe further expansion of the disaggregation 
exemptions is warranted at this time.
6. Funds With Identical Trading Strategies
    The proposal would require aggregation for positions in accounts or 
pools with identical trading strategies (e.g., long-only position in a 
given commodity), including passively-managed index funds. Under this 
provision, the general ownership threshold of 10 percent would not 
apply; rather, positions of any size in accounts or pools would require 
aggregation.
    Several commenters objected to forcing aggregation on the basis of 
identical trading strategies because it did not, in their view, further 
the purpose of preventing unreasonable or unwarranted price 
fluctuations. 270 These commenters argued that the proposal would 
lead to a decrease in index fund participation, which will reduce 
market liquidity, especially in deferred months, as well as impact 
commodity price discovery. One commenter indicated support for 
extending the aggregation requirement to commodity index funds, and the 
swaps which are indexed to each individual index.271 PMAA/NEFI opined 
that positions of passive long speculators should be aggregated to the 
extent that they follow the same trading strategies regardless of 
whether their positions are held or controlled by the same trader in 
order to shield the markets from the cumulative impact of multiple 
passive long speculators who follow the same trading strategies.272
—————————————————————————

    270 See e.g., CL-CME I supra note 8 at 18; and CL-BlackRock 
supra note 21 at 14.
    271 See e.g., CL-Better Markets supra note 37 at 69-70.
    272 CL-PMAA/NEFI supra note 6 at 14.
—————————————————————————

    The Commission is adopting this aggregation provision as proposed, 
with the clarification that a trader must aggregate positions 
controlled or held in one account with positions controlled or held in 
one pool with identical trading strategies. As the Commission stated in 
the NPRM, this aggregation provision is intended to prevent 
circumvention of the aggregation requirements. In absence of such 
aggregation requirement, a trader can, for example, acquire a large 
long-only position in a given commodity through positions in multiple 
pools, without exceeding the applicable position limits.
7. Process for Obtaining Disaggregation Exemption
    In contrast to the existing practice, the proposed aggregation 
exemptions were not self-effectuating. A trader seeking to rely on any 
aggregation exemption would be required to file an application for 
relief with the Commission, and the trader could not rely on the 
exemption until the Commission approved the application.273 Further, 
the trader would be subject to an annual renewal application and 
approval.
—————————————————————————

    273 See e.g., CL-FIA I supra note 21 at 25; CL-CMC supra note 
21 at 5; and CL-EEI/EPSA supra note 21 at 19-20.
—————————————————————————

    Several commenters objected to the proposed change from self-
executing disaggregation exemptions to an application-based exemption 
on the basis that it would create an additional burden on traders 
without any benefits. Some of these commenters argued that the 
disaggregation exemptions for FCMs should continue to be self-
effectuating because FCMs are subject to direct oversight by the 
Commission, and the Proposed Rule does not provide a sufficient 
explanation for the change in policy.274 MFA recommended that instead 
of requiring an application for exemptive relief and annual renewals, 
IACs should be required to file a notice informing the Commission that 
they intend to rely on the exemption and a representation that they 
meet the relevant conditions.275
—————————————————————————

    274 See e.g., CL-Morgan Stanley supra note 21 at 7. See also 
Futures Industry Association (“FIA II”) on May 25, 2011 (“CL-FIA 
II”) at 6.
    275 See CL-MFA supra note 21 at 16.
—————————————————————————

    Some of the commenters, objecting to the application-based 
exemption, requested that the Commission make the necessary 
applications for an exemption conditionally effective, rather than 
effective after a Commission determination.276 Other commenters 
argued that the Commission should only require that exemption 
applications be initially filed with material updates as opposed to an 
annual reapplication process.277
—————————————————————————

    276 See e.g., CL-FIA I supra note 21 at 25; Willkie Farr & 
Gallagher LLP (“Willkie”) on March 28, 2011 (“CL-Willkie”) at 7; 
CL-API supra note 21 at 12; Gavilon Group, LLC (“Gavilon”) on 
March 28, 2011(“CL-Gavilon”) at 8; and CL-CMC supra note 21 at 4. 
See also CL-BGA supra note 35 at 22.
    277 See e.g., CL-Cargill supra note 76 at 9.
—————————————————————————

    With regard to the specific conditions for applying for an 
aggregation exemption, several commenters requested that the Commission 
remove or clarify the condition that entities submit an independent 
assessment report.278 Similarly, commenters opined that the 
Commission should not require applicants to designate an office and 
employees responsible for coordinating compliance with aggregation 
rules and position limits.279
—————————————————————————

    278 See e.g., CL-FIA I supra note 21 at 26-27; and CL-BGA 
supra note 35 at 22.
    279 See e.g., CL-FIA I supra note 21 at 27.
—————————————————————————

    The Commission is adopting the proposal with modifications to 
address the concerns expressed in the comments. Specifically, the 
Commission is eliminating the requirement that a trader seeking to rely 
on a disaggregation exemption file an application for exemptive relief 
and annual renewals. Instead, the trader must file a notice, effective 
upon filing, setting forth the circumstances that warrant 
disaggregation and a certification that they meet the relevant 
conditions.
    The Commission believes that the new notice process (with its 
attendant certification requirement) for disaggregation relief 
represents a less burdensome, yet effective, alternative to the 
proposed application and pre-approval process. The notice procedure 
will allow market participants to rely on aggregation exemptions 
without the potential delay of Commission approval, thus lessening the 
burden on both market participants and the Commission to respond to 
such applications. In addition, the notice filings will give the 
Commission insight into the application

[[Page 71655]]

of the various exemptions, which the Commission could not do under a 
self-certification regime.
    Under the notice provisions, upon call by the Commission, any 
person claiming a disaggregation exemption must provide relevant 
information concerning the claim for exemption.280 Thus, for example, 
if the Commission identifies potential concerns regarding the integrity 
of the information barrier supporting a trader’s reliance on the IAC 
exemption, it can audit the subject trader for adequacy of such 
information barrier and related practices. To the extent the Commission 
finds that a trader is not appropriately following the conditions of 
the exemption, upon notice and opportunity for the affected person to 
respond, the Commission may amend, suspend, terminate, or otherwise 
modify a person’s aggregation exemption.
—————————————————————————

    280 See Sec.  151.7(h)(2).
—————————————————————————

    In response to the concerns of commenters, the Commission has 
determined to remove the conditions that a person submit an independent 
assessment report and designate an office and employees responsible for 
coordinating compliance with aggregation rules and position limits as 
part of the notice filing for an exemption.

I. Preexisting Positions

    The Commission proposed to apply the good-faith exemption under CEA 
section 4a(b) for pre-existing positions in both futures and swaps. 
This provided a limited exemption for pre-existing positions that are 
in excess of the proposed position limits, provided that they were 
established in good-faith prior to the effective date of a position 
limit set by rule, regulation, or order. However, “[s]uch person would 
not be allowed to enter into new, additional contracts in the same 
direction but could take up offsetting positions and thus reduce their 
total combined net positions.” 281 Thus, the Commission would 
calculate a person’s pre-existing position for purposes of position 
limit compliance, but a person could not violate position limits based 
upon pre-existing positions alone.
—————————————————————————

    281 76 FR at 4752, 4763.
—————————————————————————

    The Commission also proposed a broader scope of the good-faith 
exemption for swaps entered before the effective date of the Dodd-Frank 
Act. Such swaps would not be subject to position limits, and the 
Commission would allow pre-effective date swaps to be netted with post-
effective date swaps for the purpose of complying with position limits.
    Finally, the Commission proposed to permit persons with risk-
management exemptions under current Commission regulation 1.47 to 
continue to manage the risk of their swap portfolio that exists at the 
time of implementation of the legacy limits, and no new swaps would be 
covered.
    The Working Group and BGA requested that the Commission grandfather 
any positions put on in good faith prior to the effective date of any 
final rule implementing position limits for Referenced Contracts.282 
CME and Blackrock urged that the Commission instead phase in position 
limits to minimize market disruption.283
—————————————————————————

    282 See CL-BGA supra note 35 at 20; and CL-WGCEF supra note 35 
at 20.
    283 CL-CME I supra note 8 at 19-20; CL-BlackRock supra note 21 
at 17; and CL-SIFMA AMG I supra note 21 at 16.
—————————————————————————

    Commenters addressing the pre-existing positions exemption in the 
context of index funds recommended that these funds be grandfathered in 
order that they may “roll” their futures positions after the 
effective date of any position limits rule.284 Absent such 
grandfather treatment, commenters such as SIFMA opined that funds and 
accounts could be prevented from implementing rollovers in the most 
advantageous manner, and could conceivably be put in the anomalous 
positions of having to liquidate positions to return funds to investors 
if pre-existing positions cannot be replaced as necessary to meet 
stated investment goals.” 285 CME also put forth that “[i]ndex fund 
managers who do not or cannot roll-over positions would also be 
deviating from disclosed-to-investors trading strategies.286
—————————————————————————

    284 See e.g., CL-CME I supra note 8 at 19-20; CL-SIFMA AMG I 
supra note 21 at 16; CL-BlackRock supra note 21 at 17; CL-MFA supra 
note 21 at 19. These commenters generally explained that these funds 
“typically replace or `roll over’ their contracts in a staggered 
manner, before they reach their spot months, in order to maintain 
position allocations in as stable a manner as possible and without 
causing price impact.”
    285 CL-SIFMA AMG I supra note 21 at 16.
    286 CL-CME I supra note 8 at 19-20; and CL-BlackRock supra 
note 21 at 17.
—————————————————————————

    With regard to the proposal to permit swap dealers to continue to 
manage the risk of a swap portfolio that exists at the time of 
implementation of the proposed regulations, CME requested that such 
relief be extended to swap dealers with swap portfolios in contracts 
that were not previously subject to position limits and therefore did 
not require exemptions.287
—————————————————————————

    287 CL-CME I supra note 8 at 19.
—————————————————————————

    The Commission is finalizing the scope of the pre-existing position 
and grandfather exemption as proposed, subject to modifications below, 
in final Sec.  151.9. The exemption for pre-existing positions 
implements the provisions of section 4a(b)(2) of the CEA, and is 
designed to phase in position limits without significant market 
disruption. In response to concerns over the scope of the pre-existing 
position exemption, the Commission clarifies that a person can rely on 
this exemption for futures, options and swaps entered in good faith 
prior to the effective date of the rules finalized herein for non-spot 
month-position limits.288 Such pre-existing futures, options and 
swaps transactions that are in excess of the proposed position limits 
would not cause the trader to be in violation based solely on those 
positions. To the extent a trader’s pre-existing futures, options or 
swaps positions would cause the trader to exceed the non-spot-month 
limit, the trader could not increase the directional position that 
caused the positions to exceed the limit until the trader reduces the 
positions to below the position limit.289 As such, persons who 
established a net position below the speculative limit prior to the 
enactment of a regulation would be permitted to acquire new positions, 
but the Commission would calculate the combined position of a person 
based on pre-existing positions with any new position.290
—————————————————————————

    288 Notwithstanding the pre-existing exemption in non-spot 
months, a person must comply with spot-month limits. Any spot-month 
limit that is initially set or reset under Final Sec.  151.4(a) will 
apply to all spot month periods. The Commission notes it will 
provide at least two months advance notice of changes to levels of 
such spot-month limits under Final Sec.  151.4(e).
    289 For example, if the position limit in a particular 
reference contract is 1,000 and a trader’s pre-existing position 
amounted to 1,005 long positions in a Referenced Contract, the 
trader would not be in violation of the position limit. However, the 
trader could not increase its long position with additional new long 
positions until its position decreased to below the position limit 
of 1,000. Once below the position limit of 1,000, this hypothetical 
trader would be subject to the position limit of 1,000.
    290 76 FR at 4763.
—————————————————————————

    Notwithstanding the combined calculation of pre-existing positions 
with new positions, the Commission is also retaining the broader 
exemption for swaps entered prior to the effective date of the Dodd-
Frank Act and prior to the initial implementation of position limits 
under final Sec.  151.4. The pre-effective date swaps would not be 
subject to the position limits adopted herein, and persons may, but 
need not, net swaps entered before the effective date of Dodd-Frank 
with swaps entered after the effective date.
    With regard to comments addressing index funds that “roll” their 
pre-existing positions, the Commission

[[Page 71656]]

notes that CEA section 4a(b)(2) only extends the exemption for pre-
existing positions that were entered “prior to the effective date of 
such rule, regulation, or order [establishing position limits].” Given 
this statutory stricture, index funds that “roll” their pre-existing 
positions after the effective date of a position limit rule do not fall 
within the scope of the pre-existing position exemption.291
—————————————————————————

    291 The Commission also notes that absent this limitation on 
pre-existing positions, any entity that rolls futures positions 
would in effect not be subject to position limits because the 
subsequent positions would be subject to exemption.
—————————————————————————

    With regard to persons with existing exemptions under Commission 
regulation 1.47 to manage the risk of their existing swap portfolio, 
the Commission is adopting this provision as proposed. Specifically, 
the Commission is adopting a limited exemption to provide for 
transition into these position limit rules for persons with existing 
Sec.  1.47 exemptions under final Sec.  151.9(d). This limited 
exemption is also designed to limit market disruptions as market 
participants transition to these position limit rules. However, the 
Commission will only apply this relief to market participants with 
existing Sec.  1.47 exemptions because the transitional nature of 
providing such relief dictates that the Commission should not extend a 
general exemption for persons to manage their existing swap book 
outside of Sec.  1.47 exemptions. Further, since the proposed non-spot 
month class limits are not being adopted, such a person may net 
positions across futures and swaps in a Referenced Contract. This 
largely mitigates the need for a risk management exemption.

J. Commodity Index or Commodity-Based Funds

    The definition of “Referenced Contract” in Sec.  151.1 expressly 
excludes commodity index contracts. A commodity index contract is 
defined as a contract, agreement, or transaction “that is not a basis 
or any type of spread contract, [and] based on an index comprised of 
prices of commodities that are not the same nor substantially the 
same.” Thus, by the terms of this provision, contracts with 
diversified commodity reference prices are excluded from the proposed 
position limit regime. As a result, single commodity index contracts 
fall within the scope of the proposal. Further, under amended section 
4a(a)(1) of the CEA, the Commission is empowered to establish position 
limits by “group or class of traders,” and new section 4a(a)(7) gives 
the Commission authority to provide exemptions from those position 
limits to any “person or class of persons.”
    A number of commenters argued that commodity index funds (“CIFs”) 
should be exempted from the final rulemaking for position limits.292 
DB Commodity Services argued that passive CIFs apply “zero net buying 
pressure across the commodity term structure.” 293 Gresham 
Investments argued that “unleveraged, solely exchange-traded, fully 
transparent, clearinghouse guaranteed” CIFs that pose “no systemic 
risk” should be treated differently than highly leveraged futures 
traders, who pose a continuing systemic risk to the commodity 
markets.294 Three commenters argued that CIFs increase market 
liquidity for bona fide hedgers.295 Finally, BlackRock also argued 
that there is no empirical evidence supporting a causal connection 
between CIFs and commodity price volatility.296 Senator Blanche 
Lincoln argued that position limits should not apply to diversified, 
unleveraged index funds because they provide “necessary liquidity to 
assist in price discovery and hedging for commercial users * * * [and] 
are an effective way [for] investors to diversify their portfolios and 
hedge against inflation.” 297 Further, Senator Lincoln opined that 
that the Commission should distinguish between “trading activity that 
is unleveraged or fully collateralized, solely exchange-traded, fully 
transparent, clearinghouse guaranteed, and poses no systemic risk and 
highly leveraged swaps trading in its implementation of position 
limits.” 298
—————————————————————————

    292 CL-BlackRock supra note 21 at 15; CL-DB supra note 153 at 
2-4; CL-PIMCO supra note 21 at 9; ETF Securities on March 28, 2011 
(“CL-ETF Securities”) at 3-4; and CL-SIFMA AMG I supra note 21 at 
13.
    293 CL-DBCS supra note 247 at 3.
    294 CL-Gresham supra note 153 at 2, 6-7.
    295 CL-BlackRock supra note 21 at 15; CL-PIMCO supra note 21 
at 10 (citing Sen. Lincoln’s remarks on index funds); and CL-DBCS 
supra note 247 at 3-4.
    296 CL-BlackRock supra note 21 at 15.
    297 See Senator Lincoln (“Sen. Lincoln”) on Dec. 16, 2010 
(“CL-Sen. Lincoln”) at 1-2 (“I urge the CFTC not to unnecessarily 
disadvantage market participants that invest in diversified and 
unleveraged commodity indices.”)
    298 Id.
—————————————————————————

    Commenters also submitted studies regarding index traders. In 
particular, several studies conducted by two agricultural economists 
were highlighted by commenters. The authors of the studies contended 
that there is no evidence that the influx of index fund trading unduly 
influences prices.299 Commenters also cited the Commission’s 2008 
Staff Report on Commodity Index Traders and Swap Dealers, in which 
Commission staff provided an overview for the public regarding the 
participation of these types of traders in commodity derivatives 
markets.300
—————————————————————————

    299 Irwin, Scott and Dwight Sanders “The Impact of Index and 
Swap Funds on Commodity Futures Markets”, OECD Food, Agriculture, 
and Fisheries Working Papers, (2010); Sanders, Dwight and Scott 
Irwin “A Speculative Bubble in Commodity Futures Prices? Cross-
Sectional Evidence”, Agricultural Economics, (2010); Sanders, 
Dwight, Scott Irwin, and Robert Merrin “The Adequacy of Speculation 
in Agricultural Futures Markets: Too Much of a Good Thing?” 
University of Illinois at Urbana-Champaign, (2008).
    300 U.S. Commodity Futures Trading Commission “Staff Report 
on Commodity Swap Dealers and Index Traders with Commission 
Recommendations” (2008). While the majority of the report is broad 
in scope and serves as a guide to the special calls issued to swap 
dealers and index traders by the Commission, there is a discussion 
of the impact of these types of participants (generally considered 
to be speculators in most markets). Specifically, the report looks 
at the vast increase in notional value of NYMEX crude oil futures 
contracts in relationship to the vast increase in commodity index 
investment from December 2007 to June 2008. Staff concluded that the 
increase in notional value is due to the appreciation of existing 
positions, and not the influx of new money into the market, citing 
the observation that the actual number of futures-equivalent 
contracts declined over the same period.
—————————————————————————

    Other commenters, however, asserted that CIFs should be subject to 
special, more restrictive position limits.301 Some of these 
commenters argued that the presence of CIFs upsets the price discovery 
function of the market because investors buy interests in CIFs without 
regard to the market fundamentals price.302 The Air Transport 
Association of America recommended that the Commission undertake a 
study to analyze and determine the effect of such passive, long-only 
traders on the price discovery function of the markets.303
—————————————————————————

    301 CL-ABA supra note 150 at 4; CL-ATAA supra note 94 at 15; 
CL-ATA supra note 81 at 4,5; CL-PMAA/NEFI supra note 6 at 12-14; CL-
ICPO supra note 20 at 1; CL-Better Markets supra note 37 at 71 
(“limiting commodity index funds to 10 percent of total market open 
interest would likely have significant beneficial effects [on 
excessive speculation]”); and International Pizza Hut Franchise 
Holders Association (IPHFHA”) on March 24, 2011 (“CL-IPHFHA”) at 
1. There were 6,074 form comment letters that urged the Commission 
to adopt “lower speculative position limits for passive, long-only 
traders.”
    302 CL-PMAA/NEFI supra note 6 at 12-13; CL-Delta supra note 20 
at 7-8; CL-Better Markets supra note 37 at 35-36; and Industrial 
Energy Consumer of America (“IECA”) on March 28, 2011 (“CL-
IECA”) at 2.
    303 CL-ATAA supra note 94 at 15.
—————————————————————————

    Some studies opined that the recent influx of CIF trading has 
caused an increase in prices that is not explained by market 
fundamentals alone.304 For

[[Page 71657]]

example, one study argued that index speculators have been at least 
partially responsible for the tripling of commodity futures prices over 
the last five years.305
—————————————————————————

    304 Tang, Ke and Wei Xiong “Index Investing and the 
Financialization of Commodities”, Working Paper, Department of 
Economics, Princeton University, (2010).; Mou, EthanY. “Limits to 
Arbitrage and Commodity Index Investment: Front-Running the Goldman 
Roll”, Working Paper, Columbia University, (2010).; Gilbert, 
Christopher L. “Speculative Influences on Commodity Futures Prices, 
2006-2008”, Working Paper, Department of Economics, University of 
Trento, Italy, (2009).; Gilbert, Christopher L. “How to Understand 
High Food Prices”, Journal of Agricultural Economics, 61(2): 398-
425. (2010).
    305 Masters, Michael and Adam White “The Accidental Hunt 
Brothers: How Institutional Investors are Driving up Food and Energy 
Prices”, White Paper, (2008). “As hundreds of billions of dollars 
have poured into the relatively small commodities futures markets, 
prices have risen dramatically. Index Speculators working through 
swaps dealers have been the single biggest source of new speculative 
money. This has driven prices far beyond the levels that supply and 
demand would indicate, and has done tremendous damage to our economy 
as a result.”
—————————————————————————

    Regardless of whether a CIF is non-diversified or diversified, the 
Commission did not propose to impose different position limits on CIFs 
or to exempt CIFs from position limits. In addition to considering 
comments regarding the role of CIFs in commodity derivatives markets, 
the Commission has reviewed and evaluated studies cited by commenters 
presenting conflicting views on the effect of certain groups of index 
traders.306 Historically, the Commission has applied position limits 
to individual traders rather than a group or class of traders, and does 
not have a similar level of experience with respect to group or class 
limits as it has with position limits for individual traders. 
Therefore, the Commission believes more analysis is required before the 
Commission would impose a separate position limit regime, or establish 
an exemption, for a group or class of traders, including CIFs.307 The 
Commission welcomes further submissions of studies to assist in 
subsequent rulemakings on the treatment of various groups or classes of 
speculative traders.
—————————————————————————

    306 In addition, the Commission has reviewed all other studies 
submitted by commenters; a detailed description can be found in 
Section III of this release.
    307 In this regard, the lack of consensus in the studies 
submitted demonstrates the need for additional analysis.
—————————————————————————

K. Exchange Traded Funds

    CME commented that the Commission should coordinate its position 
limit policy with the Securities and Exchange Commission (“SEC”) in 
order to avoid encouraging market participants to replace their 
commodity derivatives exposures with physical commodity exchange-traded 
fund (“ETF”) exposures.308 As previously stated, the Commission 
believes that the final rules will ensure sufficient market liquidity 
for bona fide hedgers in accordance with CEA section 4a(a)(3)(B)(iii). 
With respect to the potential increase in ETF exposures, the Commission 
notes that such products are not within the scope of this rulemaking.
—————————————————————————

    308 CL-CME I supra note 8 at 20.
—————————————————————————

L. Position Visibility

    The Proposed Rule established an enhanced reporting regime for 
traders who hold or control positions in certain energy and metal 
Referenced Contracts above a specified number of net long or net short 
positions.309 These “position visibility levels” are set below the 
proposed non-spot-month position limit levels. A trader’s positions in 
all-months-combined for listed Referenced Contracts would be aggregated 
under the Proposed Rule, including bona fide hedge positions. Once a 
trader crosses a proposed position visibility level, the trader would 
have to file monthly reports with the Commission that generally capture 
the trader’s physical and derivatives portfolio in the same commodity 
and substantially same commodity as that underlying the Referenced 
Contract.310
—————————————————————————

    309 See Proposed Rule 151.6. The position visibility levels 
did not apply to agricultural commodity contracts.
    310 While the proposed position visibility regime would only 
trigger reporting requirements, the preamble did note that trading 
at or near such levels was “in no way intended to imply that 
positions at or near such levels cannot constitute excessive 
speculation or be used to manipulate prices or for other wrongful 
purposes.” See Proposed Rule at 4759.
—————————————————————————

    The general purpose behind the position visibility levels was to 
enhance the Commission’s surveillance functions to better understand 
the largest traders for energy and metal Referenced Contracts, and to 
better enable the Commission to set and adjust subsequent position 
limits, as appropriate.311
—————————————————————————

    311 75 FR 4752, 4761-62, Jan. 26, 2011.
—————————————————————————

    Commenters were divided on the utility of position visibility 
levels. A number of commenters supported the proposed visibility 
levels, with some urging the Commission to expand their application to 
agricultural contracts.312 Many of the supportive commenters stated 
that the Commission should extend the position visibility regime to 
agricultural Referenced Contracts.313 At least one commenter 
specifically requested that the Commission expand the position 
visibility levels to metal-based ETFs as well as contracts traded on 
the London Metals Exchange as a method to deter excessive speculation 
and manipulation.314
—————————————————————————

    312 See e.g., CL-Prof. Greenberger supra note 6 at 18; CL-AFR 
supra note 17 at 8; and CL-AIMA supra note 35 at 4.
    313 See e.g., CL-FWW supra note 81 at 15.
    314 See e.g., Vandenberg & Feliu LLP (“Vandenberg”) on March 
28, 2011 (“CL-Vandenberg”) at 2-3.
—————————————————————————

    Several commenters stated that the enhanced reporting requirements 
would be onerous to implement along with other Dodd-Frank Act 
requirements with little benefit to combating excessive 
speculation.315 Certain commenters also asserted that the reporting 
requirements would disproportionately impact bona fide hedgers because 
such entities would have to produce reports surrounding their hedging 
activity whereas a speculative trader would not have to produce similar 
reports.316 One commenter pointed out that the Commission could 
instead utilize its special call authority under Sec.  18.05 to receive 
data similar to the data to be reported in the position visibility 
regime.317 One commenter argued that the reporting frequency should 
be semi-annual as opposed to monthly because the Commission would not 
need to analyze this additional data on a monthly basis.318 Another 
commenter assumed that the reporting requirements would be daily and 
therefore requested the Commission alter the requirement to 
monthly.319 Some commenters opined that the scope of the position 
visibility reports was vague because it required reporting of uncleared 
swap positions in substantially the same commodity.320
—————————————————————————

    315 See e.g., CL-BGA supra note 35 at 20-21; CL-FIA I supra 
note 21 at 13; CL-EEI/EPSA supra note 21 at 6 (EEI alternatively 
argued that the Commission should raise the threshold levels for 
certain contracts if the Commission retained the visibility regime); 
CL-MFA supra note 21 at 3; CL-Utility Group supra note 21 at 13-14; 
CL-NREC/AAPP/ALLPC supra note 266 at 12; CL-USCF supra note 153 at 
11; and CL-WGCEF supra note 35 at 23. Some commenters expressed 
concern that the Commission would not have sufficient resources to 
review the data, and therefore the cost of compliance would not 
produce a benefit. See e.g., CL-MFA supra note 21 at 3.
    316 See e.g., CL-EEI/EPSA supra note 21 at 6; and CL-WGCEF 
supra note 35 at 23.
    317 See e.g., CL-BGA supra note 35 at 20-21.
    318 See e.g., CL-USCF supra note 153 at 11.
    319 See e.g., CL-NGFA supra note 72 at 5.
    320 See e.g., CL-AGA supra note 124 at 12.
—————————————————————————

    Commenters also argued that the Commission should alter the 
position visibility levels to a position accountability regime similar 
to the rules on DCMs. However, among the commenters who supported 
converting position visibility levels to position accountability 
levels, there were two distinct approaches. Some commenters wanted the 
Commission to implement position accountability levels as an interim 
measure until the Commission

[[Page 71658]]

could fully implement hard position limits outside of the spot-
month.321 The second group requested that the Commission eliminate 
visibility levels and position limits, and in their place implement 
position accountability levels.322
—————————————————————————

    321 See e.g., CL-PMAA/NEFI supra note 6 at 15; CL-ATAA supra 
note 94 at 5, 16; CL-APGA supra note 17 at 8-9; and CL-Delta supra 
note 20 at 11.
    322 See e.g., CL-BlackRock supra note 21 at 18-19; and CL-CME 
I supra note 8 at 6. See also, CL-FIA I supra note 21 at 13; and CL-
EEI/EPSA supra note 21 at 10.
—————————————————————————

    The Commission is adopting the position visibility proposal with 
certain modifications in response to comments. The Commission continues 
to believe that position visibility levels represent an important 
surveillance tool in the metal and energy Referenced Contracts because 
the Commission does not anticipate that the number of traders with 
positions in excess of the limits for metal and energy Referenced 
Contracts will constitute a significant segment of the market. As such, 
the Commission would not receive a large number of bona fide hedging 
reports and other data for many traders in excess of the position 
limit, and the position visibility levels would improve the 
Commission’s ability to monitor the positions of the largest traders in 
the markets. In this regard, the Commission anticipates that more 
traders in the agricultural Referenced Contracts will be above the 
anticipated position limits, and therefore, the Commission does not 
currently anticipate a similar need to apply the position visibility 
levels to agricultural Referenced Contracts.
    To accommodate compliance cost concerns raised by some commenters 
the position visibility level will be raised to approximately 50 
percent of the projected aggregate position limit (based on current 
futures and swaps open interest data), with the exception of NYMEX 
Light Sweet Crude Oil (CL) and NYMEX Henry Hub Natural Gas (NG) 
Referenced Contracts where the levels have been set lower to 
approximate the point where ten traders, on an annual basis, would be 
subject to position visibility reporting requirements. The Commission 
believes that this increase is appropriate in order to reduce the 
number of traders burdened by the associated reporting obligations. In 
addition, under Sec.  151.6(b)(2)(ii), the Commission will require 
position visibility reports to include uncleared swaps in Referenced 
Contracts, but will not require reporting of swaps in substantially the 
same commodity.323 The position visibility rule will become effective 
on the date that new Federal spot month limits become effective. 
Additionally, the Commission has eliminated the requirement to submit 
404A filings under Sec.  151.6 in order to further reduce the 
compliance burden for firms reporting under that provision. The 
Commission believes it will receive sufficient information on the cash 
market activity for general surveillance purposes through 404 filings 
under Sec.  151.6(c).324
—————————————————————————

    323 Proposed Sec.  151.6(c) required reporting of uncleared 
swaps in substantially the same commodity.
    324 The Commission has also amended Sec.  151.6(b)(1) to 
require the reporting of the dates, instead of the total number of 
days, that a trader held a position exceeding visibility levels.
—————————————————————————

    The Commission has eliminated the separate 402S filing and will 
gather information on uncleared swaps through the revised 401 filing. 
The revised 401 filing will provide information for general 
surveillance purposes in light of the data management issues discussed 
in II.C. of this release.
    The Commission has also reduced the required frequency of reporting 
on the 401 and 404 filings. The Commission may request more specific 
data, either in terms of data granularity (e.g., a break-out of data 
based on expirations) or with respect to a trader’s position on a 
specific date or dates under its existing authority under Commission 
regulations 18.05 and 20.6. The Commission clarifies that 401 and 404 
filings required under Sec.  151.6 are to reflect the reporting 
person’s relevant positions as of the first business Tuesday of a 
calendar quarter and on the date on which the person held the largest 
net position in excess of the level in all months. The Commission would 
require such a filing to be made within ten business days of the last 
day of the quarter in which the trader held a position exceeding 
position visibility levels.

M. International Regulatory Arbitrage

    Section 4a(a)(2)(C) of the CEA, as amended by section 737 of the 
Dodd-Frank Act, requires the Commission to “strive to ensure that 
trading on foreign boards of trade in the same commodity will be 
subject to comparable limits and that any limits to be imposed by the 
Commission will not cause price discovery in the commodity to shift to 
trading on the foreign boards of trade.” The Commission received 
several comments expressing concerns regarding the regulatory arbitrage 
opportunities that might arise as a result of the imposition of 
position limits.325
—————————————————————————

    325 See e.g., CL-BlackRock supra note 21 at 18 (“The 
variability of position limits from year to year also will create 
uncertainty for market participants as to what limits will apply to 
their long-term trading strategies, causing some participants to 
shift their commodity-risk positions to markets with no limits at 
all or possibly even fixed limits.”); and CL-ISDA/SIFMA supra note 
21 at 24-25 (“* * * we believe that the Proposed Rules will likely 
result in market participants, especially those that operate outside 
the U.S., shifting their trading activity to non- U.S. markets.”).
—————————————————————————

    The U.S. Chamber of Commerce stated that “hasty and ill-conceived 
limits on the U.S. derivatives markets will undoubtedly lead to a 
significant migration of market participants to less-regulated overseas 
markets.” 326 Similarly, ISDA/SIFMA stated that a permanent position 
limit regime should be postponed until the Commission has fully 
consulted with its counterparts around the globe about harmonizing 
limits and phasing them in simultaneously, so as to ensure that 
position limits imposed on U.S. markets do not shift business 
offshore.327 Accordingly, ISDA/SIFMA strongly urged “the CFTC to 
work with foreign regulators to ensure that foreign commodity market 
participants are subject to position limits that are comparable to 
those imposed on U.S. market participants.” 328 Michael Greenberger, 
on the other hand, opined that the proposed position limits would 
result in minimal international regulatory arbitrage because (i) The 
Commission has extraterritorial jurisdiction reach under Dodd-Frank Act 
section 722, (ii) many swap dealers would be required to register under 
the Dodd-Frank Act thereby ensuring that the Commission would have 
jurisdiction over them, (iii) other authorities are working to 
harmonize their rules and have expressed a hostility to the 
financialization of commodity markets, and (iv) many other authorities 
have shown a willingness to impose additional requirements on 
expatriate U.S. banks.329
—————————————————————————

    326 CL-USCOC supra note 246 at 4.
    327 CL-ISDA/SIFMA supra note 21 at 24-25 (“* * * we believe 
that the Proposed Rules will likely result in market participants, 
especially those that operate outside the U.S., shifting their 
trading activity to non-U.S. markets.”)
    328 Id.
    329 CL-Prof. Greenberger supra note 6 at 20.
—————————————————————————

    The Commission agrees that it should seek to avoid regulatory 
arbitrage and participate in efforts to raise regulatory standards 
internationally. The Commission has worked to achieve that general goal 
through its participation in the International Organization of 
Securities Commissions (“IOSCO”).

[[Page 71659]]

Most recently, the Commission assisted in the development of an 
international consensus on principles for the regulation and 
supervision of commodity derivatives markets, which included a 
requirement that market authorities should have the authority, among 
other things, to establish ex-ante position limits, at least in the 
delivery month.330 The Commission intends, through its activities 
within IOSCO, to seek further elaboration on the degree to which 
commodity derivatives market authorities implement those principles, 
including the extent to which position limits are been imposed.
—————————————————————————

    330 See Principles for the Regulation and Supervision of 
Commodity Derivatives Markets, IOSCO Technical Committee (2011).
—————————————————————————

    The Commission rejects the view, however, that section 4a(a)(2)(C) 
of the CEA prohibits Commission rulemaking unless and until there is 
uniformity in position limit policies in the United States and other 
major market jurisdictions. Such a view would subordinate the explicit 
statutory directive to impose position limits as a means to address 
excessive speculation in U.S. derivatives markets to a potentially 
lengthy period of policy negotiations with foreign regulators.
    The Commission also rejects the view suggested in some of the 
comment letters that it is a foregone conclusion that the mere 
existence of differences in position limit policies will inevitably 
drive trading abroad. The Commission’s prior experience in determining 
the competitive effects of regulatory policies reveals that it is 
difficult to attribute changes in the competitive position of U.S. 
exchanges to any one factor. For example, prior concerns with regard to 
the competitive effect on U.S. contract markets of alleged lighter 
regulation abroad led the CFTC to study those concerns both in 1994, 
pursuant to a congressional directive,331 and again in 1999.332 In 
both cases, the Commission’s staff reports concluded that differences 
in regulatory regimes between various countries did not appear to have 
been a significant factor in the competitive position of the world’s 
leading exchanges.333
—————————————————————————

    331 The Futures Trading Practices Act of 1992 (“FTPA”) 
required the CFTC to study the competitiveness of boards of trade 
over which it has jurisdiction compared with the boards of trade 
over which “foreign futures authorities” have jurisdiction. The 
Commission submitted its report on this issue, “A Study of the 
Global Competitiveness of U. S. Futures Markets” (“1994 Study”), 
to the Senate and House agriculture committees in April 1994.
    332 The Global Competitiveness of U.S. Futures Markets 
Revisited, CFTC Division of Economic Analysis (November 1999) http://www.cftc.gov/dea/compete/deaglobal_competitiveness.htm.
    333 CFTC press release 4333-99F (November 4, 1999) 
http://www.cftc.gov/opa/press99/opa4333-99.htm Among other things, 
the 1999 report concluded that the U.S. share of total worldwide 
futures and option trading activity appears to be stabilizing as the 
larger foreign markets have matured. As in 1994, the most actively 
traded foreign products tend to fill local or regional risk 
management needs and few products offered by foreign exchanges 
directly duplicate products offered by U.S. markets; and the 
increased competition among mature segments of the global futures 
industry, particularly in Europe, may reflect industry restructuring 
and the introduction of new technologies, particularly electronic 
trading.
—————————————————————————

    Nonetheless, the Commission takes seriously the need to avoid 
disadvantaging U.S. futures exchanges and will monitor for any 
indication that trading is migrating away from the United States 
following the establishment of the position limit structure set forth 
in this rulemaking.334
—————————————————————————

    334 As discussed above in II.E., section 719(a) of the Dodd-
Frank Act directs the Commission to study the “effects (if any) of 
the positions limits imposed pursuant to [section 4a] on excessive 
speculation and on the movement of transactions” from DCMs to 
foreign venues and to submit a report on these effects to Congress 
within 12 months after the imposition of position limits. This study 
will be conducted in consultation with DCMs. See Dodd-Frank Act, 
supra note 1, section 719(a).
—————————————————————————

N. Designated Contract Market and Swap Execution Facility Position 
Limits and Accountability Levels

    For contracts subject to Federal position limits imposed under 
section 4a(a) of the CEA, sections 5(d)(5)(B) and 5h(f)(6)(B) require 
DCMs and SEFs that are trading facilities,335 respectively, to set 
and enforce speculative position limits at a level no higher than those 
established by the Commission. Section 4a(a)(2) of the CEA, in turn, 
directs the Commission to set position limits on “physical commodities 
other than excluded commodities.” Section 5(d)(5)(A) of the CEA 
requires that DCMs set, “as is necessary and appropriate, position 
limitations or position accountability for speculators” for each 
contract executed pursuant to their rules. A similar duty is imposed on 
SEFs that are trading facilities under section 5h(f)(6)(A) of the CEA.
—————————————————————————

    335 All references to “SEFs” below are to SEFs that are 
trading facilities.
—————————————————————————

1. Required DCM and SEF Position Limits for Referenced Contracts
    Proposed Sec.  151.11(a) would have required DCMs and SEFs to set 
spot month, single month, and all-months position limits for all 
commodities, with exceptions for securities futures and some excluded 
commodities. Under proposed Sec.  151.11(a)(1), DCMs and SEFs would be 
required to set additional, DCM or SEF spot-month and non-spot-month 
position limits for Referenced Contracts at a level no higher than the 
Federal position limits established pursuant to proposed Sec.  151.4. 
For other contracts (including other physical commodity contracts), 
under proposed Sec.  151.11(a)(2), DCMs and SEFs would be required to 
set position limits utilizing the Commission’s historic approach to 
position limits.
    Shell requested that if the Commission adopts Federal spot month 
limits, exchange-based position limits should be eliminated because 
these limits will be redundant, at best, and may cause unintended 
apportionment of trading across exchanges, at worst.336 Several other 
commenters opined that the Commission should require exchanges to set 
spot month limits and to refrain from setting Federal position 
limits.337
—————————————————————————

    336 CL-Shell supra note 35 at 5-6.
    337 See e.g., CL-ICE I supra note 69 at 6-8 (Cash-settled 
contract limits should apply to each exchange-traded contract 
separately and there should not be an aggregate spot-month limit.); 
CL-DB supra note 153 at 9-10; and CL-Centaurus supra note 21 at 4.
—————————————————————————

    The Commission has determined, consistent with the statute and the 
proposal, to require the establishment of position limits by DCMs and 
SEFs for Referenced Contracts.338 As discussed above under II.A, the 
Commission has been directed under section 4a(a)(2) of the CEA to 
establish position limits on physical commodity DCM futures and options 
contracts and has been granted discretion to determine the specific 
levels. The Commission has exercised this discretion by imposing 
federally-administered position limits under Sec.  151.4 for 28 
“Referenced Contract” physical commodity derivatives markets and 
under Sec.  151.11 by directing DCMs and SEFs to establish 
methodologically similar position limits for Referenced Contracts.339 
While DCM or SEF limits are not administered by the Commission, the 
Commission may nonetheless enforce trader compliance with such limits 
as violations of the Act.340 The Commission did not propose 
federally-administered position limits over other physical commodity

[[Page 71660]]

contracts and intends to do so as practicable in the future. In the 
interim, the Commission will rigorously enforce DCM and SEF compliance 
with Core Principles 5 and 6.
—————————————————————————

    338 As discussed below in II.M.3, the Commission has 
recognized an arbitrage exemption for registered entity limits for 
all but physical-delivery contracts in the spot month. This is 
consistent with the Commission’s approach on non-spot month class 
limits as it ensures that registered entity limits do not create a 
marginal incentive to establish a position in a class of otherwise 
economically equivalent contracts outside of the spot month.
    339 The Commission notes that under Core Principle 1 for DCMs 
and SEFs, the Commission may “by rule or regulation” prescribe 
standards for compliance with Core Principles. Sections 5(d)(1)(B) 
and 5h(f)(1)(B) of the CEA, 7 U.S.C. 7(d)(1)(B), 7b-3(f)(1)(B).
    340 See section 4a(e) of the CEA, 7 U.S.C. 6a(e).
—————————————————————————

    The Commission notes that section 4a(a)(2) of the CEA requires the 
Commission to establish speculative position limits on physical 
commodity DCM contracts. This requirement does not extend to SEF 
contracts. The Commission has determined that SEF limits for physical 
commodity contracts are “necessary and appropriate” because the 
policy purposes effectuated by establishing such limits on DCM 
contracts are equally present in SEF markets.341 The Commission notes 
that the Proposed Rules would have required SEFs to establish limits 
for all physical commodity derivatives under proposed Sec.  
151.11(a).342 Accordingly, the Commission has determined to establish 
essentially identical standards for establishing position limits (and 
accountability levels) for DCMs and SEFs.
—————————————————————————

    341 See Core Principle 6 for SEFs, section 5h(f)(6)(A) of the 
CEA, 7 U.S.C. 7b-3(f)(6)(A).
    342 The Commission further notes that it did not receive any 
comments on this specific proposed requirement for SEFs.
—————————————————————————

    Under Sec.  151.11(a), the Commission requires DCMs and SEFs to 
establish spot-month limits for Referenced Contracts at levels no 
greater than 25 percent of estimated deliverable supply for the 
underlying commodity and no greater than the limits established under 
Sec.  151.4(a)(1).
    The requirement in proposed Sec.  151.11(a)(2) for position limits 
for contracts at designation has been modified in Sec.  151.11(b)(3) in 
three important ways. First, consistent with the congressional mandate 
to establish position limits on all DCM physical commodity contracts, 
the Commission is requiring that DCMs (and SEFs by extension) 343 
establish position limits for all physical commodity contracts. Second, 
the Commission has clarified this provision to apply to new contracts 
offered by DCMs and SEFs. The Commission has further clarified that it 
will be an acceptable practice that the notional quantity of the 
contract subject to such limits corresponds to a notional quantity per 
contract that is no larger than a typical cash market transaction in 
the underlying commodity. For example, if a DCM or SEF offers a new 
physical commodity contract and sets the notional quantity per contract 
at 100,000 units while most transactions in the cash market for that 
commodity are for a quantity of between 1,000 and 10,000 units and 
exactly zero percent of cash market transactions are for 100,000 units 
or greater, then the notional quantity of the derivatives contract 
offered by the DCM or SEF would be atypical. This clarification is 
intended to deter DCMs and SEFs from setting non-spot-month position 
limits for new contracts at levels where they would constitute non-
binding constraints on speculation through the use of an excessively 
large notional quantity per contract. This clarification is not 
expected to result in additional marginal cost because, among other 
things, it reflects current Commission custom in reviewing new 
contracts and is an acceptable practice for Core Principle compliance 
and not a requirement per se for DCMs or SEFs.
—————————————————————————

    343 As discussed above, the Commission has determined that SEF 
limits for physical commodity contracts are “necessary and 
appropriate” in order to effectuate the policy purposes underlying 
limits on DCM contracts.
—————————————————————————

    Finally, the Commission in the preamble to the Proposed Rule 
indicated that a DCM or SEF could elect to establish position 
accountability levels in lieu of position limits if the open interest 
in a contract was less than 5,000 contracts.344 The Commission did 
not, however, provide for this in the Proposed Rule’s text. One 
commenter specifically supported the position taken by the Commission 
in the Proposed Rule’s preamble because it recognized that position 
accountability may be more appropriate for certain contracts with lower 
levels of open interest.345
—————————————————————————

    344 76 FR at 4752, 4763.
    345 CL-AIMA supra note 35 at 6.
—————————————————————————

    The Commission clarifies that it is not adopting the preamble 
discussion for low open interest contracts. Rather, final Sec.  
151.11(b)(3) provides that it shall be an acceptable practice to 
provide for speculative limits for an individual single-month or in 
all-months-combined at no greater than 1,000 contracts for non-energy 
physical commodities and at no greater than 5,000 contracts for other 
commodities.346
—————————————————————————

    346 Proposed Sec.  151.11(a)(2) and Final Sec.  151.11(b)(3).
—————————————————————————

2. DCM and SEF Accountability Levels for Non-Referenced and Excluded 
Commodities
    Under proposed Sec.  151.11(c), consistent with current DCM 
practice, DCMs and SEFs have the discretion to establish position 
accountability levels in lieu of position limits for excluded 
commodities.347 DCMs and SEFs could impose position accountability 
rules in lieu of position limits only if the contract involves either a 
major currency or certain excluded commodities (such as measures of 
inflation) or an excluded commodity that: (1) Has an average daily open 
interest of 50,000 or more contracts, (2) has an average daily trading 
volume of 100,000 or more contracts, and (3) has a highly liquid cash 
market.
—————————————————————————

    347 See Section 1a(19) of the Act, 7 U.S.C. 1a(19).
—————————————————————————

    Under final Sec.  151.11(c)(1), the Commission provides that the 
establishment of position accountability rules are an acceptable 
alternative to position limits outside of the spot month for physical 
commodity contracts when a contract has an average month-end open 
interest of 50,000 contracts and an average daily volume of 5,000 
contracts and a liquid cash market, consistent with current acceptable 
practices for tangible commodity contracts. With respect to excluded 
commodities, consistent with the current DCM practice, DCMs and SEFs 
may provide for exemptions from their position limits for “bona fide 
hedging.” The term “bona fide hedging,” as used with respect to 
excluded commodities, would be defined in accordance with amended Sec.  
1.3(z).348 Additionally, consistent with the current DCM practice, 
DCMs and SEFs could continue to provide exemptions for “risk-
reducing” and “risk-management” transactions or positions consistent 
with existing Commission guidelines.349 Finally, though the 
Commission is removing the procedure to apply to the Commission for 
bona fide hedge exemptions for non-enumerated transactions or positions 
under Sec.  1.3(z)(3), the Commission will continue to recognize prior 
Commission determinations under that section, and DCMs and SEFs could 
recognize non-enumerated hedge transactions subject to Commission 
review.
—————————————————————————

    348 See Sec.  151.11(d)(1)(ii) of these proposed regulations. 
As explained in section G of this release, the definition of bona 
fide hedge transaction or position contained in Sec.  4a(c)(2) of 
the Act, 7 U.S.C. 6a(c)(2), does not, by its terms, apply to 
excluded commodities.
    349 See Clarification of Certain Aspects of Hedging 
Definition, 52 FR 27195, Jul. 20, 1987; and Risk Management 
Exemptions From Speculative Position Limits Approved under 
Commission regulation 1.61, 52 FR 34633, Sept. 14, 1987.
—————————————————————————

3. DCM and SEF Hedge Exemptions and Aggregation Rules
    Final Sec. Sec.  151.11(e) and 151.11(f)(1)(i) require DCMs and 
SEFs to follow the same account aggregation and bona fide exemption 
standards set forth by Sec. Sec.  151.5 and 151.7 with respect to 
exempt and agricultural commodities (collectively “physical” 
commodities). Section 151.11(f)(2) requires traders seeking a hedge 
exemption to “comply with the procedures of the designated

[[Page 71661]]

contract market or swap execution facility for granting exemptions from 
its speculative position limit rules.”
    MGEX commented on the role of DCMs and SEFs in administering bona 
fide hedge exemptions. MGEX noted that while Sec.  151.5 contemplated a 
Commission-administered bona fide hedging regime, proposed Sec.  
151.11(e)(2) would require persons seeking to establish eligibility for 
an exemption to comply with the DCM’s or SEF’s procedures for granting 
exemptions. MGEX recommended that the Commission be the primary entity 
for administering bona fide hedge exemptions and that when necessary 
that information be shared with the necessary DCMs and SEFs.
    With respect to a DCM’s or SEF’s duty to administer hedge 
exemptions, the Commission intended that DCMs and SEFs administer their 
own position limits under Sec.  151.11. Accordingly, under its 
rulemaking, the Commission is requiring that DCMs and SEFs create rules 
and procedures to allow traders to claim a bona fide hedge exemption, 
consistent with Sec.  151.5 for physical commodity derivatives and 
Sec.  1.3(z) for excluded commodities. Section 151.11 contemplates that 
DCMs and SEFs would administer their own bona fide hedge exemption 
regime in parallel to the Commission’s regime. Traders with a hedge 
position in a Referenced Contract subject to DCM or SEF limits will not 
be precluded from filing the same bona fide hedging documentation, 
provided that the hedge position would meet the criteria of Commission 
regulation 151.5 for both the purposes of Federal and DCM or SEF 
position limits.
    Section 4a(a) of the CEA provides the Commission with authority to 
exempt from the position limits or to impose different limits on 
spread, straddle, or arbitrage trades. Current Sec.  150.4(a)(3) 
recognizes these exemptions in the context of the single contract 
position limits set forth under Sec.  150.2. MFA opined that the 
Commission should restore the arbitrage exemptions because they are 
central to managing risk and maintaining balanced portfolios.350
—————————————————————————

    350 CL-MFA supra note 21 at 18.
—————————————————————————

    The Commission has determined to re-introduce a version of this 
exemption in the final rulemaking in response to commenters that opined 
directly on this issue 351 as well as those that argued against the 
imposition of the proposed class limits, as discussed above in II.D.5. 
The Commission has therefore introduced an arbitrage exemption for DCM 
or SEF limits under Sec.  151.11(g)(2) that allows traders to claim as 
an offset to their positions on a DCM or SEF positions in the same 
Referenced Contracts or in an economically equivalent futures or swap 
position.352 This arbitrage exemption does not, however, apply to 
physical-delivery contracts in the spot month. The Commission has 
reintroduced this exemption, available to those traders that 
demonstrate compliance with a DCM or SEF speculative limit through 
offsetting trades on different venues or through OTC swaps in 
economically equivalent contracts.
—————————————————————————

    351 See the discussion of non-spot month class limits under 
II.D.5 and II.F.1 supra discussing comments expressing concern that 
arbitrage exemptions were not recognized in the proposal. See e.g., 
CL-ISDA/SIFMA supra note 21 at 11; and CL-MFA supra note 21 at 18. 
See also, CL-Shell supra note 35 at 5-6.
    352 See section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).
—————————————————————————

4. DCM and SEF Position Limits and Accountability Rules Effective Date
    Section 151.11(i) provides that generally the effective date for 
the position limits or accountability levels described in Sec.  151.11 
shall be made effective sixty days after the term “swap” is further 
defined. The Commission has set this effective date to coincide with 
the effective date of the spot-month limits established under Sec.  
151.4. The one exception to this general rule is with respect to the 
acceptable guidance for DCMs and SEFs in establishing position limits 
or accountability rules for non-legacy Referenced Contracts executed 
pursuant to their rules prior to the implementation of Federal non-
spot-month limits on such Referenced Contracts. Under Sec.  151.11(j), 
the acceptable practice for these contracts during this transition 
phase will be either to retain existing non-spot-month position limits 
or accountability rules or to establish non-spot-month position limits 
pursuant to the acceptable practice described in Sec.  151.11(b)(2) 
(i.e., to impose limits based on ten percent of the average combined 
futures and delta-adjusted option month-end open interest for the most 
recent two calendar years up to 25,000 contracts with a marginal 
increase of 2.5 percent thereafter) based on open interest in the 
contract and economically equivalent contracts traded on the same DCM 
or SEF.

O. Delegation

    Proposed Sec.  151.12 would have delegated certain of the 
Commission’s proposed part 151 authority to the Director of the 
Division of Market Oversight and to other employee or employees as 
designated by the Director. The delegated authority would extend to: 
(1) Determining open interest levels for the purpose of setting non-
spot-month position limits; (2) granting an exemption relating to bona 
fide hedging transactions; and (3) providing instructions, determining 
the format, coding structure, and electronic data transmission 
procedures for submitting data records and any other information 
required under proposed part 151. The purpose of this delegation 
provision was to facilitate the ability of the Commission to respond to 
changing market and technological conditions and thus ensure timely and 
accurate data reporting.
    The Commission requested comments on whether determinations of open 
interest or deliverable supply should be adopted through Commission 
orders. With respect to spot-month position limits, a few commenters 
contended that spot month limits should be set by rulemaking.353 With 
respect to non-spot-month position limits, several commenters submitted 
that such limits should be calculated by rulemaking not by annual 
recalculation so that market participants can have sufficient advance 
notice and opportunity to comment on changes in position limit 
levels.354 CME, for example, commented that the Commission should set 
initial limits through this rulemaking and make subsequent limit 
changes subject to notice and comment, unless the formula’s automatic 
annual application would result in higher limits.355 BlackRock 
commented that the Commission could mitigate the adverse effects of 
volatile limit levels by setting limits subject to notice and 
comment.356
—————————————————————————

    353 See e.g., CL-WGCEF supra note 35 at 19-20 (proposing a 
specific schedule for the setting of spot-month position limits by 
notice and comment); CL-BGA supra note 35 at 20. See also, CL-ISDA/
SIFMA supra note 21 at 22.
    354 See e.g., CL-BlackRock supra note 21 at 18; CL-CME I supra 
note 8 at 12; CL-NGFA supra note 72 at 3; CL-EEI/EPSA supra note 21 
at 11; CL-KCBT I supra note 97 at 3; and CL-WGC supra note 21 at 5.
    355 CL-CME I supra note 8 at 12.
    356 CL-BlackRock supra note 21 at 18.
—————————————————————————

    The Commission has determined to adopt proposed Sec.  151.12 
substantially unchanged with some additional delegations provided for 
in the final rule text. Under Sec.  151.4(b)(2)(i)(A), the Commission 
has addressed concerns about the volatility of non-spot-month position 
limit levels for non-legacy Referenced Contracts by providing for 
automatic adjustments based on the higher of 12 or 24 months of 
aggregate open interest data. As discussed earlier in this release, the 
Commission believes that adjustments to Referenced Contract spot month 
and non-legacy Referenced

[[Page 71662]]

Contracts non-spot-month position limit levels on a scheduled basis by 
Commission order provide for a process that is responsive to the 
changing size of the underlying physical and financial market for the 
relevant Referenced Contracts respectively.

III. Related Matters

A. Consideration of Costs and Benefits

    In this final rulemaking, the Commission is establishing position 
limits for 28 exempt and agricultural commodity derivatives, including 
futures and options contracts and the physical commodity swaps that are 
“economically equivalent” to such contracts. The Commission imposes 
two types of position limits: Limits in the spot-month and limits 
outside of the spot-month. Generally, this rulemaking is comprised of 
three main categories: (1) The position limits; (2) exemptions from the 
limits; and (3) the aggregation of accounts.
    Section 15(a) of the CEA requires the Commission to “consider the 
costs and benefits” of its actions 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.357 The 
Commission may, in its discretion, give greater weight to any one of 
the five enumerated areas and may determine that, notwithstanding 
costs, a particular rule protects the public interest.
—————————————————————————

    357 7 U.S.C. 19(a).
—————————————————————————

    In the Notice of Proposed Rulemaking, the Commission stated, 
“[t[he proposed position limits and their concomitant limitation on 
trading activity could impose certain general but significant costs.” 
358 In particular, the Commission noted that “[o]verly restrictive 
position limits could cause unintended consequences by decreasing 
speculative activity and therefore liquidity in the markets for 
Referenced Contracts, impairing the price discovery process in their 
markets, and encouraging the migration of speculative activity and 
perhaps price discovery to markets outside of the Commission’s 
jurisdiction.” 359 The Commission invited comments on its 
consideration of costs and benefits, including a specific invitation 
for commenters to “submit any data or other information that they may 
have quantifying or qualifying the costs and benefits of proposed part 
151.” 360
—————————————————————————

    358 See 76 FR at 4764.
    359 Id.
    360 Id.
—————————————————————————

    In consideration of the costs and benefits of the final rules, the 
Commission has, wherever feasible, endeavored to estimate or quantify 
the costs and benefits of the final rules; where estimation or 
quantification is not feasible, the Commission provides a qualitative 
assessment of such costs and benefits.361 In this respect, the 
Commission notes that public comment letters provided little 
quantitative data regarding the costs and benefits associated with the 
Proposed Rules.
—————————————————————————

    361 Accordingly, to assist the Commission and the public to 
assess and understand the economic costs and benefits of the final 
rule, the Commission is supplementing its consideration of costs and 
benefits with wage rate estimates based on salary information for 
the securities industry compiled by the Securities Industry and 
Financial Markets Association (“SIFMA”). The wage estimates the 
Commission uses are derived from an industry-wide survey of 
participants and thus reflect an average across entities; the 
Commission notes that the actual costs for any individual company or 
sector may vary from the average. In response to comments, the 
Commission has also addressed its PRA estimates in this 
Considerations of Costs and Benefits section.
—————————————————————————

    In the following discussion, the Commission addresses the costs and 
benefits of the final rules, considers comments regarding the costs and 
benefits of position limits, and subsequently considers the five broad 
areas of market and public concern under section 15(a) of the CEA 
within the context of the three broad areas of this rule: Position 
limits; exemptions; and account aggregation.
1. General Comments
    A number of commenters argued that the Commission did not make the 
requisite finding that position limits are necessary to combat 
excessive speculation.362 Specifically, one commenter argued that the 
Commission has ignored the wealth of empirical evidence supporting the 
view that the proposed position limits and related exemptions would 
actually be counterproductive by decreasing liquidity in the CFTC-
regulated markets which, in turn, will increase both price volatility 
and the cost of hedging especially in deferred months.363 Similarly, 
some commenters opposing position limits questioned the benefits that 
would be derived from speculative limits in all markets or in 
particular markets.364 Several commenters denied or questioned that 
the Commission had demonstrated that excessive speculation exists or 
that the proposed speculative limits were necessary.365 Other 
commenters suggested that speculative limits would be inappropriate 
because the U.S. derivatives markets must compete against exchanges 
elsewhere in the world that do not impose position limits.366 Some 
commenters argued that even with the provisions concerning contracts on 
FBOTs, speculators could easily circumvent limits by migrating to 
FBOTs, and in fact the Proposed Rules could encourage such 
behavior.367 Other commenters opined that certain physical 
commodities, such as gold, should not be subject to position limits due 
to considerations unique to those particular commodities.368
—————————————————————————

    362 See e.g., CL-CME I supra note 8 at 2; and CL-COPE supra 
note 21 at 2-5.
    363 CL-CME I supra note 8 at 2. See also CL-Blackrock supra 
note 21 at 3.
    364 See e.g., CL-Utility Group supra note 21 at 2 (submitting 
that the compliance burden of the Commission’s position limits 
proposal is not justified by any demonstrable benefits); and CL-COPE 
supra note 21 (stating that there is no predicate for finding 
federal position limits to be appropriate at this time; and the 
Position Limits NOPR is overly complex and creates significant and 
burdensome requirements on end-users).
    365 See e.g., CL-Morgan Stanley supra note 21 at 4.
    366 See e.g., CL-CME I supra note 8 at 2.
    367 See e.g., CL-USCOC supra note 246 at 3; CL-PIMCO, supra 
note 21 at 8; and CL-ISDA/SIFMA, supra note 21 at 24.
    368 See e.g., CL-WGC supra note 21 at 3.
—————————————————————————

    One commenter stated that the Commission’s cost estimates did not 
accurately reflect the true cost to the market incurred as a result of 
the Proposed Rules because the wage estimates used were inaccurate; 
this commenter also stated that cost estimates in the PRA section were 
not addressed in the costs and benefits section of the Proposed 
Rule.369
—————————————————————————

    369 See CL-WGCEF supra note 34 at 25-26.
—————————————————————————

    As discussed above in sections II.A and II.C of this release, in 
section 4a(a)(1) Congress has determined that excessive speculation 
causing “sudden or unreasonable fluctuations or unwarranted changes in 
the price of such commodity, is an undue and unnecessary burden on 
interstate commerce in such commodity.” Further, Congress directed 
that for the purpose of “diminishing, eliminating, or preventing such 
burden,” the Commission “shall * * * proclaim and fix such [position] 
limits * * * as the Commission finds are necessary to diminish, 
eliminate, or prevent such burden.” 370 New sections 4a(a)(2) and 
4a(a)(5) of the CEA contain an express congressional directive that the 
Commission “shall” establish position limits, as appropriate, within 
an expedited timeframe after the date of enactment of the Dodd-Frank 
Act. In requiring these position limits, Congress specified in section 
4a(a)(3)(B) that in

[[Page 71663]]

addition to establishing limits on the number of positions that may be 
held by any person to diminish, eliminate, or prevent excessive 
speculation, the Commission should also, to the maximum extent 
practicable, set such limits at a level to “deter and prevent market 
manipulation, squeezes and corners,” “ensure sufficient market 
liquidity for bona fide hedgers,” and “to ensure that the price 
discovery function of the underlying market is not disrupted.”
—————————————————————————

    370 Section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).
—————————————————————————

    In light of the congressional mandate to impose position limits, 
the Commission disagrees with comments asserting that the Commission 
must first determine that excessive speculation exists or prove that 
position limits are an effective regulatory tool. Section 4a(a) 
expresses Congress’s determination that excessive speculation may 
create an undue and unnecessary burden on interstate commerce and 
directs the Commission to establish such limits as are necessary to 
“diminish, eliminate, or prevent such burden.” Congress intended the 
Commission to act to prevent such burdens before they arise. The 
Commission does not believe it must first demonstrate the existence of 
excessive speculation or the resulting burdens in order to take 
preventive action through the imposition of position limits. Similarly, 
the Commission need not prove that such limits will in fact prevent 
such burdens.
    In enacting the Dodd-Frank Act, Congress re-affirmed the findings 
regarding excessive speculation, first enacted in the Commodity 
Exchange Act of 1936, as well as the direction to the Commission to 
establish position limits.371 In the Dodd-Frank Act, Congress also 
expressly required that the Commission impose limits, as appropriate, 
to prevent excessive speculation and market manipulation while ensuring 
the sufficiency of liquidity for bona fide hedgers and the integrity of 
price discovery function of the underlying market. Comments to the 
Commission regarding the efficacy of position limits fail to account 
for the mandate that the Commission shall impose position limits. By 
its terms, CEA Section 15(a) requires the Commission to consider and 
evaluate the prospective costs and benefits of regulations and orders 
of the Commission prior to their issuance; it does not require the 
Commission to evaluate the costs and benefits of the actions or 
mandates of Congress.
—————————————————————————

    371 See Commodity Exchange Act of 1936, Pub L. 74-675, 49 
Stat. 1491 (1936).
—————————————————————————

2. Studies
    A number of commenters submitted or cited studies to the Commission 
regarding excessive speculation.372 Generally, the comments and 
studies discussed whether or not excessive speculation exists, the 
definition of excessive speculation, and/or whether excessive 
speculation has a negative impact on derivatives markets. Some of these 
studies did not explicitly address or focus on the issue of position 
limits as a means to prevent excessive speculation or otherwise, while 
some studies did generally opine on the effect of position limits on 
derivatives markets.
—————————————————————————

    372 Twenty commenters cited over 52 studies by institutional, 
academic, and industry professionals.
—————————————————————————

    Thirty-eight of the studies were focused on the impact of 
speculative activity in futures markets, i.e., how the behavior of non-
commercial traders affected price levels.373 These 38 studies did not 
provide a view on position limits in general or on the Commission’s 
implementation of position limits in particular. While the Commission 
reviewed these studies in connection with this rulemaking, the 
Commission again notes that it is not required to make a finding on the 
impact of speculation on commodity markets. Congress mandated the 
imposition of position limits, and the Commission

[[Page 71664]]

does not have the discretion to alter an express mandate from Congress. 
As such, studies suggesting that there is insufficient evidence of 
excessive speculation in commodity markets fail to address that the 
Commission must impose position limits, and do not address issues that 
are material to this rulemaking.
—————————————————————————

    373 See e.g., Anderson, David, Joe L. Outlaw, Henry L. Bryant, 
James W. Richardson, David P. Ernstes, J. Marc Raulston, J. Mark 
Welch, George M. Knapek, Brian K. Herbst, and Marc S. Allison, The 
Agricultural and Food Policy Center Texas A&M University, Research 
Report 08-1, The Effects of Ethanol on Texas Food and Feed (2008); 
Antoshin, Sergei, Elie Canetti, and Ken Miyajima, IMF, Global 
Financial Stability Report, Financial Stress and Deleveraging, 
Macrofinancial Implications and Policy: Annex 1.2. Financial 
Investment in Commodities Markets, at 62-66 (2008); Baffes, John, 
and Tasos Haniotos, World Bank, Washington DC, Policy Research 
Working Paper 5371, Placing the 2006/08 Commodity Boom into 
Perspective (2010); Brunetti, Celso, and Bahattin Buyuksahin, CFTC, 
Working Paper Series, Is Speculation Destabilizing? (2009); 
Buyuksahin, Bahattin, and Jeff Harris, The Energy Journal, The Role 
of Speculators in the Crude Oil Market (2011); Buyuksahin, Bahattin, 
and Michel Robe, CFTC, Working Paper, Speculators, Commodities, and 
Cross-Market Linkages (2010); Buyuksahin, Bahattin, Michael Haigh, 
Jeff Harris, James Overdahl, and Michel Robe, CFTC, Working Paper, 
Fundamentals, Trader Activity, and Derivative Pricing (2008); 
Eckaus, R.S., MIT Center for Energy and Environmental Policy 
Research, Working Paper 08-007WP, The Oil Price Really Is A 
Speculative Bubble (2008); Einloth, James T., Division of Insurance 
and Research, Federal Deposit Insurance Corporation, Washington, DC, 
Working Paper, Speculation and Recent Volatility in the Price of Oil 
(2009); Gilbert, Christopher L., Department of Economics, University 
of Trento, Italy, Working Paper, Speculative Influences on Commodity 
Futures Prices, 2006-2008 (2009); Gilbert, Christopher L., Journal 
of Agricultural Economics, How to Understand High Food Prices 
(2010); Government Accountability Office (GAO), Issues Involving the 
Use of the Futures Markets to Invest in Commodity Indexes (2009); 
Haigh, Michael, Jana Hranaiova, and James Overdahl, CFTC OCE, Staff 
Research Report, Price Dynamics, Price Discovery, and Large Futures 
Trader Interactions in the Energy Complex (2005); Haigh, Michael, 
Jeff Harris, James Overdahl, and Michel Robe, CFTC, Working Paper, 
Trader Participation and Pricing in Energy Futures Markets (2007); 
Hamilton, James, Brookings Paper on Economic Activity, The Causes 
and Consequences of the Oil Shock of 2007-2008 (2009); HM Treasury 
(UK), Global Commodities: A Long Term Vision for Stable, Secure, and 
Sustainable Global Markets (2008); Interagency Task Force on 
Commodity Markets, Interim Report on Crude Oil (2008); International 
Monetary Fund, World Economic Outlook, Is Inflation Back? Commodity 
Prices and Inflation, at 83-128 (2008); Irwin, Scott and Dwight 
Sanders, OECD Food, Agriculture, and Fisheries Working Papers, The 
Impact of Index and Swap Funds on Commodity Futures Markets (2010); 
Irwin, Scott, Dwight Sanders, and Robert Merrin, Journal of 
Agricultural and Applied Economics, Devil or Angel? The Role of 
Speculation in the Recent Commodity Price Boom (and Bust) (2009); 
Jacks, David, Explorations in Economic History, Populists vs 
Theorists: Futures Markets and the Volatility of Prices (2006); 
Kilian, Lutz, American Economic Review, Not All Oil Price Shocks Are 
Alike: Disentangling Demand and Supply Shocks in the Crude Oil 
Market (2009); Kilian, Lutz, and Dan Murphy, University of Michigan, 
Working Paper, The Role of Inventories and Speculative Trading in 
the Global Market for Crude Oil (2010); Korniotis, George, Federal 
Reserve Board of Governors, Finance and Economics Discussion Series, 
Does Speculation Affect Spot Price Levels? The Case of Metals With 
and Without Futures Markets (2009); Mou, Ethan Y., Columbia 
University, Working Paper, Limits to Arbitrage and Commodity Index 
Investment: Front-Running the Goldman Roll (2010); Nissanke, 
Machinko, University of London School of Oriental and African 
Studies, Commodity Markets and Excess Volatility: Sources and 
Strategies To Reduce Adverse Development Impacts (2010); Phillips, 
Peter C.B., and Jun Yu, Yale University, Cowles Foundation 
Discussion Paper No. 1770, Dating the Timeline of Financial Bubbles 
During the Subprime Crisis (2010); Plato, Gerald, and Linwood 
Hoffman, NCCC-134 Conference on Applied Commodity Price Analysis, 
Forecasting, and Market Risk Management, Measuring the Influence of 
Commodity Fund Trading on Soybean Price Discovery (2007); Robles, 
Miguel, Maximo Torero, and Joachim von Braun, International Food 
Policy Research Institute, IFPRI Issue Brief 57, When Speculation 
Matters (2009); Sanders, Dwight, and Scott Irwin, Agricultural 
Economics, A Speculative Bubble in Commodity Futures Prices? Cross-
Sectional Evidence (2010); Sanders, Dwight, Scott Irwin, and Robert 
Merrin, University of Illinois at Urbana-Champaign, The Adequacy of 
Speculation in Agricultural Futures Markets: Too Much of a Good 
Thing? (2008); Smith, James, Journal of Economic Perspectives, World 
Oil: Market or Mayhem? (2009); Technical Committee of the 
International Organization of Securities Commission. IOSCO, Task 
Force on Commodity Futures Markets Final Report (2009); Stoll, Hans, 
and Robert Whaley, Vanderbilt University, Working Paper, Commodity 
Index Investing and Commodity Futures Prices (2009); Tang, Ke, and 
Wei Xiong, Department of Economics, Princeton University, Working 
Paper, Index Investing and the Financialization of Commodities 
(2010); Trostle, Ronald, ERS (USDA), Global Agricultural Supply and 
Demand: Factors Contributing to the Recent Increase in Food 
Commodity Prices (2008); U.S. Commodity Futures Trading Commission, 
Staff Report on Commodity Swap Dealers and Index Traders With 
Commission Recommendations (2008); Wright, Brian, World Bank, Policy 
Research Working Paper, International Grain Reserves and Other 
Instruments To Address Volatility in Grain Markets (2009).
—————————————————————————

    The remaining studies did generally addresses the concept of 
position limits as part of their discussion of speculative activity. 
The authors of some of these studies and papers expressed views that 
speculative position limits were an important regulatory tool and that 
the CFTC should implement limits to control excessive speculation.374 
For example, one author opined that “* * * strict position limits 
should be placed on individual holdings, such that they are not 
manipulative.” 375 Another stated, “[S]peculative position limits 
worked well for over 50 years and carry no unintended consequences. If 
Congress takes these actions, then the speculative money that flowed 
into these markets will be forced to flow out, and with that the price 
of commodities futures will come down substantially. Until speculative 
position limits are restored, investor money will continue to flow 
unimpeded into the commodities futures markets and the upward pressure 
on prices will remain.” 376 The authors of one study claimed that 
“Rules for speculative position limits were historically much stricter 
than they are today. Moreover, despite rhetoric that imposing stricter 
limits would harm market liquidity, there is no evidence to support 
such claims, especially in light of the fact that the market was 
functioning very well prior to 2000, when speculative limits were 
tighter.” 377
—————————————————————————

    374 Greenberger, Michael, The Relationship of Unregulated 
Excessive Speculation to Oil Market Price Volatility, at 11 (2010) 
(On position limits: “The damage price volatility causes the 
economy by needlessly inflating energy and food prices worldwide far 
outweighs the concerns about the precise application of what for 
over 70 years has been the historic regulatory technique for 
controlling excessive speculation in risk-shifting derivative 
markets.”.); Khan, Mohsin S., Peterson Institute for International 
Economics, Washington, DC, Policy Brief PB09-19, The 2008 Oil Price 
`Bubble’, at 8 (2009) (“The policies being considered by the CFTC 
to put aggregate position limits on futures contracts and to 
increase the transparency of futures markets are moves in the right 
direction.”); U.S. Senate, Permanent Subcommittee on 
Investigations, Excessive Speculation in the Wheat Market, at 12 
(2009) (“The activities of these index traders constitute the type 
of excessive speculation the CFTC should diminish or prevent through 
the imposition and enforcement of position limits as intended by the 
Commodity Exchange Act.”); U.S. Senate, Permanent Subcommittee on 
Investigations, Excessive Speculation in the Natural Gas Market at 
8” (2007) (The Subcommittee recommended that Congress give the CFTC 
authority over ECMs, noting that “[to] ensure fair energy pricing, 
it is time to put the cop back on the beat in all U.S. energy 
commodity markets.”); UNCTAD, The Global Economic Crisis: Systemic 
Failures and Multilateral Remedies: Report by the UNCTAD Secretariat 
Task Force on Systemic Issues and Economic Cooperation, at 14, 
(2009) (The UNCTAD recommends that “* * * regulators should be 
enabled to intervene when swap dealer positions exceed speculative 
position limits and may represent `excessive speculation.’); UNCTAD, 
United Nations, Trade and Development Report, 2009: Chapter II: The 
Financialization of Commodity Markets, at 26 (2009) (The report 
recommends tighter restrictions, notably closing loopholes that 
allow potentially harmful speculative activity to surpass position 
limits.).
    375 De Schutter, O., United Nations Special Report on the 
Right to Food: Briefing Note 02, Food Commodities Speculation and 
Food Price Crises at 8 (2010).
    376 Masters, Michael, and Adam White, White Paper: The 
Accidental Hunt Brothers: How Institutional Investors Are Driving up 
Food and Energy Prices at 3 (2008).
    377 Medlock, Kenneth, and Amy Myers Jaffe, Rice University: 
Who Is in the Oil Futures Market and How Has It Changed?” at 8 
(2009).
—————————————————————————

    One study claimed that position limits will not restrain 
manipulation,378 while another argued that position limits in the 
agricultural commodities have not significantly affected 
volatility.379 Another study noted that while position limits are 
effective as an anti-manipulation measure, they will not prevent asset 
bubbles from forming or stop them from bursting.380 One study 
cautioned that while limits may be effective in preventing 
manipulation, they should be set at an optimal level so as to not harm 
the affected markets.381 One study claimed that position limits 
should be administered by DCMs, as those entities are closest to and 
most familiar with the intricacies of markets and thus can implement 
the most efficient position limits policy.382 Finally, one commenter 
cited a study that notes the similar efforts under discussion in 
European markets.383
—————————————————————————

    378 Ebrahim, Muhammed: Working Paper, Can Position Limits 
Restrain Rogue Traders?” at 27 (2011) (“* * * binding constraints 
have an unintentional effect. That is, they lead to a degradation of 
the equilibria and augmenting market power of Speculator in addition 
to other agents. We therefore conclude that position limits are not 
helpful in curbing market manipulation. Instead of curtailing price 
swings, they could exacerbate them.”
    379 Irwin, Scott, Philip Garcia, and Darrel L. Good: Working 
Paper, The Performance of Chicago Board of Trade Corn, Soybean, and 
Wheat Futures Contracts After Recent Changes in Speculative Limits 
at 16 (2007) (“The analysis of price volatility revealed no large 
change in measures of volatility after the change in speculative 
limits. A relatively small number of observations are available 
since the change was made, but there is little to suggest that the 
change in speculative limits has had a meaningful overall impact on 
price volatility to date.”).
    380 Parsons, John: Economia, Vol. 10, Black Gold and Fools 
Gold: Speculation in the Oil Futures Market at 30 (2010) 
(“Restoring position limits on all nonhedgers, including swap 
dealers, is a useful reform that gives regulators the powers 
necessary to ensure the integrity of the market. Although this 
reform is useful, it will not prevent another speculative bubble in 
oil. The general purpose of speculative limits is to constrain 
manipulation . * * * Position limits, while useful, will not be 
useful against an asset bubble. That is really more of a 
macroeconomic problem, and it is not readily managed with 
microeconomic levers at the individual exchange level.”).
    381 Wray, Randall, The Levy Economics Institute of Bard 
College: The Commodities Market Bubble: Money Manager Capitalism and 
the Financialization of Commodities at 41, 43 (2008) “(”While the 
participation of traditional speculators offers clear benefits, 
position limits must be carefully administered to ensure that their 
activities do not “demoralize” markets. * * *The CFTC must re-
establish and enforce position limits.”).
    382 CME Group, Inc.: CME Group White Paper, Excessive 
Speculation and Position Limits in Energy Derivatives Markets at 6 
(“Indeed, as the Commission has previously noted, the exchanges 
have the expertise and are in the best position to fix position 
limits for their contracts. In fact, this determination led the 
Commission to delegate to the exchanges authority to set position 
limits in non-enumerated commodities, in the first instances, almost 
30 years ago.”).
    383 European Commission, Review of the Markets in Financial 
Instruments Directive (2010), note 282:
    European Parliament resolution of 15 June 2010 on derivatives 
markets: future policy actions (A7-0187/2010) calls on the 
Commission to develop measures to ensure that regulators are able to 
set position limits to counter disproportionate price movements and 
speculative bubbles, as well as to investigate the use of position 
limits as a dynamic tool to combat market manipulation, most 
particularly at the point when a contract is approaching expiry. It 
also requests the Commission to consider rules relating to the 
banning of purely speculative trading in commodities and 
agricultural products, and the imposition of strict position limits 
especially with regard to their possible impact on the price of 
essential food commodities in developing countries and greenhouse 
gas emission allowances.
    Id. at 82.
—————————————————————————

    Although these studies generally discuss the impact of position 
limits, they do not address or provide analysis of how the Commission 
should specifically implement position limits under section 4a. As the 
Commission explained in the proposal, “overly restrictive” limits can 
negatively impact market liquidity and price discovery. These 
consequences are detailed in several of the studies criticizing the 
impact of position limits.384 Similarly, limits that are set too high 
fail to address issues surrounding market manipulation and excessive 
speculation. Market manipulation and excessive speculation are also 
detailed in several of the studies claiming the need for position 
limits.385 In section 4a(a)(3)(B) Congress sought to ensure that the 
Commission would “to the maximum extent practicable” ensure that 
position limits would be set at a

[[Page 71665]]

level that would “diminish, eliminate, or prevent excessive 
speculation” and deter or prevent market manipulation, while at the 
same time ensure there is sufficient market liquidity for bona fide 
hedgers and the price discovery function of the market would be 
preserved. The Commission historically has recognized the potential 
impact of both overly restrictive and unrestrictive limits, and through 
the consideration of the statutory objectives in section 4a(a)(3)(B) as 
well as the costs and benefits, has determined to finalize these rules.
—————————————————————————

    384 See e.g., Wray, Randall, supra.
    385 See e.g., Medlock, Kenneth and Amy Myers Jaffe, supra.
—————————————————————————

3. General Costs and Benefits
    As stated in the Proposed Rule, the Commission anticipates that the 
final rules establishing position limits and related provisions will 
result in costs to market participants. Generally, market participants 
will incur costs associated with developing, implementing and 
maintaining a method to ensure compliance with the position limits and 
its attendant requirements (e.g., bona fide hedging exemptions and 
aggregation standards). Such costs will include those related to the 
monitoring of positions in the relevant Referenced Contracts, related 
filing, reporting, and recordkeeping requirements, and the costs (if 
any) of changes to information technology systems. It is expected that 
market participants whose positions are exclusively in swaps (and hence 
currently not subject to any position limits regime) will incur larger 
initial costs relative to those participants in the futures markets, as 
the latter should be accustomed to operating under DCM and/or 
Commission position limit regimes.
    The final rules are also expected to result in costs to market 
participants whose market participation and trading strategies will 
need to take into account and be limited by the new position limits 
rule. For example, a swap dealer that makes a market in a particular 
class of swaps may have to ensure that any further positions taken in 
that class of swaps are hedged or offset in order to avoid increasing 
that trader’s position. Similarly, a trader that is seeking to adopt a 
large speculative position in a particular commodity and that is 
constrained by the limits would have to either diversify or refrain 
from taking on additional positions.386
—————————————————————————

    386 In this respect, the costs of these limits may not in fact 
be additional expenditures or outlays but rather foregone benefits 
that would have accrued to the firm had it been permitted to hold 
positions in excess of the limits. For ease of reference, the term 
“costs” as used in this context also refers to foregone benefits.
—————————————————————————

    The Commission does not believe it is reasonably feasible to 
quantify or estimate the costs from such changes in trading strategies. 
Quantifying the consequences or costs of market participation or 
trading strategies would necessitate having access to and understanding 
of an entity’s business model, operating model, and hedging strategies, 
including an evaluation of the potential alternative hedging or 
business strategies that would be adopted if such limits were imposed. 
Because the economic consequences to any particular firm will vary 
depending on that firm’s business model and strategy, the Commission 
believes it is impractical to develop any type of generic or 
representative calculation of these economic consequences.387
—————————————————————————

    387 Further, the Commission also believes it would be 
impractical to require all potentially affected firms to provide the 
Commission with the information necessary for the Commission to make 
this determination or assessment for each firm. In this regard, the 
Commission notes that none of the commenters provided or offered to 
provide any such analysis to the Commission.
—————————————————————————

    The Commission believes that many of the costs that arise from the 
application of the final rules are a consequence of the congressional 
mandate that the Commission impose position limits. As described more 
fully below, the Commission has considered these costs in adopting 
these final rules, and has, where appropriate, attempted to mitigate 
costs while observing the express direction of Congress in section 4a 
of the CEA.
    In the discussions below as well as in the Paperwork Reduction Act 
(“PRA”) section of this release, the Commission estimates or 
quantifies the implementing costs wherever reasonably feasible, and 
where infeasible provides a qualitative assessment of the costs and 
benefits of the final rule. In many instances, the Commission finds 
that it is not feasible to estimate or quantify the costs with reliable 
precision, primarily due to the fact that the final rules apply to a 
heretofore unregulated swaps markets and, as previously noted, the 
Commission does not have the resources or information to determine how 
market participants may adjust their trading strategies in response to 
the rules.388
—————————————————————————

    388 Further, as previously noted, market participants did not 
provide the Commission with specific information regarding how they 
may alter their trading strategies if the limits were adopted.
—————————————————————————

    At present, the Commission has limited data concerning swaps 
transactions in Referenced Contracts (and market participants engaged 
in such transactions).389 In light of these data limitations, to 
inform its consideration of costs and benefits the Commission has 
relied on: (1) Its experience in the futures markets and information 
gathered through public comment letters, its hearing, and meetings with 
the industry; and (2) relevant data from the Commission’s Large Trader 
Reporting System and other relevant data concerning cleared swaps and 
SPDCs traded on ECMs.390
—————————————————————————

    389 The Commission should be able to obtain an expanded set of 
swaps data through its swaps large trader reporting and SDR 
regulations. See Large Trader Reporting for Physical Commodity 
Swaps, 76 FR 43851, Jul. 22, 2011; and Swap Data Repositories: 
Registration Standards, Duties and Core Principles, 76 FR 54538, 
Sept. 1, 2011.
    390 Prior to the Dodd-Frank Act and at least until the 
Commission can begin regularly collecting swaps data under the Large 
Trader Reporting for Physical Commodity Swaps regulations (76 FR 
43851, Jul. 22, 2011), the Commission’s authority to collect data on 
the swaps market was generally limited to Commission regulation 
18.05 regarding Special Calls, and Part 36 of the Commission’s 
regulations.
—————————————————————————

4. Position Limits
    To implement the Congressional mandate under Dodd-Frank, the 
proposal identified 28 core physical delivery futures contracts in 
proposed Regulation 151.2 (“Core Referenced Futures Contracts”),391 
and would apply aggregate limits on a futures equivalent basis across 
all derivatives that are (i) directly or indirectly linked to the price 
of a Core Referenced Futures Contracts, or (ii) based on the price of 
the same underlying commodity for delivery at the same delivery 
location as that of a Core Referenced Futures Contracts, or another 
delivery location having substantially the same supply and demand 
fundamentals (“economically equivalent contracts”) (collectively with 
Core Referenced Futures Contracts, “Referenced Contracts”).392
—————————————————————————

    391 This is discussed in greater detail in II.B. of this 
release. These Core Referenced Futures Contracts are listed in 
regulation 151.2 of these final rules.
    392 76 FR at 4753.
—————————————————————————

    As explained in the proposal, the 28 Core Referenced Futures 
Contracts were selected on the basis that (i) they have high levels of 
open interest and significant notional value or (ii) they serve as a 
reference price for a significant number of cash market transactions. 
The Commission believes that contracts that meet these criteria are of 
particular significance to interstate commerce, and therefore warrant 
the imposition of federally administered limits. The remaining physical 
commodity contracts traded on a DCM or SEF that is a trading facility 
will be subject to limits set by those facilities.393
—————————————————————————

    393 The Commission further considers registered entity limits 
in section III.A.3.e.

—————————————————————————

[[Page 71666]]

    With regard to the scope of “economically equivalent” contracts 
that are subject to limits concurrently with the 28 Core Referenced 
Futures Contract limits, this definition incorporates contracts that 
price the same commodity at the same delivery location or that utilize 
the same cash settlement price series of the Core Referenced Futures 
Contracts (i.e., “look-alikes” as discussed above in II.B.).394 The 
Commission continues to believe, as mentioned in the proposal, that
—————————————————————————

    394 The Commission notes economically equivalent contracts are 
a subset of “Referenced Contracts.”

    “[t]he proliferation of economically equivalent instruments 
trading in multiple trading venues, * * * warrants extension of 
Commission-set position limits beyond agricultural products to 
metals and energy commodities. The Commission anticipates this 
market trend will continue as, consistent with the regulatory 
structure established by the Dodd-Frank Act, economically equivalent 
derivatives based on exempt and agricultural commodities are 
executed pursuant to the rules of multiple DCMs and SEFs and other 
Commission registrants. Under these circumstances, uniform position 
limits should be established across such venues to prevent 
regulatory arbitrage and ensure a level playing field for all 
trading venues.” 395
—————————————————————————

    395 See 75 FR 4755.

In addition, by imposing position limits on contracts that are based on 
an identical commodity reference price (directly or indirectly) or the 
price of the same commodity at the same delivery location, the final 
rules help to prevent manipulative behavior. Absent such limits on 
related markets, a trader would have a significant incentive to attempt 
to manipulate the physical-delivery market to benefit a large position 
in the cash-settled market.
    The final rule should provide for lower costs than the proposal 
with respect to determining whether a contract is a Referenced Contract 
because the final rule provides an objective test for determining 
Referenced Contracts and does not require case by case analysis of the 
correlation between contracts. In response to comments, the Commission 
eliminated the category of Referenced Contracts regarding contracts 
that have substantially the same supply and demand fundamentals of the 
Core Referenced Futures Contracts because this category did not 
establish objective criteria and would be difficult to administer when 
the correlation between two contracts change over time.
    The final categories of economically equivalent Referenced 
Contracts should also limit the costs of determining whether a contract 
is a Referenced Contract because the scope is objectively defined and 
does not require case by case analysis of the correlation between 
contracts. In this regard, the Commission eliminated the category of 
Referenced Contracts regarding contracts that have substantially the 
same supply and demand fundamentals of the Core Referenced Futures 
Contracts because this category did not establish objective criteria 
and would be difficult to administer when the correlation between two 
contracts change over time.
    The definitional criteria for the core physical delivery futures 
contracts, together with the criteria for “economic equivalent” 
derivatives, are intended to ensure that those contracts that are of 
major significance to interstate commerce and show a sufficient nexus 
to create a single market across multiple venues are subject to Federal 
position limits.396 Nevertheless, the Commission recognizes that the 
criteria informing the scope of Referenced Contracts may need to evolve 
given the Commission’s limited data and changes in market structure 
over time. As the Commission gains further experience in the swaps 
market, it may determine to expand, restrict, or otherwise modify 
through rulemaking the 28 Core Referenced Futures Contracts and the 
related definition of “economically equivalent” contracts.
—————————————————————————

    396 One commenter (CL-WGC supra note 21 at 3) opined that gold 
should not be subject to position limits because “gold is not 
consumed in a normal sense, as virtually all the gold that has ever 
been mined still exists” and given the “beneficial qualities of 
gold to the international monetary and financial systems.” Section 
4a requires the Commission to impose limits on all physical-delivery 
contracts and relevant “economically equivalent” contracts. The 
Commission notes that Congress directed the Commission to impose 
limits on physical commodities, including exempt and agricultural 
commodities. The scope of such commodities includes metal 
commodities.
—————————————————————————

    The Commission anticipates that the additional cost of monitoring 
positions in Referenced Contracts should be minimal for market 
participants that currently monitor their positions throughout the day 
for purposes such as compliance with existing DCM or Commission 
position limits, to meet their fiduciary obligations to shareholders, 
to anticipate margin requirements, etc. The Commission estimates that 
trading firms that currently track compliance with DCM or Commission 
position limits will incur an additional implementation cost of two or 
three labor weeks in order to adjust their monitoring systems to track 
the position limits for Referenced Contracts. Assuming an hourly wage 
of $78.61,397 multiplied by 120 hours, this implementation cost would 
amount to approximately $12,300 per firm, for a total across all 
estimated participants affected by such limits (as described in 
subsequent sections) of $4.2 million.398 These costs are generally 
associated with adjusting systems for monitoring futures and swaps 
Referenced Contracts to track compliance with position limits.399
—————————————————————————

    397 The Commission staff’s estimates concerning the wage rates 
are based on salary information for the securities industry compiled 
by the Securities Industry and Financial Markets Association 
(“SIFMA”). The $78.61 per hour is derived from figures from a 
weighted average of salaries and bonuses across different 
professions from the SIFMA Report on Management & Professional 
Earnings in the Securities Industry 2010, modified to account for an 
1800-hour work-year and multiplied by 1.3 to account for overhead 
and other benefits. The wage rate is a weighted national average of 
salary and bonuses for professionals with the following titles (and 
their relative weight): “programmer (senior)” (30 percent); 
“programmer” (30 percent); “compliance advisor” (intermediate) 
(20 percent); “systems analyst” (10 percent); and “assistant/
associate general counsel” (10 percent).
    398 Although one commenter provided a wage estimate of $120 
per hour, the Commission believes that the SIFMA industry average 
properly accounts for the differing entities that would be subject 
to these limits. See CL-WGCEF supra note 35 at 26, “Internal data 
collected and analyzed by members of the Working Group suggest that 
the average cost per hour is approximately $120, much higher than 
SIFMA’s $78.61, as relied upon by the Commission.” In any event, 
even using the Working Group’s higher estimated wage cost, the 
resulting cost per firm of approximately $18,000 per firm would not 
materially change the Commission’s consideration of these costs in 
relation to the benefits from the limits, and in light of the 
factors in CEA section 15(a), 7 U.S.C. 19(a).
    399 Among other things, a market participant will be required 
to identify which swap positions are subject to position limits 
(i.e., swaps that are Referenced Contracts) and allocate these 
positions to the appropriate compliance categories (e.g., the spot 
month, all months, or a single month of a Referenced Contract).
—————————————————————————

    Participants currently without reportable futures positions (i.e., 
those who trade solely or mostly in the swaps marketplaces, or “swaps-
only” traders), and traders with certain positions outside of the spot 
month in Referenced Contracts that do not currently have position 
limits or position accountability levels, would likely incur an initial 
cost in excess of those traders that do monitor their positions for the 
purpose of compliance with position limits. Because firms with 
positions in the futures markets should already have systems and 
procedures in place for monitoring compliance with position limits, the 
Commission believes that firms with positions mostly or only in the 
swaps markets would be representative of the highest incremental costs 
of the rules. Specifically, swaps-only traders may incur larger start-
up costs to develop a compliance system to monitor their

[[Page 71667]]

positions in Referenced Contracts and to comply with an applicable 
position limit. The Commission estimates that approximately 100 swaps-
only firms would be subject to position limits for the first time.
    The Commission believes that many swaps-only market participants 
potentially affected by the spot month limits are likely to have 
developed business processes to control the size of swap positions for 
a variety of business reasons, including (i) managing counterparty 
credit risk exposure, (ii) limiting the value at risk to such swap 
positions, and (iii) ensuring desired accounting treatment (e.g., hedge 
accounting under Generally Accepted Accounting Principles (“GAAP”)). 
These processes are more likely to be well developed by people with a 
larger exposure to swaps, particularly those persons with position 
sizes with a notional value close to a spot-month position limit. For 
example, traders with positions in Referenced Contracts at the spot-
month limit in the final rule would have a notional value of 
approximately $8.2 million to a maximum of $544.3 million, depending on 
the underlying physical commodity.400 The minimum value in this range 
represents a significant exposure in a single payment period for swaps; 
therefore, the Commission expects that traders with positions at the 
spot-month limit will have already developed some system to control the 
size of their positions on an intraday basis. The Commission also 
anticipates, based on current swap market data, comment letters, and 
trade interviews, that very few swaps-only traders would have positions 
close to the non-spot-month position limits imposed by the final rules, 
given that the notional value of a position at an all-months-combined 
limit will be much larger than that of a position at a spot-month 
limit.
—————————————————————————

    400 These notional values were determined based on notional 
values determined as of September 7, 2011 closing prices. The 
computation used was a position at the size of the spot-month limit 
in appendix A to part 151 (e.g., 600 contracts in wheat) times the 
unit of trading (e.g., 5,000 bushels per contract) times the closing 
price per quantity of commodity (e.g., dollars per bushel).
—————————————————————————

    As explained above, the Commission expects that traders with 
positions at the spot-month limit will have already developed some 
system to control the size of their positions on an intraday basis. 
However, the Commission recognizes that there may be a variety of ways 
to monitor positions for compliance with Federal position limits. While 
specific cost information regarding such swaps-only entities was not 
provided to the Commission in comment letters, the Commission 
anticipates that a firm could implement a monitoring regime amid a wide 
range of compliance systems based on the specific, individual needs of 
the firm. For example, a firm may elect to utilize an automatic 
software system, which may include high initial costs but lower long-
term operational and labor costs. Conversely, a firm may decide to use 
a less capital-intensive system that requires more human labor to 
monitor positions. Thus, taking this range into account, the Commission 
anticipates, on average, labor costs per entity ranging from 40 to 
1,000 annual labor hours, $5,000 to $100,000 in total annualized 
capital/start-up costs, and $1,000 to $20,000 in annual operating and 
maintenance costs.401
—————————————————————————

    401 These costs would likely be lower for firms with swaps-
only positions far below the speculative limit, as those firms may 
not need comprehensive, real-time analysis of their swaps positions 
for position limit compliance to observe whether they are at or near 
the limit. Costs may be higher for firms with very large or very 
complex positions, as those firms may need comprehensive, real-time 
analysis for compliance purposes. Due to the variation in both 
number of positions held and degree of sophistication in existing 
risk management systems, it is not feasible for the Commission to 
provide a greater degree of specificity as to the particularized 
costs for firms in the swaps market.
—————————————————————————

    During the initial period of implementation, a large number of 
traders are expected to be able to avail themselves of the pre-existing 
position exemption as defined in Sec.  151.9. As preexisting positions 
are replaced with new positions, traders will be able to incorporate an 
understanding of the new regime into existing and new trading 
strategies. The Commission has also incorporated a broader exclusion 
for swaps entered into before the effective date of the Dodd-Frank Act 
in addition to the general application of position limits to pre-
existing futures and swaps positions entered into before the effective 
date of this rulemaking, which should allow swaps market participants 
to gradually transition their trading activity into compliance with the 
position limits set forth in part 151.
    The final position limit rules impose the costs outlined above on 
traders who hold or control Referenced Contracts to monitor their 
futures and swaps positions on both an end-of-day and on an intraday 
basis to ensure compliance with the limit.402 Commenters raised 
concerns regarding the ability for their current compliance systems to 
conduct the requisite tracking and monitoring necessary to comply with 
the Proposed Rules, citing the additional contracts and markets needing 
monitoring in real-time.403
—————————————————————————

    402 The Commission notes that generally, entities have not 
previously tracked their swaps positions for purposes of position 
limit compliance. With regard to implementing systems to monitor 
positions for this rule, the Commission also notes that some 
entities that engage in only a small amount of swaps activity 
significantly below the applicable position limit may determine, 
based on their own assessment, not to track their position on an 
intraday basis because their positions do not raise concerns about a 
limit.
    403 CL-COPE supra note 21 at 5; and CL-Utility Group supra 
note 21 at 6. See also CL-Barclays I supra note 164 at 5; CL-API 
supra note 21 at 14; and CL-Shell supra note 35 at 6-7.
—————————————————————————

    The Commission and DCMs have historically applied position limits 
to both intraday and end-of-day positions; the regulations do not 
represent a departure from this practice.404 In this regard, the 
costs necessary to monitor positions in Referenced Contracts on an 
intraday basis outlined above do not constitute a significant 
additional cost on market participants.405 Positions above the limit 
levels, at any time of day, provide opportunity and incentive to trade 
such large quantities as to unduly influence market prices. The absence 
of position limits during the trading day would make it impossible for 
the Commission to detect and prevent market manipulation and excessive 
speculation as long as positions were below the limit at the end of the 
day.
—————————————————————————

    404 See section II.F of this release. See also Commodity 
Futures Trading Commission Division of Market Oversight, Advisory 
Regarding Compliance with Speculative Position Limits (May 7, 2010), 
available at http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/specpositionlimitsadvisory0510.pdf. See e.g., CME Rulebook, Rule 
443, quoted at http://www.cmegroup.com/rulebook/files/CME_Group_
RA0909-5.pdf”) (amended Sept. 14, 2009); ICE OTC Advisory, Updated 
Notice Regarding Position Limit Exemption Request Form for 
Significant Price Discovery Contracts, available at https://www.theice.com/publicdocs/otc/advisory_notices/ICE_OTC_Advisory_0110001.pdf (Jan. 4, 2010).
    405 The Commission notes that the CEA mandates DCMs and SEFs 
to have methods for conducting real-time monitoring of trading. 
Sections 5(d)(4)(A) and 5h(f)(4)(B) of the CEA, 7 U.S.C. 7(d)(4)(A), 
7b-3(f)(4)(B).
—————————————————————————

    Further, as discussed above, the Commission anticipates that the 
cost of monitoring positions on an intraday basis should be marginal 
for market participants that are already required to monitor their 
positions throughout the day for compliance purposes. For those 
entities whose positions historically have been only in the swaps or 
OTC markets, the costs of monitoring intraday positions have been 
calculated as part of the costs to create and monitor compliance 
systems for position limits in general, discussed above in further 
detail.
    As the Commission gains further experience and data regarding the 
swaps market and market participants trading

[[Page 71668]]

therein, it may reevaluate the scope of the Core Referenced Futures 
Contracts, including the definition of economically equivalent 
contracts.
a. Spot-Month Limits for Physical Delivery Contracts
    The Commission is establishing position limits during the spot-
month for physically delivered Core Referenced Futures Contracts. For 
non-enumerated agricultural, as well as energy and metal Referenced 
Contracts, the Commission initially will impose spot-month position 
limits for physical-delivery contracts at the levels currently imposed 
by the DCMs. Thereafter, the Commission will establish the levels based 
on the 25 percent of estimated deliverable supply formula with DCMs 
submitting estimates of deliverable supply to the Commission to assist 
in establishing the limit. For legacy agricultural Reference Contracts, 
the Commission will impose the spot-month limits currently imposed by 
the Commission.
    Pursuant to Core Principles 3 and 5 under the CEA, DCMs generally 
are required to fix spot-month position limits to reduce the potential 
for manipulation and the threat of congestion, particularly in the spot 
month.406 Pursuant to these Core Principles and the Commission’s 
implementing guidance,407 DCMs have generally set the spot-month 
position limits for physical-delivery futures contracts based on the 
deliverable supply of the commodity in the spot month. These spot-month 
limits under current DCM rules are generally within the levels that 
would be established using the 25 percent of deliverable supply formula 
described in these final rules. The Commission received several 
comments regarding costs of position limits in the spot month.
—————————————————————————

    406 Core Principle 3 specifies that a board of trade shall 
list only contracts that are not readily susceptible to 
manipulation, while Core Principle 5 obligates a DCM to establish 
position limits and position accountability provisions where 
necessary and appropriate “to reduce the threat of market 
manipulation or congestion, especially during the delivery month.”
    407 See appendix B, part 38, Commission regulations.
—————————————————————————

    One commenter noted the definition of deliverable supply was vague 
and could increase costs to market participants.408 One commenter 
suggested that the Commission instead base spot-month limits on 
“available deliverable supply,” a broader measure of physical 
supply.409 Commenters also raised an issue with the schedule for 
resetting limits, explaining that resetting the limits on an annual 
basis would introduce uncertainty into the market, increase the burden 
on DCMs, and increase costs for the Commission.410
—————————————————————————

    408 See e.g., CL-API supra note 21 at 5.
    409 “Available deliverable supply” includes (i) all 
available local supply (including supply committed to long-term 
commitments), (ii) all deliverable non-local supply, and (iii) all 
comparable supply (based on factors such as product and location). 
See CL-ISDA/SIFMA supra note 21 at 21. Another commenter, AIMA, 
similarly advocated a more expansive definition of deliverable 
supply. CL-AIMA supra note 35 at 3 (“This may include all supplies 
available in the market at all prices and at all locations, as if a 
party were seeking to buy a commodity in the market these factors 
would be relevant to the price.”).
    410 See e.g., CL-MGEX supra note 74 at 2-4; and CL-BGA supra 
note 35 at 20.
—————————————————————————

    In addition to the costs associated with generally monitoring 
positions in Referenced Contracts, the Commission anticipates some 
costs associated with the level of this spot-month position limit for 
physical-delivery contracts. The Commission estimates,411 on an 
annual basis, 84 traders in legacy agricultural Core Referenced Futures 
Contracts, approximately 50 traders in non-legacy agricultural 
Referenced Contracts, 12 traders in metal Referenced Contract, and 85 
traders in energy Referenced Contracts would hold or control positions 
that could exceed the spot-month position limits in Sec.  
151.4(a).412 For the majority of participants, the 25 percent of 
deliverable supply formula is estimated to impose limits that are 
sufficiently high, so as not to affect their hedging or speculative 
activity; thus, the number of participants potentially in excess of 
these limits is expected to be small in proportion to the market as a 
whole.413
—————————————————————————

    411 The Commission’s estimates of the number of affected 
participants for both spot-month and non-spot-month limits are based 
on the data it currently has on futures, options, and the limited 
set of data it has on cleared swaps. As such, the actual number of 
affected participants may vary from these estimates.
    412 These estimates are based on the number of unique traders 
holding hedge exemptions for existing DCM, ECM, or FBOT spot-month 
position limits for Referenced Contracts.
    413 To illustrate this, the Commission selected examples from 
each category of Core Referenced Futures Contracts. In the CBOT Corn 
contract (a legacy agricultural Referenced Contract), only 
approximately 4.8 percent of reportable traders are estimated to be 
impacted using the methods explained above. Using the ICE Futures 
Coffee contract as an example of a non-legacy agricultural 
Referenced Contract, COMEX Gold as an example of a metal Referenced 
Contracts, and NYMEX Crude Oil as an example of an energy Referenced 
Contract, the Commission estimates only 1.7 percent, 1.2 percent, 
and 8 percent (respectively) of all reportable traders in those 
markets would be impacted by the spot-month limit for physical-
delivery contracts. These estimates indicate that the number of 
affected entities is expected to be small in comparison to the rest 
of the market.
—————————————————————————

    To estimate the number of traders potentially affected by the spot-
month position limits in physically delivered contracts, the Commission 
looked to the number of traders currently relying on hedging and other 
exemptions from DCM position limits.414 While the Commission believes 
that the statutory definition of bona fide hedging will to a certain 
extent overlap with the bona fide hedging exemptions applied at the 
various DCMs, the definitions are not completely co-extensive. As such, 
the costs of adjusting hedging strategies or reducing the size of 
positions both within and outside of the spot-month are difficult to 
determine. For example, some of the traders relying on a current DCM 
hedging exemption may be eligible for bona fide hedging or other 
exemptions from the limits adopted herein, and thus incur the costs 
associated with filing exemption paperwork. However, other traders may 
incur the costs associated with the reduction of positions to ensure 
compliance. Absent data on the application of a bona fide hedge 
exemption, the Commission cannot determine at this time the number of 
entities who will be eligible for an exemption under the revised 
statute, and thus cannot determine the number of participants who may 
realize the benefits of being exempt from position limits and would 
incur a filing cost for the exemption, compared to those who may need 
to reduce their positions.415 The estimated monetary costs associated 
with claiming a bona fide hedge exemption are discussed below in 
consideration of the costs and benefits for bona fide hedging as well 
as in the PRA section of this final rule.
—————————————————————————

    414 Currently, DCMs report to the Commission which 
participants receive hedging and other exemptions that allow those 
participants to exceed position limit levels in the spot month.
    415 The Commission notes that under the pre-existing positions 
exemption, a trader would not be in violation of a position limit 
based solely upon the trader’s pre-existing positions in Referenced 
Contracts. Further, swaps entered into before the effective date of 
the Dodd-Frank Act will not count toward a speculative limit, unless 
the trader elects to net such swaps positions to reduce its 
aggregate position.
—————————————————————————

    Regarding costs related to market participation and trading 
strategies that need to take into account the new position limits rule, 
as mentioned above, the Commission is currently unable to estimate 
these costs associated with the spot-month position limit. Market 
participants who are the primary source of such information did not 
provide the Commission with any such information in their comments on 
the proposal. Additionally, the Commission believes it would not be 
feasible to require market participants to share such strategies with 
the Commission, or for the Commission to attempt its own

[[Page 71669]]

assessment of the costs of potential business strategies of market 
participants. While the Commission does anticipate some cost for 
certain firms to adjust their trading and hedging strategy to account 
for position limits, the Commission does not believe such costs to be 
overly burdensome. All of the 28 Core Referenced Futures Contracts have 
some form of spot-month position limits currently in place by their 
respective DCMs, and thus market participants with very large positions 
(at least those whose primary activity is in futures and options 
markets) should be currently incurring costs (or foregoing benefits) 
associated with those limits. Further, the Commission notes that CEA 
section 4a(a) mandates the imposition of a spot-month position limit, 
and therefore, a certain level of costs is already necessary to comply 
with the Congressional mandate.
    The Commission further notes that the spot limits continue current 
market practice of establishing spot-month position limits at 25 
percent of deliverable supply. This continuity in the regulatory scheme 
should reduce the number of strategy changes that participants may need 
to make as a result of the promulgation of the final rule, particularly 
for current futures market participants who already must comply with 
this limit under the current position limits regimes.
    With regard to the use of deliverable supply to set spot-month 
position limits, in the Commission’s experience of overseeing the 
position limits established at the exchanges as well as federally-set 
position limits, “spot-month speculative position limits levels are 
`based most appropriately on an analysis of current deliverable 
supplies and the history of various spot-month expirations.’ ” 416 
The comments received provide no compelling reason for changing that 
view. The Commission continues to believe that deliverable supply 
represents the best estimate of how much of a commodity is actually 
available in the cash market, and is thus the best basis for 
determining the proper level to deter manipulation and excessive 
speculation while retaining liquidity and protecting price discovery. 
In this regard, the Commission and exchanges have historically applied 
the formula of 25 percent of deliverable supply to set the spot-month 
position limit, and in the Commission’s experience, this formula is 
effective in diminishing the potential for manipulative behavior and 
excessive speculation without unduly restricting liquidity for bona 
fide hedgers or negatively impacting the price discovery process. 
Further, the definition of deliverable supply adopted in these final 
rules is consistent with the current DCM practice in setting spot-month 
limits. The Commission believes that this consistent approach 
facilitates an orderly transition to Federal limits.
—————————————————————————

    416 64 FR 24038, 24039, May 5, 1999.
—————————————————————————

    The final rules require DCMs to submit estimates of deliverable 
supply to the Commission every other year for each non-legacy 
Referenced Contract. The Commission will use this information to 
estimate deliverable supply for a particular commodity in resetting 
position limits. The Commission does not anticipate a significant 
additional burden on DCMs to submit estimates of deliverable supply 
because DCMs currently monitor deliverable supply to comply with Core 
Principles 3 and 5 and they must, as part of their self-regulatory 
responsibilities, make such calculations to justify initial limits for 
newly listed contracts or to justify changes to position limits for 
listed contracts. Given that DCMs that list Core Referenced Futures 
Contracts have considerable experience in estimating deliverable supply 
for purposes of position limits, this expertise will be of significant 
benefit to the Commission in its determination of the level of 
deliverable supply for the purpose of resetting spot-month position 
limits. The additional data provided by DCMs will help the Commission 
to accurately determine the amounts of deliverable supply, and 
therefore the proper level of spot-month position limits.
    Moreover, the Commission has staggered the resetting of position 
limits for agricultural contracts, energy contracts, and metal 
contracts as outlined in II.D.5. and II.E.3. of this release in order 
to further reduce the burden of calculating and submitting estimates of 
deliverable supply to the Commission. As explained in the PRA section, 
the Commission estimates the cost to DCMs to submit deliverable supply 
data to be a total marginal burden, across the six affected entities, 
of 5,000 annual labor hours for a total of $511,000 in labor costs and 
$50,000 in annualized capital and start-up costs and annual total 
operating and maintenance costs.
b. Spot-Month Limits for Cash-Settled Contracts
    A spot-month limit is also being implemented for cash-settled 
contract markets, including cash-settled futures and swaps. Under the 
final rules, with the exception of natural gas contracts, a market 
participant could hold positions in cash-settled Referenced Contracts 
equal to twenty-five percent of deliverable supply underlying the 
relevant Core Referenced Futures Contracts. With regard to cash-settled 
natural gas contracts, a market participant could hold positions in 
cash-settled Referenced Contracts that are up to five times the limit 
applicable to the relevant physical-delivery Core Referenced Futures 
Contracts. The final rules also impose an aggregate spot-month limit 
across physical-delivery and cash-settled natural gas contracts at a 
level of five times the spot month limit for physical-delivery 
contracts. The Commission has determined not to adopt the proposed 
conditional spot-month limit, under which a trader could maintain a 
position of five times the position limit in the Core Referenced 
Futures Contract only if the participant did not hold positions in 
physical-delivery Core Referenced Futures Contracts and did not hold 25 
percent or more of the deliverable supply of the underlying cash 
commodity.
    Several commenters questioned the application of proposed spot-
month position limits to cash-settled contracts.417 Some of these 
commenters suggested that cash-settled contracts should not be subject 
to spot-month limits based on estimated deliverable supply, and should 
be subject to relatively less restrictive spot-month position limits, 
if subject to any limits at all.418
—————————————————————————

    417 CL-ISDA/SIFMA supra note 21 at 6-7, 19; CL-Goldman supra 
note 90 at 5; CL-ICI supra note 21 at 10; CL-MGEX supra note 74 at 4 
(particularly current MGEX Index Contracts that do not settle to a 
Referenced Contract should be considered exempt from position limits 
because cash-settled index contracts are not subject to potential 
market manipulation or creation of market disruption in the way that 
physical-delivery contracts might be); CL-WGCEF supra note 35 at 20 
(“the Commission should reconsider setting a limit on cash-settled 
contracts as a function of deliverable supply and establish a much 
higher, more appropriate spot-month limit, if any, on cash-settled 
contracts”); CL-MFA supra note 21 at 16-17; and CL-SIFMA AMG I 
supra note 21 at 7.
    418 CL-BGA supra note 35 at 19; CL-ICI supra note 21 at 10; 
CL-MFA supra note 21 at 16-17; CL-WGCEF supra note 35 at 20; CL-
Cargill supra note 76 at 13; CL-EEI/EPSA supra note 21 at 9; and CL-
AIMA supra note 35 at 2. See also CL-NGSA/NCGA supra note 124 at 4-5 
(cash-settled contracts should have no limits, or at least limits 
much greater than the proposed limit, given the different economic 
functions of the two classes of contracts).
—————————————————————————

    BGA, for example, argued that position limits on swaps should be 
set based on the size of the open interest in the swaps market because 
swap contracts do not provide for physical delivery.419 Further, 
certain commenters argued that imposing an aggregate speculative limit 
on all cash-settled contracts will reduce substantially the cash-
settled positions that a trader can

[[Page 71670]]

hold because, currently, each cash-settled contract is subject to a 
separate, individual limit, and there is no aggregate limit.420 Other 
commenters urged the Commission to eliminate class limits and allow for 
netting across futures and swaps contracts so as not to impact 
liquidity.421
—————————————————————————

    419 CL-BGA supra note 35 at 10.
    420 See e.g., CL-FIA I supra note 21 at 10; and CL-ICE I supra 
note 69 at 6.
    421 See e.g., CL-ISDA/SIFMA supra note 21 at 8.
—————————————————————————

    A number of commenters objected to limiting the availability of a 
higher limit in the cash-settled contract to traders not holding any 
physical-delivery contract.422 For example, CME argued that the 
proposed conditional limits would encourage price discovery to migrate 
to the cash-settled contracts, rendering the physical-delivery contract 
“more susceptible to sudden price movements during the critical 
expiration period.” 423 AIMA commented that the prohibition against 
holding positions in the physical-delivery Core Referenced Futures 
Contract will cause investors to trade in the physical commodity 
markets themselves, resulting in greater price pressure in the physical 
commodity.424
—————————————————————————

    422 CL-AFIA supra note 94 at 3; CL-AFR supra note 17 at 6; CL-
ATAA supra note 94 at 7; CL-BGA supra note 35 at 11-12; CL-Centaurus 
Energy supra note 21 at 3; CL-CME I supra note 8 at 10; CL-WGCEF 
supra note 35 at 21-22; and CL-PMAA/NEFI supra note 6 at 14.
    423 CL-CME I supra note 8 at 10. Similarly, BGA argued that 
conditional limits incentivize the migration of price discovery from 
the physical contracts to the financial contracts and have the 
unintended effect of driving participants from the market, thereby 
increasing the potential for market manipulation with a very small 
volume of trades. CL-BGA supra note 35 at 12.
    424 CL-AIMA supra note 35 at 2.
—————————————————————————

    Some of these commenters, including the CME Group and KCBT, 
recommended that cash-settled Referenced Contracts and physical-
delivery contracts be subject to the same position limits.425 Two 
commenters opined that if the conditional limits are adopted, they 
should be greater than five times the 25 percent of deliverable supply 
formula.426 ICE recommended that they be increased to at least ten 
times the 25 percent of deliverable supply.427
—————————————————————————

    425 CL-CME I supra note 8 at 10; CL-KCBT I supra note 97 at 4; 
and CL-APGA supra note 17 at 6, 8. Specifically, the KCBT argued 
that parity should exist in all position limits (including spot-
month limits) between physical-delivery and cash-settled Referenced 
Contracts; otherwise, these limits would unfairly advantage the 
look-alike cash-settled contracts and result in the cash-settled 
contract unduly influencing price discovery. Moreover, the higher 
spot-month limit for the financial contract unduly restricts the 
physical market’s ability to compete for spot-month trading, which 
provides additional liquidity to commercial market participants that 
roll their positions forward. CL-KCBT I supra note 97 at 4.
    426 CL-AIMA supra note 35 at 2; and CL-ICE I supra note 69 at 
8.
    427 CL-ICE I supra note 69 at 8. ICE also recommended that the 
Commission remove the prohibition on holding a position in the 
physical-delivery contract or the duration to a narrower window of 
trading than the final three days of trading.
—————————————————————————

    Several commenters expressed concern that the conditional spot-
month limits would “restrict the physically-delivered contract 
market’s ability to compete for spot-month speculative trading 
interest,” thereby restricting liquidity for bona fide hedgers in 
those contracts.428 Another noted that the limit may be detrimental 
to the physically settled contracts because it restricts the ability of 
a trader to be in both the physical-delivery and cash-settled 
markets.429 Conversely, one commenter expressed concern that the 
anti-manipulation goal of spot-month position limits would not be met 
because the structure of the conditional limit in the Proposed Rule 
allowed a trader to be active in both the physical commodity and cash-
settled contracts, and so could use its position in the cash commodity 
to manipulate the price of a physically settled contract to benefit a 
leveraged cash-settled position.430
—————————————————————————

    428 See e.g., CL-KCBT I supra note 97 at 4 “[T]he higher 
spot-month limit for the financial contract unduly restricts the 
physical market’s ability to compete for spot month speculative 
trading interests, which provide additional liquidity to commercial 
market participants (bona fide hedgers) as they unwind or roll their 
positions forward.”)
    429 See e.g., CL-Centaurus Energy supra note 21 at 3.
    430 See e.g., CL-Prof. Pirrong supra note 124.
—————————————————————————

    With regard to the application of position limits to cash-settled 
contracts, the Commission notes that Congress specifically directed the 
Commission to impose aggregate spot-month limits on DCM futures 
contracts and swaps that are economically equivalent to such contracts. 
Therefore, the Commission is required to impose limits on such 
contracts. As explained in the proposal, the Commission believes that 
“limiting a trader’s position at expiration of cash-settled contracts 
diminishes the incentive to exert market power to manipulate the cash-
settlement price or index to advantage a trader’s position in the cash-
settlement contract.” Further, absent such limits on related markets, 
a trader would have a significant incentive to attempt to manipulate 
the physical-delivery market to benefit a large position in the cash-
settled economically equivalent contract.
    The Commission is adopting, on an interim final rule basis, spot-
month limits for cash-settled contract, other than natural gas 
contracts, at 25 percent of the estimated deliverable supply. These 
limits will be in parity with the spot-month limits set for the related 
physical-delivery contracts. As discussed in section II.D.3. of this 
release, the Commission has determined that the one-to-one ratio for 
commodities other than natural gas between the level of spot-month 
limits on physical-delivery contracts and the level on cash-settled 
contracts maximizes the objectives enumerated in section 4a(a)(3) of 
the CEA by ensuring market liquidity for bona fide hedgers, while 
deterring the potential for market manipulation, squeezes, and corners. 
The Commission further notes that this formula is consistent with the 
level the Commission staff has historically deemed acceptable for cash-
settled contracts, as well as the formula for physical-delivery 
contracts under Acceptable Practices for Core Principle 5 set forth in 
part 38 of the Commission’s regulations.
    At this time, the Commission’s data set does not allow the 
Commission to estimate the specific number of traders that could 
potentially be impacted by the limits on cash-settled contracts in the 
spot-month for agricultural, metals and energy commodities (other than 
natural gas). However, given the Commission’s understanding of the 
overall size of the swaps market in these commodities, the Commission 
believes that a one-to-one ratio of position limits for physical-
delivery and cash-settled Referenced Contracts maximizes the four 
statutory factors in section 4a(a)(3)(B) of the CEA.
    The Commission is also adopting, on an interim final rule basis, an 
aggregate spot-month limit for physical-delivery and cash-settled 
natural gas contracts, as well as a class limit for cash-settled 
natural gas contracts, both set at a level of five times the level of 
the spot-month limit in the relevant Core Referenced physical-delivery 
natural gas contract.
    As discussed in section II.D.3. of this release, the Commission has 
determined that the one-to-five ratio between the level of spot-month 
limits on physical-delivery natural gas contracts and the level of 
spot-month limits on cash-settled natural gas contracts maximizes the 
objectives enumerated in section 4a(a)(3) of the CEA by ensuring market 
liquidity for bona fide hedgers, while deterring the potential for 
market manipulation, squeezes, and corners. The Commission notes that 
this formula is consistent with the administrative experience with 
conditional limits in DCM and exempt commercial market natural gas 
contracts.
    As described in section II.D.3. of the release, this aggregate 
limit for natural gas contracts responds to commenters’

[[Page 71671]]

concerns regarding potentially negative impacts on liquidity and the 
price discovery function of the physical-delivery contract if traders 
are not permitted to hold any positions in the physical-delivery 
contract when they hold contracts in the cash-settled Referenced 
Contract (which are subject to higher limits than the physical-delivery 
contracts).
    The Commission is also no longer restricting the higher limit for 
cash-settled natural gas contracts to entities that hold or control 
less than 25 percent of the deliverable supply in the cash commodity. 
As pointed out by certain commenters,431 this provision would create 
significant compliance costs for entities to track whether they meet 
such a condition. The Commission believes at this time that the class 
and aggregate limits in the spot month for natural gas contracts should 
adequately account for market manipulation concerns with regard to 
entities with large cash-market positions; however, the Commission will 
continue to monitor developments in the market to determine whether to 
incorporate a cash-market restriction in the higher cash-settled 
contract limit, and the extent of the benefit provided through 
restricting cash-market positions.
—————————————————————————

    431 CL-ISDA/SIFMA supra note 21 at 7.
—————————————————————————

    The Commission expects that its estimate as to the number of 
traders affected by the limits in cash-settled contracts will change as 
swap positions are reported to the Commission through its Large Swaps 
Trader Reporting and SDR regulations. Given the Commission’s limited 
data with regard to swaps, the Commission looked to exemptions from 
position limits granted by DCMs and ECMs to estimate the number of 
traders that may be affected by the finalized limits for cash-settled 
contracts. At this time, the only data available pertains to energy 
commodities. The Commission estimates that approximately 70 to 75 
traders hold exemptions from DCM and ECM limits and therefore at least 
this number of traders may be impacted by the spot-month limit for 
cash-settled contracts. Until the Commission has accurate information 
on the size and composition of off-exchange cash-settled Referenced 
Contracts for agricultural, metal, and energy contracts, it is unable 
more precisely to determine the number of traders potentially impacted 
by the aggregate limit.432 As discussed above, by implementing the 
one-to-one and one-to-five ratios on an interim basis, the Commission 
can further gather and analyze the ratio and its impact on the market.
—————————————————————————

    432 The Commission notes that it is currently unable to 
determine the applicability of bona fide hedge exemptions because of 
differences in the revised statutory definition compared to the 
current definition applied by DCMs and ECMs. In addition, traders 
may net cash-settled contracts for purposes of the class limit in 
the spot month. Thus, absent complete data on swaps positions, the 
Commission cannot accurately estimate a trader’s position for the 
purposes of compliance with spot-month limits for cash-settled 
contracts.
—————————————————————————

    The Commission also notes that swap dealers and commercial firms 
enter into a significant number of swap transactions that are not 
submitted to clearing.433 Based on the nature of the commercial 
counterparty to such transactions, the Commission anticipates that many 
of these transactions involving commercial firm counterparties would 
likely be entitled to bona fide hedging exemptions as provided for in 
Sec.  151.5, which should limit the number of persons affected by the 
spot-month limit in cash-settled contracts without an applicable 
exemption.
—————————————————————————

    433 This observation is based upon Commission staff 
discussions with members of industry. See https://www.cftc.gov/LawRegulation/.
—————————————————————————

    The Commission also notes that swaps and other over-the-counter 
market participants may face additional costs (including foregone 
benefits) in terms of adjusting position levels and trading strategies 
to the position limits on cash-settled contracts. While current data 
precludes estimating the extent of the financial impact to swap market 
participants, these costs are inherent in establishing limits that 
reach swaps that are economically equivalent to DCM futures contracts, 
as required under section 4a(a)(5).
c. Non-Spot-Month Limits
    Section 151.4(b) provides that the non-spot-month position limits 
for non-legacy Referenced Contracts shall be fixed at a number 
determined as a function of the level of open interest in the relevant 
Referenced Contract. This formula is defined as 10 percent of the open 
interest up to the first 25,000 contracts plus 2.5 percent of open 
interest thereafter (“10-2.5 percent formula”). This is the same 
formula that has been historically used to set position limits on 
futures exchanges.434 With regard to the nine legacy agricultural 
Core Referenced Futures Contracts, which are currently subject to 
Commission imposed non-spot-month position limits, as described in 
section II.E.4. of this release, the Commission is raising those 
existing position limits to the levels described in the CME petition.
—————————————————————————

    434 See 17 CFR part 150 (2010).
—————————————————————————

    Commenters expressed concern that non-spot-month limits could be 
harmful, potentially distorting price discovery or liquidity and 
damaging long term hedging strategies.435 Others argued that there 
should be no limits outside the spot-month or that the Commission had 
not adequately justified non-spot-month limits.436 One commenter 
argued that the proposed non-spot-month class limits would increase 
costs for hedgers and harm market liquidity.437 Several commenters 
opined that the Commission should increase the open interest 
multipliers used in determining the non-spot-month position 
limits,438 while some commenters explained that the Commission should 
decrease the open interest multipliers to 5 percent of open interest 
for first 25,000 contracts and 2.5 percent thereafter.439 Other 
commenters suggested significantly different methodologies for setting 
limits that would result in relatively more restrictive limits on 
speculators.440
—————————————————————————

    435 See e.g., CL-Teucrium supra note 124 at 2; and CL-ICE I 
supra note 69 at 6.
    436 See e.g., CL-WGCEF supra note 35 at 5; and CL-Goldman 
supra note 89 at 2.
    437 See e.g., CL-DBCS supra note 247 at 8-9.
    438 CL-AIMA supra note at 35 pg. 3; CL-CME I supra note 8 at 
12 (for energy and metals); CL-FIA I supra note 21 at 12 (10% of 
open interest for first 25,000 contracts and then 5%); CL-ICI supra 
note 21 at 10 (10% of open interest until requisite market data is 
available); CL-ISDA/SIFMA supra note 21 at 20; CL-NGSA/NCGA supra 
note 124 at 5 (25% of open interest); and CL-PIMCO supra note 21 at 
11.
    439 CL-Greenberger supra note 6 at 13; and CL-FWW supra note 
81 at 12.
    440 See e.g., CL-ATA supra note 81 at 4-5; CL-AFR supra note 
17 at 5-6; CL-ATAA supra note 94 at 3, 6, 9-10, 12; CL-Better 
Markets supra note 37 at 70-71 (recommending the Commission to limit 
non-commodity index and commodity index speculative participation in 
the market to 30% and 10% of open interest respectively); CL-Delta 
supra note 20 atpg.5; and CL-PMAA/NEFI supra note 6 at 7.
—————————————————————————

    Several commenters recommended that the Commission should keep the 
legacy limits for legacy agricultural Referenced Contracts.441 One 
commenter argued that raising these limits would increase hedging 
margins and increase volatility which would ultimately undermine 
commodity producers’ ability to sell their product to consumers.442 
Another opined that the Commission need not proceed with phased 
implementation for the legacy agricultural markets because it could set

[[Page 71672]]

their limits based on existing legacy limits.443
—————————————————————————

    441 CL-ABA supra note 150 at 3-4; CL-AFIA supra note 94 at 3; 
CL-Amcot supra note 150 at 2; CL-FWW supra note 81 at 13; CL-IATP 
supra note 113 at 5; and CL-NGFA supra note 72 at 1-2.
    442 CL-ABA supra note 150 at 3-4.
    443 CL-Amcot supra note 150 at 3.
—————————————————————————

    Several other commenters recommended that the Commission abandon 
the legacy limits.444 One commenter argued that the Commission 
offered no justification for treating legacy agricultural contracts 
differently than other Referenced Contract commodities.445 Some of 
these commenters endorsed the limits proposed by CME.446 Other 
commenters recommended the use of the open interest formula proposed by 
the Commission in determining the position limits applicable to the 
legacy agricultural Referenced Contract markets.447 Finally, four 
commenters expressed their preference that non-spot position limits be 
kept consistent for the wheat Referenced Contracts.448
—————————————————————————

    444 CL-AIMA supra note 35 at 4; CL-Bunge supra note 153 at 1-
2; CL-DB supra note 153 at 6; CL-Gresham supra note 153 at 4-5; CL-
FIA I supra note 21 at 12; CL-MGEX supra note 74 at 2; CL-MFA supra 
note 21 at 18-19; and USCF supra note 153 at 10-11.
    445 CL-USCF supra note 153 at 10-11.
    446 CL-Bunge supra note 153 at 1-2; CL-FIA I supra note 21 at 
12; and CL-Gresham supra note 153 at 5. See CME Petition for 
Amendment of Commodity Futures Trading Commission Regulation 150.2 
(April 6, 2010), available at http//www.cftc.gov/LawRegulation/DoddFrankAct/Rulemaking/DF_26_PosLimits/index.htm.
    447 CL-CMC supra note 21 at 3; CL-DB supra note 153 at 10; and 
CL-MFA supra note 21 at 19.
    448 CL-CMC supra note 21 at 3; CL-KCBT I supra note 97 at 1-2; 
CL-MGEX supra note 74 at 2; and CL-NGFA supra note 72 at 4.
—————————————————————————

    In addition to the costs associated with generally monitoring 
positions in Referenced Contracts on an intraday basis, the Commission 
anticipates some costs to result from the establishment of the non-
spot-month position limit, though the Commission expects the resulting 
costs should be minimal for most market participants. To determine the 
number of potentially affected entities, the Commission took existing 
data and calculated the number of traders whose positions would be over 
the final non-spot-month limits.449 For the majority of participants, 
the non-spot-month levels are estimated to impose limits that are 
sufficiently high so as to not affect their hedging or speculative 
activity; thus, the Commission projects that relatively few market 
participants will have to adjust their activities to ensure that their 
positions are not in excess of the limits.450 According to these 
estimates, the position limits in Sec.  151.4(d) would affect, on an 
annual basis, eighty traders in agricultural Referenced Contracts, 
twenty-five traders in metal Referenced Contracts, and ten traders in 
energy Referenced Contracts.451
—————————————————————————

    449 The data was based on the Commission’s large trader 
reporting data for futures contracts and limited swaps data covering 
certain cleared swap transactions.
    450 To illustrate this, the Commission selected examples from 
each category of Core Referenced Futures Contracts. In the CBOT Corn 
contract (an agricultural Referenced Contract), only approximately 
4.8% of reportable traders are estimated to be impacted using the 
methods explained above. Using the COMEX Gold contract as an example 
of a metal Referenced Contracts, and NYMEX Crude Oil as an example 
of an energy Referenced Contract, the Commission estimates only 1.4% 
and .2% (respectively) of all reportable traders in those markets 
would be impacted by the non-spot-month limit. These estimates 
indicate that the number of affected entities is expected to be 
small in comparison to the rest of the market.
    451 These estimates do not take into account open interests 
from a significant number of swap transactions, and therefore, the 
Commission believes that the size of the non-spot position limit 
will increase over this estimate as the Commission is able to 
analyse additional data.
—————————————————————————

    As noted above, the Commission’s data on uncleared swaps is 
limited. The information currently available to the Commission 
indicates that the uncleared swaps market is primarily comprised of 
transactions between swap dealers and commercial entities. As such, 
some of the above entities that may hold positions in excess of the 
non-spot-month limits may be entitled to bona fide hedging exemptions 
as provided for in Sec.  150.5. Moreover, the Commission understands 
that swap dealers, who constitute a large percentage of those 
anticipated to be near or above the position limits set forth in Sec.  
151.4, generally use futures contracts to offset the residual portfolio 
market risk of their uncleared swaps positions.452 Under these final 
rules, market participants can net their physical delivery and cash-
settled futures contracts with their swaps transactions for purposes of 
complying with the non-spot-month limit. In this regard, the netting of 
futures and swaps positions for such swap dealers would reduce their 
exposure to an applicable position limit.
—————————————————————————

    452 The estimated monetary costs associated with claiming a 
bona fide hedge exemption are discussed below in consideration of 
the costs and benefits for bona fide hedging as well as in the 
Paperwork Reduction Act section of this final rule.
—————————————————————————

    Taking these considerations into account, the Commission 
anticipates that for the majority of participants, the non-spot month 
levels are estimated to impose limits that are sufficiently high so as 
to not affect their hedging or speculative activity as these 
participants could either rely on a bona fide hedge exemption or hold a 
net position that is under the limit. Thus, the Commission projects 
that relatively few market participants will have to adjust their 
activities to ensure that their positions are not in excess of the 
limits.
    The economic costs (or foregone benefits) of the level of position 
limits is difficult to determine accurately or quantify because, for 
example, some participants may be eligible for bona fide hedging or 
other exemptions from limits, and thus incur the costs associated with 
filing exemption paperwork, while others may incur the costs associated 
with altering their business strategies to ensure that their aggregate 
positions do not exceed the limits. In the absence of data on the 
extent to which the bona fide hedge exemption will apply to swaps 
transactions, at this time the Commission cannot determine or estimate 
the number of entities that will be eligible for such an exemption. 
Accordingly, the Commission cannot determine or estimate the total 
costs industry-wide of filing for the exemption.453
—————————————————————————

    453 As previously noted, the costs to an individual firm of 
filing an exemption are estimated at section III.A.3.
—————————————————————————

    Similarly, the Commission is unable to determine or estimate the 
number of entities that may need to alter their business 
strategies.454 Commenters did not provide any quantitative data as to 
such potential impacts from the proposed limits, and the Commission 
cannot independently evaluate the potential costs to market 
participants of such changes in strategies, which would necessarily be 
based on the underlying business models and strategies of the various 
market participants.
—————————————————————————

    454 The Commission notes that under the pre-existing positions 
exemption, a trader would not be in violation of a position limits 
based solely upon the trader’s pre-existing positions in Referenced 
Contracts. Further, swaps entered before the effective date of the 
Dodd-Frank Act will not count toward a speculative limit, unless the 
trader elects to net such swaps positions to reduce their aggregate 
position.
—————————————————————————

    While the Commission is unable to quantify the resulting costs to 
the relatively few number of market participants that the Commission 
estimates may be affected by these limits; to a certain extent costs 
associated with a change in business or trading strategies to comply 
with the non-spot-month position limits imposed by the Commission are a 
consequence of the Congressionally-imposed mandate for the Commission 
to establish such limits. Commenters suggesting that the Commission 
should not adopt non-spot-month position limits fail to address the 
mandate of Congress in CEA section 4a(a)(3)(A) that the Commission 
impose non-spot-month limits. Based on the Commission’s long-standing 
experience with the application of the 10–2.5 percent formula to 
establish non-spot-month limits in the futures market as

[[Page 71673]]

well as the Commission’s limited swaps data, the Commission anticipates 
that the application of this similar formula to both the futures and 
swaps market will appropriately maximize the statutory objectives in 
section 4a(a)(3). The data regarding the swaps market that is currently 
available to the Commission indicates that a limited number of market 
participants will be at or near the speculative position limits and 
that the imposition of these limits should not result in a significant 
decrease in liquidity in these markets. Accordingly, the Commission 
believes that non-spot-month limits imposed as a result of these final 
rules will ensure there continues to be sufficient liquidity for bona 
fide hedgers and the price discovery of the underlying market will not 
be disrupted.
    The Commission has determined to adopt the position limit levels 
proposed by the CME for the legacy Referenced Contracts. Such levels 
would be effective 60 days after the publication date of this 
rulemaking and those levels would be subject to the existing provisions 
of current part 150 until the compliance date of these rules, which is 
60 days after the Commission further defines the term “swap” under 
the Dodd-Frank Act. At that point, the relevant provisions of this part 
151, including those relating to bona-fide hedging and account 
aggregation, would also apply. In the Commission’s judgment, the CME 
proposal represents a measured approach to increasing legacy limits, 
similar to that previously implemented.455 The Commission will use 
the CME’s all-months-combined petition levels as the basis to increase 
the levels of the non-spot-month limits for legacy Referenced 
Contracts. The petition levels were based on 2009 average month-end 
open interest. Adoption of the petition levels results in increases in 
limit levels that range from 23 to 85 percent higher than the levels in 
existing Sec.  150.2.
—————————————————————————

    455 58 FR 18057, April 7, 1993.
—————————————————————————

    The Commission has determined to maintain the current approach to 
setting and resetting legacy limits because it is consistent with the 
Commission’s historical approach to setting such limits and ensures the 
continuation of maintaining a parity of limit levels for the major 
wheat contracts at DCMs. In response to comments supporting this 
approach, the Commission will also increase the levels of the limits on 
wheat at the MGEX and the KCBT to the level for the wheat contract at 
the CBOT.456
—————————————————————————

    456 For a discussion of the historical approach, see 64 FR 
24038, 24039, May 5, 1999.
—————————————————————————

d. Position Visibility
    As discussed in II.L. of this release, the Commission is adopting 
position visibility levels as a supplement to position limits. These 
levels will provide the Commission with the ability to conduct 
surveillance of market participants with large positions in the energy 
and metal Reference Contracts.457 As discussed in the Paperwork 
Reduction Act section of these final rules, the Commission increased 
the position visibility levels and reduced the reporting requirements 
in order to decrease the compliance costs associated with position 
visibility levels.
—————————————————————————

    457 As discussed in section II.L of this release, the 
Commission is not extending position visibility reporting to 
agricultural contracts because the Commission believes that 
reporting related to bona fide hedging and other exemptions should 
provide the Commission with sufficient data on the largest traders 
in agricultural Referenced Contracts.
—————————————————————————

    Commenters generally stated that the position visibility 
requirements are unnecessary, redundant, burdensome, and overly 
restrictive.458 While some commenters acknowledged the usefulness of 
the data collected through position visibility requirements, they 
maintained the burden associated with complying with these requirements 
was too great.459 One commenter noted that it is too costly to 
require monthly visibility reporting; another suggested these 
compliance costs would most affect bona fide hedgers because of the 
extra information required of those claiming a bona fide hedging 
exemption.460 Another commenter noted that position visibility 
requirements may prove duplicative once the Commission can evaluate 
data received from swaps dealers and major swaps participants, DCOs, 
SEFs and SDRs.461
—————————————————————————

    458 See e.g., CL-BGA supra note 35 at 19-20; CL-CME I supra 
note 8 at 6; CL-WGCEF supra note 35 at 23; and CL-MFA supra note 21 
at 3.
    459 See e.g., CL-USCF supra note 153 at 11.
    460 See e.g., CL-USCF supra note 153 at 11; and CL-WGCEF supra 
note 35 at 22-23.
    461 CL-FIA I supra note 21, at 13.
—————————————————————————

    The comments that suggested semi-annual reporting or no reporting 
at all, instead of monthly reporting, have not been adopted because of 
the surveillance utility afforded by the visibility reporting. The 
Commission notes that once an affected person adopts processes to 
comply with the standard reporting format, visibility reporting may 
result in a lesser burden when compared to the alternative of frequent 
production of books and records under special calls. With regard to 
frequency, reporting that is too infrequent may undermine the 
effectiveness of the Commission’s surveillance efforts, as one goal of 
reporting under position visibility levels is to provide the Commission 
with timely and accurate data regarding the current positions of a 
market’s largest traders in order to detect and deter manipulative 
behavior. The Commission notes that until SDRs are operational and the 
Commission’s large trader reporting for physical commodity swaps are 
fully implemented, the Commission would not have access to the data 
necessary to have a holistic view of the marketplace and to set 
appropriate position limit levels.
    To further mitigate costs on reporting entities, the Commission has 
determined to reduce the filing burden associated with position 
visibility to one filing per trader per calendar quarter, as opposed to 
a monthly filing. This reduced reporting is not anticipated to 
significantly impact the overall surveillance benefit provided through 
the position visibility reporting. However, if the large position 
holders subject to position visibility reporting requirements were to 
submit reports any less often, then the reports would not provide 
sufficiently regular information for the Commission to be able to 
determine the nature (hedging or speculative) of the largest positions 
in the market. This data should assist the Commission in its required 
report to Congress regarding implementation of position limits,462 
and in ongoing assessment of the appropriateness of the levels of such 
limits.
—————————————————————————

    462 See section 719 of the Dodd-Frank Act.
—————————————————————————

    The Commission has also raised the visibility levels to 
approximately 50 to 60 percent of the projected aggregate position 
limits for the Reference Contract (from 10 to 30 percent of the limit 
in the Proposed Rule), with the exception of the Light, Sweet Crude Oil 
(CL) and Henry Hub Natural Gas (NG) Referenced Contracts, for which 
these levels have been raised from the proposal but are still lower 
than 50 to 60 percent of projected aggregate position limits in order 
to capture a target number of traders.463 Based on the Commission’s 
current data regarding futures and certain cleared swap transactions, 
the higher visibility levels as compared to the Proposed Rule will 
reduce the number of traders (including bona fide hedgers) subject to 
the reporting requirements, while still providing the Commission 
sufficient data on the positions of the largest traders in the 
respective Referenced Contract.
—————————————————————————

    463 See Sec.  151.6.
—————————————————————————

    The Commission estimates that, on an annual basis, at most 73 
traders would

[[Page 71674]]

be subject to position visibility reporting requirements. As discussed 
in the PRA section of this release, the Commission estimates the costs 
of compliance to be a total burden, across all of these entities, of 
7,760 annual labor hours resulting in a total of $611,000 in annual 
labor costs and $7 million in annualized capital and start-up costs and 
annual total operating and maintenance costs.
    The Commission estimates that 25 of the traders affected by 
position visibility regulations would be bona fide hedgers. 
Specifically with regard to bona fide hedgers, the Commission estimates 
compliance costs for position visibility reporting to be a total 
burden, across all bona fide hedgers, of 2,000 total annual labor hours 
resulting in a total of $157,200 in annual labor costs and $1.625 
million in annualized capital and start-up costs and annual total 
operating and maintenance costs. The Commission notes that these 
estimated costs for bona fide hedgers are a subset of, and not in 
addition to, the costs for all participants combined enumerated above.
    The information gained from position visibility levels provides 
essential transparency to the Commission as a means of preventing 
potentially manipulative behavior. In the Commission’s judgment, such 
data is a critical component of an effective position limit regime as 
it will help to maximize to the extent practicable the statutory 
objectives of preventing excessive speculation and manipulation, while 
ensuring sufficient liquidity for bona fide hedgers and protecting the 
price discovery function of the underlying market. It allows the 
Commission to monitor the positions of the largest traders and the 
effects of those positions in the affected markets. While the extent of 
these benefits is not readily quantifiable, the ability to better 
understand the balance in the market between speculative and non-
speculative positions is critical to the Commission’s ability to 
monitor the effectiveness of position limits and potentially 
recalibrate the levels in order to ensure the limits sufficiently 
address the statutory objectives that the Commission must consider and 
maximize in establishing appropriate position limits. In this way, 
position visibility levels are not unlike position accountability 
levels that are currently utilized for many DCM contracts. Finally, as 
discussed under section II.C.2. of this release, position visibility 
reporting will enable the Commission to address data gaps that will 
exist prior to the availability of comprehensive data from SDRs.
e. DCMs and SEFs
    Pursuant to Core Principle 5(B) for DCMs and Core Principle 6(B) 
for SEFs that are trading facilities, such registered entities are 
required to establish position limits “[f]or any contract that is 
subject to a position limitation established by the Commission pursuant 
to section 4a(a).” The core principles require that these levels be 
set “at a level not higher than the position limitation established by 
the Commission.” As such, the final rules require DCMs and SEFs to set 
position limits on the 28 physical commodity Referenced Contracts 
traded or executed on such DCMs and SEFs.
    Under the proposal, DCMs and SEFs would have been required to 
implement a position limit regime for all physical commodity contracts 
executed on their facility. This proposal would effectively create a 
class limit for the trading facility’s contracts. Because the 
Commission determined to eliminate class limits outside of the spot-
month for the 28 contracts subject to Commission limits, the Commission 
has determined not to adopt the proposed requirements that would have 
effectively created class limits for a particular trading venue. 
Accordingly, the final rules permit the trading facility to grant 
spread or arbitrage exemptions regardless of the trading facility or 
market in which such positions are held. To remain consistent with the 
Commission’s class limits within the spot-month, DCMs and SEFs cannot 
grant spread or arbitrage exemptions with regard to physical-delivery 
commodity contracts. These provisions allow DCMs and SEFs to comply 
with the core principles for contracts subject to Commission position 
limits without creating an incentive for traders to migrate their 
speculative positions off of the trading facility to avoid the SEF or 
DCM limit.464
—————————————————————————

    464 For example, traders could utilize swaps not traded on a 
DCM or SEF.
—————————————————————————

    The Commission notes that the establishment of Federal limits on 
the 28 Core Referenced Futures Contracts should not significantly 
affect the compliance costs for DCMs because they currently impose 
spot-month limits for physical commodity contracts in compliance with 
existing Core Principle 5.465 DCMs in particular have long enforced 
spot-month limits, and the Commission notes that such spot-month 
position limits are currently in place for all physical-delivery 
physical commodity futures under Core Principle 5 of section 5(d) of 
the CEA. The final rule on physical-delivery spot-month limits should 
impose minimal, if any, additional compliance costs on DCMs.
—————————————————————————

    465 The Commission has further provided for acceptable 
practices for DCMs and SEFs seeking compliance with their respective 
position limit and accountability-related Core Principles in other 
commodity contracts.
—————————————————————————

    As outlined above in this section III.A.3, the Commission believes 
that the position limits finalized herein will likely cause relevant 
DCMs, SEFs, and market participants to incur various additional costs 
(or forego benefits). At this time, the Commission is unable to 
quantify the cost of such changes because the effect of this 
determination will vary per market and because the requirements 
applicable to SEFs extend to swaps, which heretofore were generally not 
subject to federally-set position limits. The Commission also notes 
that to a certain extent these costs are a consequence of the statutory 
requirement for DCMs and SEFs to set and administer position limits on 
contracts that have Federal position limits in accordance with the Core 
Principles applicable to such facilities.
    For the remaining physical commodity contracts executed on a DCM or 
SEF that is a trading facility, i.e., those contracts which are not 
Referenced Contracts, DCMs and SEFs are required to comply with new 
Core Principle 5 for DCMs and Core Principle 6 for SEFs in establishing 
position limitations or position accountability levels. The costs 
resulting from this requirement also are a consequence of the statutory 
provision requiring DCMs and SEFs to set and administer position limits 
or accountability levels.
f. CEA Section 15(a) Considerations: Position Limits
    As stated above, section 15(a) of the CEA requires the Commission 
to consider the costs and benefits of its actions 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.
i. Protection of Market Participants and the Public
    Congress has determined that excessive speculation causing “sudden 
or unreasonable fluctuations or unwarranted changes in the price of 
such commodity, is an undue and unnecessary burden on interstate 
commerce in such commodity.” Further, Congress directed that for the 
purpose of “diminishing, eliminating, or preventing such burden,” the

[[Page 71675]]

Commission “shall * * * proclaim and fix such [position] limits * * * 
as the Commission finds are necessary to diminish, eliminate, or 
prevent such burden.” 466 This rulemaking responds to the 
Congressional mandate for the Commission to impose position limits both 
within and outside of the spot-month on DCM futures and economically 
equivalent swaps.
—————————————————————————

    466 Section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).
—————————————————————————

    The Congressional mandate also directed that the Commission set 
limits, to the maximum extent practicable, in its discretion, to 
diminish, eliminate or prevent excessive speculation, deter or prevent 
market manipulation, ensure sufficient liquidity for bona fide hedgers, 
and ensure that the price discovery function of the underlying market 
is not disrupted.467 To that end, the Commission evaluated its 
historical experience setting limits and overseeing DCMs that 
administer limits, reviewed available futures and swaps data, and 
considered comments from the public in order to establish limits that 
address, to the maximum extent practicable within the Commission’s 
discretion, the above mentioned statutory objectives.
—————————————————————————

    467 See section 4a(a)(3)(B) of the CEA, 7 U.S.C. 6a(a)(3)(B).
—————————————————————————

    The spot-month limit, set at 25% of deliverable supply, retains 
current practice in setting spot-month position limits, and in the 
Commission’s experience this formula is effective in diminishing the 
potential for manipulative behavior and excessive speculation within 
the spot-month. As evidenced by the limited number of traders that may 
need to adjust their trading strategies to account for the limits, the 
Commission does not believe that this formula will impose an overly 
stringent constraint on speculative activity; and therefore, should 
ensure sufficient liquidity for bona fide hedgers and that the price 
discovery function of the underlying market is not disrupted. In 
addition, continuing the practice of registered entity spot-month 
position limits should serve to more effectively monitor trading to 
prevent manipulation and in turn protect market participants and the 
price discovery process.
    With regard to the interim final rules for cash-settled contracts 
in the spot-month, as previously explained the Commission believes that 
the level of five times the applicable limit for the physical-delivery 
natural gas contracts should protect market participants through 
maximizing, to the extent practicable, the objectives set forth by 
Congress in CEA section 4a(a)(3)(B). In addition, based upon the 
Commission’s limited swaps data, the limits on cash-settled 
agricultural, metals, and energy (other than natural gas) contracts 
should ensure sufficient liquidity for bona fide hedgers and avoid 
disruption to price discovery in the underlying market due to the 
overall size of the swap market in those commodities. Nevertheless, the 
Commission intends to monitor trading activity under the new limits to 
determine the effect on market liquidity of these limits and whether 
the limits should be modified to further maximize the four statutory 
objectives set forth in CEA section 4a(a)(3)(B). The Commission also 
invites public comment as to these determinations.
    With regard to the non-spot-month position limits, which are set at 
a percentage of open interest, the Commission believes such limits will 
also protect market participants and the public through maximization, 
to the extent practicable, the four objectives set forth in CEA section 
4a(a)(3)(B). The Commission selected the general 10-2.5% formula for 
calculating position limits as a percentage of market open interest 
based on the Commission’s longstanding experience overseeing DCM 
position limits outside of the spot-month, which are based on the same 
formula. Further, as evidenced by the relatively few traders that the 
Commission estimates would hold positions in excess of such levels, the 
relatively small percentage of total open interest these traders would 
hold in excess of these limits, and that many large traders are 
expected to be bona fide hedgers; the Commission concludes that these 
limits should protect the public through ensuring sufficient liquidity 
for bona fide hedgers and protecting the price discovery function of 
the underlying market.
    Finally, the position visibility levels established in these final 
rules should protect market participants by giving the Commission data 
to monitor the largest traders in Referenced metal and energy 
contracts. The data reported under position visibility levels will help 
the Commission in considering whether to reset position limits to 
maximize further the four statutory objectives in section 4a(a)(3(B) of 
the CEA. Further, monitoring the largest traders in these markets 
should provide the Commission with data that may help prevent or detect 
potentially manipulative behavior.
ii. Efficiency, Competiveness, and Financial Integrity of Futures 
Markets
    The Federal spot-month and non-spot-month formulas adopted under 
the final rules are designed, in accordance with CEA section 
4a(a)(3)(B),to deter and prevent manipulative behavior and excessive 
speculation, while also maintaining sufficient liquidity for hedging 
and protecting the price discovery process. To the extent that the 
position limit formulas achieve these objectives, the final rules 
should protect the efficiency, competitiveness, and financial integrity 
of futures markets.
iii. Price Discovery
    Based on its historical experience, the Commission believes that 
adopting formulas for position limits that are based on formulas that 
have historically been used by the Commission and DCMs to establish 
position limits maximizes the extent practicable, at this time, the 
four statutory objectives set forth by Congress in CEA section 
4a(a)(3). Based on its prior experience with these limits, the 
Commission believes that the price discovery function of the underlying 
market will not be disrupted. Similarly, as effective price discovery 
relies on the accuracy of prices in futures markets, and to the extent 
that the position limits described herein protect prices from market 
manipulation and excessive speculation, the final rules should protect 
the price discovery function of futures markets.
iv. Sound Risk Management Practices
    To the extent that these position limits prevent any market 
participant from holding large positions that could cause unwarranted 
price fluctuations in a particular market, facilitate manipulation, or 
disrupt the price discovery process, such limits serve to prevent 
market participants from holding positions that present risks to the 
overall market and the particular market participant as well. To this 
extent, requiring market participants to ensure that they do not 
accumulate positions that, when traded, could be disruptive to the 
overall market–and hence themselves as well–promotes sound risk 
management practices by market participants.
v. Public Interest Considerations
    The Commission has not identified any other public interest 
considerations related to the costs and benefits of the rules 
establishing limits on positions.
5. Exemptions: Bona Fide Hedging
    As discussed section II.G. of this release, the Dodd-Frank Act 
provided a definition of bona fide hedging for futures contracts that 
is more narrow than the Commission’s existing definition under 
regulation Sec.  1.3(z). Pursuant to sections 4a(c)(1) and (2) of the 
CEA, the Commission incorporated the narrowed definition of bona fide

[[Page 71676]]

hedging into the Proposed Rules, and incorporates this definition into 
these final rules. The Commission also limited bona fide hedging 
transactions to those specifically enumerated transactions and pass-
through swap transactions set forth in final Sec.  151.5. In response 
to commenters’ inquiries over whether certain transactions qualified as 
an enumerated hedge transaction, the Commission expanded the list of 
enumerated hedge transactions eligible for the bona fide hedging 
exemption, and also gave examples of enumerated hedge transactions in 
appendix B to this release.468
—————————————————————————

    468 This appendix provides examples of transactions that would 
qualify as an enumerated hedge transaction; the enumerated examples 
do not represent the only transactions that could qualify.
—————————————————————————

    Pursuant to CEA section 4a(c)(1), the Commission also proposed to 
extend the definition of bona fide hedging transactions to all 
referenced contracts, including swaps transactions. The Commission is 
adopting the definition of bona fide hedging as proposed. The 
Commission believes that applying the statutory definition of bona fide 
hedging to swaps is consistent with congressional intent as embodied in 
the expansion of the Commission’s authority to swaps (i.e., those that 
are economically-equivalent and SPDFs). In granting the Commission 
authority over such swaps, Congress recognized that such swaps warrant 
similar treatment to their economically equivalent futures for purposes 
of position limits and therefore, intended that statutory definition of 
bona fide hedging also be extended to swaps.469
—————————————————————————

    469 The Commission notes that the impact of the definition of 
bona fide hedging for both futures and swaps will vary depending of 
the positions of each entity. Due to this variability among 
potentially affected entities, the specifics of which are not known 
to the Commission, and cannot be reasonably ascertained, the 
Commission cannot reasonably quantify the impact of applying the 
same definition of bona fide hedging for swaps and futures 
transactions.
—————————————————————————

    The Commission also established a reporting and recordkeeping 
regime for bona fide hedge exemptions. Under the proposal, a trader 
with positions in excess of the applicable position limit would be 
required to file daily reports to the Commission regarding any claimed 
bona fide hedge transactions. In addition, all traders would be 
required to maintain records related to bona fide hedging exemptions, 
including the exemption for “pass-through” swaps. In response to 
comments, the Commission has reduced the reporting frequency from daily 
to monthly, and streamlined the recordkeeping requirements for pass-
through swap counterparties. These modifications should permit the 
Commission to retain its surveillance capabilities to ensure the proper 
application of the bona fide hedge exemption as defined in the statute, 
while addressing commenters’ concerns regarding costs.
    Commenters argued that the definition of bona fide hedging, as 
proposed, was too narrow and, if applied, would reduce liquidity in 
affected markets.470 These commenters suggested that the list of 
enumerated transactions did not adequately take into account all 
possible hedging transactions.471 The lack of a broad risk management 
exemption also caused concerns among some commenters, who noted that 
the cost of reclassifying transactions would be significant and could 
induce companies to do business in other markets.472 Other commenters 
expressed concerns regarding the pass-through exemption for swap 
dealers whose counterparties are bona fide hedgers, suggesting that the 
provision implied bona fide hedgers must manage the hedging status of 
their transactions and report them to the swap dealer, thus burdening 
the hedger in favor of the swap dealer.473 Some commenters suggested 
that the Commission develop a method for exempting liquidity providers 
in order to retain the valuable services such participants 
provide.474 One commenter urged the Commission to remove limit 
exemptions for index fund investors in agricultural markets in order to 
decrease volatility and allow for true price discovery.475 Another 
commenter requested that the Commission allow categorical exemptions 
for trade associations to reduce the burden on smaller entities.476
—————————————————————————

    470 See e.g., CL-Gavilon supra note 276 at 6; CL-FIA I supra 
note 21 at 14-15.
    471 See e.g., CL-Commercial Alliance I supra note 42 at 2; CL-
FIA I supra note 21 at 14; and CL-Economists Inc. supra note 172 at 
19.
    472 See e.g., CL-Gavilon supra note 276 at 6.
    473 CL-BGA supra note 35 at 17.
    474 See e.g., CL-FIA I supra note 21 at 17-18; and CL-Katten 
supra note 21 at 2-3.
    475 CL-ABA supra note 150 at 6.
    476 CL-NREC/AAPP/ALLPC supra note 266 at 27.
—————————————————————————

    Many commenters argued that the reporting requirements were overly 
burdensome and requested monthly reporting of bona fide hedging 
activity as opposed to the daily reporting that would be required by 
the Proposed Rule.477 The commenters also criticized proposed 
restrictions on holding a hedge into the last five days of 
trading.478 Some commenters on anticipatory hedging exemptions noted 
the proposed one year limitation on anticipatory hedging was biased 
toward agricultural products and did not take into account the 
different structure of other markets.479 One commenter noted that the 
requirement to obtain approval for anticipatory hedge exemptions at a 
time close to when the position may exceed the limit is 
burdensome.480
—————————————————————————

    477 See e.g., CL-API supra note 21 at 10; CL-Encana supra note 
145 at 3; CL-FIA I supra note 21 at 21; CL-WGCEF supra note 35 at 
14-15; CL-ICE I supra note 69 at 11-12; CL-COPE supra note 21 at 12; 
CL-EEI/ESPA supra note 21 at 6-7.
    478 See e.g., CL-FIA I supra note 21 at 16; and CL-ISDA/SIFMA 
supra note 21 at 11.
    479 See e.g., CL-Economists, Inc. supra note 172 at 20-21.
    480 See e.g., CL-AGA supra note 124 at 7.
—————————————————————————

    The Commission is implementing the statutory directive to define 
bona fide hedging for futures contracts as provided in CEA section 
4a(c)(2). In this respect, the Commission does not have the discretion 
to disregard a directive from Congress concerning the narrowed scope of 
the definition of bona fide hedging transactions.481 Thus, for 
example, as discussed in section II.G. of this release, the final rules 
do not provide for risk management exemptions, given that the statutory 
definition of bona fide hedging generally excludes the application of a 
risk management exemption for entities that generally manage the 
exposure of their swap portfolio.482 As discussed above, the 
Commission is authorized to define bona fide hedging for swaps and in 
this regard, may construe bona fide hedging to include risk management 
transactions. The Commission, however, does not believe that including 
a risk management provision is necessary or appropriate given that the 
elimination of the class limits outside of the spot-month will allow 
entities, including swap dealers, to net Referenced Contracts whether 
futures or economically equivalent swaps.483 As such, under the final 
rules, positions in

[[Page 71677]]

Referenced Contracts entered to reduce the general risk of a swap 
portfolio will be netted with the positions in the portfolio outside of 
the spot-month.484
—————————————————————————

    481 Some commenters suggested that the Commission should use 
its exemptive authority in section 4a(a)(7) of the CEA, 7 U.S.C. 
6a(a)(7), to expand the definition of bona fide hedging to include 
certain transactions; however, the Commission cannot use its 
exemptive authority to reshape the statutory definition provided in 
section 4a(c)(2) of the CEA, 7 U.S.C. 6a(c)(2).
    482 As discussed in II.G.1, the plain text of the new 
statutory definition directs the Commission to define bona fide 
hedging for futures contracts to include hedging for physical 
commodities (other than excluded commodities derivatives) only if 
such transactions or positions represent substitutes for cash market 
transactions and offset cash market risks. This definition excludes 
hedges of general swap position risk (i.e., a risk-management 
exemption), but does include a limited exception for pass-through 
swaps.
    483 The removal of class limits should also generally mitigate 
the impact of not having a risk management exemption across futures 
and swaps because affected traders can net risk-reducing positions 
in the same Referenced Contract outside of the spot-month.
    484 The statutory definition of bona fide hedging does not 
include a risk management exemption for futures contracts. The 
impact of not having a risk-management exemption will vary depending 
on the positions of each entity, and the extent of mitigation 
through netting futures and swaps outside of the spot-month will 
also vary depending on the positions of each entity. Due to this 
variability among potentially affected entities, the specifics of 
which are not known to the Commission, and cannot be reasonably 
ascertained, the Commission cannot reasonably quantify the impact of 
not incorporating a risk-management exemption within the definition 
of bona fide hedging. Further, as noted above, the Commission is 
currently unable to quantify the cost that a firm may incur as a 
result of position limits impacting trading strategies.
—————————————————————————

    The Commission estimates that there may be significant costs (or 
foregone benefits) associated with the implementation of the new 
statutory definition of bona fide hedging to the extent that the 
restricted definition of bona fide hedging may require traders to 
potentially adjust their trading strategies. Additionally, there may be 
costs associated with the application of the narrowed bona fide hedging 
definition to swaps. The Commission anticipates that certain firms may 
need to adjust their trading and hedging strategies to ensure that 
their aggregate positions do not exceed position limits. As previously 
noted, however, the Commission is unable to estimate the costs to 
market participants from such adjustments in trading and hedging 
strategies. Commenters did not provide any quantitative data as to such 
potential impacts from the proposed limits and the Commission does not 
have access to any such business strategies of market participants; 
thus, the Commission cannot independently evaluate the potential costs 
to market participants of such changes in strategies.
    In light of the requests from commenters for clarity on whether 
specific transactions qualified as bona fide hedge transactions, the 
Commission developed Appendix B to these Final Rules to detail certain 
examples of bona fide hedge transactions provided by commenters that 
the Commission believes represent legitimate hedging activity as 
defined by the revised statute.485
—————————————————————————

    485 See II.G.1. of this release.
—————————————————————————

    As described further in the PRA section, the Commission estimates 
the costs of bona fide hedging-related reporting requirements will 
affect approximately 200 entities annually and result in a total burden 
of approximately $29.8 million across all of these entities, including 
29,700 annual labor hours resulting in a total of $2.3 million in 
annual labor costs and $27.5 million in annualized capital and start-up 
costs and annual total operating and maintenance costs. These estimated 
costs amount to approximately $149,000 per entity. The reduction in the 
frequency of reporting from daily in the proposal to monthly in the 
final rule will decrease the burden on bona fide hedgers while still 
providing the Commission with adequate data to ensure the proper 
application of the statutory definition of bona fide hedging 
transaction. Further, the advance application required for an 
anticipatory exemption has also been changed to a notice filing, which 
should also decrease costs for bona fide hedgers as such entities can 
rely on the exemption and implement hedging strategies upon filing the 
notice as opposed to incurring a delay while awaiting the Commission to 
respond to the application.
    The Commission has also eliminated restrictions on maintaining 
certain types of bona fide hedges (e.g., anticipatory hedges) in the 
last five days of trading for all cash-settled Referenced Contracts. 
The Commission will maintain this general restriction for physically-
delivered Referenced Contracts. However, the Commission is clarifying 
the time period for these restrictions in the physical delivery 
contracts, distinguishing the agricultural physical-delivery contacts 
from the non-agricultural physical delivery contracts. The Commission 
will retain the proposed restrictions for the last five days of trading 
in agricultural physical-delivery Referenced Contracts, while non-
agricultural physical delivery Referenced Contracts will be subject to 
a prohibition that applies to holding the hedge into the spot month. 
The Commission has removed these restrictions in cash settled contracts 
in order to avoid, for example, requiring a trader with an anticipatory 
hedge exemption either to apply for a hedge exemption based on newly 
produced inventories (i.e., the hedge no longer being anticipatory) or 
to roll before the spot period restriction. The restriction on holding 
an anticipatory hedge into the last days of trading on a physical-
delivery contract mitigates concerns that liquidation of a very large 
bona fide hedging position would have a negative impact on a physical-
delivery contract during the last few days since such an anticipatory 
hedger neither intended to make nor take delivery and, thus, would 
liquidate a large position at a time of reduced trading activity, 
impacting orderly trading in the contracts. Such concerns generally are 
not present in cash-settled contracts, since a trader has no need to 
liquidate to avoid delivery. The Commission believes that permitting 
the maintenance of such hedges in cash settled contracts will not 
negatively affect the integrity of these markets.
    Also in response to commenters, the one-year limitation on 
anticipatory hedging has been amended in the final rules to apply only 
to agricultural markets; the limitation has been lifted on energy and 
metal markets, in recognition of the differences in the characteristics 
of the markets for different commodities, such as the annual crop cycle 
for agricultural commodities, that are not present in energy and metal 
commodities.
a. CEA Section 15(a) Considerations: Bona Fide Hedging
    Congress established the definition of bona fide hedge transaction 
for contracts of future delivery in CEA section 4a(c)(2), and the 
Commission incorporated this definition into the final rules. As 
described in section II.G. of this release and in the consideration of 
costs and benefits, Congress limited the scope of bona fide hedging 
transactions to those tied to a physical marketing channel.486 The 
Commission believes the enumerated hedges provide an appropriate scope 
of exemptions for market participants, consistent with the statutory 
directive for the Commission to define bona fide hedging transactions 
and positions.
—————————————————————————

    486 For the reasons discussed above in this section III.A.4., 
the Commission is defining bona fide hedging for swaps to replicate 
the statutory definition for futures contracts.
—————————————————————————

i. Protection of Market Participants and the Public
    The Commission’s filing and recordkeeping requirements for bona 
fide hedging activity are intended to enhance the Commission’s ability 
to monitor bona fide hedging activities, and in particular, to 
ascertain whether large positions in excess of an applicable position 
limit reflect bona fide hedging and thus are exempt from position 
limits. The Commission anticipates that the filing and recordkeeping 
provisions will impose costs on entities. However, the Commission 
believes that these costs provide the benefit of ensuring that the 
Commission has access to information to determine whether positions in 
excess of a position limit relate to bona fide hedging or speculative 
activity. To reduce the compliance burden on bona fide hedgers, the 
Commission has reduced the reporting frequency from daily to monthly. 
As a necessary

[[Page 71678]]

component of an effective position limits regime, the Commission 
believes that the requirements related to bona fide hedging will 
protect participants and the public.
ii. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    In CEA section 4a, as amended by the Dodd-Frank Act, Congress 
explicitly exempted those market participants with legitimate bona fide 
hedge positions from position limits. In implementing this definition, 
the final rules’ position limits will not constrict the ability for 
hedgers to mitigate risk–a fundamental function of futures markets. In 
addition, as previously noted, the Commission has set these position 
limits at levels that will, in the Commission’s judgment, to the 
maximum extent practicable at this time, meet the objectives set forth 
in CEA section 4a(a)(3)(B), which includes ensuring sufficient 
liquidity for bona fide hedgers. In maximizing these objectives, the 
Commission believes that such limits will preserve the efficiency, 
competitiveness, and financial integrity of futures markets. Similarly, 
the filing and recordkeeping requirements should help to ensure the 
proper application of the bona fide hedge exemption.
    However, Congress also narrowed the definition of what the 
Commission could consider to be a bona fide hedge for contracts as 
compared to the Commission’s definition in regulation 1.3(z). The 
Commission has attempted to mitigate concerns regarding any potential 
negative impact to the efficiency of futures markets based upon the new 
statutory definition. For instance, the Commission has expanded the 
list of enumerated hedging transactions to clarify the application of 
the statutory definition.487 In addition, the Commission has removed 
the application of class limits outside of the spot-month, which should 
mitigate the impact of narrowing the bona fide hedge exemption, since 
positions taken in the futures market to hedge the risk from a position 
established in the swaps market (or vice versa) can be netted for the 
purpose of calculating whether such positions are in excess of any 
applicable position limits. In light of these considerations, the 
Commission anticipates that the Commission’s implementation of the 
statutory definition of bona fide hedging will not negatively affect 
the competitiveness or efficiency of the futures markets.
—————————————————————————

    487 As described in earlier sections and as found in Appendix 
B of these rules.
—————————————————————————

iii. Price Discovery
    As discussed above, the Commission is implementing the new 
statutory definition of bona fide hedging. Based on its historical 
experience with position limits at the levels similar to those 
established in the final rules, and in light of the measures taken to 
mitigate the effects of the narrowed statutory definition of bona fide 
hedging, the Commission does not anticipate the rules relating to the 
bona fide hedge exemption will disrupt the price discovery process.
iv. Sound Risk Management Practices
    While the bona fide hedging requirements will cause market 
participants to monitor their physical commodity positions to track 
compliance with limits, the bona fide hedging requirements do not 
necessarily affect how a firm establishes and implements sound risk 
management practices.
v. Public Interest Considerations
    The Commission has not identified any other public interest 
considerations related to the costs and benefits of the rules with 
respect to bona fide hedging.
6. Aggregation of Accounts
    The final regulations, as adopted, largely clarify existing 
Commission aggregation standards under part 150 of the Commission’s 
regulations. As discussed in section II.H. of this release, the 
Commission proposed to significantly alter the current aggregation 
rules and exemptions. Specifically, proposed part 151 would eliminate 
the independent account controller (IAC) exemption under current Sec.  
150.3(a)(4), restrict many of the disaggregation provisions currently 
available under Sec.  150.4 and create a new owned-financial entity 
exemption. The proposal would also require a trader to aggregate 
positions in multiple accounts or pools, including passively managed 
index funds, if those accounts or pools have identical trading 
strategies. Lastly, disaggregation exemptions would no longer be 
available on a self-executing basis; rather, an entity seeking an 
exemption from aggregation would need to apply to the Commission, with 
the relief being effective only upon Commission approval.488
—————————————————————————

    488 The Commission did not propose any substantive changes to 
existing Sec.  150.4(d), which allows an FCM to disaggregate 
positions in discretionary accounts participating in its customer 
trading programs provided that the FCM does not, among other things, 
control trading of such accounts and the trading decisions are made 
independently of the trading for the FCM’s other accounts. As 
further described below, however, the FCM disaggregation exemption 
would no longer be self-executing; rather, such relief would be 
contingent upon the FCM applying to the Commission for relief.
—————————————————————————

    Commenters asserted that the elimination of the longstanding IAC 
exemption would lead to a variety of negative effects, including 
reduced liquidity and distorted price signals, among many other 
things.489 One commenter mentioned that without the IAC exemption, 
multi-advisor commodity pools may become impossible.490 Commenters 
also expressed concerns that the proposed owned non-financial entity 
exemption lacked a rational basis for drawing a distinction between 
financial and non-financial entities; and the absence of the IAC 
exemption could force a firm to violate other Federal laws by sharing 
of position information across otherwise separate entities.491 Other 
commenters criticized the costs of the aggregation exemption 
applications, stating that the process would be burdensome for 
participants.492
—————————————————————————

    489 See e.g. CL-DBCS supra note 247 at 6; CL-Morgan Stanley 
supra note 21 at 8-9; and CL-PIMCO supra note 21 at 4.
    490 CL-Willkie supra note 276 at 3-4.
    491 See e.g. CL-PIMCO supra note 21 at 4-5; CL-BGA supra note 
35 at 22; CL-FIA I supra note 21 at 24; CL-ICE I supra note 69 at 6; 
and CL-CME I supra note 8 at 16.
    492 See e.g. CL-ICE I supra note 69 at 13; CL-CME I supra note 
8 at 17; CL-FIA I supra note 21 at 26-27; and CL-Cargill supra note 
76 at 9.
—————————————————————————

    In addition, commenters objected to the changes to the 
disaggregation exemption as it applies to interests in commodity pools, 
arguing that forcing aggregation of independent traders would increase 
concentration, limit investment opportunities, and thus potentially 
reduce liquidity in the U.S. futures markets.493 Commenters also 
objected to the Commission’s proposal to aggregate on the basis of 
identical trading strategies, arguing that it would decrease index fund 
participation and reduce liquidity.494
—————————————————————————

    493 See e.g. CL-MFA supra note 21 at 14-15; and CL-Blackrock 
supra note 21 at 6-7.
    494 See e.g. CL-CME I supra note 8 at 18; and CL-Blackrock 
supra note 21 at 14.
—————————————————————————

    The primary rationale for the aggregation of positions or accounts 
is the concern that a single trader, through common ownership or 
control of multiple accounts, may establish positions in excess of the 
position limits–or otherwise attain large concentrated positions–and 
thereby increase the risk of market manipulation or disruption. 
Consistent with this goal, the Commission, in its design of the 
aggregation policy, has strived to ensure the participation of a 
minimum number of traders that are independent of each

[[Page 71679]]

other and have different trading objectives and strategies.
    Upon further consideration, and in response to commenters, the 
Commission is retaining the IAC exemption in existing Sec.  150.4, 
recognizing that to the extent that an eligible entity’s client 
accounts are traded by independent account controllers,495 with 
appropriate safeguards, such trading may enhance market liquidity and 
promote efficient price discovery without increasing the risk of market 
manipulation or disruption.496
—————————————————————————

    495 The Commission has long recognized that concerns regarding 
large concentrated positions are mitigated in circumstances 
involving client accounts managed under the discretion and control 
of an independent trader, and subject to effective information 
barriers.
    496 In retaining the IAC exemption, the Commission has decided 
not to adopt the proposed exemption for owned non-financial 
entities, which addresses commenters’ concern that the proposal 
would have resulted in unfair over discriminatory treatment of 
financial entities.
—————————————————————————

    The final rules expressly provide that the Commission’s aggregation 
policy will apply to swaps and futures. The extension of the 
aggregation requirement to swaps may force a trader to adjust its 
business model or trading strategies to avoid exceeding the limits. The 
Commission is unable to provide a reliable estimation or quantification 
of the costs (including foregone benefits) of such changes because, 
among other things, the effect of this determination will vary per 
entity and would require information concerning the subject entity’s 
underlying business models and strategies, to which the Commission does 
not have access.497
—————————————————————————

    497 The Commission notes that this cost is directly 
attributable to the congressional mandate that the Commission impose 
limits on economically equivalent swaps. That is to say, unless the 
aggregation policy is extended to swaps on equal basis, the express 
congressional mandate to impose limits on futures (options) and 
economically equivalent swaps would be undermined.
—————————————————————————

    To further respond to concerns from commenters, the Commission is 
establishing an exemption from the aggregation standards in 
circumstances where the aggregation of an account would result in the 
violation of other Federal laws or regulations, and an exemption for 
the temporary ownership or control of accounts related to underwriting 
securities. In addition, in response to commenters’ concerns regarding 
potential negative market impacts on liquidity and competitiveness, the 
Commission is not adopting the proposed changes to the standards for 
commodity pool aggregation and is instead retaining the existing 
standards. However, the Commission is retaining the provision that 
requires aggregation for identical trading strategies in order to 
prevent the evasion of speculative position limits.498
—————————————————————————

    498 The cost to monitor positions in identical trading 
strategies is reflected in the Commission’s general estimates to 
track positions on a real-time basis.
—————————————————————————

    In light of the importance of the aggregation standards in an 
effective position limits regime, it is critical that the Commission 
effectively and efficiently monitor the extent to which traders rely on 
any of the disaggregation exemptions. During the period of time that 
the exemptions from aggregation were self-certified, the Commission did 
not have an adequate ability to monitor whether entities were properly 
interpreting the scope of an exemption or whether entities followed the 
conditions applicable for exemptive relief. Accordingly, traders 
seeking to rely on any disaggregation exemption will be required to 
file a notice with the Commission; the disaggregation exemption is no 
longer self-executing. As discussed in the PRA section, the Commission 
estimates costs associated with reporting regulations will affect 
approximately ninety entities resulting in a total burden, across all 
of these entities, of 225,000 annual labor hours and $5.9 million in 
annualized capital and start-up costs and annual total operating and 
maintenance costs.
a. CEA Section 15(a) Considerations: Aggregation
    The aggregation standards finalized herein largely track the 
Commission’s longstanding policy on aggregation, which will now apply 
to futures and swaps transactions. The Commission has added certain 
additional safeguards to ensure the proper aggregation of accounts for 
position limit purposes.
i. Protection of Market Participants and the Public
    The Commission’s general policy on aggregation is derived from CEA 
section 4a(a)(1), which directs the Commission to aggregate based on 
the positions held as well as the trading done by any persons directly 
or indirectly controlled by such person.499 The Commission has 
historically interpreted this provision to require aggregation based 
upon ownership or control. The commenters largely supported the 
existing aggregation standards, and as noted above, the Commission has 
largely retained the aggregation policy from part 150 and extended its 
application to positions in swaps.
—————————————————————————

    499 Section 4a(a)(1) also directs that the Commission 
aggregate “trading done by, two or more persons acting pursuant to 
an express or implied agreement or understanding, the same as if the 
positions were held by, or trading were done by, a single person.” 
7 U.S.C. 6a(a)(1).
—————————————————————————

    As discussed above, the Commission anticipates that the aggregation 
standards will impose additional costs to various market participants, 
including the monitoring of positions and filing for an applicable 
exemption. However, the benefits derived from a notice filing, which 
ensure proper application of aggregation exemptions, and the general 
monitoring of positions, which are a necessary cost to the imposition 
of position limits, warrant adoption of the final aggregation rules. 
The continued use of existing aggregation standards, which are followed 
at the Commission and DCM level, may mitigate costs for entities to 
continue to aggregate their positions. In addition, the new aggregation 
provision related to identical trading strategies furthers the 
Commission policy on aggregation by preventing evasion of the limits 
through the use of positions in funds that follow the same trading 
strategy. Accordingly, as a necessary component of an effective 
position limit regime, and based on its experience with the current 
aggregation rules, the Commission believes that the provisions relating 
to aggregation in the final rules will promote the protection of market 
participants and the public.
ii. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    For reasons discussed above, an effective position limits regime 
must include a robust aggregation policy that is designed to prevent a 
trader from attaining market power through ownership or control over 
multiple accounts. To the extent that the aggregation policy under the 
final rules prevent any market participant from holding large positions 
that could cause unwarranted price fluctuations in a particular market, 
facilitate manipulation, or disrupt the price discovery process, the 
aggregation standards finalized herein operate to help ensure the 
efficiency, competitiveness and financial integrity of futures markets. 
In addition to the existing exemptions under part 150, to address 
commenter concerns over forced information sharing in violation of 
Federal law and regarding the underwriting of securities, the 
Commission is providing for limited exemptions to cover such 
circumstances.
iii. Price Discovery
    For similar reasons, the Commission believes that the aggregation 
requirements will further the price discovery process. An effective

[[Page 71680]]

aggregation policy has been a longstanding component of the 
Commission’s position limit regime. As a necessary component of an 
effective position limit regime, and based on its experience with the 
current aggregation rules, the Commission believes that the provisions 
relating to aggregation in the final rules will also help protect the 
price discovery process.
iv. Sound Risk Management
    As a necessary component of an effective position limits regime, 
and based on its experience with the current aggregation rules, the 
Commission believes that the provisions relating to aggregation in the 
final rules will promote sound risk management.
v. Public Interest Considerations
    The Commission has not identified any other public interest 
considerations related to the costs and benefits of the rules with 
respect to aggregation.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (“RFA”) requires Federal agencies 
to consider the impact of its rules on “small entities.” 500 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).501 In its 
proposal, the Commission explained that “[t]he requirements related to 
the proposed amendments fall mainly on [DCMs and SEFs], futures 
commission merchants, swap dealers, clearing members, foreign brokers, 
and large traders.” 502
—————————————————————————

    500 5 U.S.C. 601 et seq.
    501 5 U.S.C. sections 601(2), 603, 604 and 605.
    502 76 FR 4765.
—————————————————————————

    In response to the Proposed Rules, the Not-For-Profit Electric End 
User Coalition (“Coalition”) submitted a comment generally 
criticizing the Commission’s “rule-makings [as] an accumulation of 
interrelated regulatory burdens and costs on non-financial small 
entities like the NFP Electric End Users, who seek to transact in 
Energy Commodity Swaps and “Referenced Contracts” only to hedge the 
commercial risks of their not-for-profit public service activities.” 
503 In addition, the Coalition requested “that the Commission 
streamline the use of the bona fide hedging exemption for non-financial 
entities, especially for those that engage in CFTC-regulated 
transactions as `end user only/bona fide hedger only’ market 
participants.” 504 However, such persons necessarily would be large 
traders.
—————————————————————————

    503 Not-For-Profit Electric End User Coalition (“EEUC”) on 
March 28, 2011 (“CL-EEUC”) at 29.
    504 Id. at 15.
—————————————————————————

    The Commission has determined that this position limits rule will 
not have a significant economic impact on a substantial number of small 
businesses. With regard to the position limits and position visibility 
levels, these would only impact large traders, which the Commission has 
previously determined not to be small entities for RFA purposes.505 
The Commission would impose filing requirements under final Sec. Sec.  
151.5(c) and (d) associated with bona fide hedging if a person exceeds 
or anticipates exceeding a position limit. Although regulation Sec.  
151.5(h) of these rules requires counterparties to pass-through swaps 
to keep records supporting the transaction’s qualification for an 
enumerated hedge, the marginal burden of this requirement is mitigated 
through overlapping recordkeeping requirements for reportable futures 
traders (Commission regulation 18.05) and reportable swap traders 
(Commission regulation 20.6(b)). Further, the Commission understands 
that entities subject to the recordkeeping requirements for their swaps 
transactions maintain records of these contracts, as they would other 
documents evidencing material financial relationships, in the ordinary 
course of their businesses. Therefore, these rules would not impose a 
significant economic impact even if applied to small entities.
—————————————————————————

    505 Policy Statement and Establishment of Definitions of 
“Small Entities” for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, Apr. 30, 1982 (FCM, DCM and large trader 
determinations).
—————————————————————————

    The remaining requirements in this final rule generally apply to 
DCMs, SEFs, futures commission merchants, swap dealers, clearing 
members, and foreign brokers. The Commission previously has determined 
that DCMs, futures commission merchants, and foreign brokers are not 
small entities for purposes of the RFA.506 Similarly, swap dealers, 
clearing members, and traders would be subject to the regulations only 
if carrying large positions.
—————————————————————————

    506 See 47 FR at 18618; 72 FR 34417, Jun. 22, 2007 (foreign 
broker determination).
—————————————————————————

    The Commission has proposed, but not yet determined, that SEFs 
should not be considered to be small entities for purposes of the RFA 
for essentially the same reasons that DCMs have previously been 
determined not to be small entities.507 Similarly, the Commission has 
proposed, but not yet determined, that swap dealers should not be 
considered “small entities” for essentially the same reasons that 
FCMs have previously been determined not to be small entities.508 For 
all of the reasons stated in those previous releases, the Commission 
has determined that SEFs and swap dealers are not “small entities” 
for purposes of the RFA.
—————————————————————————

    507 See 75 FR 63745, Oct. 18, 2010.
    508 See 76 FR 6715, Feb. 8, 2011.
—————————————————————————

    The Commission notes that it has not previously determined whether 
clearing members should be considered small entities for purposes of 
the RFA. The Commission does not believe that clearing members who will 
be subject to the requirements of this rulemaking will constitute small 
entities for RFA purposes. First, most clearing members will also be 
registered as FCMs, who as a category have been previously determined 
to not be small entities. Second, any clearing member effected by this 
rule will also, of necessity be a large trader, who as a category has 
also been determined to not be small entities. For all of these 
reasons, the Commission has determined that clearing members are not 
“small entities” for purposes of the RFA.
    Accordingly, the Chairman, on behalf of the Commission, certifies, 
pursuant to 5 U.S.C. 605(b), that the actions to be taken herein will 
not have a significant economic impact on a substantial number of small 
entities.

C. Paperwork Reduction Act

1. Overview
    The Paperwork Reduction Act (“PRA”) 509 imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. Certain 
provisions of the regulations will result in new collection of 
information requirements within the meaning of the PRA. An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number. The Commission submitted the proposing release to the Office of 
Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The Commission requested that OMB approve 
and assign a new control number for the collections of information 
covered by the proposing release.
—————————————————————————

    509 44 U.S.C. 3501 et seq.
—————————————————————————

    The Commission invited the public and other Federal agencies to 
comment on any aspect of the reporting and recordkeeping burdens 
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the

[[Page 71681]]

Commission solicited comments in order to (i) Evaluate whether the 
proposed collections of information are necessary for the proper 
performance of the functions of the Commission, including whether the 
information will have practical utility, (ii) evaluate the accuracy of 
the Commission’s estimate of the burden of the proposed collections of 
information, (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected, and 
(iv) minimize the burden of the collections of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    The Commission received three comments on the burden estimates and 
information collection requirements contained in its proposing release. 
The World Gold Council stated that the recordkeeping and reporting 
costs were not addressed.510 MGEX argued that the Commission’s 
estimated burden for DCMs to determine deliverable supply levels was 
too low.511 Specifically, it commented that the Commission’s estimate 
of “6,000 hours per year for all DCMs at a combined annual cost of 
$50,000 among all DCMs” would result “in an hourly wage of less than 
$10” to comply with the rules.512 The combined annual cost estimate 
cited by MGEX appears to be the amount the Commission estimated for 
annualized capital and start-up costs and annual total operating and 
maintenance costs; 513 this estimate is separate from any calculation 
of labor costs. The Working Group commented that it could not 
meaningfully respond to the costs until it had a complete view of all 
the Dodd-Frank Act rulemakings, that the Commission did not provide 
sufficient explanation for its estimates of the number of market 
participants affected by the final regulations, and that the Commission 
underestimated wage and personnel estimates.514 As further discussed 
below, the Commission has carefully reviewed its burden analysis and 
estimates, and it has determined its estimates to be reasonable.
—————————————————————————

    510 CL-WGC supra note 21 at 5.
    511 CL-MGEX supra note 74 at 4.
    512 Id.
    513 In this regard the Commission notes that the cost estimate 
for annualized capital and start-up costs and annual total operating 
and maintenance costs was $55,000.
    514 CL-WGCEF supra note 35 at 25-26.
—————————————————————————

    Responses to the collections of information contained within these 
final rules are mandatory, and the Commission will protect proprietary 
information according to the Freedom of Information Act and 17 CFR part 
145, headed “Commission Records and Information.” In addition, the 
Commission emphasizes that section 8(a)(1) of the Act strictly 
prohibits the Commission, unless specifically authorized by the Act, 
from making public “data and information that would separately 
disclose the business transactions or market positions of any person 
and trade secrets or names of customers.” 515 The Commission also is 
required to protect certain information contained in a government 
system of records pursuant to the Privacy Act of 1974.516
—————————————————————————

    515 7 U.S.C. 12(a)(1).
    516 5 U.S.C. 552a.
—————————————————————————

    The title for this collection of information is “Part 151–
Position Limit Framework for Referenced Contracts.” OMB has approved 
and assigned OMB control number 3038-[—-] to this collection of 
information.
2. Information Provided and Recordkeeping Duties
    Proposed Sec.  151.4(a)(2) provided for a special conditional spot-
month limit for traders under certain conditions, including the 
submission of a certification that the trader met the required 
conditions, to be filed within a day after the trader exceeded a 
conditional spot-month limit. The Commission anticipated that 
approximately one hundred traders per year would submit conditional 
spot-month limit certifications and estimated that these one hundred 
entities would incur a total burden of 2,400 annual labor hours, 
resulting in a total of $189,000 in annual labor costs 517 and $1 
million in annualized capital, start-up,518 total operating, and 
maintenance costs. As described above, the Commission has eliminated 
the conditional spot-month limit as described in the Proposed Rules. 
These final rules now provide for a limit on cash-settled Referenced 
Contracts of five times the limit on the physical-delivery Referenced 
Contract. The cash-settled and physical-delivery contracts would also 
be subject to separate class limits, and the Commission would impose an 
aggregate limit set at five times the level of the spot-month limit in 
the relevant Core Referenced Futures Contract that is physically 
delivered. As such, traders need not file a certification to avail 
themselves of the conditional limit for cash-settled contracts. 
Therefore, these capital and labor cost estimates do not apply to the 
final regulations.
—————————————————————————

    517 The Commission staff’s estimates concerning the wage rates 
are based on salary information for the securities industry compiled 
by the Securities Industry and Financial Markets Association 
(“SIFMA”). The $78.61 per hour is derived from figures from a 
weighted average of salaries and bonuses across different 
professions from the SIFMA Report on Management & Professional 
Earnings in the Securities Industry 2010, modified to account for an 
1800-hour work-year and multiplied by 1.3 to account for overhead 
and other benefits. The wage rate is a weighted national average of 
salary and bonuses for professionals with the following titles (and 
their relative weight): “programmer (senior)” (30 percent); 
“programmer” (30 percent); “compliance advisor (intermediate)” 
(20 percent); “systems analyst” (10 percent); and “assistant/
associate general counsel” (10 percent).
    518 The capital/start-up cost component of “annualized 
capital/start-up, operating, and maintenance costs” is based on an 
initial capital/start-up cost that is straight-line depreciated over 
five years.
—————————————————————————

    Section 151.4(c) requires that DCMs submit an estimate of 
deliverable supply for each Referenced Contract that is subject to a 
spot-month position limit and listed or executed pursuant to the rules 
of the DCM. Under the Proposed Rules, the Commission estimated that the 
reporting would affect approximately six entities annually, resulting 
in a total marginal burden, across all of these entities, of 6,000 
annual labor hours and $55,000 in annualized capital, start-up, total 
operating, and maintenance costs. As discussed above, in response to 
comments concerning the process for determining deliverable supply, the 
Commission has determined to update spot-month limits biennially (every 
two years) instead of annually in the case of energy and metal 
contracts, and to stagger the dates on which estimates of deliverable 
supply shall be submitted by DCMs. As a result of these changes, the 
Commission estimates that this reporting will result in a total 
marginal burden, across the six affected entities, of 5,000 annual 
labor hours for a total of $511,000 in annual labor costs and $50,000 
in annualized capital, start-up, total operating, and maintenance 
costs.
    Section 151.5 sets forth the application procedure for bona fide 
hedgers and counterparties to bona fide hedging swap transactions that 
seek an exemption from the Commission-set Federal position limits for 
Referenced Contracts. If a bona fide hedger seeks to claim an exemption 
from position limits because of cash market activities, then the hedger 
would submit a 404 filing pursuant to Sec.  151.5(b). The 404 filing 
would be submitted when the bona fide hedger exceeds the applicable 
position limit and claims an exemption or when its hedging needs 
increase. Similarly, parties to bona fide hedging swap transactions 
would be required to submit a 404S filing to qualify for a hedging 
exemption, which would also be submitted when the bona fide hedger 
exceeds the applicable position limit and claims an exemption or when 
its

[[Page 71682]]

hedging needs increase. If a bona fide hedger seeks an exemption for 
anticipated commercial production or anticipatory commercial 
requirements, then the hedger would submit a 404A filing pursuant to 
Sec.  151.5(c).
    Under the Proposed Rules, 404 and 404S filings would have been 
required on a daily basis. In light of comments concerning the burden 
of daily filings to both market participants and the Commission, the 
final regulations require only monthly reporting of 404 and 404S 
filings. These monthly reports would provide information on daily 
positions for the month reporting period.
    The Commission estimated in the Proposed Rules that these bona fide 
hedging-related reporting requirements would affect approximately two 
hundred entities annually and result in a total burden of approximately 
$37.6 million across all of these entities, 168,000 annual labor hours, 
resulting in a total of $13.2 million in annual labor costs and $25.4 
million in annualized capital, start-up, total operating, and 
maintenance costs. As a result of modifications made to the Proposed 
Rules, under the final regulations these bona fide hedging-related 
reporting requirements will affect approximately two hundred entities 
annually and result in a total burden of approximately $28.6 million 
across all of these entities, 29,700 annual labor hours, resulting in a 
total of $2.3 million in annual labor costs and $26.3 million in 
annualized capital, start-up, total operating, and maintenance costs.
    With regard to 404 filings, under the Proposed Rules, the 
Commission estimated that 404 filing requirements would affect 
approximately ninety entities annually, resulting in a total burden, 
across all of these entities, of 108,000 total annual labor hours and 
$11.7 million in annualized capital, start-up, total operating, and 
maintenance costs. Under the final regulations, 404 filing requirements 
will affect approximately ninety entities annually, resulting in a 
total burden, across all of these entities, of 108,000 total annual 
labor hours and $11.7 million in annualized capital, start-up, total 
operating, and maintenance costs.
    With regard to 404A filings, under the Proposed Rules, the 
Commission estimated that 404A filing requirements would affect 
approximately sixty entities annually, resulting in a total burden, 
across all of these entities, of 6,000 total annual labor hours and 
$4.2 million in annualized capital, start-up, total operating, and 
maintenance costs. In addition to adjustments in these estimates 
stemming from the change in the frequency of filings, the estimate of 
entities affected by 404A filing requirements has been modified to 
reflect the fact that the final regulations include certain 
anticipatory hedging exemptions that were absent from the Proposed 
Rules. Thus, under the final regulations, 404A filing requirements will 
affect approximately ninety entities annually, resulting in a total 
burden, across all of these entities, of 2,700 total annual labor hours 
and $6.3 million in annualized capital, start-up, total operating, and 
maintenance costs.
    With regard to 404S filings, under the Proposed Rules the 
Commission estimated that 404S filing requirements would affect 
approximately forty-five entities annually, resulting in a total 
burden, across all of these entities, of 54,000 total annual labor 
hours and $9.5 million in annualized capital, start-up, total 
operating, and maintenance costs. Under the final regulations, 404S 
filing requirements will affect approximately forty-five entities 
annually, resulting in a total burden, across all of these entities, of 
16,200 total annual labor hours and $9.5 million in annualized capital, 
start-up, total operating, and maintenance costs.
    Section 151.5(e) specifies recordkeeping requirements for traders 
who claim bona fide hedge exemptions. These recordkeeping requirements 
include complete books and records concerning all of their related 
cash, futures, and swap positions and transactions and make such books 
and records, along with a list of swap counterparties to the 
Commission. Regulations 151.5(g) and 151.5(h) provide procedural 
documentation requirements for those availing themselves of a bona fide 
hedging transaction exemption. These firms would be required to 
document a representation and confirmation by at least one party that 
the swap counterparty is relying on a bona fide hedge exemption, along 
with a confirmation of receipt by the other party to the swap. 
Paragraph (h) of Sec.  151.5 also requires that the written 
representation and confirmation be retained by the parties and 
available to the Commission upon request.519 The marginal impact of 
this requirement is limited because of its overlap with existing 
recordkeeping requirements under Sec.  15.03. The Commission estimates, 
as it did under the Proposed Rules, that bona fide hedging-related 
recordkeeping regulations will affect approximately one hundred sixty 
entities, resulting in a total burden, across all of these entities, of 
40,000 total annual labor hours and $10.4 million in annualized 
capital, start-up, total operating, and maintenance costs.
—————————————————————————

    519 The Commission notes that entities would have to retain 
such books and records in compliance with Sec.  1.31.
—————————————————————————

    Section 151.6 requires traders with positions exceeding visibility 
levels in Referenced Contracts in metal and energy commodities to 
submit additional information about cash market and derivatives 
activity in substantially the same commodity. Section 151.6(b) requires 
the submission of a 401 filing which would provide basic position 
information on the position exceeding the visibility level. 
Section151.6(c) requires additional information, through a 402S filing, 
on a trader’s uncleared swaps in substantially the same commodity. The 
Commission has determined to increase the visibility levels from the 
proposed levels, meaning fewer market participants will be affected by 
the relevant reporting requirements. In addition, the Proposed Rules 
included a requirement to submit 404A filings under proposed Sec.  
151.6, but the Commission has eliminated this requirement in order to 
reduce the compliance burden for firms reporting under Sec.  151.6.
    Requirements under 401 filing reporting regulations in the Proposed 
Rules would have affected approximately one hundred forty entities 
annually, resulting in a total burden, across all of these entities, of 
16,800 total annual labor hours and $15.4 million in annualized 
capital, start-up, total operating, and maintenance costs. In the final 
regulations, these requirements will affect approximately seventy 
entities annually, resulting in a total burden, across all of these 
entities, of 8,400 total annual labor hours and $5.3 million in 
annualized capital, start-up, total operating, and maintenance costs.
    Requirements under 402S filing reporting regulations in the 
Proposed Rules would have affected approximately seventy entities 
annually, resulting in a total burden, across all of these entities, of 
5,600 total annual labor hours and $4.9 million in annualized capital, 
start-up, total operating, and maintenance costs. In the final 
regulations, the Commission has eliminated the 402S filing, thus 
eliminating any burden stemming from such reports.
    Requirements under visibility level-related 404 filing reporting 
regulations 520 in the Proposed Rules

[[Page 71683]]

would have affected approximately sixty entities annually, resulting in 
a total burden, across all of these entities, of 4,800 total annual 
labor hours and $4.2 million in annualized capital, start-up, total 
operating, and maintenance costs. In the final regulations, these 
requirements will affect approximately thirty entities annually, 
resulting in a total burden, across all of these entities, of 2,400 
total annual labor hours and $2.1 million in annualized capital, start-
up, total operating, and maintenance costs.
—————————————————————————

    520 For the visibility level-related 404 filing requirements, 
the estimated burden is based on reporting duties not already 
accounted for in the burden estimate for those submitting 404 
filings pursuant to proposed Sec.  151.5. For many of these firms, 
the experience and infrastructure developed submitting or preparing 
to submit a 404 filing under Sec.  151.5 would reduce the marginal 
burden imposed by having to submit filings under Sec.  151.6.
—————————————————————————

    As noted above, 404A filing requirements under Sec.  151.6 have 
been eliminated in the final regulations. Therefore, the burden 
estimates for this requirement under the Proposed Rules (approximately 
forty entities affected annually, resulting in a total burden, across 
all of these entities, of 3,200 total annual labor hours and $2.8 
million in annualized capital, start-up, total operating, and 
maintenance costs) do not apply to the final regulations.
    As a result of this modification and higher visibility levels, 
estimates for the overall burden of visibility level-related reporting 
regulations have been modified. In the Proposed Rules, the Commission 
estimated that visibility level-related reporting regulations would 
affect approximately one hundred forty entities annually, resulting in 
a total burden, across all of these entities, of 30,400 annual labor 
hours, resulting, a total of $2.4 million in annual labor costs, and 
$27.3 million in annualized capital, start-up, total operating, and 
maintenance costs. Under the final regulations, visibility level-
related reporting regulations will affect approximately seventy 
entities annually, resulting in a total burden, across all of these 
entities, of 8,160 annual labor hours, resulting in a total of $642,000 
in annual labor costs and $7.4 million in annualized capital, start-up, 
total operating, and maintenance costs.
    Section 151.7 concerns the aggregation of trader accounts. Proposed 
Sec.  151.7(g) provided for a disaggregation exemption for certain 
limited partners in a pool, futures commission merchants that met 
certain independent trading requirements, and independently controlled 
and managed non-financial entities in which another entity had an 
ownership or equity interest of 10 percent or greater. In all three 
cases, the exemption would become effective upon the Commission’s 
approval of an application described in proposed Sec.  151.7(g), and 
renewal was required for each year following the initial application 
for exemption.
    As discussed in greater detail above, in the final regulations the 
Commission has made several modifications to account aggregation rules 
and exemptions. The modifications include reinstatement of the IAC 
exemption and exemption for certain interests in commodity pools (both 
of which are part of current Commission account aggregation policy but 
were absent from the Proposed Rules), an exemption from aggregation 
related to the underwriting of securities, and an exemption for 
situations in which aggregation across commonly owned affiliates would 
require the sharing of position information that would result in the 
violation of Federal law. In addition, the final regulations contain a 
modified procedure for exemptive relief under Sec.  151.7. The 
Commission has eliminated the provision in the Proposed Rules requiring 
a trader seeking a disaggregation exemption to file an application for 
exemptive relief as well as annual renewals. Instead, under the final 
regulations the trader must file a notice, effective upon filing, 
setting forth the circumstances that warrant disaggregation and a 
certification that they meet the relevant conditions.
    As a result of these modifications, estimates for the burden of 
reporting regulations related to account aggregation have been 
modified. Under the Proposed Rules, the Commission estimated that these 
reporting regulations would affect approximately sixty entities, 
resulting in a total burden, across all of these entities, of 300,000 
annual labor hours and $9.9 million in annualized capital, start-up, 
total operating, and maintenance costs. Under the final regulations, 
these reporting regulations will affect approximately ninety entities, 
resulting in a total burden, across all of these entities, of 225,000 
annual labor hours and $5.9 million in annualized capital, start-up, 
total operating, and maintenance costs.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 150

    Commodity futures, Cotton, Grains.

17 CFR Part 151

    Position limits, Bona fide hedging, Referenced Contracts.

    In consideration of the foregoing, pursuant to the authority 
contained in the Commodity Exchange Act, the Commission hereby amends 
chapter I of title 17 of the Code of Federal Regulations as follows:

PART 1–GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by Title VII of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 
111-203, 124 Stat. 1376 (2010).

Sec.  1.3  [Revised]

0
2. Revise Sec.  1.3 (z) to read as follows:
    (z) Bona fide hedging transactions and positions for excluded 
commodities. (1) General definition. Bona fide hedging transactions and 
positions shall mean any agreement, contract or transaction in an 
excluded commodity on a designated contract market or swap execution 
facility that is a trading facility, where such transactions or 
positions normally represent a substitute for transactions to be made 
or positions to be taken at a later time in a physical marketing 
channel, and where they are economically appropriate to the reduction 
of risks in the conduct and management of a commercial enterprise, and 
where they arise from:
    (i) The potential change in the value of assets which a person 
owns, produces, manufactures, processes, or merchandises or anticipates 
owning, producing, manufacturing, processing, or merchandising,
    (ii) The potential change in the value of liabilities which a 
person owns or anticipates incurring, or
    (iii) The potential change in the value of services which a person 
provides, purchases, or anticipates providing or purchasing.
    (iv) Notwithstanding the foregoing, no transactions or positions 
shall be classified as bona fide hedging unless their purpose is to 
offset price risks incidental to commercial cash or spot operations and 
such positions are established and liquidated in an orderly manner in 
accordance with sound commercial practices and, for transactions or 
positions on contract markets subject to trading and position limits in 
effect pursuant to section 4a of

[[Page 71684]]

the Act, unless the provisions of paragraphs (z)(2) and (3) of this 
section have been satisfied.
    (2) Enumerated hedging transactions. The definitions of bona fide 
hedging transactions and positions in paragraph (z)(1) of this section 
includes, but is not limited to, the following specific transactions 
and positions:
    (i) Sales of any agreement, contract, or transaction in an excluded 
commodity on a designated contract market or swap execution facility 
that is a trading facility which do not exceed in quantity:
    (A) Ownership or fixed-price purchase of the same cash commodity by 
the same person; and
    (B) Twelve months’ unsold anticipated production of the same 
commodity by the same person provided that no such position is 
maintained in any agreement, contract or transaction during the five 
last trading days.
    (ii) Purchases of any agreement, contract or transaction in an 
excluded commodity on a designated contract market or swap execution 
facility that is a trading facility which do not exceed in quantity:
    (A) The fixed-price sale of the same cash commodity by the same 
person;
    (B) The quantity equivalent of fixed-price sales of the cash 
products and by-products of such commodity by the same person; and
    (C) Twelve months’ unfilled anticipated requirements of the same 
cash commodity for processing, manufacturing, or feeding by the same 
person, provided that such transactions and positions in the five last 
trading days of any agreement, contract or transaction do not exceed 
the person’s unfilled anticipated requirements of the same cash 
commodity for that month and for the next succeeding month.
    (iii) Offsetting sales and purchases in any agreement, contract or 
transaction in an excluded commodity on a designated contract market or 
swap execution facility that is a trading facility which do not exceed 
in quantity that amount of the same cash commodity which has been 
bought and sold by the same person at unfixed prices basis different 
delivery months of the contract market, provided that no such position 
is maintained in any agreement, contract or transaction during the five 
last trading days.
    (iv) Purchases or sales by an agent who does not own or has not 
contracted to sell or purchase the offsetting cash commodity at a fixed 
price, provided that the agent is responsible for the merchandising of 
the cash position that is being offset, and the agent has a contractual 
arrangement with the person who owns the commodity or has the cash 
market commitment being offset.
    (v) Sales and purchases described in paragraphs (z)(2)(i) through 
(iv) of this section may also be offset other than by the same quantity 
of the same cash commodity, provided that the fluctuations in value of 
the position for in any agreement, contract or transaction are 
substantially related to the fluctuations in value of the actual or 
anticipated cash position, and provided that the positions in any 
agreement, contract or transaction shall not be maintained during the 
five last trading days.
    (3) Non-Enumerated cases. A designated contract market or swap 
execution facility that is a trading facility may recognize, consistent 
with the purposes of this section, transactions and positions other 
than those enumerated in paragraph (2) of this section as bona fide 
hedging. Prior to recognizing such non-enumerated transactions and 
positions, the designated contract market or swap execution facility 
that is a trading facility shall submit such rules for Commission 
review under section 5c of the Act and part 40 of this chapter.
* * * * *

Sec.  1.47  [Removed and Reserved]

0
3. Remove and reserve Sec.  1.47.

Sec.  1.48  [Removed and Reserved]

0
4. Remove and reserve Sec.  1.48.

PART 150–LIMITS ON POSITIONS

0
5. Revise Sec.  150.2 to read as follows:

Sec.  150.2  Position limits.

    No person may hold or control positions, separately or in 
combination, net long or net short, for the purchase or sale of a 
commodity for future delivery or, on a futures-equivalent basis, 
options thereon, in excess of the following:

                                           Speculative Position Limits
—————————————————————————————————————-
                                                                        Limits by number of contracts
—————————————————————————————————————-
                         Contract                              Spot month       Single month       All months
—————————————————————————————————————-
                                             Chicago Board of Trade
—————————————————————————————————————-
Corn and Mini-Corn 1………………………………               600            33,000            33,000
Oats………………………………………………               600             2,000             2,000
Soybeans and Mini-Soybeans 1……………………….               600            15,000            15,000
Wheat and Mini-Wheat 1…………………………….               600            12,000            12,000
Soybean Oil………………………………………..               540             8,000             8,000
Soybean Meal……………………………………….               720             6,500             6,500
—————————————————————————————————————-
                                           Minneapolis Grain Exchange
—————————————————————————————————————-
Hard Red Spring Wheat……………………………….               600            12,000            12,000
—————————————————————————————————————-
                                                ICE Futures U.S.
—————————————————————————————————————-
Cotton No. 2……………………………………….               300             5,000             5,000
—————————————————————————————————————-
                                           Kansas City Board of Trade
—————————————————————————————————————-
Hard Winter Wheat…………………………………..               600            12,000            12,000
—————————————————————————————————————-
1 For purposes of compliance with these limits, positions in the regular sized and mini-sized contracts shall
  be aggregated.

[[Page 71685]]

0
6. Add part 151 to read as follows:

PART 151–POSITION LIMITS FOR FUTURES AND SWAPS

Sec.
151.1 Definitions.
151.2 Core Referenced Futures Contracts.
151.3 Spot months for Referenced Contracts.
151.4 Position limits for Referenced Contracts.
151.5 Bona fide hedging and other exemptions for Referenced 
Contracts.
151.6 Position visibility.
151.7 Aggregation of positions.
151.8 Foreign boards of trade.
151.9 Pre-existing positions.
151.10 Form and manner of reporting and submitting information or 
filings.
151.11 Designated contract market and swap execution facility 
position limits and accountability rules.
151.12 Delegation of authority to the Director of the Division of 
Market Oversight.
151.13 Severability.
Appendix A to Part 151–Spot-Month Position Limits
Appendix B to Part 151–Examples of Bona Fide Hedging Transactions 
and Positions

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19, 
as amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

Sec.  151.1  Definitions.

    As used in this part–
    Basis contract means an agreement, contract or transaction that is 
cash-settled based on the difference in price of the same commodity (or 
substantially the same commodity) at different delivery locations;
    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.
    Commodity index contract means an agreement, contract, or 
transaction that is not a basis or any type of spread contract, based 
on an index comprised of prices of commodities that are not the same or 
substantially the same; provided that, a commodity index contract used 
to circumvent speculative position limits shall be considered to be a 
Referenced Contract for the purpose of applying the position limits of 
Sec.  151.4.
    Core Referenced Futures Contract means a futures contract that is 
listed in Sec.  151.2.
    Eligible Entity means a commodity pool operator; the operator of a 
trading vehicle which is excluded, or which itself has qualified for 
exclusion from the definition of the term “pool” or “commodity pool 
operator,” respectively, under Sec.  4.5 of this chapter the limited 
partner or shareholder in a commodity pool the operator of which is 
exempt from registration under Sec.  4.13 of this chapter; a commodity 
trading advisor; a bank or trust company; a savings association; an 
insurance company; or the separately organized affiliates of any of the 
above entities:
    (1) Which authorizes an independent account controller 
independently to control all trading decisions with respect to the 
eligible entity’s client positions and accounts that the independent 
account controller holds directly or indirectly, or on the eligible 
entity’s behalf, but without the eligible entity’s day-to-day 
direction; and
    (2) Which maintains:
    (i) Only such minimum control over the independent account 
controller as is consistent with its fiduciary responsibilities to the 
managed positions and accounts, and necessary to fulfill its duty to 
supervise diligently the trading done on its behalf; or
    (ii) If a limited partner or shareholder of a commodity pool the 
operator of which is exempt from registration under Sec.  4.13 of this 
chapter, only such limited control as is consistent with its status.
    Entity means a “person” as defined in section 1a of the Act.
    Excluded commodity means an “excluded commodity” as defined in 
section 1a of the Act.
    Independent Account Controller means a person:
    (1) Who specifically is authorized by an eligible entity 
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 registered as a futures commission merchant, an 
introducing broker, a commodity trading advisor, or an associated 
person of any such registrant, or is a general partner of a commodity 
pool the operator of which is exempt from registration under Sec.  4.13 
of this chapter.
    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.
    Referenced Contract means, on a futures equivalent basis with 
respect to a particular Core Referenced Futures Contract, a Core 
Referenced Futures Contract listed in Sec.  151.2, or a futures 
contract, options contract, swap or swaption, other than a basis 
contract or commodity index contract, that is:
    (1) 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
    (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 that particular Core Referenced Futures 
Contract for delivery at the same location or locations as specified in 
that particular Core Referenced Futures Contract.
    Spot month means, for Referenced Contracts, the spot month defined 
in Sec.  151.3.
    Spot-month, single-month, and all-months-combined position limits 
mean, for Referenced Contracts based on a commodity identified in Sec.  
151.2, the maximum number of contracts a trader may hold as set forth 
in Sec.  151.4.
    Spread contract means either a calendar spread contract or an 
intercommodity spread contract.
    Swap means “swap” as defined in section 1a of the Act and as 
further defined by the Commission.
    Swap dealer means “swap dealer” as that term is defined in 
section 1a of the Act and as further defined by the Commission.
    Swaption means an option to enter into a swap or a physical 
commodity option.
    Trader means a person that, for its own account or for an account 
that it controls, makes transactions in Referenced Contracts or has 
such transactions made.

Sec.  151.2  Core Referenced Futures Contracts.

    (a) Agricultural commodities. Core Referenced Futures Contracts in 
agricultural commodities include the following futures contracts and 
options thereon:
    (1) Core Referenced Futures Contracts in legacy agricultural 
commodities:

[[Page 71686]]

    (i) Chicago Board of Trade Corn (C);
    (ii) Chicago Board of Trade Oats (O);
    (iii) Chicago Board of Trade Soybeans (S);
    (iv) Chicago Board of Trade Soybean Meal (SM);
    (v) Chicago Board of Trade Soybean Oil (BO);
    (vi) Chicago Board of Trade Wheat (W);
    (vii) ICE Futures U.S. Cotton No. 2 (CT);
    (viii) Kansas City Board of Trade Hard Winter Wheat (KW); and
    (ix) Minneapolis Grain Exchange Hard Red Spring Wheat (MWE).
    (2) Core Referenced Futures Contracts in non-legacy agricultural 
commodities:
    (i) Chicago Mercantile Exchange Class III Milk (DA);
    (ii) Chicago Mercantile Exchange Feeder Cattle (FC);
    (iii) Chicago Mercantile Exchange Lean Hog (LH);
    (iv) Chicago Mercantile Exchange Live Cattle (LC);
    (v) Chicago Board of Trade Rough Rice (RR);
    (vi) ICE Futures U.S. Cocoa (CC);
    (vii) ICE Futures U.S. Coffee C (KC);
    (viii) ICE Futures U.S. FCOJ-A(OJ);
    (ix) ICE Futures U.S. Sugar No. 11 (SB); and
    (x) ICE Futures U.S. Sugar No. 16 (SF).
    (b) Metal commodities. Core Referenced Futures Contracts in metal 
commodities include the following futures contracts and options 
thereon:
    (1) Commodity Exchange, Inc. Copper (HG);
    (2) Commodity Exchange, Inc. Gold (GC);
    (3) Commodity Exchange, Inc. Silver (SI);
    (4) New York Mercantile Exchange Palladium (PA); and
    (5) New York Mercantile Exchange Platinum (PL).
    (c) Energy commodities. The Core Referenced Futures Contracts in 
energy commodities include the following futures contracts and options 
thereon:
    (1) New York Mercantile Exchange Henry Hub Natural Gas (NG);
    (2) New York Mercantile Exchange Light Sweet Crude Oil (CL);
    (3) New York Mercantile Exchange New York Harbor Gasoline 
Blendstock (RB); and
    (4) New York Mercantile Exchange New York Harbor Heating Oil (HO).

Sec.  151.3  Spot months for Referenced Contracts.

    (a) Agricultural commodities. For Referenced Contracts based on 
agricultural commodities, the spot month shall be the period of time 
commencing:
    (1) At the close of business on the business day prior to the first 
notice day for any delivery month and terminating at the end of the 
delivery period in the underlying Core Referenced Futures Contract for 
the following Referenced Contracts:
    (i) ICE Futures U.S. Cocoa (CC) contract;
    (ii) ICE Futures U.S. Coffee C (KC) contract;
    (iii) ICE Futures U.S. Cotton No. 2 (CT) contract;
    (iv) ICE Futures U.S. FCOJ-A (OJ) contract;
    (v) Chicago Board of Trade Corn (C) contract;
    (vi) Chicago Board of Trade Oats (O) contract;
    (vii) Chicago Board of Trade Rough Rice (RR) contract;
    (viii) Chicago Board of Trade Soybeans (S) contract;
    (ix) Chicago Board of Trade Soybean Meal (SM) contract;
    (x) Chicago Board of Trade Soybean Oil (BO) contract;
    (xi) Chicago Board of Trade Wheat (W) contract;
    (xii) Minneapolis Grain Exchange Hard Red Spring Wheat (MW) 
contract; and
    (xiii) Kansas City Board of Trade Hard Winter Wheat (KW) contract;
    (2) At the close of business of the first business day after the 
fifteenth calendar day of the calendar month preceding the delivery 
month if the fifteenth calendar day is a business day, or at the close 
of business of the second business day after the fifteenth day if the 
fifteenth day is a non-business day and terminating at the end of the 
delivery period in the underlying Core Referenced Futures Contract for 
the ICE Futures U.S. Sugar No. 11 (SB) Referenced Contract;
    (3) At the close of business on the sixth business day prior to the 
last trading day and terminating at the end of the delivery period in 
the underlying Core Referenced Futures Contract for the ICE Futures 
U.S. Sugar No. 16 (SF) Referenced Contract;
    (4) At the close of business on the business day immediately 
preceding the last five business days of the contract month and 
terminating at the end of the delivery period in the underlying Core 
Referenced Futures Contract for the Chicago Mercantile Exchange Live 
Cattle (LC) Referenced Contract;
    (5) On the ninth trading day prior to the last trading day and 
terminating on the last trading day for Chicago Mercantile Exchange 
Feeder Cattle (FC) contract;
    (6) On the first trading day of the contract month and terminating 
on the last trading day for the Chicago Mercantile Exchange Class III 
Milk (DA) contract; and
    (7) At the close of business on the fifth business day prior to the 
last trading day and terminating on the last trading day for the 
Chicago Mercantile Exchange Lean Hog (LH) contract.
    (b) Metal commodities. The spot month shall be the period of time 
commencing at the close of business on the business day prior to the 
first notice day for any delivery month and terminating at the end of 
the delivery period in the underlying Core Referenced Futures Contract 
for the following Referenced Contracts:
    (1) Commodity Exchange, Inc. Gold (GC) contract;
    (2) Commodity Exchange, Inc. Silver (SI) contract;
    (3) Commodity Exchange, Inc. Copper (HG) contract;
    (4) New York Mercantile Exchange Palladium (PA) contract; and
    (5) New York Mercantile Exchange Platinum (PL) contract.
    (c) Energy commodities. The spot month shall be the period of time 
commencing at the close of business of the third business day prior to 
the last day of trading in the underlying Core Referenced Futures 
Contract and terminating at the end of the delivery period for the 
following Referenced Contracts:
    (1) New York Mercantile Exchange Light Sweet Crude Oil (CL) 
contract;
    (2) New York Mercantile Exchange New York Harbor No. 2 Heating Oil 
(HO) contract;
    (3) New York Mercantile Exchange New York Harbor Gasoline 
Blendstock (RB) contract; and
    (4) New York Mercantile Exchange Henry Hub Natural Gas (NG) 
contract.

Sec.  151.4  Position limits for Referenced Contracts.

    (a) Spot-month position limits. In accordance with the procedure in 
paragraph (d) of this section, and except as provided or as otherwise 
authorized by Sec.  151.5, no trader may hold or control a position, 
separately or in combination, net long or net short, in Referenced 
Contracts in the same commodity when such position is in excess of:
    (1) For physical-delivery Referenced Contracts, a spot-month 
position limit that shall be based on one-quarter of the estimated 
spot-month deliverable supply as established by the Commission pursuant 
to paragraphs (d)(1) and (d)(2) of this section; and
    (2) For cash-settled Referenced Contracts:
    (i) A spot-month position limit that shall be based on one-quarter 
of the

[[Page 71687]]

estimated spot-month deliverable supply as established by the 
Commission pursuant to paragraphs (d)(1) and (d)(2) of this section. 
Provided, however,
    (ii) For New York Mercantile Exchange Henry Hub Natural Gas 
Referenced Contracts:
    (A) A spot-month position limit equal to five times the spot-month 
position limit established by the Commission for the physical-delivery 
New York Mercantile Exchange Henry Hub Natural Gas Referenced Contract 
pursuant to paragraph (a)(1); and
    (B) An aggregate spot-month position limit for physical-delivery 
and cash-settled New York Mercantile Exchange Henry Hub Natural Gas 
Referenced Contracts equal to five times the spot-month position limit 
established by the Commission for the physical-delivery New York 
Mercantile Exchange Henry Hub Natural Gas Referenced Contract pursuant 
to paragraph (a)(1).
    (b) Non-spot-month position limits. In accordance with the 
procedure in paragraph (d) of this section, and except as otherwise 
authorized in Sec.  151.5, no person may hold or control positions, 
separately or in combination, net long or net short, in the same 
commodity when such positions, in all months combined (including the 
spot month) or in a single month, are in excess of:
    (1) Non-legacy Referenced Contract position limits. All-months-
combined aggregate and single-month position limits, fixed by the 
Commission based on 10 percent of the first 25,000 contracts of average 
all-months-combined aggregated open interest with a marginal increase 
of 2.5 percent thereafter as established by the Commission pursuant to 
paragraph (d)(3) of this section;
    (2) Aggregate open interest calculations for non-spot-month 
position limits for non-legacy Referenced Contracts. (i) For the 
purpose of fixing the speculative position limits for non-legacy 
Referenced Contracts in paragraph (b)(1) of this section, the 
Commission shall determine:
    (A) The average all-months-combined aggregate open interest, which 
shall be equal to the sum, for 12 or 24 months of values obtained under 
paragraph (B) and (C) of this section for a period of 12 or 24 months 
prior to the fixing date divided by 12 or 24 respectively as of the 
last day of each calendar month;
    (B) The all-months-combined futures open interest of a Referenced 
Contract is equal to the sum of the month-end open interest for all of 
the Referenced Contract’s open contract months in futures and option 
contracts (on a delta adjusted basis) across all designated contract 
markets; and
    (C) The all-months-combined swaps open interest is equal to the sum 
of all of a Referenced Contract’s month-end open swaps positions, 
considering open positions attributed to both cleared and uncleared 
swaps, where the uncleared all-months-combined swaps open positions 
shall be the absolute sum of swap dealers’ net uncleared open swaps 
positions by counterparty and by single Referenced Contract month as 
reported to the Commission pursuant to part 20 of this chapter, 
provided that, other than for the purpose of determining initial non-
spot-month position limits, open swaps positions attributed to swaps 
with two swap dealer counterparties shall be counted once for the 
purpose of determining uncleared all-months-combined swaps open 
positions, provided further that, upon entry of an order under Sec.  
20.9 of this chapter determining that operating swap data repositories 
are processing positional data that will enable the Commission 
effectively to conduct surveillance in swaps, the Commission shall rely 
on data from such swap data repositories to compute the all-months-
combined swaps open interest;
    (ii) Notwithstanding the provisions of this section, for the 
purpose of determining initial non-spot-month position limits for non-
legacy Referenced Contracts, the Commission may estimate uncleared all-
months-combined swaps open positions based on uncleared open swaps 
positions reported to the Commission pursuant to part 20 of this 
chapter by clearing organizations or clearing members that are swap 
dealers; and
    (3) Legacy agricultural Referenced Contract position limits. All-
months-combined aggregate and single-month position limits, fixed by 
the Commission at the levels provided below as established by the 
Commission pursuant to paragraph (d)(4) of this section:

————————————————————————
                 Referenced contract                    Position limits
————————————————————————
(i) Chicago Board of Trade Corn (C) contract……..              33,000
(ii) Chicago Board of Trade Oats (O) contract…….               2,000
(iii) Chicago Board of Trade Soybeans (S) contract..              15,000
(iv) Chicago Board of Trade Wheat (W) contract……              12,000
(v) Chicago Board of Trade Soybean Oil (BO) contract               8,000
(vi) Chicago Board of Trade Soybean Meal (SM)                      6,500
 contract…………………………………….
(vii) Minneapolis Grain Exchange Hard Red Spring                  12,000
 Wheat (MW) contract…………………………..
(viii) ICE Futures U.S. Cotton No. 2 (CT) contract..               5,000
(ix) Kansas City Board of Trade Hard Winter Wheat                 12,000
 (KW) contract………………………………..
————————————————————————

    (c) Netting of positions. (1) For Referenced Contracts in the spot 
month. (i) For the spot-month position limit in paragraph (a) of this 
section, a trader’s positions in the physical-delivery Referenced 
Contract and cash-settled Referenced Contract are calculated 
separately. A trader cannot net any physical-delivery Referenced 
Contract with cash-settled Referenced Contracts towards determining the 
trader’s positions in each of the physical-delivery Referenced Contract 
and cash-settled Referenced Contracts in paragraph (a) of this section. 
However, a trader can net positions in cash-settled Referenced 
Contracts in the same commodity.
    (ii) Notwithstanding the netting provision in paragraph (c)(1)(i) 
of this section, for the aggregate spot-month position limit in New 
York Mercantile Exchange Henry Hub Natural Gas Referenced Contracts in 
paragraph (a)(2)(ii) of this section, a trader’s positions shall be 
combined and the net resulting position in the physical-delivery 
Referenced Contract and cash-settled Referenced Contracts shall be 
applied towards determining the trader’s aggregate position.
    (2) For the purpose of applying non-spot-month position limits, a 
trader’s position in a Referenced Contract shall be combined and the 
net resulting position shall be applied towards determining the 
trader’s aggregate single-month and all-months-combined position.
    (d) Establishing and effective dates of position limits. (1) 
Initial spot-month position limits for Referenced Contracts. (i) Sixty 
days after the term “swap” is

[[Page 71688]]

further defined under the Wall Street Transparency and Accountability 
Act of 2010, the spot-month position limits for Referenced Contracts 
referred to in Appendix A shall apply to all the provisions of this 
part.
    (2) Subsequent spot-month position limits for Referenced Contracts. 
(i) Commencing January 1st of the second calendar year after the term 
“swap” is further defined under the Wall Street Transparency and 
Accountability Act of 2010, the Commission shall fix position limits by 
Commission order that shall supersede the initial limits established 
under paragraph (d)(1) of this section.
    (ii) In fixing spot-month position limits for Referenced Contracts, 
the Commission shall utilize the estimates of deliverable supply 
provided by a designated contract market under paragraph (d)(2)(iii) of 
this section unless the Commission determines to rely on its own 
estimate of deliverable supply.
    (iii) Each designated contract market shall submit to the 
Commission an estimate of deliverable supply for each Core Referenced 
Futures Contract that is subject to a spot-month position limit and 
listed or executed pursuant to the rules of the designated contract 
market according to the following schedule commencing January 1st of 
the second calendar year after the term “swap” is further defined 
under the Wall Street Transparency and Accountability Act of 2010:
    (A) For metal Core Referenced Futures Contracts listed in Sec.  
151.2(b), by the 31st of December and biennially thereafter;
    (B) For energy Core Referenced Futures Contracts listed in Sec.  
151.2(c), by the 31st of March and biennially thereafter;
    (C) For corn, wheat, oat, rough rice, soybean and soybean products, 
livestock, milk, cotton, and frozen concentrated orange juice Core 
Referenced Futures Contracts, by the 31st of July, and annually 
thereafter;
    (D) For coffee, sugar, and cocoa Core Referenced Futures Contracts, 
by the 30th of September, and annually thereafter.
    (iv) For purposes of estimating deliverable supply, a designated 
contract market may use any guidance adopted in the Acceptable 
Practices for Compliance with Core Principle 3 found in part 38 of the 
Commission’s regulations.
    (v) The estimate submitted under paragraph (d)(2)(iii) of this 
section shall be accompanied by a description of the methodology used 
to derive the estimate along with any statistical data supporting the 
designated contract market’s estimate of deliverable supply.
    (vi) The Commission shall fix and publish pursuant to paragraph (e) 
of this section, the spot-month limits by Commission order, no later 
than:
    (A) For metal Referenced Contracts listed in Sec.  151.2(b), by the 
28th of February following the submission of estimates of deliverable 
supply provided to the Commission under paragraph (d)(2)(iii)(A) of 
this section and biennially thereafter;
    (B) For energy Referenced Contracts listed in Sec.  151.2(c), by 
the 31st of May following the submission of estimates of deliverable 
supply provided to the Commission under paragraph (d)(2)(iii)(B) of 
this section and biennially thereafter;
    (C) For corn, wheat, oat, rough rice, soybean and soybean products, 
livestock, milk, cotton, and frozen concentrated orange juice 
Referenced Contracts, by the 30th of September following the submission 
of estimates of deliverable supply provided to the Commission under 
paragraph (d)(2)(iii)(C) of this section and annually thereafter;
    (D) For coffee, sugar, and cocoa Referenced Contracts, by the 30th 
of November following the submission of estimates of deliverable supply 
provided to the Commission under paragraph (d)(2)(iii)(D) of this 
section and annually thereafter.
    (3) Non-spot-month position limits for non-legacy Referenced 
Contract. (i) Initial non-spot-month limits for non-legacy Referenced 
Contracts shall be fixed and published within one month after the 
Commission has obtained or estimated 12 months of values pursuant to 
paragraphs (b)(2)(i)(B), (b)(2)(i)(C), and (b)(2)(ii) of this section, 
and shall be fixed and made effective as provided in paragraph (b)(2) 
and (e) of this section.
    (ii) Subsequent non-spot-month limits for non-legacy Referenced 
Contracts shall be fixed and published within one month after two years 
following the fixing and publication of initial non-spot-month position 
limits and shall be based on the higher of 12 months average all-
months-combined aggregate open interest, or 24 months average all-
months-combined aggregate open interest, as provided for in paragraphs 
(b)(2) and (e) of this section.
    (iii) Initial non-spot-month limits for non-legacy Referenced 
Contracts shall be made effective by Commission order.
    (4) Non-spot-month legacy limits for legacy agricultural Referenced 
Contracts. The non-spot-month position limits for legacy agricultural 
Referenced Contracts shall be effective sixty days after the term 
“swap” is further defined under the Wall Street Transparency and 
Accountability Act of 2010, and shall apply to all the provisions of 
this part.
    (e) Publication. The Commission shall publish position limits on 
the Commission’s Web site at http://www.cftc.gov prior to making such 
limits effective, other than those limits specified under paragraph 
(b)(3) of this section and appendix A to this part.
    (1) Spot-month position limits shall be effective:
    (i) For metal Referenced Contracts listed in Sec.  151.2(b), on the 
1st of May after the Commission has fixed and published such limits 
under paragraph (d)(2)(vi)(A) of this section;
    (ii) For energy Referenced Contracts listed in Sec.  151.2(c), on 
the 1st of August after the Commission has fixed and published such 
limits under paragraph (d)(2)(vi)(B) of this section;
    (iii) For corn, wheat, oat, rough rice, soybean and soybean 
products, livestock, milk, cotton, and frozen concentrated orange juice 
Referenced Contracts, on the 1st of December after the Commission has 
fixed and published such limits under paragraph (d)(2)(vi)(C) of this 
section; and
    (iv) For coffee, sugar, and cocoa Referenced Contracts, on the 1st 
of February after the Commission has fixed and published such limits 
under paragraph (d)(2)(vi)(D) of this section.
    (2) The Commission shall publish month-end all-months-combined 
futures open interest and all-months-combined swaps open interest 
figures within one month, as practicable, after such data is submitted 
to the Commission.
    (3) Non-spot-month position limits established under paragraph 
(b)(2) of this section shall be effective on the 1st calendar day of 
the third calendar month immediately following publication on the 
Commission’s Web site under paragraph (d)(3) of this section.
    (f) Rounding. In determining or calculating all levels and limits 
under this section, a resulting number shall be rounded up to the 
nearest hundred contracts.

Sec.  151.5  Bona fide hedging and other exemptions for Referenced 
Contracts.

    (a) Bona fide hedging transactions or positions. (1) Any person 
that complies with the requirements of this section may exceed the 
position limits set forth in Sec.  151.4 to the extent that a 
transaction or position in a Referenced Contract:
    (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 risks in the 
conduct and management of a commercial enterprise; and

[[Page 71689]]

    (iii) Arises from the potential change in the value of one or 
several–
    (A) Assets that a person owns, produces, manufactures, processes, 
or merchandises or anticipates owning, producing, manufacturing, 
processing, or merchandising;
    (B) Liabilities that a person owns or anticipates incurring; or
    (C) Services that a person provides, purchases, or anticipates 
providing or purchasing; or
    (iv) Reduces risks attendant to a position resulting from a swap 
that–
    (A) Was executed opposite a counterparty for which the transaction 
would qualify as a bona fide hedging transaction pursuant to paragraph 
(a)(1)(i) through (iii) of this section; or
    (B) Meets the requirements of paragraphs (a)(1)(i) through (iii) of 
this section.
    (v) Notwithstanding the foregoing, no transactions or positions 
shall be classified as bona fide hedging for purposes of Sec.  151.4 
unless such transactions or positions are established and liquidated in 
an orderly manner in accordance with sound commercial practices and the 
provisions of paragraph (a)(2) of this section regarding enumerated 
hedging transactions and positions or paragraphs (a)(3) or (4) of this 
section regarding pass-through swaps of this section have been 
satisfied.
    (2) Enumerated hedging transactions and positions. Bona fide 
hedging transactions and positions for the purposes of this paragraph 
mean any of the following specific transactions and positions:
    (i) Sales of Referenced Contracts that do not exceed in quantity:
    (A) Ownership or fixed-price purchase of the contract’s underlying 
cash commodity by the same person; and
    (B) Unsold anticipated production of the same commodity, which may 
not exceed one year of production for an agricultural commodity, by the 
same person provided that no such position is maintained in any 
physical-delivery Referenced Contract during the last five days of 
trading of the Core Referenced Futures Contract in an agricultural or 
metal commodity or during the spot month for other physical-delivery 
contracts.
    (ii) Purchases of Referenced Contracts that do not exceed in 
quantity:
    (A) The fixed-price sale of the contract’s underlying cash 
commodity by the same person;
    (B) The quantity equivalent of fixed-price sales of the cash 
products and by-products of such commodity by the same person; and
    (C) Unfilled anticipated requirements of the same cash commodity, 
which may not exceed one year for agricultural Referenced Contracts, 
for processing, manufacturing, or use by the same person, provided that 
no such position is maintained in any physical-delivery Referenced 
Contract during the last five days of trading of the Core Referenced 
Futures Contract in an agricultural or metal commodity or during the 
spot month for other physical-delivery contracts.
    (iii) Offsetting sales and purchases in Referenced Contracts that 
do not exceed in quantity that amount of the same cash commodity that 
has been bought and sold by the same person at unfixed prices basis 
different delivery months, provided that no such position is maintained 
in any physical-delivery Referenced Contract during the last five days 
of trading of the Core Referenced Futures Contract in an agricultural 
or metal commodity or during the spot month for other physical-delivery 
contracts.
    (iv) Purchases or sales by an agent who does not own or has not 
contracted to sell or purchase the offsetting cash commodity at a fixed 
price, provided that the agent is responsible for the merchandising of 
the cash positions that is being offset in Referenced Contracts and the 
agent has a contractual arrangement with the person who owns the 
commodity or holds the cash market commitment being offset.
    (v) Anticipated merchandising hedges. Offsetting sales and 
purchases in Referenced Contracts that do not exceed in quantity the 
amount of the same cash commodity that is anticipated to be 
merchandised, provided that:
    (A) The quantity of offsetting sales and purchases is not larger 
than the current or anticipated unfilled storage capacity owned or 
leased by the same person during the period of anticipated 
merchandising activity, which may not exceed one year;
    (B) The offsetting sales and purchases in Referenced Contracts are 
in different contract months, which settle in not more than one year; 
and
    (C) No such position is maintained in any physical-delivery 
Referenced Contract during the last five days of trading of the Core 
Referenced Futures Contract in an agricultural or metal commodity or 
during the spot month for other physical-delivery contracts.
    (vi) Anticipated royalty hedges. Sales or purchases in Referenced 
Contracts offset by the anticipated change in value of royalty rights 
that are owned by the same person provided that:
    (A) The royalty rights arise out of the production, manufacturing, 
processing, use, or transportation of the commodity underlying the 
Referenced Contract, which may not exceed one year for agricultural 
Referenced Contracts; and
    (B) No such position is maintained in any physical-delivery 
Referenced Contract during the last five days of trading of the Core 
Referenced Futures Contract in an agricultural or metal commodity or 
during the spot month for other physical-delivery contracts.
    (vii) Service hedges. Sales or purchases in Referenced 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 
the same person provided that:
    (A) The contract for services arises out of the production, 
manufacturing, processing, use, or transportation of the commodity 
underlying the Referenced Contract, which may not exceed one year for 
agricultural Referenced Contracts;
    (B) The fluctuations in the value of the position in Referenced 
Contracts are substantially related to the fluctuations in value of 
receipts or payments due or expected to be due under a contract for 
services; and
    (C) No such position is maintained in any physical-delivery 
Referenced Contract during the last five days of trading of the Core 
Referenced Futures Contract in an agricultural or metal commodity or 
during the spot month for other physical-delivery contracts.
    (viii) Cross-commodity hedges. Sales or purchases in Referenced 
Contracts described in paragraphs (a)(2)(i) through (vii) of this 
section may also be offset other than by the same quantity of the same 
cash commodity, provided that:
    (A) The fluctuations in value of the position in Referenced 
Contracts are substantially related to the fluctuations in value of the 
actual or anticipated cash position; and
    (B) No such position is maintained in any physical-delivery 
Referenced Contract during the last five days of trading of the Core 
Referenced Futures Contract in an agricultural or metal commodity or 
during the spot month for other physical-delivery contracts.
    (3) Pass-through swaps. Bona fide hedging transactions and 
positions for the purposes of this paragraph include the purchase or 
sales of Referenced Contracts that reduce the risks attendant to a 
position resulting from a swap that was executed opposite a 
counterparty for whom the swap transaction would qualify as a bona fide 
hedging transaction pursuant to paragraph (a)(2) of this section 
(“pass-through swaps”),

[[Page 71690]]

provided that no such position is maintained in any physical-delivery 
Referenced Contract during the last five days of trading of the Core 
Referenced Futures Contract in an agricultural or metal commodity or 
during the spot month for other physical-delivery contracts unless such 
pass-through swap position continues to offset the cash market 
commodity price risk of the bona fide hedging counterparty.
    (4) Pass-through swap offsets. For swaps executed opposite a 
counterparty for whom the swap transaction would qualify as a bona fide 
hedging transaction pursuant to paragraph (a)(2) of this section (pass-
through swaps), such pass-through swaps shall also be classified as a 
bona fide hedging transaction for the counterparty for whom the swap 
would not otherwise qualify as a bona fide hedging transaction pursuant 
to paragraph (a)(2) of this section (“non-hedging counterparty”), 
provided that the non-hedging counterparty purchases or sells 
Referenced Contracts that reduce the risks attendant to such pass-
through swaps. Provided further, that the pass-through swap shall 
constitute a bona fide hedging transaction only to the extent the non-
hedging counterparty purchases or sells Referenced Contracts that 
reduce the risks attendant to the pass-through swap.
    (5) Any person engaging in other risk-reducing practices commonly 
used in the market which they believe may not be specifically 
enumerated in Sec.  151.5(a)(2) may request relief from Commission 
staff under Sec.  140.99 of this chapter or the Commission under 
section 4a(a)(7) of the Act concerning the applicability of the bona 
fide hedging transaction exemption.
    (b) Aggregation of accounts. Entities required to aggregate 
accounts or positions under Sec.  151.7 shall be considered the same 
person for the purpose of determining whether a person or persons are 
eligible for a bona fide hedge exemption under Sec.  151.5(a).
    (c) Information on cash market commodity activities. Any person 
with a position that exceeds the position limits set forth in Sec.  
151.4 pursuant to paragraphs (a)(2)(i)(A), (a)(2)(ii)(A), 
(a)(2)(ii)(B), (a)(2)(iii), or (a)(2)(iv) of this section shall submit 
to the Commission a 404 filing, in the form and manner provided for in 
Sec.  151.10.
    (1) The 404 filing shall contain the following information with 
respect to such position for each business day the same person exceeds 
the limits set forth in Sec.  151.4, up to and through the day the 
person’s position first falls below the position limits:
    (i) The date of the bona fide hedging position, an indication of 
under which enumerated hedge exemption or exemptions the position 
qualifies for bona fide hedging, the corresponding Core Referenced 
Futures Contract, the cash market commodity hedged, and the units in 
which the cash market commodity is measured;
    (ii) The entire quantity of stocks owned of the cash market 
commodity that is being hedged;
    (iii) The entire quantity of fixed-price purchase commitments of 
the cash market commodity that is being hedged;
    (iv) The sum of the entire quantity of stocks owned of the cash 
market commodity and the entire quantity of fixed-price purchase 
commitments of the cash market commodity that is being hedged;
    (v) The entire quantity of fixed-price sale commitments of the cash 
commodity that is being hedged;
    (vi) The quantity of long and short Referenced Contracts, measured 
on a futures-equivalent basis to the applicable Core Referenced Futures 
Contract, in the nearby contract month that are being used to hedge the 
long and short cash market positions;
    (viii) The total number of long and short Referenced Contracts, 
measured on a futures equivalent basis to the applicable Core 
Referenced Futures Contract, that are being used to hedge the long and 
short cash market positions; and
    (viii) Cross-commodity hedging information as required under 
paragraph (g) of this section.
    (2) Notice filing. Persons seeking an exemption under this 
paragraph shall file a notice with the Commission, which shall be 
effective upon the date of the submission of the notice.
    (d) Information on anticipated cash market commodity activities. 
(1) Initial statement. Any person who intends to exceed the position 
limits set forth in Sec.  151.4 pursuant to paragraph (a)(2)(i)(B), 
(a)(2)(ii)(C), (a)(2)(v), (a)(2)(vi), or (a)(2)(vii) of this section in 
order to hedge anticipated production, requirements, merchandising, 
royalties, or services connected to a commodity underlying a Referenced 
Contract, shall submit to the Commission a 404A filing in the form and 
manner provided in Sec.  151.10. The 404A filing shall contain the 
following information with respect to such activities, by Referenced 
Contract:
    (i) A description of the type of anticipated cash market activity 
to be hedged; how the purchases or sales of Referenced Contracts are 
consistent with the provisions of (a)(1) of this section; and the units 
in which the cash commodity is measured;
    (ii) The time period for which the person claims the anticipatory 
hedge exemption is required, which may not exceed one year for 
agricultural commodities or one year for anticipated merchandising 
activity;
    (iii) The actual use, production, processing, merchandising (bought 
and sold), royalties and service payments and receipts of that cash 
market commodity during each of the three complete fiscal years 
preceding the current fiscal year;
    (iv) The anticipated use production, or commercial or merchandising 
requirements (purchases and sales), anticipated royalties, or service 
contract receipts or payments of that cash market commodity which are 
applicable to the anticipated activity to be hedged for the period 
specified in (d)(1)(ii) of this section;
    (v) The unsold anticipated production or unfilled anticipated 
commercial or merchandising requirements of that cash market commodity 
which are applicable to the anticipated activity to be hedged for the 
period specified in (d)(1)(ii) of this section;
    (vi) The maximum number of Referenced Contracts long and short (on 
an all-months-combined basis) that are expected to be used for each 
anticipatory hedging activity for the period specified in (d)(1)(ii) of 
this section on a futures equivalent basis;
    (vii) If the hedge exemption sought is for anticipated 
merchandising pursuant to (a)(2)(v) of this section, a description of 
the storage capacity related to the anticipated merchandising 
transactions, including:
    (A) The anticipated total storage capacity, the anticipated 
merchandising quantity, and purchase and sales commitments for the 
period specified in (d)(1)(ii) of this section;
    (B) Current inventory; and
    (C) The total storage capacity and quantity of commodity moved 
through the storage capacity for each of the three complete fiscal 
years preceding the current fiscal year; and
    (viii) Cross-commodity hedging information as required under 
paragraph (g) of this section.
    (2) Notice filing. Persons seeking an exemption under this 
paragraph shall file a notice with the Commission. Such a notice shall 
be filed at least ten days in advance of a date the person expects to 
exceed the position limits established under this part, and shall be 
effective after that ten day period unless otherwise notified by the 
Commission.
    (3) Supplemental reports for 404A filings. Whenever a person 
intends to

[[Page 71691]]

exceed the amounts determined by the Commission to constitute a bona 
fide hedge for anticipated activity in the most recent statement or 
filing, such person shall file with the Commission a statement that 
updates the information provided in the person’s most recent filing at 
least ten days in advance of the date that person wishes to exceed 
those amounts.
    (e) Review of notice filings. (1) The Commission may require 
persons submitting notice filings provided for under paragraphs (c)(2) 
and (d)(2) of this section to submit such other information, before or 
after the effective date of a notice, which is necessary to enable the 
Commission to make a determination whether the transactions or 
positions under the notice filing fall within the scope of bona fide 
hedging transactions or positions described under paragraph (a) of this 
section.
    (2) The transactions and positions described in the notice filing 
shall not be considered, in part or in whole, as bona fide hedging 
transactions or positions if such person is so notified by the 
Commission.
    (f) Additional information from swap counterparties to bona fide 
hedging transactions. All persons that maintain positions in excess of 
the limits set forth in Sec.  151.4 in reliance upon the exemptions set 
forth in paragraphs (a)(3) and (4) of this section shall submit to the 
Commission a 404S filing, in the form and manner provided for in Sec.  
151.10. Such 404S filing shall contain the following information with 
respect to such position for each business day that the same person 
exceeds the limits set forth in Sec.  151.4, up to and through the day 
the person’s position first falls below the position limit that was 
exceeded:
    (1) By Referenced Contract;
    (2) By commodity reference price and units of measurement used for 
the swaps that would qualify as a bona fide hedging transaction or 
position gross long and gross short positions; and
    (3) Cross-commodity hedging information as required under paragraph 
(g) of this section.
    (g) Conversion methodology for cross-commodity hedges. In addition 
to the information required under this section, persons who avail 
themselves of cross-commodity hedges pursuant to (a)(2)(viii) of this 
section shall submit to the Commission a form 404, 404A, or 404S 
filing, as appropriate. The first time such a form is filed where a 
cross-commodity hedge is claimed, it should contain a description of 
the conversion methodology. That description should explain the 
conversion from the actual commodity used in the person’s normal course 
of business to the Referenced Contract that is being used for hedging, 
including an explanation of the methodology used for determining the 
ratio of conversion between the actual or anticipated cash positions 
and the person’s positions in the Referenced Contract.
    (h) Recordkeeping. Persons who avail themselves of bona fide hedge 
exemptions shall keep and maintain complete books and records 
concerning all of their related cash, futures, and swap positions and 
transactions and make such books and records, along with a list of 
pass-through swap counterparties for pass-through swap exemptions under 
(a)(3) of this section, available to the Commission upon request.
    (i) Additional requirements for pass-through swap counterparties. A 
party seeking to rely upon Sec.  151.5(a)(3) to exceed the position 
limits of Sec.  151.4 with respect to such a swap may only do so if its 
counterparty provides a written representation (e.g., in the form of a 
field or other representation contained in a mutually executed trade 
confirmation) that, as to such counterparty, the swap qualifies in good 
faith as a bona fide hedging transaction under paragraph (a)(3) of this 
section at the time the swap was executed. That written representation 
shall be retained by the parties to the swap for a period of at least 
two years following the expiration of the swap and furnished to the 
Commission upon request. Any person that represents to another person 
that the swap qualifies as a pass-through swap under paragraph (a)(3) 
of this section shall keep and make available to the Commission upon 
request all relevant books and records supporting such a representation 
for a period of at least two years following the expiration of the 
swap.
    (j) Financial distress exemption. Upon specific request made to the 
Commission, the Commission may exempt a person or related persons under 
financial distress circumstances for a time certain from any of the 
requirements of this part. Financial distress circumstances are 
situations involving the potential default or bankruptcy of a customer 
of the requesting person or persons, affiliate of the requesting person 
or persons, or potential acquisition target of the requesting person or 
persons. Such exemptions shall be granted by Commission order.

Sec.  151.6  Position visibility.

    (a) Visibility levels. A person holding or controlling positions, 
separately or in combination, net long or net short, in Referenced 
Contracts that equal or exceed the following levels in all months or in 
any single month (including the spot month), shall comply with the 
reporting requirements of paragraphs (b) and (c) of this section:

————————————————————————
 
————————————————————————
(1) Visibility Levels for Metal Referenced Contracts
————————————————————————
(i) Commodity Exchange, Inc. Copper (HG)…………               8,500
(ii) Commodity Exchange, Inc. Gold (GC)………….              30,000
(iv) Commodity Exchange, Inc. Silver (SI)………..               8,500
(v) New York Mercantile Exchange Palladium (PA)…..               1,500
(vi) New York Mercantile Exchange Platinum (PL)…..               2,000
————————————————————————
(2) Visibility Levels for Energy Referenced Contracts
————————————————————————
(i) New York Mercantile Exchange Light Sweet Crude                50,000
 Oil (CL)…………………………………….
(ii) New York Mercantile Exchange Henry Hub Natural               50,000
 Gas (NG)…………………………………….
(iii) New York Mercantile Exchange New York Harbor                10,000
 Gasoline Blendstock (RB)………………………
(iv) New York Mercantile Exchange New York Harbor                 16,000
 No. 2 Heating Oil (HO)………………………..
————————————————————————

     (b) Statement of person exceeding visibility level. Persons 
meeting the provisions of paragraph (a) of this section, shall submit 
to the Commission a 401 filing in the form and manner provided for in 
Sec.  151.10. The 401 filing shall contain the following information, 
by Referenced Contract:
    (1) A list of dates, within the applicable calendar quarter, on 
which the person held or controlled a position

[[Page 71692]]

that equaled or exceeded such visibility levels; and
    (2) As of the first business Tuesday following the applicable 
calendar quarter and as of the day, within the applicable calendar 
quarter, in which the person held the largest net position (on an all 
months combined basis) in excess of the level in paragraph (a) of this 
section:
    (i) Separately by futures, options and swaps, gross long and gross 
short futures equivalent positions in all months in the applicable 
Referenced Contract(s) (using economically reasonable and analytically 
supported deltas) on a futures-equivalent basis; and
    (ii) If applicable, by commodity referenced price, gross long and 
gross short uncleared swap positions in all months basis in the 
applicable Referenced Contract(s) futures-equivalent basis (using 
economically reasonable and analytically supported deltas).
    (c) 404 filing. A person that holds a position in a Referenced 
Contract that equals or exceeds a visibility level in a calendar 
quarter shall submit to the Commission a 404 filing in the form and 
manner provided for in Sec.  151.10, and it shall contain the 
information regarding such positions as described in Sec.  151.5(c) as 
of the first business Tuesday following the applicable calendar quarter 
and as of the day, within the applicable calendar quarter, in which the 
person held the largest net position in excess of the level in all 
months.
    (d) Alternative filing. With the express written permission of the 
Commission or its designees, the submission of a swaps or physical 
commodity portfolio summary statement spreadsheet in digital format, 
only insofar as the spreadsheet provides at least the same data as that 
required by paragraphs (b) or (c) of this section respectively may be 
substituted for the 401 or 404 filing respectively.
    (e) Precedence of other reporting obligations. Reporting 
obligations imposed by regulations other than those contained in this 
section shall supersede the reporting requirements of paragraphs (b) 
and (c) of this section but only insofar as other reporting obligations 
provide at least the same data and are submitted to the Commission or 
its designees at least as often as the reporting requirements of 
paragraphs (b) and (c) of this section.
    (f) Compliance date. The compliance date of this section shall be 
sixty days after the term “swap” is further defined under the Wall 
Street Transparency and Accountability Act of 2010. A document will be 
published in the Federal Register establishing the compliance date.

Sec.  151.7  Aggregation of positions.

    (a) Positions to be aggregated. The position limits set forth in 
Sec.  151.4 shall apply to all positions in accounts for which any 
person by power of attorney or otherwise directly or indirectly holds 
positions or controls trading and to positions held by two or more 
persons acting pursuant to an expressed or implied agreement or 
understanding the same as if the positions were held by, or the trading 
of the position were done by, a single individual.
    (b) Ownership of accounts generally. For the purpose of applying 
the position limits set forth in Sec.  151.4, except for the ownership 
interest of limited partners, shareholders, members of a limited 
liability company, beneficiaries of a trust or similar type of pool 
participant in a commodity pool subject to the provisos set forth in 
paragraph (c) of this section or in accounts or positions in multiple 
pools as set forth in paragraph (d) of this section, any person holding 
positions in more than one account, or holding accounts or positions in 
which the person by power of attorney or otherwise directly or 
indirectly has a 10 percent or greater ownership or equity interest, 
must aggregate all such accounts or positions.
    (c) Ownership by limited partners, shareholders or other pool 
participants. (1) Except as provided in paragraphs (c)(2) and (3) of 
this section, a person that is a limited partner, shareholder or other 
similar type of pool participant with an ownership or equity interest 
of 10 percent or greater in a pooled account or positions who is also a 
principal or affiliate of the operator of the pooled account must 
aggregate the pooled account or positions with all other accounts or 
positions owned or controlled by that person, unless:
    (i) The pool operator has, and enforces, written procedures to 
preclude the person from having knowledge of, gaining access to, or 
receiving data about the trading or positions of the pool;
    (ii) The person does not have direct, day-to-day supervisory 
authority or control over the pool’s trading decisions; and
    (iii) The pool operator has complied with the requirements of 
paragraph (h) of this section on behalf of the person or class of 
persons.
    (2) A commodity pool operator having ownership or equity interest 
of 10 percent or greater in an account or positions as a limited 
partner, shareholder or other similar type of pool participant must 
aggregate those accounts or positions with all other accounts or 
positions owned or controlled by the commodity pool operator.
    (3) Each limited partner, shareholder, or other similar type of 
pool participant having an ownership or equity interest of 25 percent 
or greater in a commodity pool the operator of which is exempt from 
registration under Sec.  4.13 of this chapter must aggregate the pooled 
account or positions with all other accounts or positions owned or 
controlled by that person.
    (d) Identical trading. Notwithstanding any other provision of this 
section, for the purpose of applying the position limits set forth in 
Sec.  151.4, any person that holds or controls the trading of 
positions, by power of attorney or otherwise, in more than one account, 
or that holds or controls trading of accounts or positions in multiple 
pools with identical trading strategies must aggregate all such 
accounts or positions that a person holds or controls.
    (e) Trading control by futures commission merchants. The position 
limits set forth in Sec.  151.4 shall be construed to apply to all 
positions held by a futures commission merchant or its separately 
organized affiliates in a discretionary account, or in an account which 
is part of, or participates in, or receives trading advice from a 
customer trading program of a futures commission merchant or any of the 
officers, partners, or employees of such futures commission merchant or 
its separately organized affiliates, unless:
    (1) A trader other than the futures commission merchant or the 
affiliate directs trading in such an account;
    (2) The futures commission merchant or the affiliate maintains only 
such minimum control over the trading in such an account as is 
necessary to fulfill its duty to supervise diligently trading in the 
account; and
    (3) Each trading decision of the discretionary account or the 
customer trading program is determined independently of all trading 
decisions in other accounts which the futures commission merchant or 
the affiliate holds, has a financial interest of 10 percent or more in, 
or controls.
    (f) Independent Account Controller. An eligible entity need not 
aggregate its positions with the eligible entity’s client positions or 
accounts carried by an authorized independent account controller, as 
defined in Sec.  151.1, except for the spot month provided in physical-
delivery Referenced Contracts, provided, however, that the eligible 
entity has complied with the requirements of paragraph (h) of this 
section, and that the overall positions

[[Page 71693]]

held or controlled by such independent account controller may not 
exceed the limits specified in Sec.  151.4.
    (1) Additional requirements for exemption of Affiliated Entities. 
If the independent account controller is affiliated with the eligible 
entity or another independent account controller, each of the 
affiliated entities must:
    (i) Have, and enforce, written procedures to preclude the 
affiliated entities from having knowledge of, gaining access to, or 
receiving data about, trades of the other. Such procedures must include 
document routing and other procedures or security arrangements, 
including separate physical locations, which would maintain the 
independence of their activities; provided, however, that such 
procedures may provide for the disclosure of information which is 
reasonably necessary for an eligible entity to maintain the level of 
control consistent with its fiduciary responsibilities and necessary to 
fulfill its duty to supervise diligently the trading done on its 
behalf;
    (ii) Trade such accounts pursuant to separately developed and 
independent trading systems;
    (iii) Market such trading systems separately; and
    (iv) Solicit funds for such trading by separate disclosure 
documents that meet the standards of Sec.  4.24 or Sec.  4.34 of this 
chapter, as applicable where such disclosure documents are required 
under part 4 of this chapter.
    (g) Exemption for underwriting. Notwithstanding any of the 
provisions of this section, a person need not aggregate the positions 
or accounts of an owned entity if the ownership interest is based on 
the ownership of securities constituting the whole or a part of an 
unsold allotment to or subscription by such person as a participant in 
the distribution of such securities by the issuer or by or through an 
underwriter.
    (h) Notice filing for exemption. (1) Persons seeking an aggregation 
exemption under paragraph (c), (e), (f), or (i) of this section shall 
file a notice with the Commission, which shall be effective upon 
submission of the notice, and shall include:
    (i) A description of the relevant circumstances that warrant 
disaggregation; and
    (ii) A statement certifying that the conditions set forth in the 
applicable aggregation exemption provision has been met.
    (2) Upon call by the Commission, any person claiming an aggregation 
exemption under this section shall provide to the Commission such 
information concerning the person’s claim for exemption. Upon notice 
and opportunity for the affected person to respond, the Commission may 
amend, suspend, terminate, or otherwise modify a person’s aggregation 
exemption for failure to comply with the provisions of this section.
    (3) In the event of a material change to the information provided 
in the notice filed under this paragraph, an updated or amended notice 
shall promptly be filed detailing the material change.
    (4) A notice shall be submitted in the form and manner provided for 
in Sec.  151.10.
    (i) Exemption for federal law information sharing restriction. 
Notwithstanding any provision of this section, a person is not subject 
to the aggregation requirements of this section if the sharing of 
information associated with such aggregation would cause either person 
to violate Federal law or regulations adopted thereunder and provided 
that such a person does not have actual knowledge of information 
associated with such aggregation. Provided, however, that such person 
file a prior notice with the Commission detailing the circumstances of 
the exemption and an opinion of counsel that the sharing of information 
would cause a violation of Federal law or regulations adopted 
thereunder.

Sec.  151.8  Foreign boards of trade.

    The aggregate position limits in Sec.  151.4 shall apply to a 
trader with positions in Referenced Contracts executed on, or pursuant 
to the rules of a foreign board of trade, provided that:
    (a) 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
    (b) 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.

Sec.  151.9  Pre-existing positions.

    (a) Non-spot-month position limits. The position limits set forth 
in Sec.  151.4(b) of this chapter may be exceeded to the extent that 
positions in Referenced Contracts remain open and were entered into in 
good faith prior to the effective date of any rule, regulation, or 
order that specifies a position limit under this part.
    (b) Spot-month position limits. Notwithstanding the pre-existing 
exemption in non-spot months, a person must comply with spot month 
limits.
    (c) Pre-Dodd-Frank and transition period swaps. The initial 
position limits established under Sec.  151.4 shall not apply to any 
swap positions entered into in good faith prior to the effective date 
of such initial limits. Swap positions in Referenced Contracts entered 
into in good faith prior to the effective date of such initial limits 
may be netted with post-effective date swap and swaptions for the 
purpose of applying any position limit.
    (d) Exemptions. Exemptions granted by the Commission under Sec.  
1.47 for swap risk management shall not apply to swap positions entered 
into after the effective date of initial position limits established 
under Sec.  151.4.

Sec.  151.10  Form and manner of reporting and submitting information 
or filings.

    Unless otherwise instructed by the Commission or its designees, any 
person submitting reports under this section shall submit the 
corresponding required filings and any other information required under 
this part to the Commission as follows:
    (a) Using the format, coding structure, and electronic data 
transmission procedures approved in writing by the Commission; and
    (b) Not later than 9 a.m. Eastern Time on the next business day 
following the reporting or filing obligation is incurred unless:
    (1) A 404A filing is submitted pursuant Sec.  151.5(d), in which 
case the filing must be submitted at least ten business days in advance 
of the date that transactions and positions would be established that 
would exceed a position limit set forth in Sec.  151.4;
    (2) A 404 filing is submitted pursuant to Sec.  151.5(c) or a 404S 
is submitted pursuant to Sec.  151.5(f), the filing must be submitted 
not later than 9 a.m. on the third business day after a position has 
exceeded the level in a Referenced Contract for the first time and not 
later than the third business day following each calendar month in 
which the person exceeded such levels;
    (3) The filing is submitted pursuant to Sec.  151.6, then the 401 
or 404, or their respective alternatives as provided for under Sec.  
151.6(d), shall be submitted within ten business days following the 
quarter in which the person holds a position in excess in the 
visibility levels provided in Sec.  151.6(a); or
    (4) A notice of disaggregation is filed pursuant to Sec.  151.7(h), 
in which case the notice shall be submitted within five business days 
of when the person claims a disaggregation exemption.

[[Page 71694]]

    (e) When the reporting entity discovers errors or omissions to past 
reports, the entity so notifies the Commission and files corrected 
information in a form and manner and at a time as may be instructed by 
the Commission or its designee.

Sec.  151.11  Designated contract market and swap execution facility 
position limits and accountability rules.

    (a) Spot-month limits. (1) For all Referenced Contracts executed 
pursuant to their rules, swap execution facilities that are trading 
facilities and designated contract markets shall adopt, enforce, and, 
establish rules and procedures for monitoring and enforcing spot-month 
position limits set at levels no greater than those established by the 
Commission under Sec.  151.4.
    (2) For all agreements, contracts, or transactions executed 
pursuant to their rules that are not subject to the limits set forth in 
paragraph (a)(1) of this section, it shall be an acceptable practice 
for swap execution facilities that are trading facilities and 
designated contract markets to adopt, enforce, and establish rules and 
procedures for monitoring and enforcing spot-month position limits set 
at levels no greater than 25 percent of estimated deliverable supply, 
consistent with Commission guidance set forth in this title.
    (b) Non-spot-month limits. (1) Referenced Contracts. For Referenced 
Contracts executed pursuant to their rules, swap execution facilities 
that are trading facilities and designated contract markets shall adopt 
enforce, and establish rules and procedures for monitoring and 
enforcing single month and all-months limits at levels no greater than 
the position limits established by the Commission under Sec.  
151.4(d)(3) or (4).
    (2) Non-referenced contracts. For all other agreements, contracts, 
or transactions executed pursuant to their rules that are not subject 
to the limits set forth in Sec.  151.4, except as provided in Sec.  
151.11(b)(3) and (c), it shall be an acceptable practice for swap 
execution facilities that are trading facilities and designated 
contract markets to adopt, enforce, and establish rules and procedures 
for monitoring and enforcing single-month and all-months-combined 
position limits at levels no greater than ten percent of the average 
delta-adjusted futures, swaps, and options month-end all months open 
interest in the same contract or economically equivalent contracts 
executed pursuant to the rules of the designated contract market or 
swap execution facility that is a trading facility for the greater of 
the most recent one or two calendar years up to 25,000 contracts with a 
marginal increase of 2.5 percent thereafter.
    (3) Levels at designation or initial listing. Other than in 
Referenced Contracts, at the time of its initial designation or upon 
offering a new contract, agreement, or transaction to be executed 
pursuant to its rules, it shall be an acceptable practice for a 
designated contract market or swap execution facility that is a trading 
facility to provide for speculative limits for an individual single-
month or in all-months-combined at no greater than 1,000 contracts for 
physical commodities other than energy commodities and 5,000 contracts 
for other commodities, provided that the notional quantity for such 
contracts, agreements, or transactions, corresponds to a notional 
quantity per contract that is no larger than a typical cash market 
transaction in the underlying commodity.
    (4) For purposes of this paragraph, it shall be an acceptable 
practice for open interest to be calculated by combining the all months 
month-end open interest in the same contract or economically equivalent 
contracts executed pursuant to the rules of the designated contract 
market or swap execution facility that is a trading facility (on a 
delta-adjusted basis, as appropriate) for all months listed during the 
most recent one or two calendar years.
    (c) Alternatives. In lieu of the limits provided for under Sec.  
151.11(a)(2) or (b)(2), it shall be an acceptable practice for swap 
execution facilities that are trading facilities and designated 
contract markets to adopt, enforce, and establish rules and procedures 
for monitoring and enforcing position accountability rules with respect 
to any agreement, contract, or transaction executed pursuant to their 
rules requiring traders to provide information about their position 
upon request by the exchange and to consent to halt increasing further 
a trader’s position upon request by the exchange as follows:
    (1) On an agricultural or exempt commodity that is not subject to 
the limits set forth in Sec.  151.4, having an average month-end open 
interest of 50,000 contracts and an average daily volume of 5,000 
contracts and a liquid cash market, provided, however, such swap 
execution facilities that are trading facilities and designated 
contract markets are not exempt from the requirement set forth in 
paragraph (a)(2) that they adopt a spot-month position limit with a 
level no greater than 25 percent of estimated deliverable supply; or
    (2) On a major foreign currency, for which there is no legal 
impediment to delivery and for which there exists a highly liquid cash 
market; or
    (3) On an excluded commodity that is an index or measure of 
inflation, or other macroeconomic index or measure; or
    (4) On an excluded commodity that meets the definition of section 
1a(19)(ii), (iii), or (iv) of the Act.
    (d) Securities futures products. Position limits for securities 
futures products are specified in 17 CFR part 41.
    (e) Aggregation. Position limits or accountability rules 
established under this section shall be subject to the aggregation 
standards of Sec.  151.7.
    (f) Exemptions. (1) Hedge exemptions. (i) For purposes of exempt 
and agricultural commodities, no designated contract market or swap 
execution facility that is a trading facility bylaw, rule, regulation, 
or resolution adopted pursuant to this section shall apply to any 
position that would otherwise be exempt from the applicable Federal 
speculative position limits as determined by Sec.  151.5; provided, 
however, that the designated contract market or swap execution facility 
that is a trading facility may limit bona fide hedging positions or any 
other positions which have been exempted pursuant to Sec.  151.5 which 
it determines are not in accord with sound commercial practices or 
exceed an amount which may be established and liquidated in an orderly 
fashion.
    (ii) For purposes of excluded commodities, no designated contract 
market or swap execution facility that is a trading facility by law, 
rule, regulation, or resolution adopted pursuant to this section shall 
apply to any transaction or position defined under Sec.  1.3(z) of this 
chapter; provided, however, that the designated contract market or swap 
execution facility that is a trading facility may limit bona fide 
hedging positions that it determines are not in accord with sound 
commercial practices or exceed an amount which may be established and 
liquidated in an orderly fashion.
    (2) Procedure. Persons seeking to establish eligibility for an 
exemption must comply with the procedures of the designated contract 
market or swap execution facility that is a trading facility for 
granting exemptions from its speculative position limit rules. In 
considering whether to permit or grant an exemption, a designated 
contract market or swap execution facility that is a trading facility 
must take into account sound commercial practices and

[[Page 71695]]

paragraph (d)(1) of this section and apply principles consistent with 
Sec.  151.5.
    (g) Other exemptions. Speculative position limits adopted pursuant 
to this section shall not apply to:
    (1) Any position acquired in good faith prior to the effective date 
of any bylaw, rule, regulation, or resolution which specifies such 
limit;
    (2) Spread or arbitrage positions either in positions in related 
Referenced Contracts or, for contracts that are not Referenced 
Contracts, economically equivalent contracts provided that such 
positions are outside of the spot month for physical-delivery 
contracts; or
    (3) Any person that is registered as a futures commission merchant 
or floor broker under authority of the Act, except to the extent that 
transactions made by such person are made on behalf of or for the 
account or benefit of such person.
    (h) Ongoing responsibilities. Nothing in this part shall be 
construed to affect any provisions of the Act relating to manipulation 
or corners or to relieve any designated contract market, swap execution 
facility that is a trading facility, or governing board of a designated 
contract market or swap execution facility that is a trading facility 
from its responsibility under other provisions of the Act and 
regulations.
    (i) Compliance date. The compliance date of this section shall be 
60 days after the term “swap” is further defined under the Wall 
Street Transparency and Accountability Act of 2010. A document will be 
published in the Federal Register establishing the compliance date.
    (j) Notwithstanding paragraph (i) of this section, the compliance 
date of provisions of paragraph (b)(1) of this section as it applies to 
non-legacy Referenced Contracts shall be upon the establishment of any 
non-spot-month position limits pursuant to Sec.  151.4(d)(3). In the 
period prior to the establishment of any non-spot-month position limits 
pursuant to Sec.  151.4(d)(3) it shall be an acceptable practice for a 
designated contract market or swap execution facility to either:
    (1) Retain existing non-spot-month position limits or 
accountability rules; or
    (2) Establish non-spot-month position limits or accountability 
levels pursuant to the acceptable practice described in Sec.  
151.11(b)(2) and (c)(1) based on open interest in the same contract or 
economically equivalent contracts executed pursuant to the rules of the 
designated contract market or swap execution facility that is a trading 
facility.

Sec.  151.12  Delegation of authority to the Director of the Division 
of Market Oversight.

    (a) 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:
    (1) In Sec.  151.4(b) for determining levels of open interest, in 
Sec.  151.4(d)(2)(ii) to estimate deliverable supply, in Sec.  
151.4(d)(3)(ii) to fix non-spot-month limits, and in Sec.  151.4(e) to 
publish position limit levels.
    (2) In Sec.  151.5 requesting additional information or determining 
whether a filing should not be considered as bona fide hedging;
    (3) In Sec.  151.6 for accepting alternative position visibility 
filings under paragraphs (c)(2) and (d) therein;
    (4) In Sec.  151.7(h)(2) to call for additional information from a 
trader claiming an aggregation exemption;
    (5) In Sec.  151.10 for providing instructions or determining the 
format, coding structure, and electronic data transmission procedures 
for submitting data records and any other information required under 
this part.
    (b) 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.
    (c) Nothing in this section prohibits the Commission, at its 
election, from exercising the authority delegated in this section.

Sec.  151.13  Severability.

    If any provision of this part, or the application thereof to any 
person or circumstances, is held invalid, such invalidity shall not 
affect other provisions or application of such provision to other 
persons or circumstances which can be given effect without the invalid 
provision or application.

Appendix A to Part 151–Spot-Month Position Limits

————————————————————————
                                                           Referenced
                       Contract                          contract spot-
                                                          month limit
————————————————————————
                    Agricultural Referenced Contracts
————————————————————————
ICE Futures U.S. Cocoa………………………….              1,000
ICE Futures U.S. Coffee C……………………….                500
Chicago Board of Trade Corn……………………..                600
ICE Futures U.S. Cotton No. 2……………………                300
ICE Futures U.S. FCOJ-A…………………………                300
Chicago Mercantile Exchange Class III Milk………..              1,500
Chicago Mercantile Exchange Feeder Cattle…………                300
Chicago Mercantile Exchange Lean Hog……………..                950
Chicago Mercantile Exchange Live Cattle…………..                450
Chicago Board of Trade Oats……………………..                600
Chicago Board of Trade Rough Rice………………..                600
Chicago Board of Trade Soybeans………………….                600
Chicago Board of Trade Soybean Meal………………                720
Chicago Board of Trade Soybean Oil……………….                540
ICE Futures U.S. Sugar No. 11……………………              5,000
ICE Futures U.S. Sugar No. 16……………………              1,000
Chicago Board of Trade Wheat…………………….                600
Minneapolis Grain Exchange Hard Red Spring Wheat…..                600
Kansas City Board of Trade Hard Winter Wheat………                600
————————————————————————
                       Metal Referenced Contracts
————————————————————————
Commodity Exchange, Inc. Copper………………….              1,200
New York Mercantile Exchange Palladium……………                650

[[Page 71696]]

 
New York Mercantile Exchange Platinum…………….                500
Commodity Exchange, Inc. Gold……………………              3,000
Commodity Exchange, Inc. Silver………………….              1,500
————————————————————————
                       Energy Referenced Contracts
————————————————————————
New York Mercantile Exchange Light Sweet Crude Oil…              3,000
New York Mercantile Exchange New York Harbor Gasoline              1,000
 Blendstock……………………………………
New York Mercantile Exchange Henry Hub Natural Gas…              1,000
New York Mercantile Exchange New York Harbor Heating               1,000
 Oil………………………………………….
————————————————————————

Appendix B to Part 151–Examples of Bona Fide Hedging Transactions and 
Positions

    A non-exhaustive list of examples of bona fide hedging 
transactions or positions under Sec.  151.5 is presented below. A 
transaction or position qualifies as a bona fide hedging transaction 
or position when it meets the requirements under Sec.  151.5(a)(1) 
and one of the enumerated provisions under Sec.  151.5(a)(2). With 
respect to a transaction or position that does not fall within an 
example in this Appendix, a person seeking to rely on a bona fide 
hedging exemption under Sec.  151.5 may seek guidance from the 
Division of Market Oversight.

1. Royalty Payments

    a. Fact Pattern: In order to develop an oil field, Company A 
approaches Bank B for financing. To facilitate the loan, Bank B 
first establishes an independent legal entity commonly known as a 
special purpose vehicle (SPV). Bank B then provides a loan to the 
SPV. Payments of principal and interest from the SPV to the Bank are 
based on a fixed price for crude oil. The SPV in turn makes a 
production loan to Company A. The terms of the production loan 
require Company A to provide the SPV with volumetric production 
payments (VPPs) based on the SPV’s share of the production and the 
prevailing price of crude oil. Because the price of crude may fall, 
the SPV reduces that risk by entering into a NYMEX Light Sweet Crude 
Oil crude oil swap with Swap Dealer C. The swap requires the SPV to 
pay Swap Dealer C the floating price of crude oil and for Swap 
Dealer C to pay a fixed price. The notional quantity for the swap is 
equal to the expected production underlying the VPPs to the SPV.
    Analysis: The swap between Swap Dealer C and the SPV meets the 
general requirements for bona fide hedging transactions (Sec.  
151.5(a)(1)(i)-(iii)) and the specific requirements for royalty 
payments (Sec.  151.5(a)(2)(vi)). The VPPs that the SPV receives 
represent anticipated royalty payments from the oil field’s 
production. The swap represents a substitute for transactions to be 
made in the physical marketing channel. The SPV’s swap position 
qualifies as a hedge because it is economically appropriate to the 
reduction of risk. The SPV is reasonably certain that the notional 
quantity of the swap is equal to the expected production underlying 
the VPPs. The swap reduces the risk associated with a change in 
value of a royalty asset. The fluctuations in value of the SPV’s 
anticipated royalties are substantially related to the fluctuations 
in value of the NYMEX Light Sweet Crude Oil Referenced Contract swap 
with Swap Dealer C. The risk-reducing position will not qualify as a 
bona fide hedge in a physical-delivery Referenced Contract during 
the spot month.
    b. Continuation of Fact Pattern: Swap Dealer C offsets the risk 
associated with the swap to the SPV by selling Referenced Contracts. 
The notional quantity of the Referenced Contracts sold by Swap 
Dealer C exactly matches the notional quantity of the swap with the 
SPV.
    Analysis: Because the SPV enters the swap as a bona fide hedger 
under Sec.  151.5(a)(2)(vi), the offset of the risk of the swap in a 
Referenced Contract by Swap Dealer C qualifies as a bona fide 
hedging transaction under Sec.  151.5(a)(3). As provided in Sec.  
151.5(a)(3), the risk reducing position of Swap Dealer C does not 
qualify as a bona fide hedge in a physical-delivery Referenced 
Contract during the spot month.

2. Sovereigns

    a. Fact Pattern: A Sovereign induces a farmer to sell his 
anticipated production of 100,000 bushels of corn forward to User A 
at a fixed price for delivery during the expected harvest. In return 
for the farmer entering into the fixed-price forward sale, the 
Sovereign agrees to pay the farmer the difference between the market 
price at the time of harvest and the price of the fixed-price 
forward, in the event that the market price is above the price of 
the forward. The fixed-price forward sale of 100,000 bushels of corn 
reduces the farmer’s downside price risk associated with his 
anticipated agricultural production. The Sovereign faces commodity 
price risk as it stands ready to pay the farmer the difference 
between the market price and the price of the fixed-price contract. 
To reduce that risk, the Sovereign purchases 100,000 bushels of 
Chicago Board of Trade (“CBOT”) Corn Referenced Contract call 
options.
    Analysis: Because the Sovereign and the farmer are acting 
together pursuant to an express agreement, the aggregation 
provisions of Sec.  151.7 and Sec.  151.5(b) apply and they are 
treated as a single person. Taking the positions of the Sovereign 
and farmer jointly, the risk profile of the combination of the 
forward sale and the long call is approximately equivalent to the 
risk profile of a synthetic long put.521 A synthetic long put may 
be a bona fide hedge for anticipated production. Thus, that single 
person satisfies the general requirements for bona fide hedging 
transactions (Sec.  151.5(a)(1)(i)-(iii)) and specific requirements 
for anticipated agricultural production (Sec.  151.5(a)(2)(i)(B)). 
The synthetic long put is a substitute for transactions that the 
farmer will make at a later time in the physical marketing channel 
after the crop is harvested. The synthetic long put reduces the 
price risk associated with anticipated agricultural production. The 
size of the hedge is equivalent to the size of the Sovereign’s risk 
exposure. As provided under Sec.  151.5(a)(2)(i)(B), the Sovereign’s 
risk-reducing position will not qualify as a bona fide hedge in a 
physical-delivery Referenced Contract during the last five trading 
days.
—————————————————————————

    521 Put-call parity describes the mathematical relationship 
between price of a put and call with identical strike prices and 
expiry.
—————————————————————————

3. Services

    a. Fact Pattern: Company A enters into a risk service agreement 
to drill an oil well with Company B. The risk service agreement 
provides that a portion of the revenue receipts to Company A depends 
on the value of the oil produced. Company A is concerned that the 
price of oil may fall resulting in lower anticipated revenues from 
the risk service agreement. To reduce that risk, Company A sells 
5,000 NYMEX Light Sweet Crude Oil Referenced Contracts, which is 
equivalent to the firm’s anticipated share of the oil produced.
    Analysis: Company A’s hedge of a portion of its revenue stream 
from the risk service agreement meets the general requirements for 
bona fide hedging (Sec.  151.5(a)(1)(i)-(iii)) and the specific 
provisions for services (Sec.  151.5(a)(2)(vii)). Selling NYMEX 
Light Sweet Crude Oil Referenced Contracts is a substitute for 
transactions to be taken at a later time in the physical marketing 
channel once the oil is produced. The Referenced Contracts sold by 
Company A are economically appropriate to the reduction of risk 
because the total notional quantity of the Referenced Contracts sold 
by Company A equals its share of the expected quantity of future 
production under the risk service agreement. Because the price of 
oil may fall, the transactions in Referenced Contracts arise from a 
potential reduction in the value of the service that Company A is 
providing to Company B. The contract for services

[[Page 71697]]

involves the production of a commodity underlying the NYMEX Exchange 
Light Sweet Crude Oil Referenced Contract. As provided under Sec.  
151.5(a)(2)(vii), the risk reducing position will not qualify as a 
bona fide hedge during the spot month of the physical-delivery 
Referenced Contract.
    b. Fact Pattern: A City contracts with Firm A to provide waste 
management services. The contract requires that the trucks used to 
transport the solid waste use natural gas as a power source. 
According to the contract, the City will pay for the cost of the 
natural gas used to transport the solid waste by Firm A. In the 
event that natural gas prices rise, the City’s waste transport 
expenses rise. To mitigate this risk, the City establishes a long 
position in NYMEX Natural Gas Referenced Contracts that is 
equivalent to the expected use of natural gas over the life of the 
service contract.
    Analysis: This transaction meets the general requirements for 
bona fide hedging transaction (Sec.  151.5(a)(1)(i)-(iii)) and the 
specific provisions for services (Sec.  151.5(a)(2)(vii)). Because 
the City is responsible for paying the cash price for the natural 
gas used to power the trucks that transport the solid waste under 
the services agreement, the long hedge is a substitute for 
transactions to be taken at a later time in the physical marketing 
channel. The transaction is economically appropriate to the 
reduction of risk because the total notional quantity of the 
positions Referenced Contracts purchased equals the expected use of 
natural gas over the life of the contract. The positions in 
Referenced Contracts reduce the risk associated with an increase in 
anticipated liabilities that the City may incur in the event that 
the price of natural gas increases. The service contract involves 
the use of a commodity underlying a Referenced Contract. As provided 
under Sec.  151.5(a)(2)(vii), the risk reducing position will not 
qualify as a bona fide hedge during the spot month of the physical-
delivery Referenced Contract.
    c. Fact Pattern: Natural Gas Producer A induces Pipeline 
Operator B to build a pipeline between Producer A’s natural gas 
wells and the Henry Hub pipeline interconnection by entering into a 
fixed-price contract for natural gas transportation that guarantees 
a specified quantity of gas to be transported over the pipeline. 
With the construction of the new pipeline, Producer A plans to 
deliver natural gas to Henry Hub at a price differential between his 
gas wells and Henry Hub that is higher than its transportation cost. 
Producer A is concerned, however, that the price differential may 
decline. To lock in the price differential, Producer A decides to 
sell outright NYMEX Henry Hub Natural Gas Referenced Contract cash-
settled futures contracts and buy an outright swap that NYMEX Henry 
Hub Natural Gas at his gas wells.
    Analysis: This transaction satisfies the general requirements 
for a bona fide hedge exemption (Sec. Sec.  151.5(a)(1)(i)-(iii)) 
and specific provisions for services (Sec.  151.5(a)(2)(vii)).522 
The hedge represents a substitute for transactions to be taken in 
the future (e.g., selling natural gas at Henry Hub). The hedge is 
economically appropriate to the reduction of risk that the location 
differential will decline, provided the hedge is not larger than the 
quantity equivalent of the cash market commodity to be produced and 
transported. As provided under Sec.  151.5(a)(2)(vii), the risk 
reducing position will not qualify as a bona fide hedge during the 
spot month of the physical-delivery Referenced Contract.
—————————————————————————

    522 Note that in addition to the use of Referenced Contracts, 
Producer A could have hedged this risk by using a basis contract, 
which is excluded from the definition of Referenced Contracts.
—————————————————————————

4. Lending a Commodity

    a. Fact Pattern: Bank B lends 1,000 ounces of gold to Jewelry 
Fabricator J at LIBOR plus a differential. Under the terms of the 
loan, Jewelry Fabricator J may later purchase the gold at a 
differential to the prevailing price of Commodity Exchange, Inc. 
(“COMEX”) Gold (i.e., an open-price purchase agreement embedded in 
the terms of the loan). Jewelry Fabricator J intends to use the gold 
to make jewelry and reimburse Bank B for the loan using the proceeds 
from jewelry sales. Because Bank B is concerned about its potential 
loss if the price of gold drops, it reduces the risk of a potential 
loss in the value of the gold by selling COMEX Gold Referenced 
Contracts with an equivalent notional quantity of 1,000 ounces of 
gold.
    Analysis: This transaction meets the general bona fide hedge 
exemption requirements (Sec. Sec.  151.5(a)(1)(i)-(iii)) and the 
specific requirements associated with owing a cash commodity (Sec.  
151.5(a)(2)(i)). Bank B’s short hedge of the gold represents a 
substitute for a transaction to be made in the physical marketing 
channel. Because the total notional quantity of the amount of gold 
contracts sold is equal to the amount of gold that Bank B owns, the 
hedge is economically appropriate to the reduction of risk. Finally, 
the transactions in Referenced Contracts arise from a potential 
change in the value of the gold owned by Bank B.
    b. Fact Pattern: Silver Processor A agrees to purchase scrap 
metal from a Scrap Yard that will be processed into 5,000 ounces of 
silver. To finance the purchase, Silver Processor A borrows 5,000 
ounces of silver from Bank B and sells the silver in the cash 
market. Using the proceeds from the sale of silver in the cash 
market, Silver Processor A pays the Scrap Yard for the scrap metal 
containing 5,000 ounces of silver at a negotiated discount from the 
current spot price. To repay Bank B, Silver Processor A may either: 
Provide Bank B with 5,000 ounces of silver and an interest payment 
based on a differential to LIBOR; or repay the Bank at the current 
COMEX Silver settlement price plus an interest payment based on a 
differential to LIBOR (i.e., an open-price purchase agreement). 
Silver Processor A processes and refines the scrap to repay Bank B. 
Although Bank B has lent the silver, it is still exposed to a 
reduction in value if the price of silver falls. Bank B reduces the 
risk of a possible decline in the value of their silver asset over 
the loan period by selling COMEX Silver Referenced Contracts with a 
total notional quantity equal to 5,000 ounces.
    Analysis: This transaction meets the general requirements for a 
bona fide hedging transaction (Sec. Sec.  151.5(a)(1)(i)-(iii)) and 
specific provisions for owning a commodity (Sec.  151.5(a)(2)(i)). 
Bank B’s hedge of the silver that it owns represents a substitute 
for a transaction in the physical marketing channel. The hedge is 
economically appropriate to the reduction of risk because the bank 
owns 5,000 ounces of silver. The hedge reduces the risk of a 
potential change in the value of the silver that it owns.

5. Processor Margins

    a. Fact Pattern: Soybean Processor A has a total throughput 
capacity of 100 million tons of soybeans per year. Soybean Processor 
A “crushes” soybeans into products (soybean oil and meal). It 
currently has 20 million tons of soybeans in storage and has offset 
that risk through fixed-price forward sales of the amount of 
products expected to be produced from crushing 20 million tons of 
soybeans, thus locking in the crushing margin on 20 million tons of 
soybeans. Because it has consistently operated its plant at full 
capacity over the last three years, it anticipates purchasing 
another 80 million tons of soybeans over the next year. It has not 
sold the crushed products forward. Processor A faces the risk that 
the difference in price between soybeans and the crushed products 
could change such that crush products (i.e., the crush spread) will 
be insufficient to cover its operating margins. To lock in the crush 
spread, Processor A purchases 80 million tons of CBOT Soybean 
Referenced Contracts and sells CBOT Soybean Meal and Soybean Oil 
Referenced Contracts, such that the total notional quantity of 
soybean meal and oil Referenced Contracts equals the expected 
production from crushing soybeans into soybean meal and oil 
respectively.
    Analysis: These hedging transactions meet the general 
requirements for bona fide hedging transactions (Sec. Sec.  
151.5(a)(1)(i)-(iii)) and the specific provisions for unfilled 
anticipated requirements and unsold anticipated agricultural 
production (Sec. Sec.  151.5(a)(2)(i)-(ii)). Purchases of soybean 
Referenced Contracts qualify as bona fide hedging transaction 
provided they do not exceed the unfilled anticipated requirements of 
the cash commodity for one year (in this case 80 million tons). Such 
transactions are a substitute for purchases to be made at a later 
time in the physical marketing channel and are economically 
appropriate to the reduction of risk. The transactions in Referenced 
Contracts arise from a potential change in the value of soybeans 
that the processor anticipates owning. The size of the permissible 
hedge position in soybeans must be reduced by any inventories and 
fixed-price purchases because they are no longer unfilled 
requirements. As provided under Sec.  151.5(a)(2)(ii)(C), the risk 
reduction position that is not in excess of the anticipated 
requirements for soybeans for that month and the next succeeding 
month qualifies as a bona fide hedge during the last five trading 
days provided it is not in a physical-delivery Referenced Contract.
    Given that Soybean Processor A has purchased 80 million tons 
worth of CBOT Soybean Referenced Contracts, it can reduce

[[Page 71698]]

its processing risk by selling soybean meal and oil Referenced 
Contracts equivalent to the expected production. The sale of CBOT 
Soybean, Soybean Meal, and Soybean Oil contracts represents a 
substitute for transactions to be taken at a later time in the 
physical marketing channel by the soybean processor. Because the 
amount of soybean meal and oil Referenced Contracts sold forward by 
the soybean processor corresponds to expected production from 80 
million tons of soybeans, the hedging transactions are economically 
appropriate to the reduction of risk in the conduct and management 
of the commercial enterprise. These transactions arise from a 
potential change in the value of soybean meal and oil that is 
expected to be produced. The size of the permissible hedge position 
in the products must be reduced by any fixed-price sales because 
they are no longer unsold production. As provided under Sec.  
151.5(a)(2)(i)(B), the risk reducing position does not qualify as a 
bona fide hedge in a physical-delivery Referenced Contract during 
the last five trading days in the event the anticipated crushed 
products have not been produced.

6. Portfolio Hedging

    a. Fact Pattern: It is currently January and Participant A owns 
five million bushels of corn located in its warehouses. Participant 
A has entered into fixed-price forward sale contracts with several 
processors for a total of five million bushels of corn that will be 
delivered in May of this year. Participant A has separately entered 
into fixed-price purchase contracts with several merchandisers for a 
total of two million bushels of corn to be delivered in March of 
this year. Participant A’s gross long cash position is equal to 
seven million bushels of corn. Because Participant A has sold 
forward five million bushels of corn, its net cash position is equal 
to long two million bushels of corn. To reduce its price risk, 
Participant A chooses to sell the quantity equivalent of two million 
bushels of CBOT Corn Referenced Contracts.
    Analysis: The cash position and the fixed-price forward sale and 
purchases are all in the same crop year. Participant A currently 
owns five million bushels of corn and has effectively sold that 
amount forward. The firm is concerned that the remaining amount–two 
million bushels worth of fixed-price purchase contracts–will fall 
in value. Because the firm’s net cash position is equal to long two 
million bushels of corn, the firm is exposed to price risk. Selling 
the quantity equivalent of two million bushels of CBOT Corn 
Referenced Contracts satisfies the general requirements for bona 
fide hedging transactions (Sec. Sec.  151.5(a)(1)(i)-(iii)) and the 
specific provisions associated with owning a commodity (Sec.  
151.5(a)(2)(i)).523 Participant A’s hedge of the two million 
bushels represents a substitute to a fixed-price forward sale at a 
later time in the physical marketing channel. The transaction is 
economically appropriate to the reduction of risk because the amount 
of Referenced Contracts sold does not exceed the quantity equivalent 
risk exposure (on a net basis) in the cash commodity in the current 
crop year. Lastly, the hedge arises from a potential change in the 
value of corn owned by Participant A.
—————————————————————————

    523 Participant A could also choose to hedge on a gross basis. 
In that event, Participant A would sell the quantity equivalent of 
seven million bushels of March Chicago Board of Trade Corn 
Referenced Contracts, and separately purchase the quantity 
equivalent of five million bushels of May Chicago Board of Trade 
Corn Referenced Contracts.
—————————————————————————

7. Anticipated Merchandising

    a. Fact Pattern: Elevator A, a grain merchandiser, owns a 31 
million bushel storage facility. The facility currently has 1 
million bushels of corn in storage. Based upon its historical 
purchasing and selling patterns for the last three years, Elevator A 
expects that in September it will enter into fixed-price forward 
purchase contracts for 30 million bushels of corn that it expects to 
sell in December. Currently the December corn futures price is 
substantially higher than the September corn futures price. In order 
to reduce the risk that its unfilled storage capacity will not be 
utilized over this period and in turn reduce Elevator A’s 
profitability, Elevator A purchases the quantity equivalent of 30 
million bushels of September CBOT Corn Referenced Contracts and 
sells 30 million bushels of December CBOT Corn Referenced Contracts.
    Analysis: This hedging transaction meets the general 
requirements for bona fide hedging transactions (Sec. Sec.  
151.5(a)(1)(i)-(iii)) and specific provisions associated with 
anticipated merchandising (Sec.  151.5(a)(2)(v)). The hedging 
transaction is a substitute for transactions to be taken at a later 
time in the physical marketing channel. The hedge is economically 
appropriate to the reduction of risk associated with the firm’s 
unfilled storage capacity because: (1) The December CBOT Corn 
futures price is substantially above the September CBOT Corn futures 
price; and (2) Elevator A reasonably expects to engage in the 
anticipated merchandising activity based on a review of its 
historical purchasing and selling patterns at that time of the year. 
The risk arises from a change in the value of an asset that the firm 
owns. As provided by Sec.  151.5(a)(2)(v), the size of the hedge is 
equal to the firm’s unfilled storage capacity relating to its 
anticipated merchandising activity. The purchase and sale of 
offsetting Referenced Contracts are in different months, which 
settle in not more than twelve months. As provided under Sec.  
151.5(a)(2)(v), the risk reducing position will not qualify as a 
bona fide hedge in a physical-delivery Referenced Contract during 
the last 5 trading days of the September contract.

8. Aggregation of Persons

    a. Fact Pattern: Company A owns 100 percent of Company B. 
Company B buys and sells a variety of agricultural products, such as 
wheat and cotton. Company B currently owns 1 million bushels of 
wheat. To reduce some of its price risk, Company B decides to sell 
the quantity equivalent of 600,000 bushels of CBOT Wheat Referenced 
Contracts. After communicating with Company B, Company A decides to 
sell the quantity equivalent of 400,000 bushels of CBOT Wheat 
Referenced Contracts.
    Analysis: Because Company A owns more than 10 percent of Company 
B, Company A and B are aggregated together as one person under Sec.  
151.7. Under Sec.  151.5(b), entities required to aggregate accounts 
or positions under Sec.  151.7 shall be considered the same person 
for the purpose of determining whether a person or persons are 
eligible for a bona fide hedge exemption under paragraph Sec.  
151.5(a). The sale of wheat Referenced Contracts by Company A and B 
meets the general requirements for bona fide hedging transactions 
(Sec. Sec.  151.5(a)(1)(i)-(iii)) and the specific provisions for 
owning a cash commodity (Sec.  151.5(a)(2)(i)). The transactions in 
Referenced Contracts by Company A and B represent a substitute for 
transactions to be taken at a later time in the physical marketing 
channel. The transactions in Referenced Contracts by Company A and B 
are economically appropriate to the reduction of risk because the 
combined total of 1,000,000 bushels of CBOT Wheat Referenced 
Contracts sold by Company A and Company B does not exceed the 
1,000,000 bushels of wheat that is owned by Company A. The risk 
exposure for Company A and B results from a potential change in the 
value of wheat.

9. Repurchase Agreements

    a. Fact Pattern: When Elevator A purchased 500,000 bushels of 
wheat in April it decided to reduce its price risk by selling the 
quantity equivalent of 500,000 bushels of CBOT Wheat Referenced 
Contracts. Because the price of wheat has steadily risen since 
April, Elevator A has had to make substantial maintenance margin 
payments. To alleviate its concern about further margin payments, 
Elevator A decides to enter into a repurchase agreement with Bank B. 
The repurchase agreement involves two separate contracts: A fixed-
price sale from Elevator A to Bank B at today’s spot price; and an 
open-priced purchase agreement that will allow Elevator A to 
repurchase the wheat from Bank B at the prevailing spot price three 
months from now. Because Bank B obtains title to the wheat under the 
fixed-price purchase agreement, it is exposed to price risk should 
the price of wheat drop. It therefore decides to sell the quantity 
equivalent of 500,000 bushels of CBOT Wheat Referenced Contracts.
    Analysis: Bank B’s hedging transaction meets the general 
requirements for bona fide hedging transactions (Sec. Sec.  
151.5(a)(1)(i)-(iii)) and the specific provisions for owning the 
cash commodity (Sec.  151.5(a)(2)(i)). The sale of Referenced 
Contracts by Bank B is a substitute for a transaction to be taken at 
a later time in the physical marketing channel either to Elevator A 
or to another commercial party. The transaction is economically 
appropriate to the reduction of risk in the conduct and management 
of the commercial enterprise of Bank B because the notional quantity 
of Referenced Contracts sold by Bank B is not larger than the 
quantity of cash wheat purchased by Bank B. Finally, the purchase of 
CBOT Wheat Referenced Contracts reduces the risk associated with 
owning cash wheat.

10. Inventory

    a. Fact Pattern: Copper Wire Fabricator A is concerned about 
possible reductions in the

[[Page 71699]]

price of copper. Currently it is November and it owns inventory of 
100,000 pounds of copper and 50,000 pounds of finished copper wire. 
Currently, deferred futures prices are lower than the nearby futures 
price. Copper Wire Fabricator A expects to sell 150,000 pounds of 
finished copper wire in February. To reduce its price risk, Copper 
Wire Fabricator A sells 150,000 pounds of February COMEX Copper 
Referenced Contracts.
    Analysis: The Copper Wire Fabricator A’s hedging transaction 
meets the general requirements for bona fide hedging transactions 
(Sec. Sec.  151.5(a)(1)(i)-(iii)) and the provisions for owning a 
commodity (Sec.  151.5(a)(2)(i)(A)). The sale of Referenced 
Contracts represents a substitute for transactions to be taken at a 
later time. The transactions are economically appropriate to the 
reduction of risk in the conduct and management of the commercial 
enterprise because the price of copper could drop further. The 
transactions in Referenced Contracts arise from a possible reduction 
in the value of the inventory that it owns.

    Issued by the Commission this 18th day of October 2011, in 
Washington, DC.
David Stawick,
Secretary of the Commission.

Appendices to Position Limits for Futures and Swaps–Commission Voting 
Summary and Statements of Commissioners

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1–Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn and 
Chilton voted in the affirmative; Commissioners Sommers and O’Malia 
voted in the negative.

Appendix 2–Statement of Chairman Gary Gensler

    I support the final rulemaking to establish position limits for 
physical commodity derivatives. The CFTC does not set or regulate 
prices. Rather, the Commission is charged with a significant 
responsibility to ensure the fair, open and efficient functioning of 
derivatives markets. Our duty is to protect both market participants 
and the American public from fraud, manipulation and other abuses.
    Position limits have served since the Commodity Exchange Act 
passed in 1936 as a tool to curb or prevent excessive speculation 
that may burden interstate commerce. When the CFTC set position 
limits in the past, the agency sought to ensure that the markets 
were made up of a broad group of market participants with no one 
speculator having an outsize position. At the core of our 
obligations is promoting market integrity, which the agency has 
historically interpreted to include ensuring that markets do not 
become too concentrated. Position limits help to protect the markets 
both in times of clear skies and when there is a storm on the 
horizon. In 1981, the Commission said that “the capacity of any 
contract market to absorb the establishment and liquidation of large 
speculative positions in an orderly manner is related to the 
relative size of such positions, i.e., the capacity of the market is 
not unlimited.”
    In the Dodd-Frank Act, Congress mandated that the CFTC set 
aggregate position limits for certain physical commodity 
derivatives. The Dodd-Frank Act broadened the CFTC’s position limits 
authority to include aggregate position limits on certain swaps and 
certain linked contracts traded on foreign boards of trade in 
addition to U.S. futures and options on futures. Congress also 
narrowed the exemptions traditionally available from position limits 
by modifying the definition of bona fide hedge transaction, which 
particularly would affect swap dealers.
    Today’s final rule implements these important new provisions. 
The final rule fulfills the Congressional mandate that we set 
aggregate position limits that, for the first time, apply to both 
futures and economically equivalent swaps, as well as linked 
contracts on foreign boards of trade. The final rule establishes 
federal position limits in 28 referenced commodities in 
agricultural, energy and metals markets.
    Per Congress’s direction, the rule implements one position 
limits regime for the spot month and another for single-month and 
all-months combined limits. It implements spot-month limits, which 
are currently set in agriculture, energy and metals markets, sooner 
than the single-month or all-months-combined limits. Spot-month 
limits are set for futures contracts that can by physically settled 
as well as those swaps and futures that can only be cash-settled. We 
are seeking additional comment as part of an interim final rule on 
these spot month limits with regard to cash-settled contracts.
    Single-month and all-months-combined limits, which currently are 
only set for certain agricultural contracts, will be re-established 
in the energy and metals markets and be extended to certain swaps. 
These limits will be set using a formula that is consistent with 
that which the CFTC has used to set position limits for decades. The 
limits will be set by a Commission order based upon data on the 
total size of the swaps and futures market collected through the 
position reporting rule the Commission finalized in July. It is only 
with the passage and implementation of the Dodd-Frank Act that the 
Commission now has broad authority to collect data in the swaps 
market.
    The final rule also implements Congress’s direction to narrow 
exemptions while also ensuring that bona fide hedge exemptions are 
available for producers and merchants. The final position limits 
rulemaking builds on more than two years of significant public 
input. The Commission benefited from more than 15,100 comments 
received in response to the January 2011proposal. We first held 
three public meetings on this issue in the summer of 2009 and got a 
great deal of input from market participants and the broader public. 
We also benefited from the more than 8,200 comments we received in 
response to the January 2010 proposed rulemaking to re-establish 
position limits in the energy markets. We further benefited from 
input received from the public after a March 2010 meeting on the 
metals markets.

Appendix 3–Statement of Commissioner Jill Sommers

    I respectfully dissent from the action taken today by the 
Commission to issue final rules establishing position limits for 
futures and swaps.
    It has been nearly two years since the Commission issued its 
January 2010 proposal to impose position limits on a small group of 
energy contracts. Since then, Commission staff and the Commission 
have spent an enormous amount of time and energy on the issue of 
imposing speculative position limits, time that could have been much 
better spent implementing the specific Dodd-Frank regulatory reforms 
that will actually reduce systemic risk and prevent another 
financial crisis.
    This vote today on position limits is no doubt the single most 
significant vote I have taken since becoming a Commissioner. It is 
not because imposing position limits will fundamentally change the 
way the U.S. markets operate, but because I believe this agency is 
setting itself up for an enormous failure.
    As I have said in the past, position limits can be an important 
tool for regulators. I have been clear that I am not philosophically 
opposed to limits. After all, this agency has set limits in certain 
markets for many years. However, I have had concerns all along about 
the particular application of the limits in this rule, compounded by 
the unnecessary narrowing of the bona-fide hedging exemptions, 
beyond what was required by the Dodd-Frank Act.
    Over the last four years, many have argued for position limits 
with such fervor and zeal, believing them to be a panacea for 
everything. Just this past week, the Commission has been bombarded 
by a letter-writing campaign suggesting that the five of us have the 
power to end world hunger by imposing position limits on 
agricultural commodities. This latest campaign exemplifies my 
ongoing concern and may result in damaging the credibility of this 
agency. I do not believe position limits will control prices or 
market volatility, and I fear that this Commission will be blamed 
when this final rule does not lower food and energy costs. I am 
disappointed at this unfortunate circumstance because, while the 
Commission’s mission is to protect market users and the public from 
fraud, manipulation, abusive practices and systemic risk related to 
derivatives that are subject to the Commodity Exchange Act, and to 
foster open, competitive, and financially sound markets, nowhere in 
our mission is the responsibility or mandate to control prices.
    When analyzing the potential impact this final rule will have on 
market participants, I am most concerned that rules designed to 
“reign in speculators” have the real potential to inflict the 
greatest harm on bona fide hedgers–that is, the producers, 
processers, manufacturers, handlers and users of physical 
commodities. This rule will make hedging more difficult, more 
costly, and less efficient, all of which, ironically, can result in 
increased food and energy costs for consumers.

[[Page 71700]]

    Currently, the Commission sets and administers position limits 
and exemptions for contracts on nine agricultural commodities. For 
contracts of the remaining commodities, the exchanges set and 
administer position limits and exemptions. Pursuant to the final 
rule the Commission issued today, the Commission will set and 
administer position limits and exemptions for 28 reference 
contracts. This will amount to a substantial transfer of 
responsibility from the exchanges to the Commission. As a result of 
taking on this responsibility for 19 new reference contracts, the 
Commission is significantly increasing its front-line oversight of 
the granting and monitoring of bona-fide hedging exemptions for the 
transactions of massive, global corporate conglomerates that on a 
daily basis produce, process, handle, store, transport, and use 
physical commodities in their extremely complex logistical 
operations.
    At the very time the Commission is taking on this new 
responsibility, the Commission is eliminating a valuable source of 
flexibility that has been a part of regulation 1.3(z) for decades–
that is, the ability to recognize non-enumerated hedge transactions 
and positions. This final rule abandons important and long-standing 
Commission precedent without justification or reasoned explanation, 
by merely stating “the Commission has * * * expanded the list of 
enumerated hedges.” The Commission also seems to be saying that we 
no longer need the flexibility to allow for non-enumerated hedge 
transactions and positions because one can seek interpretative 
guidance pursuant to Commission Regulation 140.99 on whether a 
transaction or class of transactions qualifies as a bona-fide hedge, 
or can petition the Commission to amend the list of enumerated 
transactions. The Commission also recognizes that CEA Section 
4a(a)(7) grants it the broad exemptive authority is issue an order, 
rule, or regulation, but offers no guidance on when it may do so, 
and what factors it may consider or criteria it may use to make a 
determination.
    These processes are cold comfort. There is no way to tell how 
long interpretative guidance or a Commission Order will take. 
Moreover, if a market participant petitions the Commission to amend 
the list of enumerated transactions, if the Commission chooses to do 
so, it must formally propose the amendment pursuant to APA notice 
and comment. As we know all too well, issuing new rules and 
regulations is a time consuming process fraught with delay and 
uncertainty. In the end, none of these processes is flexible or 
useful to the needs of hedgers in a complex global marketplace.
    When the Commission first recognized the need to allow for non-
enumerated hedges in 1977, the Commission stated “The purpose of 
the proposed provision was to provide flexibility in application of 
the general definition and to avoid an extensive specialized listing 
of enumerated bona fide hedging transactions and positions. * * *” 
Today the global marketplace and commercial firms’ hedging 
strategies are much more complex than in 1977. Yet, we are content 
to abandon decades of precedent that provided flexibility in favor 
of specifying a specialized list of enumerated bona fide hedging 
transactions and positions. I am not comfortable with notion that a 
list of eight bona-fide hedging transactions in this rule is 
sufficiently extensive and specialized to cover the complex needs of 
today’s bona-fide hedgers. Repealing the ability to recognize non-
enumerated hedge transactions and positions is a mistake and the 
statute does not require it. The Commission should have remained 
true to its precedent and utilized the broad authority contained in 
CEA Section 4a(a)(7) to include within Regulation 151.5(a)(2) a 
ninth enumerated hedging transaction and position, with the same 
conditions as the previous eight, as follows: “Other risk-reducing 
practices commonly used in the market that are not enumerated above, 
upon specific request made in accordance with Regulation section 
1.47.”
    In addition to abandoning decades of flexibility to recognize 
non-enumerated hedging transactions and positions, the final rules 
today do not fully effect the authority the Commission has had for 
decades to define bona-fide hedging transactions and positions “to 
permit producers, purchasers, sellers, middlemen, and users of a 
commodity or a product derived therefrom to hedge their legitimate 
anticipated business needs. * * *” This authority is found in CEA 
Section 4a(c)(1). In addition, Section 4a(c)(2) clearly recognizes 
the need for anticipatory hedging by using the word “anticipates” 
in three places. Nonetheless, without defining what constitutes 
“merchandising” the Commission has limited “Anticipated 
Merchandising Hedging” in Regulation 151.5(a)(2)(v) to transactions 
not larger than “current or anticipated unfilled storage 
capacity.” It appears then that merchandising does not include the 
varying activities of “producers, purchasers, sellers, middlemen, 
and users of a commodity” as contemplated by Section 4a(c)(1), but 
merely consists of storing a commodity. This limited approach is 
needlessly at odds with the statute and with the legitimate needs of 
hedgers.
    I have always believed that there was a right way and a wrong 
way for us to move forward on position limits. Unfortunately I 
believe we have chosen to go way beyond what is in the statute and 
have created a very complicated regulation that has the potential to 
irreparably harm these vital markets.

Appendix 4–Statement of Commissioner Scott O’Malia

    I respectfully dissent from the action taken today by the 
Commission to issue final rules relating to position limits for 
futures and swaps. While I have a number of serious concerns with 
this final rule, my principal disagreement is with the Commission’s 
restrictive interpretation of the statutory mandate under Section 4a 
of the Commodity Exchange Act (“CEA” or “Act”) to establish 
position limits without making a determination that such limits are 
necessary and effective in relation to the identifiable burdens of 
excessive speculation on interstate commerce.
    While I agree that the Commission has been directed to establish 
position limits applicable to futures, options, and swaps that are 
economically equivalent to such futures and options (for exempt and 
agricultural commodities as defined by the Act), I disagree that our 
mandate provides for so little discretion in the manner of its 
execution. Throughout the preamble, the Commission uses, “Congress 
did not give the Commission a choice” 524 as a rationale in 
adopting burdensome and unmanageable rules of questionable 
effectiveness. This statement, in all of its iterations in this 
rule, is nothing more than hyperbole used tactfully to support a 
politically-driven overstatement as to the threat of “excessive 
speculation” in our commodity markets. In aggrandizing a market 
condition that it has never defined through quantitative or 
qualitative criteria in order to justify draconian rules, the 
Commission not only fails to comply with Congressional intent, but 
misses an opportunity to determine and define the type and extent of 
speculation that is likely to cause sudden, unreasonable and/or 
unwarranted commodity price movements so that it can respond with 
rules that are reasonable and appropriate.
—————————————————————————

    524 Position Limits for Futures and Swaps (to be codified at 
17 CFR pts. 1, 150 and 151) at 11, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister101811c.pdf (hereafter, “Position Limits for Futures 
and Swaps”).
—————————————————————————

    In relevant part, section 4a(a)(1) of the Act states: 
“Excessive speculation in any commodity under contracts of sale of 
such commodity for future delivery * * * or swaps * * * causing 
sudden or unreasonable fluctuations or unwarranted changes in the 
price of such commodity, is an undue and unnecessary burden on 
interstate commerce in such commodity.” Section 4a(a)(1) further 
defines the Commission’s duties with regard to preventing such price 
fluctuations through position limits, clearly stating: “For the 
purpose of diminishing, eliminating, or preventing such burden, the 
Commission shall, from time to time, after due notice and 
opportunity for hearing, by rule, regulation, or order, proclaim and 
fix such limits * * * as the Commission finds are necessary to 
diminish, eliminate, or prevent such burden.” Congress could not be 
more clear in its directive to the Commission to utilize not only 
its expertise, but the public rulemaking process, each and every 
time it determines to establish position limits to ensure that such 
limits are essential and suitable to combat the actual or potential 
threats to commodity prices due to excessive speculation.

An Ambiguously Worded Mandate Does Not Relieve the Commission of Its 
Duties Under the Act

    Historically, the Commission has taken a much more disciplined 
and fact-based approach in considering the question of position 
limits; a process that is lacking from the current proposal. The 
general authority for the Commission to establish “limits on the 
amounts of trading which may be done or positions which may be held 
* * * as the Commission finds are necessary to diminish, eliminate, 
or prevent” the “undue burdens” associated with excessive 
speculation found in section 4a of the Act has remained unchanged 
since its original enactment in 1936 and through subsequent 
amendments,

[[Page 71701]]

including the Dodd-Frank Act.525 Over thirty years ago, on 
December 2, 1980, the Commission, pursuant in part to its authority 
under section 4a (1) of the Act, issued a proposal to implement 
rules requiring exchanges to impose position limits on contracts 
that were not currently subject to Commission imposed limits.526
—————————————————————————

    525 Position Limits for Futures and Swaps, supra note 1, at 5.
    526 Speculative Position Limits, 45 FR 79831 (proposed Dec. 2, 
1980) (to be codified at 17 CFR pt. 1).
—————————————————————————

    In support of its proposal, the Commission relied on a June 1977 
report on speculative limits prepared by the Office of the Chief 
Economist (the “Staff Report”). The Staff Report addressed three 
major policy questions: (1) whether there should be limits and for 
what groups of commodities; (2) what guidelines are appropriate in 
setting the level of limits; and (3) whether the Commission or the 
exchange should set the limits.527 528  In considering 
these questions, the Staff Report noted, “Although the Commission 
is authorized to establish speculative limits, it is not required to 
do so.” 529 In its Interpretation of the above language in 
section 4a, the Staff Report at the outset provided the legal 
context for its study as follows:
—————————————————————————

    527 Id. at 79832; Speculative Limits: a staff paper prepared 
for Commission discussion by the Office of the Chief Economist at 1, 
June 24, 1977.
    528 The Staff Report ultimately made four general 
recommendations. First, the Commission ought to adopt a policy of 
establishing speculative limits only in those markets where the 
characteristics of the commodity, its marketing system, and the 
contract lend themselves to undue influence from large scale 
speculative positions. Second, that in markets where limits are 
deemed to be necessary, such limits should only be established to 
curtail extraordinary speculative positions which are not offset by 
comparable commercial positions. Third, there ought to be no limits 
on daily trading except to the extent that the limits would prevent 
the accumulation of large intraday positions. Fourth, in markets 
where limits are deemed necessary, the exchange should set and 
review the limits subject to Commission approval. Office of Chief 
Economist, supra note 4, at 5-6.
    529 Office of Chief Economist, supra note 4, at 7.

    [T]he Commission need not establish speculative limits if it 
does not find that excessive speculation exists in the trading of a 
particular commodity. Furthermore, apparently, the Commission does 
not have to establish limits if it finds that such limits will not 
effectively curb excessive speculation.530
—————————————————————————

    530 Id. at 7-8.

    While not directly linked to the statutory language of section 
4a or an interpretation of such language, the Staff Report utilized 
its findings to formulate a policy for the Commission to move 
forward, which, based on comments to the Commission’s January 2011 
proposal,531 is clearly embodied in the purpose and spirit of the 
—————————————————————————
Act:

    531 See, e.g., Comment letter from Futures Industry 
Association on Position Limits for Derivatives (RIN 2028-AD15 and 
3038-AD16) at 6-7 (Mar. 25, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=34054&SearchText=futures%20industry%20association
; Comment letter from CME Group on Position Limits for Derivatives 
at 1-7 (Mar. 28, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=33920&SearchText=cme; and Comment 
Letter of International Swaps and Derivatives Association, Inc. and 
Securities Industry and Financial Markets Association on Notice of 
Proposed Rulemaking–Position Limits for Derivatives (RIN 3038-AD15 
and 3038-AD16) at 3-6 (Mar. 28, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=33568&SearchText=isda.

Perhaps the most important feature brought out in the study is that, 
prior to the adoption of speculative position limits for any 
commodity in which limits are not now imposed by CFTC, the 
Commission should carefully consider the need for and effectiveness 
of such limits for that commodity and the resources necessary to 
enforce such limits.532
—————————————————————————

    532 Office of Chief Economist, supra note 7, at 5.

    In its final rule, published in the Federal Register on October 
16, 1981–almost exactly thirty years ago today–the Commission 
chose to base its determination on Congressional findings embodied 
in section 4a(1) of the Act that excessive speculation is harmful to 
the market, and a finding that speculative limits are an effective 
prophylactic measure. The Commission did not do so because it found 
that more specific determinations regarding the necessity and 
effectiveness of position limits were not required. Rather, the 
Commission was fashioning a rule “to assure that the exchanges 
would have an opportunity to employ their knowledge of their 
individual contract markets to propose the position limits they 
believe most appropriate.” 533 Moreover, none of the commenters 
opposing the adoption of limits for all markets demonstrated to the 
Commission that its findings as to the prophylactic nature of the 
proposal before them were unsubstantiated.534 Therefore, the 
Commission did not eschew a requirement to demonstrate whether 
position limits were necessary and would be effective–it delegated 
these determinations to the exchanges.
—————————————————————————

    533 46 FR at 50938, 50940.
    534 Id.
—————————————————————————

    Today, the Commission reaffirms its proposed interpretation of 
amended section 4a that in setting position limits pursuant to 
directives in sections 4a(a)(2)(A), 4a(a)(3) and 4a(a)(5), it need 
not first determine that position limits are necessary before 
imposing them or that it may set limits only after conducting a 
complete study of the swaps market.535 Relying on the various 
directives following “shall,” the Commission has bluntly stated 
that “Congress did not give the Commission a choice.” 536 This 
interpretation ignores the plain language in the statute that the 
“shalls” in sections 4a(a)(2)(A), 4a(a)(3) and 4a(a)(5) are 
connected to the modifying phrase, “as appropriate.” Although the 
Commission correctly construes the “as appropriate” language in 
the context of the provisions as a whole to direct the Commission to 
exercise its discretion in determining the extent of the limits that 
Congress “required” it to impose, the Commission ignores the fact 
that in the context of the Act, such discretion is broad enough to 
permit the Commission to not impose limits if they are not 
appropriate. Though a permissible interpretation, the Commission’s 
narrow view of its authority permeates the final rules today and 
provides a convenient rationale for many otherwise unsustainable 
conclusions, especially with regard to the cost-benefit analysis of 
the rule.
—————————————————————————

    535 Position Limits for Futures and Swaps, supra note 1, at 
10-11.
    536 Id.
—————————————————————————

    Section 4a(a)(2)(A), in relevant part, states that the 
Commission “shall by rule, regulation, or order establish limits on 
the amount of positions, as appropriate” that may be held by any 
person in physical commodity futures and options contracts traded on 
a designated contract market (DCM). In section 4a(a)(5), Congress 
directed that the Commission “shall establish limits on the amount 
of positions, including aggregate position limits, as appropriate” 
that may be held by any person with respect to swaps. Section 
4a(a)(3) qualifies the Commission’s authority by directing it so set 
such limits “required” by section 4a(a)(2), “as appropriate * * * 
[and] to the maximum extent practicable, in its discretion” (1) to 
diminish, eliminate, or prevent excessive speculation as described 
under this section (section 4a of the Act), (2) to deter and prevent 
market manipulation, squeezes, and corners, (3) to ensure sufficient 
market liquidity for bona fide hedgers, and (4) to ensure that the 
price discovery function of the underlying market is not 
disrupted.537
—————————————————————————

    537 See section 4a(a)(3)(B) of the CEA.
—————————————————————————

    Congress, in repeatedly qualifying its mandates with the phrase 
“as appropriate” and by specifically referring back to the 
Commission’s authority to set position limits as proscribed in 
section 4a(a)(1), clearly did not relieve the Commission of any 
requirement to exercise its expertise and set position limits only 
to the extent that it can provide factual support that such limits 
will diminish, eliminate or prevent excessive speculation.538 
Instead, by directing the Commission to establish limits “as 
appropriate,” 539 Congress intended to

[[Page 71702]]

provide the Commission with the discretion necessary to establish a 
position limit regime in a manner that will not only protect the 
markets from undue burdens due to excessive speculation and 
manipulation, but that will also provide for market liquidity and 
price discovery in a level playing field while preventing regulatory 
arbitrage.540
—————————————————————————

    538 See, e.g., Comment letter from BG Americas & Global LNG on 
Proposed Rule Regarding Position Limits for Derivatives (RIN 2028-
AD15 and 3038-AD16) at 4 (Mar. 28, 2011), available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=965 
(“Notwithstanding the Commission’s argument that it has authority 
to use position limits absent a specific finding that an undue 
burden on interstate commerce had actually resulted, the language 
and intent of CEA Section 4a(a)(1) remains unchanged by the Dodd-
Frank Act. As a consequence, the Commission has not been relieved of 
the obligation under Section 4a(a)(1) to show that the proposed 
position limits for the Referenced Contracts are necessary to 
prevent excessive speculation.”).
    539 See La Union Del Pueblo Entero v. FEMA, No. B-08-487, slip 
op., 2009 WL 1346030 at *4 (S.D. Tex. May 13, 2009) (“[W]hen 
`shall’ is modified by a discretionary phrase such as `as may be 
necessary’ or `as appropriate’ an agency has some discretion when 
complying with the mandate.” (citing Consumer Fed’n of America v. 
U.S. Dep’t of Health and Human Servs., 83 F.3d 1497, 1503 (DC Cir. 
1996) (indicating that where Congress in mandating administrative 
action modifies the word “shall” with the phrase “as 
appropriate” an agency has discretion to evaluate the circumstances 
and determine when and how to act)).
    540 Section 4a(a)(6) mandates through an unqualified 
“shall,” that the Commission set aggregate limits across trading 
venues including foreign boards of trade.
—————————————————————————

    I agree with commenters who argued that the Commission is 
directed under its new authority to set position limits “as 
appropriate,” or in other words meaning that whatever limits the 
Commission sets are supported by empirical evidence demonstrating 
that those would diminish, eliminate, or prevent excessive 
speculation.541 In the absence of such evidence, I also agree with 
commenters that we are unable, at this time, to fulfill the mandate 
and assure Congress and market participants that any such limits we 
do establish will comply with the statutory objectives of section 
4a(a)(3). And, to be clear, without empirical data, we cannot assure 
Congress that the limits we set will not adversely affect the 
liquidity and price discovery functions of affected markets. The 
Commission will have significant additional data about the over-the-
counter (OTC) swaps markets in the next year, and at a minimum, I 
believe it would be appropriate for the Commission to defer any 
decisions about the nature and extent of position limits for months 
outside of the spot-month, including any determinations as to 
appropriate formulas, until such time as we have had a meaningful 
opportunity to review and assess the new data and its relevance to 
any determinations regarding excessive speculation. At a future 
date, when the Commission applies the second phase of the position 
limits regime and sets the non-spot-month limits (single and all-
months combined limits), I will work to ensure that the position 
formulas and applicable limits are validated by Commission data to 
be both appropriate and effective so that those limits truly 
“diminish, eliminate, or prevent excessive speculation.”
—————————————————————————

    541 See, e.g., Comment letter from Futures Industry 
Association on Position Limits for Derivatives (RIN 2028-AD15 and 
3038-AD16) at 6-8; Comment Letter of International Swaps and 
Derivatives Association, Inc. and Securities Industry and Financial 
Markets Association on Notice of Proposed Rulemaking–Position 
Limits for Derivatives (RIN 3038-AD15 and 3038-AD16) at 3-4.
—————————————————————————

An Absence of Justification

    Today the Commission voted to move forward on a rule that (1) 
establishes hard federal position limits and position limit formulas 
for 28 physical commodity futures and options contracts and physical 
commodity swaps that are economically equivalent to such contracts 
in the spot-month, for single months, and for all-months combined; 
(2) establishes aggregate position limits that apply across 
different trading venues to contracts based on the same underlying 
commodity; (3) implements a new, more limited statutory definition 
of bona fide hedging transactions; (4) revises account aggregation 
standards; (5) establishes federal position visibility reporting 
requirements; and (6) establishes standards for position limits and 
position accountability rules for registered entities. The 
Commission voted on this multifaceted rule package without the 
benefit of performing an objective factual analysis based on the 
necessary data to determine whether these particular limits and 
limit formulas will effectively prevent or deter excessive 
speculation. The Commission did not even provide for public comment 
a determination as to what criteria it utilized to determine whether 
or not excessive speculation is present or will potentially threaten 
prices in any of the commodity markets affected by the new position 
limits.
    Moreover, while it engaged in a public rulemaking, the 
Commission’s Notice of Proposed Rulemaking,542 in its complexity 
and lack of empirical data and legal rationale for several new 
mandates and changes to existing policies–in spite of the fact that 
we largely rely on our historical experiences in setting such 
limits–tainted the entire process. By failing to put forward data 
evidencing that commodity prices are threatened by the negative 
influence of a defined level of speculation that we can define as 
“excessive speculation,” and that today’s measures are appropriate 
(i.e. necessary and effective) in light of such findings, I believe 
that we have failed under the Administrative Procedure Act to 
provide a meaningful and informed opportunity for public 
comment.543
—————————————————————————

    542 Position Limits for Derivatives, 76 FR 4752 (proposed Jan. 
26, 2011) (to be codified at 17 CFR pts. 1, 150 and 151).
    543 See Am. Med. Ass’n v. Reno, 57 F.3d 1129, 1132-3 (DC Cir. 
1995) (“Notice of a proposed rule must include sufficient detail on 
its content and basis in law and evidence to allow for meaningful 
and informed comment: `the Administrative Procedure Act requires the 
agency to make available to the public in a form that allows for 
meaningful comment, the data the agency used to develop the proposed 
rule.”’) (quoting Engine Mfrs. Ass’n v. EPA, 20 F.3d 1177, 1181 (DC 
Cir. 1994)).
—————————————————————————

    Substantive comment letters, of which there were approximately 
100,544 devoted at times substantial text to expressions of 
confusion and requests for clarification of vague descriptions and 
processes. In more than one instance, preamble text did not reflect 
proposed rule text and vice versa.545 Indeed, the entire 
rulemaking process has been plagued by internal and public debates 
as to what the Commission’s motives are and to what extent they are 
based on empirical evidence, in policy, or are simply without 
reason.
—————————————————————————

    544 Position Limits for Futures and Swaps, supra note 1, at 4.
    545 See, e.g., 76 FR at 4752, 4763 and 4775 (In its discussion 
of registered entity position limits, the preamble makes no mention 
of proposed Sec.  151.11(a)(2) which would remove a registered 
entity’s discretion under CEA Sec.  5(d)(5)(A) for designated 
contract markets (DCMs) and under CEA Sec.  5h(f)(6)(A) for swap 
execution facilities (SEFs) that are trading facilities to set 
position accountability in lieu of position limits for physical 
commodity contracts for which the Commission has not set Federal 
limits.).
—————————————————————————

Implementing an Appropriate Program for Position Management

    This rule, like several proposed before it, fails to make a 
compelling argument that the proposed position limits, which only 
target large concentrated positions,546 will dampen price 
distortions or curb excessive speculation–especially when those 
position limits are identified by the overall participation of 
speculators as an increased percentage of the market. What the rule 
argues is that there is a Congressional mandate to set position 
limits, and therefore, there is no duty on the Commission to 
determine that excessive speculation exists (and is causing price 
distortions), or to “prove that position limits are an effective 
regulatory tool.” 547 This argument is incredibly convenient 
given that the proposed position limits are modeled on the 
agricultural commodities position limits, and despite those federal 
position limits, contracts such as wheat, corn, soybeans, and cotton 
contracts were not spared record-setting price increases in 2007 and 
2008. Indeed, the cotton No. 2 futures contract has hit sixteen 
“record-setting” prices since December 1, 2010. The most recent 
high was set on March 4, 2011 when the March 2011 future traded at a 
price of $215.15.
—————————————————————————

    546 Today’s final rule does not hide the fact that the 
position limits regime is aimed at “prevent[ing] a large trader 
from acquiring excessively large positions and thereby would help 
prevent excessive speculation and deter and prevent market 
manipulations, squeezes, and corners.” See Position Limits for 
Futures and Swaps, supra note 1, at 47. See also Comment letter from 
Better Markets on Position Limits for Derivatives (RIN 2028-AD15 and 
3038-AD16) at 62 (Mar. 28, 2011) available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=34010&SearchText=better%20markets (“[T]here are 
critical differences between a commodities market position limit 
regime focused just on manipulation, and one focusing on a very 
different concept of excessive speculation.”).
    547 Position Limits for Futures and Swaps, supra note 1, at 
137 (“In light of the congressional mandate to impose position 
limits, the Commission disagrees with comments asserting that the 
Commission must first determine that excessive speculation exists or 
prove that position limits are an effective tool.”).
—————————————————————————

    To be clear, I am not opposed to position or other trading 
limits in all circumstances. I remain convinced that position 
limits, whether enforced at the exchange level or by the Commission, 
are effective only to the extent that they mitigate potential 
congestion during delivery periods and trigger reporting obligations 
that provide regulators with the complete picture of an entity’s 
trading. I therefore believe that accountability levels and 
visibility levels provide a more refined regulatory tool to 
identify, deter, and respond in advance to threats of manipulation 
and other non-legitimate price movements and distortions. I would 
have supported a rule that would impose position limits in the spot-
month for physical commodities, i.e. the referenced contracts,548 
and would establish an accountability level. The Commission’s 
ability to monitor such accountability levels

[[Page 71703]]

would rely on a technology based, real-time surveillance program 
that the Commission must be committed to deploying if it is to take 
its market oversight mission seriously.
—————————————————————————

    548 As defined in new Sec.  151.1.
—————————————————————————

    And to be absolutely clear, “speculation” in the world of 
commodities is a technical term ascribed to any trading that does 
not qualify as “bona fide hedging.” Congress has not outlawed 
speculation, even when that speculation reaches some unspecified 
tipping point where it becomes “excessive.” What Congress has 
stated, for over seventy years until the passage of the Dodd-Frank 
Act, is that excessive speculation that causes sudden or 
unreasonable fluctuations or unwarranted changes in the price of a 
commodity is a burden on interstate commerce, and the Commission has 
authority to utilize its expertise to establish limits on trading or 
positions that will be effective in diminishing, eliminating, or 
preventing such burden.549 The Commission, however, is not, and 
has never been, without other tools to detect and deter those who 
engage in abusive practices.550 What the Dodd-Frank Act did do is 
direct the Commission to exercise its authority at a time when there 
is simply a lack of empirical data to support doing so, in a 
universe of legal uncertainty. However, the Dodd-Frank Act did not 
leave us without a choice, as contended by today’s rule. Rather, 
against the current backdrop of market uncertainty, and Congress’s 
longstanding deference to the expertise of the Commission, the most 
reasonable interpretation of Dodd-Frank’s mandate is that while we 
must take action and establish position limits, we must only do so 
to the extent they are appropriate.
—————————————————————————

    549 See section 4a(a)(1) of the CEA.
    550 See Establishment of Speculative Position Limits, 46 FR 
50938, 50939 (Oct. 16, 1981) (to be codified at 17 CFR pt. 1) (“The 
Commission wishes to emphasize, that while Congress gave the 
Commission discretionary authority to impose federal speculative 
limits in section 4a(1), the development of an alternate procedure 
was not foreclosed, and section 4a(1) should not be read in a 
vacuum.”).
—————————————————————————

    Today I write to not only reiterate my concerns with regard to 
the effectiveness of position limits generally, but to highlight 
some of the regulatory provisions that I believe pose the greatest 
fundamental problems and/or challenges to the implementation of the 
rule passed today. In addition to disagreeing with the Commission’s 
interpretation of its statutory mandate, I believe the Commission 
has so severely restricted the permitted activities allowed under 
the bona fide hedging rules that the pursuit by industry of 
legitimate and appropriate risk management is now made unduly 
onerous. These limitations, including a veritable ban on 
anticipatory hedging for merchandisers, are inconsistent with the 
statutory directive and the very purpose of the markets to, among 
other things, provide for a means for managing and assuming price 
risks. I also believe that the rules put into place overly broad 
aggregation standards, fail to substantiate claims that they 
adequately protect against international regulatory arbitrage, and 
do not include an adequate cost-benefit analysis.

Bona Fide Hedging: Guilty Until Proven Innocent

    The Commission’s regulatory definition of bona fide hedging 
transactions in Sec.  151.5 of the rules, as directed by new section 
4a(c)(1) of the Act, generally restricts bona fide hedge exemptions 
from the application of federally-set position limits to those 
transactions or positions which represent a substitute for an actual 
cash market transaction taken or to be taken later, or those trading 
as the counterparty to an entity that it engaged in such 
transaction. This definition is narrower than current Commission 
regulation 1.3(z)(1), which allows for an exemption for transactions 
or positions that normally represent a substitute for a physical 
market transaction.
    When combined with the remaining provisions of Sec.  151.5, 
which provide for a closed universe of enumerated hedges and 
ultimately re-characterize longstanding acceptable bona fide hedging 
practices as speculative, it is evident that the Commission has used 
its authority to further narrow the availability of bona fide 
hedging transactions in a manner that will negatively impact the 
cash commodity markets and the physical commodity marketplace by 
eliminating certain legitimate derivatives risk management 
strategies, most notably anticipatory hedging. Among other things, I 
believe the Commission should have defined bona fide hedging 
transactions and positions more broadly so that they encompass long-
standing risk management practices and should have preserved a 
process by which bona fide hedgers could expeditiously seek 
exemptions for non-enumerated hedging transactions.
    In this instance, Congress was particularly clear in its mandate 
under section 4a(c)(2) that the Commission must limit the definition 
of bona fide hedging transactions/positions to those that represent 
actual substitutes for cash market transactions, but Congress did 
not so limit the Commission in any other manner with regard to the 
new regulatory provisions addressing anticipatory hedging and the 
availability of non-enumerated hedges.551 Moreover, inasmuch as 
the bona fide hedging definition is restrictive, section 4a(a)(7) 
provides the Commission broad exemptive authority which it could 
have utilized to create a process for expeditious adjudication of 
petitions from entities relying on a broader set of legitimate 
trading strategies than those that fit the confines of section 
4a(c)(1). In addition, given the complex, multi-faceted nature of 
hedging for commodity-related risks, the Commission could have, as 
suggested by one commenter, engaged in a separate and distinct 
informal rulemaking process to develop a workable, commercially 
practicable definition of bona fide hedging.552 Given the 
commercial interests at stake, this would have been a welcome 
approach. Instead, the Commission chose form over function so that 
it could “check the box” on its mandate.
—————————————————————————

    551 To the contrary, Congress specifically indicated that in 
defining bona fide hedging transactions or positions, the Commission 
may do so in such a manner as “to permit producers, sellers, 
middlemen, and users of a commodity or a product derived therefrom 
to hedge their legitimate anticipated business needs for that period 
of time into the future for which an appropriate futures contract is 
open and available on an exchange.” See section 4a(c)(1) of the 
CEA.
    552 See, e.g., Comment letter from BG Americas & Global LNG on 
Proposed Rule Regarding Position Limits for Derivatives (RIN 2028-
AD15 and 3038-AD16) at 13.
—————————————————————————

    In order to qualify as a bona fide hedging transaction or 
position, a transaction must meet both the requirements under Sec.  
151.5(a)(1) and qualify as one of eight specific and enumerated 
hedging transactions described in Sec.  151.5(a)(2). While the list 
of enumerated hedging transactions is an improvement from the 
proposed rules, and responds to several comments, especially with 
regard to the addition of an Appendix B to the final rule describing 
examples of bona fide hedging transactions, it remains inflexible. 
In response to commenters, the Commission has decided–at the last 
minute–to permit entities engaging in practices that reduce risk 
but that may not qualify as one of the enumerated hedging 
transactions under Sec.  151.5(a)(2) to seek relief from Commission 
staff under Sec.  140.99 or the Commission under section 4a(a)(7) of 
the CEA. Whereas this change to the preamble and the rule text is 
helpful, neither of these alternatives provides for an expeditious 
determination, nor do they provide for a predictable or certain 
outcome. In its refusal to accommodate traders seeking legitimate 
bona fide hedging exemptions in compliance with the Act with an 
expeditious and straightforward process, the Commission is being 
short-sighted in light of the dynamic (and in the case of the OTC 
markets, uncertain) nature of the commodity markets and with respect 
to the appropriate use of Commission resources.
    One particularly glaring example of the Commission’s decision to 
pursue form over function is found in the enumerated exemption for 
anticipated merchandising found at Sec.  151.5(2)(v). The new 
statutory provision in section 4a(c)(d)(A)(ii) is included to 
assuage unsubstantiated concerns about unintended consequences such 
as creating a potential loophole for clearly speculative 
activity.553 The Commission has so narrowly defined the 
anticipated merchandising that only the most elementary operations 
will be able to utilize it.
—————————————————————————

    553 Position Limits for Futures and Swaps, supra note 1, at 
75.
—————————————————————————

    For example, in order to qualify an anticipatory merchandising 
transaction as a bona fide hedge, a hedger must (i) own or lease 
storage capacity and demonstrate that the hedge is no greater than 
the amount of current or anticipated unfilled storage capacity owned 
or leased by the same person during the period of anticipated 
merchandising activity, which may not exceed one year, (ii) execute 
the hedge in the form of a calendar spread that meets the 
“appropriateness” test found in Sec.  151.5(a)(1), and (iii) exit 
the position prior to the last five days of trading if the Core 
Referenced Futures Contract is for agricultural or metal contracts 
or the spot month for other physical-delivery commodities. In 
addition,

[[Page 71704]]

(iv) an anticipatory merchandiser must meet specific filing 
requirements under Sec.  151.5(d), which among other things, (v) 
requires that the person who intends on exceeding position limits 
complete the filing at least ten days prior to the date of expected 
overage.
    Putting the burdens associated with the Sec.  151.5(d) filings 
aside, the anticipatory merchandising exemption and its limitations 
on capacity, the requirement to “own or lease” such capacity, and 
one-year limitation for agricultural commodities does not comport 
with the economic realities of commercial operations. In recent 
testimony, Todd Thul, Risk Manager for Cargill AgHorizons, commented 
on its understanding of this provision. He said that by limiting the 
exemption to unfilled storage capacities through calendar spread 
positions for one year, the CFTC will reduce the industry’s ability 
to continue offering the same suite of marketing tools to farmers 
that they are accustomed to using.554 Mr. Thul offered a more 
reasonable and appropriate limitation on anticipatory hedging based 
on annual throughput actually handled on a historic basis by the 
company in question. It is unclear from today’s rule as to whether 
the Commission considered such an alternative, but according to Mr. 
Thul, by going forward with the exemption as-is, we will “severely 
limit the ability of grain handlers to participate in the market and 
impede the ability to offer competitive bids to farmers, manage 
risk, provide liquidity and move agriculture products from origin to 
destination.” 555 556 Limiting commercial participation, 
Mr. Thul points out, increases volatility–and that is clearly not 
what Congress intended. I agree. I cannot help but think that the 
Commission is waging war on commercial hedging by employing a 
“government knows best” mandate to direct companies to employ only 
those hedging strategies that we give our blessing to and can 
conceive of at this point in time. Imagine the absurdity that we 
could prevent a company such as a cotton merchandiser from hedging 
forward a portion of his expected cotton purchase. Or, if they meet 
the complicated prerequisites, the commercial firm must get approval 
from the Commission before deploying a legitimate commercial 
strategy that exchanges have allowed for years.
—————————————————————————

    554 Testimony of Todd Thul, Risk Manager, Cargill AgHorizons 
before the House Committee on Agriculture, Oct. 12, 2011, available 
at http://agriculture.house.gov/pdf/hearings/Thul111012.pdf.
    555 Id.
    556 Though I rely upon the example of agricultural operations 
to illustrate my point, the limitations on the anticipated 
merchandising hedge are equally harmful to other industries that 
operate in relatively volatile environments that are subject to 
unpredictable supply and demand swings due to economic factors, most 
notably energy. See, e.g., Comment letter from ISDA on Notice of 
Proposed Rulemaking–Position Limits for Derivatives at 3-5 (Oct. 3, 
2011).
—————————————————————————

Aggregation Disparity

    In another attack on commercial hedging the Commission has 
developed a flawed aggregation rule that singles out owned-non 
financial firms for unique and unfair treatment under the rule. 
These commercial firms, which, among others, could be energy 
producers or merchandisers, are not provided the same protections 
under the independent controller rules as financial entities such as 
hedge funds or index funds. I believe that the aggregation 
provisions of the final rule would have benefited from a more 
thorough consideration of additional options and possible re-
proposal of at least two provisions: the general aggregation 
provision found in Sec.  151.7(b) and the proposed aggregation for 
exemption found in Sec.  151.7(f) of the proposed rule,557 now 
commonly referred to at the Commission as the owned non-financial 
exemption or “ONF.”
—————————————————————————

    557 See 76 FR at 4752, 4762 and 4774.
—————————————————————————

    Under Sec.  151.7(b), absent the applicability of a specific 
exemption found elsewhere in Sec.  151.7, a direct or indirect 
ownership interest of ten percent or greater by any entity in 
another entity triggers a 100% aggregation of the “owned” entity’s 
positions with that of the owner. While commenters agreed that an 
ownership interest of ten percent or greater has been the historical 
basis for requiring aggregation of positions under Commission 
regulation Sec.  150.5(b), absent applicable exemptions, 
historically, aggregation has not been required in the absence of 
indicia of control over the “owned” entity’s trading activities, 
consistent with the independent account controller exemption (the 
“IAC”) under Commission regulation Sec.  150.3(a)(4). While the 
final rule preserves the IAC exemption, it only does so in response 
to overwhelming comments arguing against its proposed elimination, 
which was without any legal rationale.558 And, to be clear, the 
IAC is only available to “eligible entities” defined in Sec.  
151.1, namely financial entities, and only with respect to client 
positions.
—————————————————————————

    558 See 76 FR at 4752, 4762.
—————————————————————————

    The practical effect of this requirement is that non-eligible 
entities, such as holding companies who do not meet any of the other 
limited specified exemptions will be forced to aggregate on a 100% 
basis the positions of any operating company in which it holds a ten 
percent or greater equity interest in order to determine compliance 
with position limits. While the Commission concedes that the holding 
company could conceivably enter into bona fide hedging transactions 
relating to the operating company’s cash market activities, provided 
that the operating company itself has not entered into such 
hedges,559 this is an inadequate, operationally-impracticable 
solution to the problem of imparting ownership absent control. 
Moreover, by requiring 100% aggregation based on a ten percent 
ownership interest, the Commission has determined that it would 
prefer to risk double-counting of positions over a rational 
disaggregation provision based on a concept of ownership that does 
not clearly attach to actual control of trading of the positions in 
question.
—————————————————————————

    559 Position Limits for Futures and Swaps, supra note 1, at 
83-84.
—————————————————————————

    Exemptions like those found in Sec. Sec.  151.7(g) and (i) that 
provide for disaggregation when ownership above the ten percent 
threshold is specifically associated with the underwriting of 
securities or where aggregation across commonly-owned affiliates 
would require information sharing that would result in a violation 
of federal law, are useful and no doubt appreciated. However, the 
Commission has failed to apply a consistent standard supporting the 
principles of ownership and control across all entities in this 
rulemaking.

Tiered Aggregation–A Viable and Fair Solution

    Also, the Commission did not address in the final rules a 
proposal put forth by Barclays Capital for the Commission to clarify 
that when aggregation is triggered, and no exemption is available, 
only an entity’s pro rata share of the position that is actually 
controlled by it, or in which it has an ownership interest will be 
aggregated. This proposal included a suggestion that the Commission 
consider positions in tiers of ownership, attributing a percentage 
of the positions to each tier. While Barclays acknowledged that the 
monitoring would still be imperfect, the measures would be more 
accurate than an attribution of a full 100% ownership and would 
decrease the percentage of duplicative counting of positions.560
—————————————————————————

    560 Comment letter from Barclays Capital on Position Limits 
for Derivatives (RIN 3038-AD15 and 3038-AD16) at 3 (Mar. 28, 2011), 
available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=965.
—————————————————————————

    I believe that a tiered approach to aggregation should have been 
considered in these rules, and not be entirely removed from 
consideration as we move forward with these final rules. Barclays 
(and perhaps others) has made a compelling case and staff has not 
persuaded me that there is any legal rationale for not further 
exploring this option. While I understand that it may be more 
administratively burdensome for the Commission to monitor tiered 
aggregation, I would presume that we could engage in a cost-benefit 
analysis to more fully explore such burdens in light of the 
potential costs to industry associated with the implementation of 
100% aggregation.

Owned Non-Financial–No Justification

    The best example of the Commission’s imbalanced treatment of 
market participants is manifest in the aggregation rules applied to 
owned non-financial firms. The Commission has shifted its 
aggregation proposal from the draft proposal to this final version. 
The final rule does not ultimately adopt the proposed owned-non-
financial entity exemption which was proposed in lieu of the IAC to 
allow disaggregation primarily in the case of a conglomerate or 
holding company that “merely has a passive ownership interest in 
one or more non-financial companies.” 561 The rationale was that, 
in such cases, operating companies would likely have complete 
trading and management independence and operate at such a distance 
that is would simply be inappropriate to aggregate positions.562 
While several commenters argued that the ONF was too narrow and 
discriminated against financial entities without a proper basis, the 
Commission provided no

[[Page 71705]]

substantive rationale for its decision to fully drop the ONF 
exemption from consideration. Instead, the Commission relied upon 
its determination to retain the IAC exemption and add the additional 
exemptions under Sec. Sec.  151.7(g) and (i) described above to find 
that it “may not be appropriate, at this time, to expand further 
the scope of disaggregation exemptions to owned-non financial 
entities.”
—————————————————————————

    561 76 FR at 4752, 4762.
    562 Id.
—————————————————————————

    In failing to articulate a basis for its decision to drop 
outright from consideration the ONF exemption, the Commission places 
itself in the same improvident position it was in when it proposed 
eliminating the IAC exemption, and now has given no reasoned 
explanation for discriminating against non-financial entities. This 
is especially disconcerting since at least one commenter has pointed 
out that baseless decision-making of this kind creates a risk that a 
court will strike down our action as arbitrary and capricious.563
—————————————————————————

    563 See Comment letter from CME Group on Position Limits for 
Derivatives at 16 (Mar. 28, 2011), available at http://
comments.cftc.gov/PublicComments/
ViewComment.aspx?id=33920&SearchText=CME (“Where agencies do not 
articulate a basis for treating similarly situated entities 
differently, as the Commission fails to do here, courts will strike 
down their actions as arbitrary and capricious. See, e.g., Indep. 
Petroleum Ass’n of America v. Babbitt, 92 F.3d 1248 (D.D. Cir. 1996) 
(“An Agency must treat similar cases in a similar manner unless it 
can provide a legitimate reason for failing to do so.” (citing 
Nat’l Ass’n of Broadcasters v. FCC, 740 F.2d 1190, 1201 (DC Cir. 
1984))).
—————————————————————————

    Since I first learned of the Commission’s change of course, I 
have requested that the Commission re-propose the ONF exemption in a 
manner that establishes an appropriate legal basis and provides for 
additional public comment pursuant to the Administrative Procedure 
Act. The Commission has outright refused to entertain my request to 
even include in the preamble of the final rules a commitment to 
further consider a version of the ONF exemption that would be more 
appropriate in terms of its breadth. The Commission’s decision puts 
the rule at risk of being overturned by the courts and exemplifies 
the pains at which this rule has been drafted to put form over 
function.

The Great Unknown: International Regulatory Arbitrage

    In addressing concerns relating to the opportunities for 
regulatory arbitrage that may arise as a result of the Commission 
imposing these position limits, the Commission points out that is 
has worked to achieve the goal of avoiding such regulatory arbitrage 
through participation in the International Organization of 
Securities Commissions (“IOSCO”) and summarily rejects commenters 
who believe it is a foregone conclusion that the existence of 
international differences in position limit policies will result in 
such arbitrage in reliance on prior experience. While I don’t 
disagree that the Commission’s work within IOSCO is beneficial in 
that it increases the likelihood that we will reach international 
consensus with regard to the use of position limits, the Commission 
ought to be more forthcoming as to principles as a whole.
    In particular, while the IOSCO Final Report on Principles for 
the Regulation and Supervision of Commodity Derivatives Markets 
564 does, for the first time, call on market authorities to make 
use of intervention powers, including the power to set ex-ante 
position limits, this is only one of many such recommendations that 
international market authorities are not required to implement. The 
IOSCO Report includes the power to set position limits, including 
less restrictive measures under the more general term “position 
management.” Position Management encompasses the retention of 
various discretionary powers to respond to identified large 
concentrations. It would have been preferable for the Commission to 
have explored some of these other discretionary powers as options in 
this rulemaking, thereby putting us in the right place to put our 
findings into more of a practice.
—————————————————————————

    564 Principles for Regulation and Supervision of Commodity 
Derivatives Markets, IOSCO Technical Committee (Sept. 2011), 
available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD358.pdf.
—————————————————————————

    As to the Commission’s stance that today’s rules will not, by 
their very passage, drive trading abroad, I am concerned that the 
Commission’s prior experience in determining the competitive effects 
of regulatory policies is inadequate. Today’s rules by far represent 
the most expansive exercise of the Commission’s authority both with 
regard to the setting of position limits and with regard to its 
jurisdiction in the OTC markets. The Commission’s past studies 
regarding the effects of having a different regulatory regime than 
our international counterparts, conducted in 1994 and 1999, cannot 
possibly provide even a baseline comparison. Since 2000, the volume 
of actively traded futures and option contracts on U.S. exchanges 
alone has increased almost tenfold. Electronic trading now 
represents 83% of that volume, and it is not too difficult to 
imagine how easy it would be to take that volume global.
    I recognize that we cannot dictate how our fellow market 
authorities choose to structure their rules and that in any action 
we take, we must do so with the knowledge that as with any rules, we 
risk triggering a regulatory race to the bottom. However, I believe 
that we ought not to deliver to Congress, or the public, an 
unsubstantiated sense of security in these rules.

Cost-Benefit Analysis: Hedgers Bear the Brunt of an Undue and Unknown 
Burden

    With every final rule, the Commission has attempted to conduct a 
more rigorous cost-benefit analysis. There is most certainly an 
uncertainty as to what the Commission must do in order to justify 
proposals aimed at regulating the heretofore unregulated. These 
analyses demonstrate that the Commission is taking great pains to 
provide quantifiable justifications for its actions, but only when 
reasonably feasible. The baseline for reasonability was especially 
low in this case because, in spite of the availability of enough 
data to determine that this rule will have an annual effect on the 
economy of more than $100 million, and the citation of at least 
fifty-two empirical studies in the official comment record debating 
all sides of the excessive speculation debate, the Commission is not 
convinced that it must “determine that excessive speculation exists 
or prove that position limits are an effective regulatory tool.” 
565 I suppose this also means that the Commission did not have to 
consider the costs of alternative means by which it could have 
complied with the statutory mandates. It is utterly astounding that 
the Commission has designed a rule to combat the unknown threat of 
“excessive speculation” that will likely cost market participants 
$100 million dollars annually and yet, “[T]he Commission need not 
prove that such limits will in fact prevent such burdens.” 566 A 
flip remark such as this undermines the entire rule, and invites 
legal challenge.
—————————————————————————

    565 Position Limits for Futures and Swaps, supra note 1, at 
137.
    566 Id.
—————————————————————————

    I respect that the Commission has been forthcoming in that the 
overall costs of this final rule will be widespread throughout the 
markets and that swap dealers and traditional hedgers alike will be 
forced to change their trading strategies in order to comply with 
the position limits. However, I am unimpressed by the Commission’s 
glib rationale for not fully quantifying them. The Commission does 
not believe it is reasonably feasible to quantify or even estimate 
the costs from changes in trading strategies because doing so would 
necessitate having access to and an understanding of entities’ 
business models, operating models, hedging strategies, and 
evaluations of potential alternative hedging or business strategies 
that would be adopted in light of such position limits.567 The 
Commission believed it impractical to develop a generic or 
representative calculation of the economic consequences of a firm 
altering its trading strategies.568 It seems that the numerous 
swap dealers and commercial entities who provided comments as to 
what kind of choices they would be forced to make if they were to 
find themselves faced with hard position limits, the loss of 
exchange-granted bona fide hedge exemptions for risk management and 
anticipatory hedging, and forced aggregation of trading accounts 
over which they may not even have current access to trading 
strategies or position information, more likely than not thought 
they were being pretty clear as to the economic costs.
—————————————————————————

    567 Id. at 144.
    568 Id.
—————————————————————————

    In choosing to make hardline judgments with regard to setting 
position limits, limiting bona fide hedging, and picking clear 
winners and losers with regard to account aggregation, the 
Commission was perhaps attempting to limit the universe of trading 
strategies. Indeed, as one runs through the examples in the preamble 
and the new Appendix B to the final rules, one cannot help but 
conclude that how you choose to get your exposure will affect the 
application of position limits. And the Commission will help you 
make that choice even if you aren’t asking for it.
    I have numerous lingering questions and concerns with the cost-
benefit analysis, but I will focus on the impact of these rules on 
the costs of claiming a bona fide hedge exemption.

[[Page 71706]]

    In addition to incorporating the new, narrower statutory 
definition of bona fide hedging for futures contracts into the final 
rules, the Commission also extended the definition of bona fide 
hedging transactions to swaps and established a reporting and 
recordkeeping regime for bona fide hedging exemptions. In the 
section of the cost-benefit analysis dedicated to a discussion of 
the bona fide hedging exemptions, the Commission “estimates that 
there may be significant costs (or foregone benefits)” and that 
firms “may need to adjust their trading and hedging strategies” 
(emphasis added).569 Based on the comments of record and public 
contention over these rules, that may be the understatement of the 
year. To be clear, however, there is no quantification or even 
qualification of this potentially tectonic shift in how commercial 
firms and liquidity providers conduct their business because the 
Commission is unable to estimate these kinds of costs, and the 
commenters did not provide any quantitative data for them to work 
with.570 I think this part of the cost-benefit analysis may be 
susceptible to legal challenge.
—————————————————————————

    569 Position Limits for Futures and Swaps, supra note 1, at 
166.
    570 Id. at 171.
—————————————————————————

    The Commission does attempt a strong comeback in estimating the 
costs of bona fide hedging-related reporting requirements. The 
Commission estimates that these requirements, even after all of the 
commenter-friendly changes to the final rule, will affect 
approximately 200 entities annually and result in a total burden of 
approximately $29.8 million. These costs, it argues, are necessary 
in that they provide the benefit of ensuring that the Commission has 
access to information to determine whether positions in excess of a 
position limit relate to bona fide hedging or speculative 
activity.571 This $29.8 million represents almost thirty percent 
of the overall estimated costs at this time, and it only covers 
reporting for entities seeking to hedge their legitimate commercial 
risk. I find it difficult to believe that the Commission cannot come 
up with a more cost-effective and less burdensome alternative, 
especially in light of the current reporting regimes and development 
of universal entity, commodity, and transaction identifiers. I was 
not presented with any other options. I will, however, continue to 
encourage the rulemaking teams to communicate with one another in 
regard to progress in these areas and ensure that the Commission’s 
new Office of Data and Technology is tasked with the permanent 
objective of exploring better, less burdensome, and more cost-
efficient ways of ensuring that the Commission receives the data it 
needs.
—————————————————————————

    571 Id.
—————————————————————————

We Have Done What Congress Asked–But, What Have We Actually Done?

    The consequence is that in its final iteration, the position 
limits rule represents the Commission’s desire to “check the box” 
as to position limits. Unfortunately, in its exuberance and attempt 
to justify doing so, the Commission has overreached in interpreting 
its statutory mandate to set position limits. While I do not 
disagree that the Commission has been directed to impose position 
limits, as appropriate, this rule fails to provide a legally sound, 
comprehensible rationale based on empirical evidence. I cannot 
support passing our responsibilities on to the judicial system to 
pick apart this rule in a multitude of legal challenges, especially 
when our action could negatively affect the liquidity and price 
discovery function of our markets, or cause them to shift to foreign 
markets. I also have serious reservations regarding the excessive 
regulatory burden imposed on commercial firms seeking completely 
legitimate and historically provided relief under the bona fide 
hedge exemption. These firms will spend excessive amounts to remain 
within the strict limitations set by this rule. Congress clearly 
conceived of a much more workable and flexible solution that this 
Commission has ignored.
    In its comment letter of March 25, 2011, the Futures Industry 
Association (FIA) stated, “The price discovery and risk-shifting 
functions of the U.S. derivatives markets are too important to U.S. 
and international commerce to be the subject of a position limits 
experiment based on unsupported claims about price volatility caused 
by excessive speculative positions.” 572 Their summation of our 
proposal as an experiment is apt. Today’s final rule is based on a 
hypothesis that historical practice and approach, which has not been 
proven effective in recognized markets, will be appropriate for this 
new integrated futures and swaps market that is facing uncertainty 
from all directions largely due to the other rules we are in the 
process of promulgating. I do not believe the Commission has done 
its research and assessed the impacts of testing this hypothesis, 
and that is why I cannot support the rule. As the Commission begins 
to analyze the results of its experiment, it remains my sincerest 
hope that our miscalculations ultimately do not lead to more harm 
than good. I will take no comfort if being proven correct means that 
the agency has failed in its mission.
—————————————————————————

    572 Comment letter from Futures Industry Association on 
Position Limits for Derivatives (RIN 2028-AD15 and 3038-AD16) at 3 
(Mar. 25, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=34054&SearchText=futures%20industry%20association
.

[FR Doc. 2011-28809 Filed 11-10-11; 11:15 am]
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