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Federal Register, Volume 78 Issue 221 (Friday, November 15, 2013)[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]
[Proposed Rules]
[Pages 68945-68979]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27339]
[[Page 68945]]
Vol. 78
Friday,
No. 221
November 15, 2013
Part III
Commodity Futures Trading Commission
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17 CFR Part 150
Aggregation of Positions; Proposed Rule
Federal Register / Vol. 78 , No. 221 / Friday, November 15, 2013 /
Proposed Rules
[[Page 68946]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 150
RIN 3038-AD82
Aggregation of Positions
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
———————————————————————–
SUMMARY: On May 30, 2012, the Commodity Futures Trading Commission
(“Commission” or “CFTC”) published in the Federal Register a notice
of proposed modifications to part 151 of the Commission’s regulations.
The modifications addressed the policy for aggregation under the
Commission’s position limits regime for 28 exempt and agricultural
commodity futures and options contracts and the physical commodity
swaps that are economically equivalent to such contracts. In an Order
dated September 28, 2012, the District Court for the District of
Columbia vacated part 151 of the Commission’s regulations. The
Commission is now proposing modifications to the aggregation provisions
of part 150 of the Commission’s regulations that are substantially
similar to the aggregation modifications proposed to part 151, except
that the modifications address the policy for aggregation under the
Commission’s position limits regime for futures and option contracts on
nine agricultural commodities set forth in part 150. Separately, the
Commission is also proposing today to establish speculative position
limits for the 28 exempt and agricultural commodity futures and options
contracts and the physical commodity swaps that are economically
equivalent to such contracts that previously had been covered by part
151 of its regulations. If both proposals are finalized, the
modifications proposed here to the aggregation provisions of part 150
would apply to the position limits regimes for both the futures and
option contracts on nine agricultural commodities and the 28 exempt and
agricultural commodity futures and options contracts and the physical
commodity swaps that are economically equivalent to such contracts.
However, the Commission may determine to adopt the modifications
proposed here separately from any other amendment to the position
limits regime.
DATES: Comments must be received on or before January 14, 2014.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD82,
by any of the following methods:
Agency Web site: http://comments.cftc.gov;
Mail: Melissa D. Jurgens, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581;
Hand delivery/courier: Same as mail, above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that may be exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
CFTC regulations at 17 CFR part 145.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,
Division of Market Oversight, (202) 418-5452, [email protected]; Riva
Spear Adriance, Senior Special Counsel, Division of Market Oversight,
(202) 418-5494, [email protected]; or Mark Fajfar, Assistant General
Counsel, Office of General Counsel, (202) 418-6636, [email protected];
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
The Commission has long established and enforced speculative
position limits for futures and options contracts on various
agricultural commodities as authorized by the Commodity Exchange Act
(“CEA”).1 The part 150 position limits regime,2 generally
includes three components: (1) The level of the limits, which set a
threshold that restricts the number of speculative positions that a
person may hold in the spot-month, individual month, and all months
combined,3 (2) exemptions for positions that constitute bona fide
hedging transactions and certain other types of transactions,4 and
(3) rules to determine which accounts and positions a person must
aggregate for the purpose of determining compliance with the position
limit levels.5
—————————————————————————
1 7 U.S.C. 1 et seq.
2 See 17 CFR part 150. Part 150 of the Commission’s
regulations establishes federal position limits on certain
enumerated agricultural contracts; the listed commodities are
referred to as enumerated agricultural commodities.
3 See 17 CFR 150.2.
4 See 17 CFR 150.3.
5 See 17 CFR 150.4.
—————————————————————————
The Commission’s existing aggregation policy under regulation 150.4
generally requires that unless a particular exemption applies, a person
must aggregate all positions for which that person controls the trading
decisions with all positions for which that person has a 10 percent or
greater ownership interest in an account or position, as well as the
positions of two or more persons acting pursuant to an express or
implied agreement or understanding.6 The scope of exemptions from
aggregation include the ownership interests of limited partners in
pooled accounts,7 discretionary accounts and customer trading
programs of futures commission merchants (“FCM”),8 and eligible
entities with independent account controllers that manage customer
positions (“IAC” or “IAC exemption”).9 Market participants
claiming one of the exemptions from aggregation are subject to a call
by the Commission for information demonstrating compliance with the
conditions applicable to the claimed exemption.10
—————————————————————————
6 See 17 CFR 150.4(a) and (b).
7 See 17 CFR 150.4(c).
8 See 17 CFR 150.4(d).
9 See 17 CFR 150.3(a)(4).
10 See 17 CFR 150.3(b) and 150.4(e).
—————————————————————————
B. Proposed Modifications to the Policy for Aggregation Under Part 151
of the Commission’s Regulations
The Commission adopted part 151 of its regulations in November 2011
under the authority of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank Act”), which President Obama signed on
July 21, 2010.11 Title VII of the Dodd-Frank
[[Page 68947]]
Act 12 amended the CEA 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.
—————————————————————————
11 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/DoddFrankAct/index.htm.
12 Pursuant to section 701 of the Dodd-Frank Act, Title VII
may be cited as the “Wall Street Transparency and Accountability
Act of 2010.”
—————————————————————————
As amended by the Dodd-Frank Act, sections 4a(a)(2) and 4a(a)(5) of
the CEA authorize the Commission to establish limits for futures and
option contracts traded on a designated contract market (“DCM”), as
well as swaps that are economically equivalent to such futures or
options contracts traded on a DCM. In response to this new authority,
the position limits regime adopted in part 151 would have applied to 28
physical commodity futures and option contracts and physical commodity
swaps that are economically equivalent to such contracts.13 The
regulations in the part 151 position limits regime are in three
components that are generally similar to the three components of part
150.14 With regard to determining which accounts and positions a
person must aggregate, regulation 151.7 largely adopted the
Commission’s existing aggregation policy under regulation 150.4.15
Regulation 151.7, however, also provided additional exemptions for
underwriters of securities, and for where the sharing of information
between persons would cause either person to violate federal law or
regulations adopted thereunder.16 With the exception of the exemption
for underwriters, regulation 151.7 required market participants to file
a notice with the Commission demonstrating compliance with the
conditions applicable to each exemption.17
—————————————————————————
13 See Position Limits for Futures and Swaps, 76 FR 71626
(Nov. 18, 2011). In an Order dated September 28, 2012, the District
Court for the District of Columbia vacated part 151 of the
Commission’s regulations, with the exception of the revised position
limit levels in amended section 150.2. See International Swaps and
Derivatives Association v. United States Commodity Futures Trading
Commission, 887 F. Supp. 2d 259 (D.D.C. 2012).
In a separate proposal approved on the same date as this
proposal, the Commission is proposing to establish speculative
position limits for 28 exempt and agricultural commodity futures and
option contracts, and physical commodity swaps that are
“economically equivalent” to such contracts (as such term is used
in section 4a(a)(5) of the CEA). In connection with establishing
these limits, the Commission is also proposing to update some
relevant definitions; revise the exemptions from speculative
position limits, including for bona fide hedging; and extend and
update reporting requirements for persons claiming exemption from
these limits. See Position Limits for Derivatives (November 5,
2013).
The Commission is proposing these amendments to regulation 150.4
and certain related regulations separately from its proposed
amendments to position limits because it believes that these
proposed amendments regarding aggregation of provisions could be
appropriate regardless of whether the position limit amendments are
adopted. The Commission anticipates that it could adopt these
amendments related to aggregation separately from the amendments to
the position limits.
If both proposals are finalized, the modifications proposed here
to the aggregation provisions of part 150 would apply to the
position limits regimes for both the futures and option contracts on
nine agricultural commodities and the 28 exempt and agricultural
commodity futures and options contracts and the physical commodity
swaps that are economically equivalent to such contracts.
14 See notes 2 through 5, above, and accompanying text.
15 See notes 6 through 9, above, and accompanying text.
16 See regulations 151.7(g) and (i), respectively.
17 See regulation 151.7(i).
—————————————————————————
On May 30, 2012, the Commission proposed, partially in response to
a petition for interim relief from part 151’s provision for aggregation
of positions across accounts,18 certain modifications to its policy
for aggregation under the part 151 position limits regime (the “Part
151 Aggregation Proposal”).19 In brief, the Part 151 Aggregation
Proposal included the following five elements.
—————————————————————————
18 A copy of the petition (the “aggregation petition”) can
be found on the Commission’s Web site at www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf. The
aggregation petition was originally filed by the Working Group of
Commercial Energy Firms; certain members of the group later
reconstituted as the Commercial Energy Working Group. Both groups
(hereinafter, collectively, the “Working Groups”) presented one
voice with respect to the aggregation petition.
19 See Aggregation, Position Limits for Futures and Swaps, 77
FR 31767 (May 30, 2012).
—————————————————————————
First, the Commission proposed to amend regulation 151.7(i) to make
clear that the exemption from aggregation for situations where the
sharing of information was restricted under law would include
circumstances in which the sharing of information would create a
“reasonable risk” of a violation–in addition to an actual
violation–of federal law or regulations adopted thereunder. The
Commission also proposed extending the exemption to situations where
the sharing of information would create a “reasonable risk” of a
violation of state law or the law of a foreign jurisdiction. But the
Commission did not propose to modify the requirement that market
participants file an opinion of counsel to rely on the exemption in
regulation 151.7(i).
Second, the Commission proposed regulation 151.7(b)(1), which would
establish a notice filing procedure to permit a person in specified
circumstances to disaggregate the positions of a separately organized
entity (“owned entity”), even if such person has a 10 percent or
greater interest in the owned entity. The notice filing would need to
demonstrate compliance with certain conditions set forth in proposed
regulation 151.7(b)(1)(i), and such relief would not be available to
persons with a greater than 50 percent ownership or equity interest in
the owned entity. Similar to other exemptions from aggregation, the
Commission would be able to subsequently call for additional
information as well as reject, modify or otherwise condition such
relief. Further, such person would be obligated to amend the notice
filing in the event of a material change to the circumstances described
in the filing. The proposed criteria to claim relief in proposed
regulation 151.7(b)(1)(i) would have required a demonstration that the
person filing for disaggregation relief and the owned entity do not
have knowledge of the trading decisions of the other; that they trade
pursuant to separately developed and independent trading systems; that
they have, and enforce, written procedures to preclude one entity from
having knowledge of, gaining access to, or receiving data about, trades
of the other; that they do not share employees that control trading
decisions and that employees do not share trading control with respect
to both entities; and that they do not have risk management systems
that permit the sharing of trades or trading strategies with the other.
Third, the Commission proposed regulation 151.7(j), which would
allow higher-tier entities to rely upon a notice for exemption filed by
the owned entity, but such reliance would only go to the accounts or
positions specifically identified in the notice. The proposed
regulation also would require that a higher-tier entity that wishes to
rely upon an owned entity’s exemption notice must comply with
conditions of the applicable aggregation exemption other than the
notice filing requirements.
Fourth, the Commission proposed an aggregation exemption in
proposed
[[Page 68948]]
regulation 151.7(g) for an ownership interest of a broker-dealer
registered with the SEC, or similarly registered with a foreign
regulatory authority, in an entity based on the ownership of securities
acquired as part of reasonable activity in the normal course of
business as a dealer. However, the proposed exemption would not have
applied where a broker-dealer acquires more than a 50 percent ownership
interest in another entity.
Fifth, the Commission proposed to expand the definition of
independent account controller to include the managing member of a
limited liability company, so that “regulation 4.13 commodity pools”
(i.e., a commodity pool, the operator of which is exempt from
registration under regulation 4.13) established as limited liability
companies would be accorded the same treatment as such pools formed as
limited partnerships.
The Commission received approximately 26 written comments on the
Part 151 Aggregation Proposal.20
—————————————————————————
20 The written comments are available on the Commission’s Web
site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1208.
—————————————————————————
II. Proposed Rules
The Commission is now proposing to amend regulation 150.4, and
certain related regulations, to include rules to determine which
accounts and positions a person must aggregate that are substantially
similar to the corresponding rules in part 151, as it was proposed to
be amended in May 2012. In addition, the amendments now being proposed
to regulation 150.4 reflect the Commission’s consideration of the
comments that were received on the Part 151 Aggregation Proposal. Thus,
the discussion below covers the amendments in the Part 151 Aggregation
Proposal, the comments on those proposed amendments, and the amendments
that the Commission is now proposing.21
—————————————————————————
21 For additional background on part 150 and part 151 and the
existing provisions for aggregation, see the Part 151 Aggregation
Proposal.
—————————————————————————
A. Proposed Rules on the Information Sharing Restriction
B.1. Part 151 Proposed Approach–Amendment to Regulation 151.7(i)
As noted above, regulation 151.7(i) provided exemptions from
aggregation under certain conditions where the sharing of information
would cause a violation of Federal law or regulation. These exemptions
had not previously been available. In the Part 151 Aggregation
Proposal, the Commission proposed to amend regulation 151.7(i) to make
clear that the exemption to the aggregation requirement would include
circumstances in which the sharing of information would create a
“reasonable risk” of a violation–in addition to an actual
violation–of federal law or regulations adopted thereunder. The
Commission noted that whether a reasonable risk exists would depend on
the interconnection of the applicable statute and regulatory guidance,
as well as the particular facts and circumstances as applied to the
statute and guidance.
The proposed amendments to part 151 retained the requirement that
market participants file an opinion of counsel to rely on the exemption
in regulation 151.7(i). The Commission explained that requiring an
opinion would allow Commission staff to review the legal basis for the
asserted regulatory impediment to the sharing of information, and would
be particularly helpful where the asserted impediment arises from laws
or regulations that the Commission does not directly administer.
Further, Commission staff would have the ability to consult with other
federal regulators as to the accuracy of the opinion, and to coordinate
the development of rules surrounding information sharing and
aggregation across accounts. The Commission also noted that the
proposed clarification regarding a “reasonable risk” of violation
should address the concerns that obtaining an opinion of counsel could
be difficult if the Commission read the existing standard to include
only per se violations.
The Commission also noted that, notwithstanding the Commission’s
facts and circumstances review of potentially conflicting federal laws
or regulations, the exemption in regulation 151.7(i) would be effective
upon filing of the notice required in regulation 151.7(h) and opinion
of counsel. Further, these provisions authorized the Commission to
request additional information beyond that contained in the notice
filing, and the Commission may amend, suspend, terminate or otherwise
modify a person’s aggregation exemption upon further review. Last, the
Commission noted that as it gained further experience with the
exemption for federal law information sharing restriction in regulation
151.7(i), it anticipated providing further guidance to market
participants.
a. Part 151 Proposed Rules for Information Sharing Restriction–Foreign
Law
For the same reasons the Commission adopted the exemption for
federal information sharing restrictions, the Commission proposed
extending the exemption to the law of a foreign jurisdiction. In
addition, similar to the clarification for the exemption for federal
law information sharing restriction, the Commission also proposed an
exemption where the sharing of information creates a “reasonable
risk” of violating the law of a foreign jurisdiction. However, the
Commission remained concerned that certain market participants could
potentially use the existing and proposed expansion of the exemption in
regulation 151.7(i) to evade the requirements for the aggregation of
accounts. In this regard, the proposed amendment to part 151,
consistent with the exemption for federal law information sharing
restriction, included the requirement to file an opinion of counsel
specifically identifying the particular law and facts requiring a
market participant to claim the exemption.
The Commission noted that the aggregation petition references
information sharing restrictions that arise from “international” law,
and the Commission sought comment on the types of “international”
law, if any, which could create information sharing restrictions other
than the law of a foreign jurisdiction. The Commission asked if the
regulation 151.7(i) exemption should include “international” law or
whether it was sufficient to refer to the “law of a foreign
jurisdiction.”
b. Part 151 Proposed Rules for Information Sharing Restriction–State
Law
The Commission also proposed to establish an exemption for
situations where information sharing restrictions could trigger state
law violations. In addition, similar to the clarification related to
information sharing restrictions under federal law, the Commission also
proposed that the state law information sharing restriction apply where
the sharing of information creates a “reasonable risk” of violating
the state law. However, as noted above, the Commission remained
concerned about the potential for evasion within the context of this
exemption. In this regard, the Part 151 Aggregation Proposal,
consistent with the federal law information sharing restriction,
included the requirement to file an opinion of counsel specifically
identifying the restriction of law and facts particular to the market
participant claiming the exemption.
The clarification and expansion of the violation of law exemption
in the Part 151 Aggregation Proposal addressed
[[Page 68949]]
concerns raised in the aggregation petition. First, the clarification
and extension of the violation of law exemption responded to concerns
that market participants could face increased liability under state,
federal and foreign law. While the aggregation petition and other
commenters argued that an owned non-financial entity exemption would
reduce the risk of liability under antitrust and other laws, the
clarification and expansion in the Part 151 Aggregation Proposal would
also reduce risk of liability under antitrust or other laws by allowing
market participants to avail themselves of the violation of law
exemption in those circumstances where the sharing of information
created a reasonable risk of violating the above mentioned bodies of
law.
The Commission solicited comments as to the appropriateness of
extending the information sharing exemption to state law. The
Commission also considered, as an alternative, a case-by-case approach,
through petitions submitted pursuant to CEA section 4a(a)(7), where the
Commission would otherwise rely upon the preemption of state law in
administering its aggregation policy.
The Commission noted that the aggregation petition cites to Texas
Public Utility Code Substantive Rule 25.503, which provides that “a
market participant shall not collude with other market participants to
manipulate the price or supply of power.” 22 That provision applies
to intra-state transactions and resembles regulations of the Federal
Energy Regulatory Commission.23 In this regard, the Commission asked
if it should limit application of the proposed exemption for state law
information sharing restrictions to laws that have a comparable
provision at the federal level, and what criteria it should use in
identifying state laws that a person may rely upon for an exemption
from aggregation. The Commission also solicited additional comment as
to the types of state laws, including specific laws, which could create
an information sharing restriction in conflict with the Commission’s
aggregation policy.
—————————————————————————
22 Aggregation petition at 24.
23 See, e.g., 18 CFR 1c.1 and 1c.2.
—————————————————————————
The Commission further noted that the aggregation petition seeks to
extend the exemption to information sharing restrictions that arise
from “local” law.24 However, the aggregation petition did not
provide examples of local laws that could create restrictions on
information sharing, and the Commission was concerned that an exemption
for local law would be difficult to implement due to the large number
of such laws and/or regulations that would need to be considered and
the vast numbers of localities that might issue such laws and/or
regulations.
—————————————————————————
24 Aggregation petition at 24.
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The Commission solicited comment as to the appropriateness of
extending the information sharing exemption to “local” law.
Commenters were asked to provide the scope of local law and identify
any specific laws that create information sharing restrictions that
would conflict with the Commission’s aggregation policy. The Commission
also asked what criteria it could use in identifying local laws that a
person may rely upon for an exemption from aggregation, and if the
Commission should adopt a case-by-case approach through petitions
submitted pursuant to CEA section 4a(a)(7) and otherwise rely upon the
preemption of local law in administering its aggregation policy.
2. Commenters’ Views
One commenter said that the information sharing exemption should
not be expanded, but should instead be limited to violations of federal
law.25 This commenter also said that the exemption from aggregation
for potential violations should not be included, because it is
impractical to determine if potential violations actually justify
disaggregation, and that if the exemption is expanded, only “foreign
law,” not “international law,” should be a basis for the exemption
since international law (such as a treaty) is not directly applicable
to information sharing.26
—————————————————————————
25 Institute for Agriculture and Trade Policy on June 29, 2012
(“CL-IATP”).
26 CL-IATP.
—————————————————————————
Other commenters said that the proposed exemptions for information
sharing requirements under state or foreign law are appropriate, and
that a “reasonable risk” of violation is the right standard for the
exemptions.27 Commenters also said that requirements under state law
should be a valid basis for an exemption regardless of whether a
comparable federal law exists, and even if federal law pre-empts state
law.28 These commenters cited state utility regulations and state
regulation of local gas distribution companies as examples of the types
of state laws that could prohibit information sharing. Without citing
any examples of such laws that may restrict information sharing, two
commenters said that local law should also be a valid basis for an
exemption.29
—————————————————————————
27 EEI on June 29, 2012 (“CL-EEI”), FIA on June 29, 2012
(“CL-FIA”), International Swaps and Derivatives Association and
Securities Industry and Financial Markets Association, jointly on
June 29, 2012 (“CL-ISDA/SIFMA”).
28 American Gas Association on June 29, 2012 (“CL-AGA”),
American Petroleum Institute on June 29, 2012 (“CL-API”), Atmos
Energy Holdings on June 29, 2012 (erroneously dated July 29, 2012)
(“CL-Atmos”), CL-EEI, CL-FIA, Coalition of Physical Energy
Companies on June 29, 2012 (“CL-COPE”).
29 CL-API, Working Group of Commercial Energy Firms and
Sutherland Asbill & Brennan LLP, on behalf of The Commercial Energy
Working Group, jointly on June 29, 2012 (“CL-WGCEF”).
—————————————————————————
Regarding which types of legal provisions should be treated as
“state law,” commenters said it should include state statutes,
regulations and common law (including, e.g., fiduciary duties under
common law),30 and rules, regulations, administrative rulings and
court orders imposed by state commissions or other governmental
authorities with jurisdiction.31
—————————————————————————
30 CL-FIA, Private Equity Growth Capital Council on June 29,
2012 (“CL-PEGCC”).
31 CL-AGA, Alternative Investment Management Association
Limited on July 6, 2012 (“CL-AIMA”), CL-Atmos.
—————————————————————————
Addressing the requirement of an opinion of counsel, some
commenters said that the requirement in the existing rule should not be
changed.32 These commenters reasoned that the presumption should be
that aggregation is required in all but the most clear-cut cases, and
for those cases an opinion would be available.33
—————————————————————————
32 Better Markets, Inc. on June 29, 2012 (“CL-Better
Markets”), CL-IATP.
33 CL-Better Markets, CL-IATP.
—————————————————————————
Other commenters said that a memorandum of law prepared by internal
or external counsel should suffice if it sets out a legal basis for the
exemption.34 These commenters generally pointed out that formal legal
opinions can be expensive to obtain, typically contain many
qualifications, and otherwise are not a practical means of advancing
the goals mentioned in the Part 151 Aggregation Proposal.35 One
commenter said that as an alternative to a memorandum of law, a person
claiming the exemption should be allowed simply to provide a copy of
the court order, administrative ruling or other document showing the
prohibition of information sharing.36
—————————————————————————
34 CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.
35 CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.
Commenters also said that persons should be able to rely on a
general legal opinion (as compared to a legal opinion or memorandum
prepared specifically for that person) with respect to laws that
impose a broadly applicable prohibition of information sharing.
36 CL-AIMA.
—————————————————————————
3. Proposed Rule
The Commission is proposing to adopt rule 150.4(b)(8), which is
largely
[[Page 68950]]
similar to rule 151.7(i) as it was proposed to be amended. The
Commission notes that many of the commenters agreed that the proposed
amendment to part 151 appropriately required that the sharing of
information create “a reasonable risk that either person could violate
state or federal law or the law of a foreign jurisdiction, or
regulations adopted thereunder.” Based on the comments received and
further consideration, the Commission does not believe it is necessary
that the person show that a comparable federal law exists in order for
a state law to be the basis for an exemption.
The Commission has carefully considered the comments asserting that
local law and international law should be a basis for the exemption.
However, the Commission does not believe that this would be
appropriate. First, the Commission notes that the commenters were
divided on this point, and only some supported incorporating local law
and international law into the exemption. With regard to local law, the
Commission continues to believe, as stated in the Part 151 Aggregation
Proposal, that an exemption for local law would be difficult to
implement due to the number of laws and regulations that would need to
be considered and the number of localities that might issue them. Also,
even though the number of such laws and regulations may be large, the
Commission is not persuaded that there would be a significant number of
instances where these laws and regulations would prohibit information
sharing that would otherwise be permitted under federal and state
law.37 In this respect, the Commission notes that even commenters
supportive of including exceptions for local law did not cite any local
laws that restrict the information sharing necessary to comply with the
Commission’s aggregation policy. Furthermore, the Commission is
concerned that reviewing notices of exemptions based on local laws
would create a substantial administrative burden for the Commission.
That is, balancing the possibility that including local law as a basis
for the exemption would be helpful to market participants against the
possibility that doing so would lead to confusion or inappropriate
results, the Commission preliminarily concludes that the better course
is not to provide for local law to be a basis for the exemption.
—————————————————————————
37 In addition, in those instances where local law would
impose an information sharing restriction that is not present under
state or federal law, the Commission believes that it could be
inappropriate to favor the local law serving a local purpose to the
detriment of the position limits under federal law that serve a
national purpose.
—————————————————————————
With regard to international law, the Commission is persuaded by
the commenter who pointed out that the sources of international law,
such as treaties and international court decisions, would be unlikely
to include information sharing prohibitions that would not otherwise
apply under foreign or federal law, and that therefore including
international law as a basis for the exemption is unnecessary.
The Commission’s proposed rule 150.4(b)(8) differs from the
proposed amendment to rule 151.7, in that instead of requiring a person
to provide an opinion of counsel regarding the reasonable risk of a
violation of law, the proposed rule would require the person to provide
a written memorandum of law (which may be prepared by an employee of
the person or its affiliates) which explains the legal basis for
determining that information sharing creates a reasonable risk that
either person could violate federal, state or foreign law. The
Commission is persuaded by the commenters saying that requiring a
formal opinion of counsel may be expensive and may not provide
benefits, in terms of the purposes of this requirement, as compared to
a memorandum of law. As noted in the Part 151 Aggregation Proposal, the
purpose of this requirement is to allow Commission staff to review the
legal basis for the asserted regulatory impediment to the sharing of
information (which should be particularly helpful when the asserted
impediment arises from laws that the Commission does not directly
administer), to consult with other regulators as to the accuracy of the
assertion, and to coordinate the development of rules surrounding
information sharing and aggregation. The Commission expects that a
written memorandum of law would, at a minimum, contain information
sufficient to serve these purposes.
The Commission preliminarily believes that if there is a reasonable
risk that persons in general could violate a provision of federal,
state or foreign law of general applicability by sharing information
associated with position aggregation, then the written memorandum of
law may be prepared in a general manner (i.e., not specifically for the
person providing the memorandum) and may be provided by more than one
person in satisfaction of the requirement. For example, the Commission
is aware that trade associations commission law firms to provide
memoranda on various legal issues of concern to their members. Under
the proposed rule, such a memorandum (i.e., one that sets out in detail
the basis for concluding that a certain provision of federal, state or
foreign law of general applicability creates a reasonable risk of
violation arising from information sharing) could be provided by
various persons to satisfy the requirement, so long as it is clear from
the memorandum how the risk applies to the person providing the
memorandum.
On the other hand, the Commission is not persuaded that, as
suggested by some commenters, simply providing a copy of the law or
other legal authority would be sufficient, because this would not set
out the basis for a conclusion that the law creates a reasonable risk
of violation if the particular person providing the document shared
information associated with position aggregation. If the effect of the
law is clear, the written memorandum of law need not be complex, so
long as it explains in detail the effect of the law on the person’s
information sharing.
Proposed rule 150.4(b)(8) also reflects the addition of a
parenthetical clause to clarify that the types of information that may
be relevant in this regard may include, only by way of example,
information reflecting the transactions and positions of a such person
and the owned entity. The Commission believes it is helpful to clarify
in the rule text what types of information may potentially be involved.
The mention of transaction and position information as examples of this
information is not intended to limit the types of information that may
be relevant.
Finally, the Commission preliminarily believes that the question of
what legal authorities, in particular, constitute “state law” or
“foreign law,” where it is relevant, is a question to be addressed in
the written memorandum of law. In general, any state-level or foreign
legal authority that is binding on the person could be a basis for the
exemption.
The Commission solicits comment as to all aspects of proposed rule
150.4(b)(8). In particular, the Commission solicits comment as to the
appropriateness of requiring that a person provide a written memorandum
of law, rather than an opinion of counsel, regarding the reasonable
risk of a violation of law. Also, what types of information may
potentially be the subject of the sharing that is of concern in this
rule?
C. Ownership of Positions Generally
1. Part 151 Proposed Approach
The Part 151 Aggregation Proposal reflected the Commission’s long-
[[Page 68951]]
standing incremental approach to exemptions from the aggregation
requirement for persons owning a financial interest in an entity. The
Part 151 Aggregation Proposal highlighted the relevant statutory
language of section 4a(a)(1) of the CEA, which requires aggregation of
an entity’s positions on the basis of either ownership or control of
the entity, and the related legislative history and regulatory
developments which support the Commission’s approach. In addition, the
Part 151 Aggregation Proposal also explained that the Commission’s
historical practice has been to craft narrowly-tailored exemptions,
when and if appropriate, to the basic requirement of aggregation when
there is either ownership or control of an entity.38
—————————————————————————
38 See also note 41, below, and accompanying text.
—————————————————————————
Regarding the threshold level at which an exemption from
aggregation on the basis of ownership would be available, the
Commission noted in the Part 151 Aggregation Proposal that it has
generally found that an ownership or equity interest of less than 10
percent in an account or position that is controlled by another person
who makes discretionary trading decisions does not present a concern
that such ownership interest results in control over trading or can be
used indirectly to create a large speculative position through
ownership interests in multiple accounts. As such, the Commission has
exempted an ownership interest below 10 percent from the aggregation
requirement.39 Prior comments discussed in the Part 151 Aggregation
Proposal suggested that a similar analysis should prevail for an
ownership interest of 10 percent or more where such ownership
represents a passive investment that does not involve control of the
trading decisions of the owned entity, because such passive investments
would present a reduced concern that ownership would result in trading
pursuant to direct or indirect control, as well as a reduced risk for
persons with positions in multiple accounts to hold an unduly large
overall position.
—————————————————————————
39 The Commission codified this aggregation threshold in its
1979 statement of policy on aggregation, which was derived from the
administrative experience of the Commission’s predecessor. See
Statement of Policy on Aggregation of Accounts and Adoption of
Related Reporting Rules (“1979 Aggregation Policy”), 44 FR 33839,
33843 (June 13, 1979). Note, however, that consistent with the
approach taken in 151.7(d), proposed rule 150.4(d) will separately
require aggregation of investments in accounts with identical
trading strategies.
—————————————————————————
While other Commission rulemakings prior to the Part 151
Aggregation Proposal generally restricted exemptions from aggregation
based on ownership to FCMs, limited partner investors in commodity
pools, and independent account controllers managing customer funds for
an eligible entity, a broader passive investment exemption has
previously been considered but not enacted by the Commission.40
Further, the Commission reiterated its belief in incremental
development of aggregation exemptions over time.41 Consistent with
that incremental approach, the Commission considered the additional
information provided and the concerns raised by the aggregation
petition, and proposed relief from the ownership criteria of
aggregation.
—————————————————————————
40 See, e.g., 53 FR 13290, 13292 (1988) (proposal). The 1988
proposal for the independent account controller rule requested
comment on the possibility of a broader passive investment
exemption, and specifically noted:
[Q]uestions also have been raised regarding the continued
appropriateness of the Commission’s aggregation standard which
provides that a beneficial interest in an account or positions of
ten percent or more constitutes a financial interest tantamount to
ownership. This threshold financial interest serves to establish
ownership under both the ownership criterion of the aggregation
standard and as one of the indicia of control under the 1979
Aggregation Policy.
In particular, certain instances have come to the Commission’s
attention where beneficial ownership in several otherwise unrelated
accounts may be greater than ten percent, but the circumstances
surrounding the financial interest clearly exclude the owner from
control over the positions. The Commission is requesting comment on
whether further revisions to the current Commission rules and
policies regarding ownership are advisable in light of the exemption
hereby being proposed. If such financial interests raise issues not
addressed by the proposed exemption for independent account
controllers, what approach best resolves those issues while
maintaining a bright-line aggregation test?
41 See 77 FR 31767, 31773. This incremental approach to
account aggregation standards reflects the Commission’s historical
practice. See, e.g., 53 FR 41563, 41567, Oct. 24, 1988 (the
definition of eligible entity for purposes of the IAC exemption
originally only included CPOs, or exempt CPOs or pools, but the
Commission indicated a willingness to expand the exemption after a
“reasonable opportunity” to review the exemption.); 56 FR 14308,
14312, Apr. 9, 1991 (the Commission expanded eligible entities to
include commodity trading advisors, but did not include additional
entities requested by commenters until the Commission had the
opportunity to assess the current expansion and further evaluate the
additional entities); and 64 FR 24038, May 5, 1999 (the Commission
expanded the list of eligible entities to include many of the
entities commenters requested in the 1991 rulemaking).
—————————————————————————
The Part 151 Aggregation Proposal would have established a notice
filing procedure to permit a person with an ownership or equity
interest in a separately organized entity (“owned entity”) of 10
percent or greater, but no more than 50 percent, to disaggregate the
positions of the owned entity in specified circumstances. Under that
proposal, the notice filing would demonstrate compliance with certain
conditions set forth in the proposed amendment to part 151. Similar to
other exemptions from aggregation, the notice filing would be effective
upon submission to the Commission, but the Commission would be able to
subsequently call for additional information as well as reject, modify
or otherwise condition such relief. Further, such person would be
obligated to amend the notice filing in the event of a material change
to the circumstances described in the filing.
a. Initial Proposed Ownership Threshold for Disaggregation Relief
The proposed amendment to part 151 would have conditioned
disaggregation relief on a demonstration that the person does not have
greater than a 50 percent ownership or equity interest in the owned
entity. The Part 151 Aggregation Proposal explained that an equity or
ownership interest above 50 percent constitutes a majority ownership or
equity interest of the owned entity and is so significant as to require
aggregation under the ownership prong of Section 4a(a)(1) of the CEA.
As noted in the Part 151 Aggregation Proposal, the proposed amendment
to part 151 would have provided certainty and an easily administrable
bright-line test, and would have addressed concerns about circumvention
of position limits by coordinated trading or direct or indirect
influence between entities. To the extent that the majority owner may
have the ability and incentive to direct, control or influence the
management of the owned entity, the proposed bright-line test would be
a reasonable approach to the aggregation of owned accounts pursuant to
Section 4a(a)(1). A person with a greater than 50 percent ownership
interest in multiple accounts would have the ability to hold and
control a significant and potentially unduly large overall position in
a particular commodity, which position limits are intended to prevent.
The owned entity exemption in the Part 151 Aggregation Proposal
would have applied to both financial and non-financial entities that
have passive ownership interests. Market participants that qualify for
the exemption could file a notice with the Commission demonstrating
independence between entities and, thereafter, forgo the development of
monitoring and tracking systems for the aggregation of accounts. The
Commission sought comment as to whether such passive interests present
a significantly reduced risk of coordinated trading compared to owned
entities that fail the criteria for the proposed
[[Page 68952]]
exemption. In addition, the Commission specifically requested comment
as to whether the proposed relief should be limited to ownership
interests in non-financial entities.
While the owned non-financial entity exemption mentioned in the
aggregation petition would permit disaggregation even if the owned
entity is wholly owned, the Commission was concerned that an ownership
interest greater than 50 percent presents heightened concerns for
coordinated trading or direct or indirect influence over an account or
position, and that permitting disaggregation at that level of ownership
would be inconsistent with the statutory requirement to aggregate on
the basis of ownership. The Part 151 Aggregation Proposal noted that
while small ownership interests of less than 10 percent do not warrant
aggregation, and although 10 percent or greater ownership has served as
a useful threshold for aggregation, the Commission believed relief may
be warranted for passive investments above 10 percent. However, for the
reasons discussed above, aggregation would be inappropriate where an
ownership interest is greater than 50 percent. Therefore, the
Commission proposed limiting the availability of the exemption to those
having an ownership interest no greater than 50 percent.
b. Initial Proposed Criteria for Disaggregation Relief
The proposed criteria to claim relief under the proposed amendment
to part 151 addressed the Commission’s concerns that an ownership or
equity interest of 10 percent and above may facilitate or enable
control over trading of the owned entity or allow a person to
accumulate a large position through multiple accounts that could
overall amount to an unduly large position. The Part 151 Aggregation
Proposal grouped these criteria into four general categories.
First, the proposed amendment to part 151 would have conditioned
aggregation relief on a demonstration that the person filing for
disaggregation relief and the owned entity do not have knowledge of the
trading decisions of the other. The Commission noted that where an
entity has an ownership interest in another entity and neither entity
shares trading information, such entities demonstrate independence, but
persons with knowledge of trading decisions of another in which they
have an ownership interest are likely to take such decisions into
account in making their own trading decisions.
Second, the proposed amendment to part 151 would have conditioned
aggregation relief on a demonstration that the person seeking
disaggregation relief and the owned entity trade pursuant to separately
developed and independent trading systems. Further, a demonstration
that such person and the owned entity have, and enforce, written
procedures to preclude the one entity from having knowledge of, gaining
access to, or receiving data about, trades of the other, would also be
required. Such procedures would address document routing and other
procedures or security arrangements, including separate physical
locations, which would maintain the independence of their activities.
The Part 151 Aggregation Proposal noted that these conditions would
strengthen the independence between the two entities for the owned
entity exemption.
Third, the proposed amendment to part 151 would have conditioned
aggregation relief on a demonstration that the person does not share
employees that control the owned entity’s trading decisions, and the
employees of the owned entity do not share trading control with such
persons. The Part 151 Aggregation Proposal noted that, similar to the
restriction on information sharing, the sharing of employees with
knowledge of trading decisions presents a strong risk to the
independence of trading between entities. In the Part 151 Aggregation
Proposal, the Commission sought comment regarding whether the sharing
of employees such as attorneys, accountants, risk managers, compliance
and other mid- and back-office personnel compromises independence
because it would provide each entity with knowledge of the other’s
trading decisions.42
—————————————————————————
42 In the aggregation petition, the Working Groups asserted
that entities should be permitted to share “attorneys, accountants,
risk managers, compliance and other mid- and back-office
personnel.” Aggregation petition at Exhibit A.
—————————————————————————
Fourth, the proposed amendment to part 151 would have conditioned
aggregation relief on a demonstration that the person and the owned
entity do not have risk management systems that permit the sharing of
trades or trading strategies with the other. This condition, which is
similar to a condition proposed in the aggregation petition, addressed
concerns that risk management systems that permit the sharing of trades
or trading strategies with each other present a significant risk of
coordinated trading through the sharing of information. The Part 151
Aggregation Proposal did not include a condition that the risk
management systems of the two entities be separately developed, and the
Commission sought comment as to whether independence of trading between
the two entities can be maintained when their risk management systems
do not communicate trade information.
c. Initial Proposed Notice Filing Requirement
With regard to filing requirements for the exemption in the
proposed amendment to part 151, the Commission noted that market
participants would be required to file in accordance with regulation
151.7(h). As such, market participants would be required to file a
notice with the Commission with a description of how they adhere to the
criteria in the proposed amendment to part 151 and a certification that
the conditions are met. This certification, as well as any other
certification made under regulation 151.7(h), would be required to be
made by a senior officer of the market participant with knowledge as to
the contents of the notice.43 Further, regulation 151.7(h)(3)
requires market participants to promptly update a notice filing in the
event of a material change of the information contained in the notice
filing.44
—————————————————————————
43 See proposed rule 151.7(h)(1)(ii), 77 FR 31767, 31782.
44 In this regard, the Commission clarified that a material
change would include, among other events, if the person making the
original certification is no longer employed by the company. See
also CEA sections 6(c)(2) and 9(a)(3).
—————————————————————————
With regard to the type of material necessary to file a notice to
claim an exemption under the proposed amendment to part 151, the
Commission noted that each submission would have to be specific to the
facts of the particular entity. The person claiming the exemption would
be required to provide specific facts that demonstrate compliance with
each condition of relief. Such a demonstration would likely include an
organizational chart showing the ownership and control structure of the
involved entities, a description of the risk management system, a
description of the information-sharing systems (including bulletin
boards, and common email addresses of the entities identified), an
explanation of how and to whom the trade data and position information
is distributed (including the responsibilities of the individual
receiving such information), and the officers that receive reports of
the trade data and position information.45
—————————————————————————
45 The Commission noted that this list was not meant to be
exhaustive of the factors that would indicate an exemption is
warranted and should not be interpreted as being solely sufficient
to claim the exemption because each filing is fact specific. And, as
noted earlier, the Commission is able to demand additional
information regarding the exemption within its discretion.
—————————————————————————
[[Page 68953]]
d. Initial Proposed Treatment of Higher Tier Entities
In connection with its request for the Commission to include an
owned non-financial entity exemption, the aggregation petition also
requested that the Commission provide relief from the filing
requirements for claiming the exemption. Specifically, it argued that
if an entity files a notice and claims the owned non-financial entity
exemption, then “every higher-tier company (a company that holds an
interest in the company that submitted the notice) need not aggregate
the referenced contracts of the owned non-financial entities identified
in the notice.” 46 After consideration of this request, the
Commission proposed rules that would provide relief to such “higher-
tier entities” within the context of a corporate structure.47
—————————————————————————
46 Aggregation petition at 23.
47 For purposes of the discussion below, “higher-tier”
entities include entities with a 10 percent or greater ownership
interest in an owned entity.
—————————————————————————
The proposed amendments to part 151 would have provided that
higher-tier entities may rely upon a notice for exemption filed by the
owned entity, and such reliance would only go to the accounts or
positions specifically identified in the notice. For example, if
company A had a 30 percent interest in company B, and company B filed
an exemption notice for the accounts and positions of company C, then
company A could rely upon company B’s exemption notice for the accounts
and positions of company C. Should company A wish to disaggregate the
accounts or positions of company B, company A would have to file a
separate notice for an exemption.
The proposed amendments to part 151 would have also provided that a
higher-tier entity that wishes to rely upon an owned entity’s exemption
notice would be required to comply with conditions of the applicable
aggregation exemption other than the notice filing requirements.
Although higher-tier entities would not have to submit a separate
notice to rely upon the notice filed by an owned entity, the Commission
noted that it would be able, upon call, to request that a higher-tier
entity submit information to the Commission, or allow an on-site visit,
demonstrating compliance with the applicable conditions.
The Part 151 Aggregation Proposal stated that the proposed
amendments to part 151 should significantly reduce the filing
requirements for aggregation exemptions. Further, the Commission did
not anticipate that the reduction in filing would impact the
Commission’s ability to effectively surveil the proper application of
exemptions from aggregation. The first filing of an owned entity
exemption notice should provide the Commission with sufficient
information regarding the appropriateness of the exemption, while
repetitive filings of higher-tier entities would not be expected to
provide additional substantive information. However, the Commission
again noted that higher-tier entities would still be required to comply
with the conditions of the exemption specified in the owned entity’s
notice filing.
The Commission specifically requested comments as to the
appropriateness of the owned entity exemption as well as the conditions
applicable to the exemption, and whether the Commission should add
additional criteria and if so, what criteria and why. The Commission
also asked if it should require market participants to submit
additional information to claim the exemption, and if so, what
information and why. With regard to the owned entity exemption, the
Commission asked if it should alter the scope of the exemption, and if
so, how it should be altered and why. Further, the Commission asked
commenters to address the percentage ownership interest, if any, at
which a market participant should no longer be able to claim the
exemption in the proposed amendments to part 151, and whether there are
specific circumstances in which a percentage of ownership higher than
50 percent would be appropriate to claim the exemption notwithstanding
the concerns described above regarding coordinated trading, direct or
indirect influence, and significantly large and potentially unduly
large overall positions in a particular commodity. In addition, the
Commission invited comment on the owned non-financial entity exemption
set forth in appendix A of the aggregation petition as an alternative
to the proposed owned entity exemption.
2. Commenters’ Views
a. Comments on the Initial Proposed Ownership Threshold for
Disaggregation Relief
Some commenters supported the proposed rules requiring that, to
obtain relief from the aggregation requirement, a person must own 50
percent or less of an owned entity. One commenter said that unless the
standards for an independent account controller are met, any exemption
from aggregation for greater than 50 percent-owned entities would
constitute an unacceptable weakening of the position limits regime.48
This commenter also noted that CEA section 4a(a)(1) requires
aggregation of positions held by any persons “directly or indirectly”
controlled by a person, and “ownership is the paradigm example of
indirect control.” 49
—————————————————————————
48 CL-Better Markets.
49 CL-Better Markets.
—————————————————————————
Two commenters said that the proposed rules went too far in
allowing exemptions from aggregation. These commenters were concerned
that the exemptions in the Part 151 Aggregation Proposal could impede
prevention of excessive speculation on agricultural futures, which
requires the imposition of position limits based on consistent
aggregation of positions,50 and that allowing owners of more than 10
percent of another entity not to aggregate could “potentially spark
additional `herd-like’ behavior, thus causing another commodities
futures boom-bust cycle.” 51
—————————————————————————
50 CL-IATP.
51 International Association of Machinists and Aerospace
Workers on June 29, 2012 (“CL-IAMAW”).
—————————————————————————
The other commenters on the Part 151 Aggregation Proposal said that
the requirement of ownership of 50 percent or less of the owned entity
should not apply, and disaggregation relief should be available to any
person demonstrating that the owned entity’s trading is independent
according to criteria along the lines of proposed rule
151.7(b)(1)(i).52 Some of these commenters also said that, as an
alternative to providing relief for any person that could demonstrate
independent trading by the owned entity, disaggregation relief should
be available to the extent specifically provided by the Commission in
response to a specific request for relief,53 or if the person makes
an additional demonstration of why majority ownership of the owned
entity does not result in trading control or information sharing that
warrants
[[Page 68954]]
aggregation.54 One commenter representing private investment funds
suggested rules allowing disaggregation relief if a person could
demonstrate independent trading by the owned entity and one of three
alternative conditions were met: (i) The owner uses information about
the owned entity’s trading only for risk management, (ii) the owned
entity only enters into bona fide hedging transactions, or (iii) the
owned entity is not consolidated on the owner’s financial statements,
representatives of the owner on the owned entity’s board of directors
do not control the owned entity’s trading and the owned entity’s
trading qualifies as bona fide hedging.55
—————————————————————————
52 American Benefits Council on June 29, 2012 (“CL-ABC”),
CL-AGA, CL-AIMA, CL-API, Barclays Capital on June 29, 2012 (“CL-
Barclays”), Commodity Markets Council on June 29, 2012 (“CL-
CMC”), CL-COPE, CL-EEI, CL-FIA, Iberdrola Renewables, LLC and
Iberdrola Energy Services LLC, jointly on June 29, 2012 (“CL-
Iberdrola”), CL-ISDA/SIFMA, Managed Funds Association on June 28,
2012 (“CL-MFA”) and CL-WGCEF.
53 CL-AIMA, CL-API. Two commenters’ first position (not an
alternative position) was along these lines–that disaggregation
relief should be available to the extent provided by the Commission.
CL-Atmos, CL-MFA.
54 CL-ISDA/SIFMA, CL-WGCEF, CL-PEGCC. One of these commenters
said that, instead of requiring aggregation of positions, the
Commission should consider requiring that additional safeguards be
in place for majority-owned entities, such as requiring that both
the person and the owned entity to make certain annual
certifications. CL-WGCEF.
55 CL-PEGCC and Private Equity Growth Capital Council
supplemental letter on August 20, 2012 (“CL-PEGCC Supp.”).
—————————————————————————
The commenters opposed to the requirement of ownership of 50
percent or less of the owned entity provided various reasons for why
the requirement should not apply. Some of these commenters said that
although ownership of more than 50 percent of an entity is an indicator
of control, such ownership does not always equate to control,56
because ownership of an entity does not provide control unless the
owner has an ability to direct or influence management) 57 or because
treating ownership as tantamount to control is contrary to principles
of corporate separateness.58 Other commenters said that aggregation
is consistent with the underlying purposes of the position limits
regime only if a person has direct and actual control of the trading of
another person or has access to information about the other entity’s
trading that facilitates its own trading.59
—————————————————————————
56 CL-AGA, CL-MFA, CL-PEGCC, CL-WGCEF.
57 CL-API, CL-Atmos.
58 CL-ISDA/SIFMA, CL-PEGCC.
59 CL-CMC, CL-EEI.
—————————————————————————
Other commenters claimed that the requirement of ownership of 50
percent or less of the owned entity is inconsistent with the CEA or
past practices of the Commission. These commenters said that while CEA
section 4a(a)(1) refers to positions held by “controlled” persons, it
does not refer to positions held by owned persons,60 that the
Commission does not require aggregation of positions of owned commodity
pools, or of positions (even those held by the entity itself) if there
is an independent account controller,61 and that the “bright line”
standard at 50 percent ownership is arbitrary,62 inconsistent with
both a 1979 policy statement of the Commission that trading control is
a question of fact and with prior practice of DCMs to allow owners to
demonstrate lack of control of an owned entity’s trading,63 or
unnecessary in light of the Commission’s Part 151 Aggregation Proposal
of factors to determine whether a person controls the trading of an
owned entity.64
—————————————————————————
60 CL-ISDA/SIFMA, CL-PEGCC.
61 CL-PEGCC.
62 CL-AGA, CL-API, CL-COPE.
63 CL-API, CL-WGCEF.
64 CL-AIMA.
—————————————————————————
Another reason cited by commenters against the requirement of
ownership of 50 percent or less of the owned entity is that in certain
corporate structures, majority ownership may not provide for control of
the owned entity. Commenters said, for example, that limited partners
may not control the trading of a limited partnership, even though they
own a majority equity interest in the limited partnership,65 or a
joint venture may contain contractual provisions that prevent the
venture partners from controlling its trading,66 or a passive
majority investor in a commercial company may not control the company’s
trading.67 Commenters also said that it would be inappropriate to
treat two companies that operate in different regions or at different
levels of commerce (e.g., wholesale and retail) as trading under common
control simply because both companies are owned by a common holding
company.68
—————————————————————————
65 CL-CMC, CL-COPE, CL-WGCEF.
66 CL-API, CL-CMC.
67 U.S. Chamber of Commerce and the Real Estate Roundtable,
jointly on June 29, 2012 (“CL-Chamber”). Other commenters along
these lines added that to requiring passive investors to aggregate
the positions of majority-owned companies would inhibit legitimate
commercial and investment activity, CL-FIA, and that providing
relief from aggregation for passive investors would be similar to
the lack of aggregation for passive owners of commodity pools. CL-
PEGCC.
68 CL-AGA, CL-Iberdrola. Another commenter added that since
the independent account controller exemption would generally not be
available to holding companies owning operating companies, the
requirement of ownership of 50 percent or less of the owned entity
in order to disaggregate creates a regulatory imbalance between such
holding companies and the entities to which the independent account
controller exemption is available. CL-WGCEF.
—————————————————————————
Commenters also described other factors that they believe weigh
against the requirement of ownership of 50 percent or less of the owned
entity in order to disaggregate. One commenter said that requiring
persons to aggregate the positions of all majority-owned entities would
lead to more information sharing and coordinated trading between such
entities, which the Commission should seek to prevent, and it would
also likely lead to incorrect position reporting while disaggregation
would encourage more granular and more accurate reporting.69 Another
commenter was concerned that the Commission’s adoption of aggregation
rules would lead DCMs and SEFs to apply similar aggregation rules for
the position limits regimes that they enforce, thereby increasing the
importance of the aggregation rules to a wider variety of firms using
many different types of swaps.70 A commenter representing employee
benefit plans said that the Commission should not require aggregation
of the positions of a corporate entity that is the sponsor of an
employee benefit plan with the positions of the plan even if the
employees of the plan sponsor (or its subsidiaries) control the
investments of the plan, because such employees have a legal duty to
act solely in the interests of the plan.71
—————————————————————————
69 CL-CMC.
70 CL-Chamber.
71 CL-ABC. This commenter also asked for clarification whether
a person that owns an entity that controls the trading of an
employee benefit plan would be required to aggregate the positions
of such plan with such person’s positions. Id.
—————————————————————————
b. Comments on the Initial Proposed Criteria for Disaggregation Relief
There were a variety of comments on the criteria in the proposed
amendment to part 151 that must be met in order for a person to obtain
disaggregation relief with respect to an owned entity. One general
point raised by several commenters was that the limits on sharing
information between the person and the owned entity should not apply to
employees that do not direct or influence trading (such as attorneys or
risk management and compliance personnel), although the employees may
have knowledge of the trading of both the person and the owned
entity.72 A commenter representing employee benefit plan managers
said that restrictions on information sharing are, in general, a
problem for plan managers, which have a fiduciary duty to inquire as to
an owned entities’ activities, so the Commission should recognize that
acting as required by fiduciary duties
[[Page 68955]]
does not constitute a violation of the information sharing
restriction.73
—————————————————————————
72 CL-AGA, CL-API, CL-Atmos, CL-Cargill, CL-EEI. Commenters
said that shared knowledge among employees is not relevant if they
are not involved in trading and do not serve as conduit for sharing
trading information, CL-AGA, CL-AIMA, CL-Atmos, and that it is
important that risk management and compliance personnel have
continuous knowledge of trading. CL-EEI.
73 CL-ABC.
—————————————————————————
Summarized below are the comments on each of the four general
categories of criteria for disaggregation relief in the proposed rule.
No shared knowledge of trading decisions. Commenters said that this
proposed amendment to part 151 should be clarified to indicate that it
prohibits the sharing only of knowledge held by personnel with the
ability to direct or participate in trading decisions by either the
person or the owned entity that would allow them to trade in
anticipation or in concert, and that it allows post-trade information
sharing for risk management, accounting, compliance, or similar
purposes and information sharing among mid- and back-office personnel
that do not control trading.74 Another commenter said that this
proposed amendment to part 151 should be clarified to provide that
information sharing resulting when the person and the owned entity (or
two owned entities) are counterparties in an arm’s length transaction
should not be a violation of the rule.75
—————————————————————————
74 CL-AIMA, CL-EEI, CL-MFA, CL-WGCEF.
75 CL-COPE.
—————————————————————————
Trade pursuant to separately developed and independent trading
systems; have and enforce written procedures to preclude sharing of
trading information and other procedures to maintain independence,
including separate physical locations. Commenters said that this
requirement should not apply to commercial energy firms which use
similar trading systems,76 or where existing systems can be modified
to prevent coordinated trading,77 or to prevent the use of third
party “off-the-shelf” execution algorithms.78 Other commenters said
the requirement should apply only to systems that direct trading
decisions, and not trade capture, trade risk or trade facilitation
systems.79 One commenter said this provision of the proposed
amendment to part 151 should be deleted, because it is the use of the
system, not its development, which is relevant.80 Commenters also
said that this proposed amendment to part 151 should apply only with
respect to personnel directing or participating in trading
decisions,81 and it should permit the sharing of virtual
documentation, so long as such document can be accessed only by persons
that do not manage or control trading.82 Commenters said that the
requirement of separate physical locations should not require that
personnel be located in separate buildings, so long as the relevant
employees of the person and the owned entity do not have access to each
other’s physical premises.83 One commenter said that the requirement
to have specified policies and procedures should not apply to the owned
entity, because it does not control its owner.84
—————————————————————————
76 CL-WGCEF.
77 CL-API.
78 CL-AIMA. The commenter said that, in this case, the rule
should require only that the systems be independently operated.
79 CL-EEI, CL-FIA.
80 CL-COPE.
81 CL-WGCEF.
82 CL-FIA.
83 CL-API, CL-EEI, CL-WGCEF.
84 CL-AIMA.
—————————————————————————
No shared employees that control trading decisions. Commenters on
this proposed amendment to part 151 said it should not prohibit sharing
of board or advisory committee members who do not influence trading
decisions, sharing of research personnel, or sharing for training,
operational or compliance purposes, so long as trading of the person
and the owned entity remains independent.85
—————————————————————————
85 CL-API, CL-Cargill.
—————————————————————————
No risk management systems that permit shared trading. Commenters
said that this proposed amendment to part 151 should permit continuous
sharing of position information so long as such information is used
only for risk management and surveillance purposes and is not shared
with trading personnel.86
—————————————————————————
86 CL-FIA, CL-WGCEF.
—————————————————————————
c. Comments on the Initial Proposed Notice Filing Requirement
Commenters also addressed the burdens that would result from the
requirement that a filing be made to support disaggregation relief for
persons owning more than 10 percent of an owned entity. Two commenters
questioned the statement in the Part 151 Aggregation Proposal that
allowing persons that own more than 50 percent of an owned entity to
file requests for disaggregation relief would be burdensome, saying
that such filings would be required only if the person were seeking
disaggregation relief, and that such filings could be tailored so as to
provide the necessary information in an efficient way.87 One of these
commenters also said that requiring private investment funds to
aggregate positions held by majority-owned entities would be burdensome
because it would lead to persons owning between 10 and 50 percent of
the fund to make filings to support disaggregation relief.88 Another
commenter said that a single aggregate notice filing (with annual
updates for material changes) should be permitted, where the person
would list all owned entities for which it claims an exemption from the
aggregation requirement and make the required certifications, that the
filing should be effective retroactively to the beginning of the prior
filing period, and that affiliates at same level of ownership should be
able to rely on each other’s notice filings (as do higher tier owners)
if the filings contain the appropriate demonstrations of compliance by
the affiliates.89 Last, one commenter said that no filing should be
required to support disaggregation relief or, in the alternative, a
filing should be required only where the absence of control of the
owned entity is not obvious and the filing should not be required until
90 days after the threshold level of ownership of the owned entity is
obtained.90
—————————————————————————
87 CL-Atmos, CL-PEGCC.
88 CL-PEGCC.
89 CL-FIA.
90 CL-Barclays. Another commenter said that requiring a person
owning 50 percent or less of an owned entity to make a filing in
support of disaggregation relief is overly burdensome, and such
filings should be required only if the person owns more than 50
percent of the owned entity. CL-ISDA/SIFMA.
—————————————————————————
d. Comments on Other Issues Relating to Disaggregation Relief in the
Part 151 Aggregation Proposal
Commenters addressed several miscellaneous issues arising from the
proposed amendments to part 151 requiring ownership of 50 percent or
less of the owned entity in order to disaggregate. In response to the
Commission’s request for comment on whether applications for exemption
from the aggregation requirements should be handled on a case-by-case
basis, several commenters said that doing so would not be efficient and
the process in the proposed rule is preferable.91 One commenter said
that the final regulation on aggregation adopted by the Commission
should also apply for exemptions from the aggregation requirements of
DCMs and SEFs.92 Another commenter requested a transition period of
at least six months after the date that compliance with the position
limits regime is required before compliance with the aggregation
requirements would be required.93 Several commenters said that when
aggregation of positions are required, the positions should be
attributed from the owned entity to the owner on a basis that is pro
rata to the owner’s interest in
[[Page 68956]]
the owned entity, to avoid double counting and an artificial limit on
trading that may affect liquidity.94 Two commenters addressed
information that the Commission may request under the proposed
amendments to part 151, saying they should be amended to specifically
limit such information to that which is relevant to establishing
whether a person meets the criteria for disaggregation and will be kept
confidential.95
—————————————————————————
91 CL-AGA, CL-EEI, CL-FIA.
92 CL-MFA.
93 CL-FIA.
94 CL-ABC, CL-Barclays, CL-FIA.
95 CL-API, CL-WGCEF.
—————————————————————————
One commenter said that the Commission should not adopt a rule
regarding aggregation of positions of owned entities and that the
Commission should instead rely on information provided on reports on
Commission Form 40, which includes information regarding whether the
respondent controls, or is controlled by, any other entity.96 Another
commenter said that the position limits regime is long overdue and
there should be a general requirement of aggregation, with no
exceptions or waivers.97
—————————————————————————
96 CL-Barclays.
97 CL-Ja Sto.
—————————————————————————
3. Proposed Rule
The Commission continues to believe, as stated in the Part 151
Aggregation Proposal, that ownership of an entity is an appropriate
criterion for aggregation of that entity’s positions. Section 4a(a)(1)
of the CEA provides for the general aggregation standard with regard to
position limits, and specifically provides:
In determining whether any person has exceeded such limits, the
positions held and trading done by any persons directly or
indirectly controlled by such person shall be included with the
positions held and trading done by such person; and further, such
limits upon positions and trading shall apply to positions held by,
and trading done by, two or more persons acting pursuant to an
expressed or implied agreement or understanding, the same as if the
positions were held by, or the trading were done by, a single
person.98
—————————————————————————
98 7 U.S.C. 6a(a)(1).
The legislative history to the enactment of this provision in 1968
states that Congress added this language to expressly incorporate prior
administrative determinations of the Commodity Exchange Authority
(predecessor to the Commission) into the statute.99 These prior
administrative determinations, as well as regulations of the Commodity
Exchange Authority, announced standards that included control of
trading and financial interests in positions. As early as 1957, the
Commission’s predecessor issued determinations requiring that accounts
in which a person has a financial interest be included in
aggregation.100 In addition, the definition of “proprietary
account” in regulation 1.3(y), which has been in effect for decades,
includes any account in which there is 10 percent ownership.101
—————————————————————————
99 See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968) regarding
the CEA Amendments of 1968, Public Law 90-258, 82 Stat. 26 (1968).
This Senate Report provides:
Certain longstanding administrative interpretations would be
incorporated in the act. As an example, the present act authorizes
the Commodity Exchange Commission to fix limits on the amount of
speculative “trading” that may be done. The Commission has
construed this to mean that it has the authority to set limits on
the amount of buying or selling that may be done and on the size of
positions that may be held. All of the Commission’s speculative
limit orders, dating back to 1938, have been based upon this
interpretation. The bill would clarify the act in this regard. . . .
Section 2 of the bill amends section 4a(1) of the act to show
clearly the authority to impose limits on “positions which may be
held.” It further provides that trading done and positions held by
a person controlled by another shall be considered as done or held
by such other; and that trading done or positions held by two or
more persons acting pursuant to an express or implied understanding
shall be treated as if done or held by a single person.
100 See Administrative Determination (“A.D.”) 163 (Aug. 7,
1957) (“[I]n the application of speculative limits, accounts in
which the firm has a financial interest must be combined with any
trading of the firm itself or any other accounts in which it in fact
exercises control.”). In addition, the Commission’s predecessor,
and later the Commission, provided the aggregation standards for
purposes of position limits in the large trader reporting rules. See
Supersedure of Certain Regulations, 26 FR 2968, Apr. 7, 1961. In
1961, then regulation 18.01 read:
(a) Multiple Accounts. If any trader holds or has a financial
interest in or controls more than one account, whether carried with
the same or with different futures commission merchants or foreign
brokers, all such accounts shall be considered as a single account
for the purpose of determining whether such trader has a reportable
position and for the purpose of reporting. 17 CFR 18.01 (1961).
In the 1979 Aggregation Policy, the Commission discussed
regulation 18.01, stating:
Financial Interest in Accounts. Consistent with the underlying
rationale of aggregation, existing reporting Rule 18.10(a) a (sic)
basically provides that if a trader holds or has a financial
interest in more than one account, all accounts are considered as a
single account for reporting purposes. Several inquiries have been
received regarding whether a nomial (sic) financial interest in an
account requires the trader to aggregate. Traditionally, the
Commission’s predecessor and its staff have expressed the view that
except for the financial interest of a limited partner or
shareholder (other than the commodity pool operator) in a commodity
pool, a financial interest of 10 percent or more requires
aggregation. The Commission has determined to codify this
interpretation at this time and has amended Rule 18.01 to provide in
part that, “For purposes of this Part, except for the interest of a
limited partner or shareholder (other than the commodity pool
operator) in a commodity pool, the term `financial interest’ shall
mean an interest of 10 percent or more in ownership or equity of an
account.”
Thus, a financial interest at or above this level will
constitute the trader as an account owner for aggregation purposes.
1979 Aggregation Policy, 44 FR at 33843.
The provisions concerning aggregation for position limits
generally remained part of the Commission’s large trader reporting
regime until 1999 when the Commission incorporated the aggregation
provisions into rule 150.4 with the existing position limit
provisions in part 150. See 64 FR 24038, May 5, 1999. The
Commission’s part 151 rulemaking also incorporated the aggregation
provisions in rule 151.7 along with the remaining position limit
provisions in part 151. See 76 FR 71626, Nov. 18, 2011.
101 17 CFR 1.3(y). This provision has been in Regulation
1.3(y)(1)(iv) since at least 1976, which the Commission adopted from
regulations of its predecessor, with “for the most part,
procedural, housekeeping-type modifications, conforming the
regulations to the recently enacted CFTCA.” See 41 FR 3192, 3195
(January 21, 1976).
—————————————————————————
In light of the language in section 4a, its legislative history,
subsequent regulatory developments, and the Commission’s historical
practices in this regard, the Commission continues to believe that
section 4a requires aggregation on the basis of either ownership or
control of an entity. The Commission also believes that aggregation of
positions across accounts based upon ownership is a necessary part of
the Commission’s position limit regime.102
—————————————————————————
102 See Revision of Federal Speculative Position Limits and
Associated Rules, 64 FR 24038, 24044, May 5, 1999 (“[T]he
Commission . . . interprets the `held or controlled’ criteria as
applying separately to ownership of positions or to control of
trading decisions.”). See also, Exemptions from Speculative
Position Limits for Positions which have a Common Owner but which
are Independently Controlled and for Certain Spread Positions, 53 FR
13290, 13292, Apr. 22, 1988. In response to two separate petitions,
the Commission proposed the independent account controller exemption
from speculative position limits, but declined to remove the
ownership standard from its aggregation policy.
—————————————————————————
Also, an ownership standard establishes a bright-line test that
provides certainty to market participants and the Commission.103
Without aggregation on the basis of ownership, the Commission would
have to apply a control test in all cases, which would pose significant
administrative challenges to individually assess control across all
market participants. Further, the Commission considers that if the
statute required aggregation based only on control, market participants
may be able to use an ownership interest to directly or indirectly
influence the account or
[[Page 68957]]
position and thereby circumvent the aggregation requirement.
—————————————————————————
103 In this regard, the Commission is mindful of the point
raised by some commenters that the aggregation rules adopted by the
Commission would be a precedent for aggregation rules enforced by
DCMs and SEFs, leading to the application of the aggregation rules
to a wide variety of firms. See CL-Chamber. The Commission believes
that for this reason, it is important that the aggregation rules set
out, to the extent feasible, “bright line” rules that are capable
of easy application by a wide variety of market participants while
not being susceptible to circumvention.
—————————————————————————
The Commission does not believe, as suggested by some commenters,
that an aggregation requirement would lead to more information sharing
and significantly increased levels of coordinated speculative trading
by the entities subject to aggregation. Among other things, the
position limits would affect the trading of only the relatively small
number of entities that hold positions in excess of the limits.104
—————————————————————————
104 See, e.g., Position Limits for Futures and Swaps, 76 FR
71626, 71668 (Nov. 18, 2011) (describing the number of traders
estimated to be subject to position limits).
—————————————————————————
For example, the following table shows the relatively small number
of persons that held positions over the applicable limit during the
period of January 17 to September 12, 2012. For comparison, the table
also shows the number of persons with positions at a level in excess of
60 percent or 80 percent of the applicable limit. It is important to
note that this table was prepared by applying the current aggregation
requirements in regulation 150.4 without applying any of the current
exemptions to aggregation that may be available. Thus, this table
reflects the maximum number of persons that may hold positions of the
level shown, assuming that no exemptions to aggregation apply.
—————————————————————————
105 In this table, “*” means fewer than 4 unique owners
exceeded the level, and “–” means no unique owner exceeded the
level.
Number of Unique Persons Over 60, 80, and 100 Percent of Levels of Rule 150.2 Federal Speculative Position Limits January 17, 2012 to September 30, 2012
105
——————————————————————————————————————————————————–
Spot month Single month All months
———————————————————————————————–
Percent of Total number Total number Total number
Contract/DCM limit level of unique Number of of unique Number of of unique Number of
persons over person-days persons over person-days persons over person-days
level level level
——————————————————————————————————————————————————–
Chicago Board of Trade
——————————————————————————————————————————————————–
Corn and Mini-Corn…………………. 60 97 517 22 1347 26 2289
80 72 372 11 643 13 1069
100 26 198 5 315 9 822
Oats……………………………… 60 * * 6 436 8 527
80 * * * * 5 283
100 * * * * 4 217
Soybeans and Mini-Soybeans………….. 60 59 316 33 2751 36 3044
80 39 223 20 1580 25 1962
100 19 102 11 979 16 1244
Wheat and Mini-Wheat……………….. 60 19 95 33 2877 32 3181
80 12 53 18 1660 23 2342
100 6 32 13 1050 15 1446
Soybean Oil……………………….. 60 54 211 36 3291 47 3568
80 34 126 25 2161 32 2589
100 12 47 14 1281 17 1551
Soybean Meal………………………. 60 26 158 33 2546 37 2690
80 18 99 18 1480 21 1645
100 8 45 7 895 12 930
——————————————————————————————————————————————————–
Kansas City Board of Trade
——————————————————————————————————————————————————–
Hard Winter Wheat………………….. 60 10 38 6 334 7 450
80 5 28 * * * *
100 4 20 * * * *
——————————————————————————————————————————————————–
Minneapolis Grain Exchange
——————————————————————————————————————————————————–
Hard Red Spring Wheat………………. 60 5 12 — — * *
80 5 12 — — — —
100 * * — — — —
——————————————————————————————————————————————————–
ICE Futures U.S.
——————————————————————————————————————————————————–
Cotton No. 2………………………. 60 5 31 35 3386 39 3417
80 5 30 21 2133 25 2554
100 5 25 14 1363 17 1701
——————————————————————————————————————————————————–
Also, some of the entities subject to aggregation, which is based
on common ownership or control, might already share information
regarding their trading activities. Thus, the Commission continues to
believe, as it explained in the Part 151 Aggregation Proposal, that the
regulations proposed here will not result in a significantly increased
level of information sharing that would increase coordinated
speculative trading. The Commission notes that these proposed
regulations will provide further aggregation exemptions, lessening the
need to share information regarding speculative trading to ensure
compliance with position limits.
As a final introductory point, the Commission has considered that
relief from any rule requiring the aggregation of positions held by
separate entities is
[[Page 68958]]
only necessary where the entities would be below the relevant limits on
an individual basis, but above a limit when aggregated. Thus, if a
group of affiliated entities can take steps to maintain an aggregate
position that does not exceed any limit, then the group will not have
to seek disaggregation relief.
In other words, seeking disaggregation relief is one option for
those groups of affiliated entities that may exceed a limit on an
aggregate basis but will remain below the relevant limits on an
individual basis. Other avenues are also available to corporate groups
that seek to remain in compliance with the position limit regime. For
example, the affiliated entities may put into place procedures to avoid
exceeding the limits on an aggregate basis.106 One potential approach
that could be available to a holding company with multiple subsidiaries
would be to assign each subsidiary an internal limit based on a
percentage of the level of the position limit. The holding company
would allocate no more in aggregate internal limits than the level of
the position limit.107 Further, a breach of an internal limit would
provide the holding company with notice that it should consider filing
for bona fide hedging exemptions or taking other compliance steps, as
applicable.
—————————————————————————
106 The procedures adopted by the affiliates may obviate more
complex steps such as the implementation of real-time monitoring
software to consolidate all derivative activities of the affiliates,
especially if the group currently does not have an aggregate
position approaching the size of a position limit and has
historically not changed position sizes day-over-day by a
significant percentage of the position limit.
107 An even more cautious approach would be for the holding
company to limit the overall allocation to the subsidiaries to less
than 100% of the position limit. For example, a holding company with
three subsidiaries may assign each subsidiary an internal limit
equal to 30% of the level of the federal limit. Thus, the holding
company has allocated permission to subsidiaries to hold, in the
aggregate, positions equal to up to 90% of the level of the relevant
position limit. Each subsidiary would simply report at close of
business its derivative position to the holding company. The 10%
cushion provides the holding company with the ability to remain in
compliance with the limit, even if all subsidiaries slightly exceed
the internal limits on the same side of the market at the same time.
—————————————————————————
a. Disaggregation Relief for Ownership or Equity Interests of 50
Percent or Less
The Commission is proposing to adopt rule 150.4(b)(2), which is
largely similar to proposed rule 151.7(b)(1). Proposed rule 150.4(b)(2)
would continue the Commission’s longstanding rule that persons with
either an ownership or an equity interest in an account or position of
less than 10 percent need not aggregate such positions solely on the
basis of the ownership criteria, and persons with a 10 percent or
greater ownership interest would still generally be required to
aggregate the account or positions.108 However, rule 150.4(b)(2)
would establish a notice filing procedure, effective upon submission,
to permit a person with either an ownership or an equity interest in an
owned entity of 50 percent or less to disaggregate the positions of an
owned entity in specified circumstances, even if such person has a 10
percent or greater interest in the owned entity.109 The notice filing
would have to demonstrate compliance with certain conditions set forth
in proposed rule 150.4(b)(2). As discussed in the Part 151 Aggregation
Proposal, and similar to other exemptions from aggregation, the notice
filing would be effective upon submission to the Commission, but the
Commission would be able to subsequently call for additional
information, and to amend, terminate or otherwise modify the person’s
aggregation exemption for failure to comply with the provisions of rule
150.4(b)(2). Further, the person would be obligated to amend the notice
filing in the event of a material change to the circumstances described
in the filing.
—————————————————————————
108 For purposes of aggregation, the Commission believes that
contingent ownership rights, such as an equity call option, would
not constitute an ownership or equity interest.
109 Under the approach proposed here, and in a manner similar
to current regulation, if a person qualifies for disaggregation
relief, the person would nonetheless have to aggregate those same
accounts or positions covered by the relief if they are held in
accounts with substantially identical trading strategies. See
proposed rule 150.4(a)(2). The exemptions in proposed rule 150.4 are
set forth as alternatives, so that, for example, the applicability
of the exemption in paragraph (b)(2) would not affect the
applicability of a separate exemption from aggregation (e.g., the
independent account controller exemption in paragraph (b)(5)).
—————————————————————————
The Commission preliminarily believes that a 50 percent limit on
the ownership interest in another entity is a reasonable, “bright
line” standard for determining when aggregation of positions is
required, even where the ownership interest is passive. As explained in
the Part 151 Aggregation Proposal, majority ownership (i.e., over 50
percent) is indicative of control, and this standard addresses the
Commission’s concerns about circumvention of position limits by
coordinated trading or direct or indirect influence between entities.
To the extent that a majority owner would have the ability and
incentive to direct, control or influence the management of the owned
entity, the 50 percent limit is a reasonable approach to the
aggregation of owned accounts pursuant to Section 4a(a)(1) of the CEA.
Aggregation based upon an ownership or equity interest of greater than
50 percent is appropriate to address the heightened risk of direct or
indirect influence over the owned entity.110
—————————————————————————
110 The Commission notes that, as stated in the Part 151
Aggregation Proposal, the requirement in proposed rule 150.4(b)(2)
of aggregation based on ownership depends on a person’s ownership
interest in another entity, regardless of the person’s voting
control of that entity. However, as discussed further below, the
Commission believes that relief from the aggregation requirement may
be appropriate in some circumstances, where the owned entity is not
consolidated on the owner’s financial statements. Since the extent
of the owner’s voting interest in the owned entity may be a factor
in determining whether financial consolidation is required, the
voting interest may indirectly be a factor in determining if
aggregation is required.
—————————————————————————
Moreover, greater than 50 percent ownership is a standard used by
other government agencies and reflects a general understanding that
ownership at this level poses substantial potential for direct or
indirect control over an owned entity. For example, the U.S. Federal
Trade Commission and U.S. Department of Justice use a 50 percent
ownership threshold test to determine “control” for the purpose of
defining pre-merger and acquisition filing requirements under the Hart-
Scott-Rodino Antitrust Improvements Act of 1974.111
—————————————————————————
111 15 U.S.C. 18(a); see also 16 CFR 801.1(b) (defining
“control” for purpose of implementing regulations to include
“[h]olding 50 percent or more of the outstanding voting securities
of an issuer or, in the case of any unincorporated entity, having
the right to 50 percent or more of the profits of the entity, or
having the right in the event of dissolution to 50 percent or more
of the assets of the entity”); Premerger Notification; Reporting
and Waiting Period Requirements, 43 FR 33450, 33457 (July 31, 1978)
(“ `Control’ was defined at the level of 50 percent stock ownership
for two reasons. First, it supplied an objective, easily
administrable criterion. Second, except for cases in which the
holding is exactly 50 percent, majority ownership will always enable
the holder to direct the day-to-day activities of the controlled
entity, even though for many large corporations, de facto control
may arise from holdings well below 50 percent”).
—————————————————————————
The Commission notes that a requirement of ownership of 50 percent
or less of the owned entity in order to obtain disaggregation relief by
making a notice filing would not affect a person’s ability to obtain
other exemptions. For example, exemptions from position limits for bona
fide hedging positions or from aggregation for independent account
controllers, if applicable, would still be utilized to the extent an
owned entity is entering into positions for bona fide hedging or on
behalf of customers, as provided in those exemptions.
Regarding those commenters who said that if an owned entity’s
positions are aggregated with the owner’s position, the aggregation
should be pro rata to the ownership interest, the Commission believes
that a pro rata approach could be administratively burdensome for both
owners and the Commission. For
[[Page 68959]]
example, the level of ownership interest in a particular owned entity
may change over time for a number of reasons, including stock
repurchases, stock rights offerings, or mergers and acquisitions, any
of which may dilute or concentrate an ownership interest. Thus, it may
be burdensome to determine and monitor the appropriate pro rata
allocation on a daily basis. Moreover, the Commission has historically
interpreted the statute to require aggregation of all the relevant
positions of owned entities, absent an exemption. This is consistent
with the view that a holder of a significant ownership interest in
another entity may have the ability to influence all the trading
decisions of the entity in which such ownership interest is held.
The Commission invites commenters to address whether the Commission
should adopt an approach that would require aggregation of only a pro-
rata allocation of owned-entity positions to equity owners based on the
percentage of ownership interest. How could aggregation in a manner pro
rata to the ownership interest be effected in practice? What procedures
could be used to implement a pro rata method, and what would those
procedures entail? If procedures to implement a pro rata method are
suggested, please address the burden those procedures could place on
the owners and on the Commission.
The Commission also solicits comment on whether the Commission
should permit a person to file a notice that would inform the
Commission of that person’s ownership interest in an owned entity, and
permit that person to aggregate only a pro rata allocation of the
owned-entity’s positions based on that person’s less than 100 percent
ownership. In light of the potential administrative burdens associated
with the adoption of an aggregation methodology based on allocation pro
rata to ownership interest, should the Commission provide for
aggregation of an owned-entity’s positions to the owner based on
ownership tiers? Commenters may address, for example, the establishment
of two ownership tiers, one for an ownership interest of 10 percent to
25 percent, with an attribution of 25 percent of the owned-entity’s
positions (rather than 100 percent of the affiliate’s position) to the
owner, and another tier for an ownership interest of greater than 25
percent to 50 percent, with an attribution of 50 percent of the owned-
entity’s positions (rather than 100 percent of the affiliate’s
position) to the owner. Would a tiered approach such as this alleviate
concerns about aggregation in general? What are the potential burdens
of applying this approach? If this approach is implemented, should
owners be required to file a notice with the Commission when the
relevant ownership interest changes from one tier to another?
Regarding those commenters who said that there should be a
transition period for application of the requirement of ownership of 50
percent or less of the owned entity in order to obtain disaggregation
relief, the Commission notes that this proposal would apply to existing
position limits currently in effect, and as noted above, would provide
further aggregation exemptions.
The Commission also considered comments that aggregation of
positions is unnecessary because information about ownership and
control is available to the Commission through reports on Commission
Form 40. However, the Commission is not persuaded that these reports
are a sufficient substitute for the position limits regime. While these
reports provide some information necessary for surveillance of
positions, some owned entities may not file these reports. Also, the
obligation to provide updates to the Commission if there are material
changes to the relevant information, which is included in the proposed
revision of rule 150.4, may not necessarily apply to information
provided in the reports on Form 40. On a more fundamental level, the
Commission believes that compliance with the position limit rules,
including aggregation of the positions of owned entities, is primarily
the responsibility of the owned entities and their owners. Even if the
information on Form 40 were sufficient, it would be impractical and
inefficient for the Commission to use that information to monitor
compliance with the position limit rules, as compared to the ability of
the entities themselves to maintain compliance with the position
limits.
Similarly, the Commission is not persuaded by the commenter who
asserted that aggregation of positions would, in general, lead to
inaccurate reporting of positions. Rather, the Commission believes that
the proposed rule would facilitate accurate reporting by providing a
“bright line” rule for determining when aggregation is required.112
The Commission emphasizes the responsibility of those who are subject
to the aggregation and position reporting requirements to ensure that
the information required by the Commission’s regulations is provided
accurately.
—————————————————————————
112 See note 103 and accompanying text, supra.
—————————————————————————
b. Disaggregation Relief for Ownership or Equity Interests of Greater
Than 50 Percent
The Commission continues to believe, as stated in the Part 151
Aggregation Proposal, that an equity or ownership interest above 50
percent constitutes a majority ownership or equity interest of the
owned entity and is so significant as to justify aggregation under the
ownership prong of Section 4a(a)(1) of the CEA. A person with a greater
than 50 percent ownership interest in multiple accounts would have the
ability to hold and control a significant and potentially unduly large
overall position in a particular commodity, which position limits are
intended to prevent. Also, as noted above, in general this “bright
line” approach would provide administrative certainty.
While the Commission continues to believe that relief from the
aggregation requirement should not be available merely upon a notice
filing by a person who has a greater than 50 percent ownership or
equity interest in the owned entity, the Commission has considered the
points raised by commenters in this regard. In view of the comments,
the Commission understands that in some limited situations
disaggregation relief may be appropriate even for majority owners if
the owned entity is not required to be, and is not, consolidated on the
financial statement of the person, if the person can demonstrate that
the person does not control the trading of the owned entity, based on
the criteria in proposed rule 150.4(b)(2)(i), and if both the person
and the owned entity have procedures in place that are reasonably
effective to prevent coordinated trading. The person would have to
demonstrate that it does not control the owned entity’s trading even
though the person is the majority owner of the owned entity.
To provide such limited relief in order to address issues raised by
commenters would represent a break by the Commission from past
practice. The Commission is authorized to provide such relief by the
plenary authority granted to the Commission in section 4a(a)(7) of the
CEA to provide relief from the requirements of the position limits
regime.
Consequently, the proposed rules includes a provision (proposed
rule 150.4(b)(3)) that would permit a person with a greater than 50
percent ownership of an owned entity to apply to the Commission for
relief from aggregation on a case-by-case basis. The
[[Page 68960]]
person would be required to demonstrate to the Commission that:
i. the owned entity is not required to be, and is not, consolidated
on the financial statement of the person,
ii. the person does not control the trading of the owned entity
(based on criteria in rule 150.4(b)(2)(i)), with the person showing
that it and the owned entity have procedures in place that are
reasonably effective to prevent coordinated trading in spite of
majority ownership,113
—————————————————————————
113 The Commission points out that since this criterion
requires a person to certify that the person does not control
trading of its owned entity, the criterion could not be met by a
natural person or any entity, such as a partnership, where it is not
possible to separate knowledge and control of the person from that
of the owned entity.
—————————————————————————
iii. each representative of the person (if any) on the owned
entity’s board of directors attests that he or she does not control
trading of the owned entity, and
iv. the person certifies that either (a) all of the owned entity’s
positions qualify as bona fide hedging transactions or (b) the owned
entity’s positions that do not so qualify do not exceed 20 percent of
any position limit currently in effect, and the person agrees in either
case that:
[ssquf] if this certification becomes untrue for the owned entity,
the person will aggregate the owned entity for three complete calendar
months and if all of the owned entity’s positions qualify as bona fide
hedging transactions during that time the person would have the
opportunity to make the certification again and stop aggregating,
[ssquf] upon any call by the Commission, the owned entity(ies) will
make a filing responsive to the call, reflecting the owned entity’s
positions and transactions only, at any time (such as when the
Commission believes the owned entities in the aggregate may exceed a
visibility level), and
[ssquf] the person will provide additional information to the
Commission if any owned entity engages in coordinated activity, short
of common control (understanding that if there were common control, the
positions of the owned entity(ies) would be aggregated).
The Commission wishes to clarify that this relief would not be
automatic, but rather would be available only if the Commission finds,
in its discretion, that the four conditions above are met. Thus,
persons applying for this relief should not assume that relief would be
granted. The proposed rule would not impose any time limits on the
Commission’s process for making the determination of whether relief is
appropriately granted, and relief would be available only if and when
the Commission acts on a particular request for relief.
The first requirement would be that the owned entity is not, and is
not required to be, consolidated on the financial statements of the
person. The Commission is aware that, for most entities, ownership of
more than 50 percent of another entity’s voting shares is the point at
which consolidation of the owned entity on the owner’s financial
statements is required under U.S. Generally Accepted Accounting
Principles (“GAAP”).114 Consequently, if a person holds an equity
or ownership interest above 50 percent in another entity, but does not
hold a greater than 50 percent voting interest in that entity, it may
be possible that the owned entity would not be required to be
consolidated on the person’s financial statements and the person would,
therefore, be able to apply to the Commission for relief from the
aggregation requirement. Similarly, in some cases, limited partners
holding a greater than 50 percent equity or ownership interest in a
limited partnership are not required to consolidate the limited
partnership because it is controlled by the general partner.115 Also,
the Commission realizes that there are exceptions to the consolidation
requirement for certain types of entities. For example, financial
consolidation may also not be required for entities that are
“investment companies” under GAAP, and certain broker-dealers may not
be required to consolidate certain owned entities over which the
broker-dealer is likely to have only temporary control. The Commission
reiterates that lack of financial consolidation would be only one of
the factors in determining whether aggregation relief would be granted,
and even if the owned entity is not consolidated and other requirements
for relief are satisfied, the Commission could nevertheless, in its
discretion, determine that relief is not appropriate.
—————————————————————————
114 See Financial Accounting Standards Board Accounting
Standards Codification Topic 810, at paragraphs 810-10-15-8 and 10,
available at https://asc.fasb.org/. See also Accounting Research
Bulletin 51 at paragraph 3 and Statement of Financial Accounting
Standard No. 94 at paragraph 2.
115 Thus, proposed rule 150.4(b)(3) would address those
commenters who said that aggregation should not be required by
limited partners who own a majority equity interest in a limited
partnership but do not control its trading. Where a limited partner
does not consolidate the limited partnership on its financial
statements, and the other conditions of the proposed rule are met,
the limited partner could apply to the Commission for relief from
the aggregation requirement.
—————————————————————————
The Commission preliminarily believes, based in part on points
raised by commenters, that the presence of certain additional factors
may, in particular circumstances, be favorable to granting relief from
the aggregation requirement (although no such factor would be
dispositive and the Commission could deny granting relief even in the
presence of any or all such factors). These factors could include
certain points raised by commenters, such as the owned entity being a
newly acquired standalone business or a joint venture subject to
special restrictions on control, or two different owned entities
conducting operations at different levels of commerce (such as retail
and wholesale).116 Under the proposed approach, the Commission would
interpret factors such as these to be favorable to granting relief from
the aggregation requirement.
—————————————————————————
116 See generally CL-AGA, CL-API, CL-Chamber, CL-CMC, CL-
Iberdrola.
—————————————————————————
If a person with greater than 50 percent ownership of an owned
entity could not meet the conditions in proposed rule 150.4(b)(3), the
person could apply to the Commission for relief from aggregation under
CEA section 4a(a)(7).117 Persons wishing to seek such relief should
apply to the Commission stating the particular facts and circumstances
that justify the relief. For example, if the owned entity is
consolidated on the financial statement of the person, the person could
describe the facts and circumstances which the person believes indicate
that the person should not be considered to own or control the owned
entity’s positions, notwithstanding that financial consolidation may be
associated with ownership and control. The Commission notes that CEA
section 4a(a)(7) does not impose any time limits on the Commission’s
process for determining whether relief under that section is
appropriate, nor does it prescribe or limit the factors that the
Commission may consider to be relevant in determining whether to grant
relief. The Commission solicits comment as to whether relief from
aggregation under CEA section 4a(a)(7) should be available to persons
with greater than 50 percent ownership of owned entities who cannot
meet the conditions in proposed rule 150.4(b)(3), and as to the facts
and circumstances that the Commission should take into account in
considering such relief.
—————————————————————————
117 Section 4a(a)(7) of the CEA provides authority to the
Commission to grant relief from the position limits regime.
—————————————————————————
The Commission has considered the comment that a corporate entity
that is the sponsor of an employee benefit plan should not be required
to aggregate the positions of the plan with the sponsor’s
[[Page 68961]]
proprietary positions.118 The Commission notes that the sponsor of an
employee benefit plan is an “eligible entity” as defined in
regulation 150.1(d),119 and the Commission preliminarily believes it
is appropriate to provide relief in this regard that is similar to the
provisions that apply to positions controlled by an IAC. In particular,
the Commission proposes to treat the manager of the employee benefit
plan as an IAC and the plan’s positions as client positions. To effect
this treatment, the Commission is proposing amended rule 150.1(e)(5)
and proposed rule 150.4(b)(5) that would allow managers of employee
benefit plans (i.e., persons that manage a commodity pool, the operator
of which is excluded from registration as a commodity pool operator
under rule 4.5(a)(4)) to be treated as an IAC, on the condition that an
IAC notice filing is made as required under rule 150.4(c). The
Commission emphasizes that this proposed relief would be limited to
employee benefit plans.
—————————————————————————
118 CL-ABC.
119 The definition of “eligible entity” in regulation
150.1(d) includes the operator of a trading vehicle which is
excluded from the definition of the term “pool” under regulation
4.5, which in turn excludes, in regulation 4.5(a)(4), the sponsors
of most employee benefit plans.
—————————————————————————
c. Proposed Criteria for Disaggregation Relief
The Commission is proposing criteria to claim disaggregation relief
in proposed rule 150.4(b)(2)(i) that are similar to the criteria set
forth in proposed rule 151.7(b)(1)(i). Essentially, the criteria are
the conditions that would have to be met in order for a person to rebut
the presumption that an ownership or equity interest of between 10 and
50 percent (inclusive) requires aggregation of the positions of the
owned entity.120
—————————————————————————
120 As noted in the Part 151 Aggregation Proposal, the
criteria would apply to the person filing the notice as well as the
owned entity. In addition, for purposes of meeting the criteria,
such “person” would include any entity that such person must
aggregate pursuant to proposed rule 150.4. For example, if company A
files a notice under proposed rule 150.4(c) for company A’s equity
interest of 30 percent in company B, then company A must comply with
the conditions for the exemption, including any entity with which
company A aggregates positions proposed rule 150.4. In this
connection, if company A controlled the trading of company C, then
company A’s 150.4(c) notice filing must demonstrate that there is
independence between company B and company C.
—————————————————————————
In general, the Commission proposes that these criteria would be
interpreted and applied in accordance with the Commissions’ past
practices in this regard.121 In accordance with these precedents, the
Commission would not expect that the criteria would impose requirements
beyond a reasonable, plain-language interpretation of the criteria. For
example, routine pre- or post-trade systems to effect trading on an
operational level (such as trade capture, trade risk or order-entry
systems) would not, broadly speaking, have to be independently
developed in order to comply with the criteria. Also, employees that do
not direct or participate in an entity’s trading decisions would
generally not be subject to these requirements. A brief discussion of
each of the five criteria in proposed rule 150.4(b)(2)(i) is set forth
below.
—————————————————————————
121 See, e.g., 1979 Aggregation Policy, 44 FR 33839 (providing
indicia of independence); CFTC Interpretive Letter No. 92-15 (CCH ]
25,381) (ministerial capacity overseeing execution of trades not
necessarily inconsistent with indicia of independence); revision of
federal speculative position limits, 64 FR 24038, 24044 (May 5,
1999) (intent in issuing final aggregation rule “merely to codify
the 1979 Aggregation Policy, including the continued efficacy of the
[1992] interpretative letter”).
—————————————————————————
Proposed rule 150.4(b)(2)(i)(A) would condition aggregation relief
on a demonstration that the person filing for disaggregation relief and
the owned entity do not have knowledge of the trading decisions of the
other. The Commission preliminarily believes that where an entity has
an ownership interest in another entity and neither entity shares
trading information, such entities demonstrate independence. In
contrast, persons with knowledge of trading decisions of another in
which they have an ownership interest are likely to take such decisions
into account in making their own trading decisions, which implicates
the Commission’s concern about independence and enhances the risk for
coordinated trading.122 As noted above, this proposed criterion would
address concerns regarding knowledge of employees who control, direct
or participate in an entity’s trading decisions, and would not prohibit
information sharing solely for risk management, accounting, compliance,
or similar purposes and information sharing among mid- and back-office
personnel that do not control, direct or participate in trading
decisions. In response to comments on this criterion, the Commission
wishes to clarify that this criterion would generally not require
aggregation solely based on knowledge that a party gains during
execution of a transaction regarding the trading of the counterparty to
that transaction, nor would it encompass knowledge that an entity would
gain when carrying out due diligence under a fiduciary duty, so long as
such knowledge is not directly used to affect the entity’s trading.
—————————————————————————
122 As noted in the Part 151 Aggregation Proposal, the
Commission does not consider knowledge of overall end-of-day
position information to necessarily constitute knowledge of trading
decisions, so long as the position information cannot be used to
dictate or infer trading strategies. As such, the knowledge of end-
of-day positions for the purpose of monitoring credit limits for
corporate guarantees does not necessarily constitute knowledge of
trading information. However, the ability to monitor the development
of positions on a real time basis could constitute knowledge of
trading decisions because of the substantial likelihood that such
knowledge might affect trading strategies or influence trading
decisions of the other.
—————————————————————————
Proposed rule 150.4(b)(2)(i)(B) would condition aggregation relief
on a demonstration that the person seeking disaggregation relief and
the owned entity trade pursuant to separately developed and independent
trading systems. Further, proposed rule 150.4(b)(2)(i)(C) would
condition relief on a demonstration that such person and the owned
entity have, and enforce, written procedures to preclude the one entity
from having knowledge of, gaining access to, or receiving data about,
trades of the other. Such procedures would have to include document
routing and other procedures or security arrangements, including
separate physical locations, which would maintain the independence of
their activities. As noted in the Part 151 Aggregation Proposal, the
Commission has applied these same conditions in connection with the IAC
exemption to ensure independence of trading between an eligible entity
and an affiliated independent account controller.123 Similar to the
IAC exemption, proposed rule 150.4(b)(2) permits disaggregation in
certain circumstances where there is independence of trading between
two entities. Thus, the Commission is proposing the above conditions,
which are already applicable and working well in the IAC context, and
which are expected to strengthen the independence between the two
entities for the owned entity exemption.
—————————————————————————
123 See regulation 150.3(a)(4) (proposed here to be replaced
by proposed rule 150.4(b)(5)). Such conditions have been useful in
ensuring that trading is not coordinated through the development of
similar trading systems, and that procedures are in place to prevent
the sharing of trading decisions between entities.
—————————————————————————
The Commission proposes that the phrase “separately developed and
independent trading systems” should be interpreted in accordance with
the Commission’s prior practices in this regard.124 The Commission
generally
[[Page 68962]]
does not expect that this criterion would prevent an owner and an owned
entity from both using the same “off-the-shelf” system that is
developed by a third party. Rather, the Commission’s concern is that
trading systems (in particular, the parameters for trading that are
applied by the systems) could be used by multiple parties who each know
that the other parties are using the same trading system as well as the
specific parameters used for trading and, therefore, are indirectly
coordinating their trading.125
—————————————————————————
124 See, e.g., 1979 Aggregation Policy, 44 FR 33839, 33840-1
(futures commission merchant (FCM) “deemed to control” trading of
customer accounts in trading program where FCM gives specific advice
or recommendations not made available to other customers, unless
such accounts and programs are traded independently and for
different purposes than proprietary accounts).
125 Compare id. at 33841. “However, the Commission also
recognizes that purportedly different programs which in fact are
similar in design and purpose and are under common control may be
initiated in an attempt to circumvent speculative limit and
reporting requirements.”
—————————————————————————
The requirement of “separate physical locations” in proposed rule
150.4(b)(2)(i)(C) would not necessarily require that the relevant
personnel be located in separate buildings. The Commission believes
that the important factor is that there be a physical barrier between
the personnel that prevents access between the personnel that would
impinge on their independence. For example, locked doors with
restricted access would generally be sufficient, while merely providing
the purportedly “independent” personnel with desks of their own would
not. Similar principles would apply to sharing documents or other
resources.
Proposed rule 150.4(b)(2)(i)(D) would condition aggregation relief
on a demonstration that the person does not share employees that
control the owned entity’s trading decisions, and the employees of the
owned entity do not share trading control with such persons. The
Commission continues to be concerned that, as stated in the Part 151
Aggregation Proposal, shared employees with control of trading
decisions may undermine the independence of trading between entities.
Regarding the comments on the sharing of attorneys, accountants, risk
managers, compliance and other mid- and back-office personnel, the
Commission proposes, as noted above, that sharing of such personnel
between entities would generally not compromise independence so long as
the employees do not control, direct or participate in the entities’
trading decisions.126 Similarly, sharing of board or advisory
committee members, research personnel or sharing of employees for
training, operational or compliance purposes would not result in a
violation of the criteria if the personnel do not influence (e.g.,
“have a say in”) or direct the entities’ trading decisions.127
—————————————————————————
126 As noted in the Part 151 Aggregation Proposal, the
condition barring the sharing of employees that control the owned
entity’s trading decisions would include a prohibition on sharing of
the types of employees described in the aggregation petition
(attorneys, accountants, risk managers, compliance and other mid-and
back-office personnel), to the extent such employees participate in
control of the trading decisions of the person or the owned entity.
For further clarification, see previous discussion regarding the
condition under proposed rule 150.4(b)(2)(i)(A) (conditioning
aggregation relief on a demonstration that the person filing for
disaggregation relief and the owned entity do not have knowledge of
the trading decisions of the other, and discussing what constitutes
“knowledge” for this purpose).
127 In this respect, proposed rule 150.4(b)(2)(i)(D) would be
consistent with the Commission’s Interpretive Letter No. 92-15 (CCH
] 25,381), where an employee both oversaw the execution of orders
for a commodity pool, as well as maintained delta neutral option
positions in non-agricultural commodities for the proprietary
account of an affiliate of the sponsor of the commodity pool. The
Commission concluded that the use of clerical personnel who are dual
employees of both affiliates would not require aggregation when the
clerical personnel engage in ministerial activities and steps are
taken to maintain independence, such as: (i) Limiting trading
authority so that the personnel do not have responsibility for the
two entities’ activities in the same commodity; and (ii) separating
the times at which the personnel conduct activities for the two
entities.
—————————————————————————
Proposed rule 150.4(b)(2)(i)(E) would condition aggregation relief
on a demonstration that the person and the owned entity do not have
risk management systems that permit the sharing of trades or trading
strategies with the other. This condition would address concerns that
risk management systems that permit the sharing of trades or trading
strategies with each other present a significant risk of coordinated
trading through the sharing of information.128 The Commission
proposes that this criterion generally would not prohibit sharing of
information to be used only for risk management and surveillance
purposes, when such information is not used for trading purposes and
not shared with employees that, as noted above, control, direct or
participate in the entities’ trading decisions. Thus, sharing with
employees who use the information solely for risk management or
compliance purposes would generally be permitted, even though those
employees’ risk management or compliance activities could be considered
to have an “influence” on the entity’s trading.
—————————————————————————
128 The Commission remains concerned, as stated in the Part
151 Aggregation Proposal and as noted above, that a trading system,
as opposed to a risk management system, that is not separately
developed from another system can subvert independence because such
a system could apply the same or similar trading strategies even
without the sharing of trading information.
—————————————————————————
d. Proposed Notice Filing Requirement
The Commission is proposing a notice filing requirement in proposed
rule 150.4(c) that is similar to the criteria set forth in proposed
rule 151.7(h)(1), with a modification to add an application procedure
for ownership interests of more than 50 percent under proposed rule
150.4(b)(3). The proposed rule contemplates that the filing under
proposed rule 150.4(c)(1) would be made before the exemption from
aggregation is needed, since the filing is a pre-requisite for
obtaining the exemption. However, where a prior filing is impractical
(such as where a person lacks information regarding a newly-acquired
subsidiary’s activities), the Commission proposes that the filing under
proposed rule 150.4(c)(1) should be made as promptly as practicable.
Even though a filing under proposed rule 150.4(c)(1) may be made
after an ownership or equity interest is acquired, the Commission
proposes that the exemption from aggregation would not be effective
retroactively because the filing is a pre-requisite to the exemption.
The Commission believes that retroactive application of such filings
could result in administrative difficulty in monitoring the scope of
exemptions from aggregation and negatively affect the Commission
staff’s surveillance efforts.
Generally, the Commission proposes that entities could consolidate
these filings in any efficient manner by, for example, discussing more
than one owned entity in a single filing, so long as the scope of the
filing is made clear.129 The Commission also wishes to emphasize that
if an entity determines to no longer apply an exemption (or if an
exemption is no longer available), the entity would be required to
inform the Commission by making a filing under proposed rule 150.4(c)
because this would constitute a material change to the prior filing. Of
course, once an exemption no longer applies to an owned entity, the
person would be required to subsequently aggregate the positions of the
entity in question.
—————————————————————————
129 In response to commenters on the Part 151 Aggregation
Proposal, the Commission clarifies that section 8 of the CEA would
apply to the information that the Commission may request under
proposed rule 150.4(c), and sets out the extent to which such
information will be treated confidentially.
—————————————————————————
In order to implement an application procedure for ownership
interests of more than 50 percent under proposed rule 150.4(b)(3), as
noted above, the Commission is also proposing proposed rule
150.4(c)(2), under which filings would not be effective until the
Commission’s finding that the person
[[Page 68963]]
has satisfied the conditions of proposed rule 150.4(b)(3).
The Commission solicits comment as to all aspects of proposed rule
150.4. Commenters are invited to address the potential effects and
implications of the proposed rule as the scope of the position limits
regime may change in the future. For example, what issues or concerns
arising from the scope and the requirements of the disaggregation
relief in the proposed rule would have to be addressed if the
Commission were to adopt its proposal to establish speculative position
limits for 28 exempt and agricultural commodity futures and option
contracts, and physical commodity swaps that are “economically
equivalent” to such contracts? 130
—————————————————————————
130 See Position Limits for Derivatives (November 5, 2013).
—————————————————————————
If the Commission were to adopt its proposal to establish position
limits on physical commodity swaps, are there any implications with
respect to the interplay between the disaggregation relief in the
proposed rule and the Commission’s other rules relating to swaps? For
instance, the Commission understands that various corporate groups
organize the swap activities of the affiliated entities within
corporate groups in different ways. Some corporate groups centralize
some or all swap activities in a particular affiliate, while in other
groups the affiliates engage in swaps independently. Also, corporate
groups may apply centralized risk management policies to varying
degrees, which may affect how the affiliated entities in the group
engage in swaps. What are the implications of the disaggregation relief
in the proposed rule for the various ways that affiliated entities in
corporate groups organize their swap activities? In considering the
proposed rule, what other Commission rules should the Commission take
into account and what are the implications of how other Commission
rules may affect affiliated entities? Have corporate groups begun to
organize their swap activities to comply with other Commission rules in
ways that could be affected by the proposed rule? If so, what
considerations should the Commission take into account in this regard?
The Commission also solicits comment as to the appropriateness of
the conditions for disaggregation relief in proposed rule 150.4(b), and
whether relief should be available for persons that have a greater than
50 percent ownership or equity interest in an owned entity. If such
relief should be available, is it appropriate to condition such relief
on the owned entity not being, and not being required to be,
consolidated on the financial statements of the owner? Is financial
consolidation a relevant consideration in this regard? Why or why not?
For example, is financial consolidation a useful proxy for other
characteristics that are relevant to the position limits regime, such
as ownership and control?
Regarding the condition in proposed rule 150.4(b)(3)(iii), is it
clear when an individual board member is considered the
“representative” of a person on the board of directors? Are there
modifications to this condition that would help to identify which board
members should be required to make the certification?
e. Proposed Revisions To Clarify Regulations
In connection with the proposed modifications to rule 150.4, the
Commission has reviewed whether the text of existing regulation 150.4
is easy to understand and apply. In this regard, the Commission notes
that the existing regulation may be unclear, especially in terms of the
relationship between the provisions of paragraphs (a) through (d) of
the existing regulation and whether a particular paragraph is an
exception to another. Also, as more different types of market
participants have studied existing regulation 150.4 (and regulation
151.7, which has similar provisions), both in connection with the Dodd-
Frank Act and otherwise, questions have arisen about the application of
the aggregation requirements to a wide variety of circumstances. The
Commission believes it is important that the rules setting forth the
aggregation requirements be clear in their application to both the
circumstances in which they currently apply, and the various
circumstances in which they may apply in the future. These textual
modifications are not intended to effect any substantive change to the
meaning of rule 150.4, and the Commission invites commenters to address
whether any of these modifications change the meaning of the
aggregation requirements in their particular circumstances.131
—————————————————————————
131 The textual modifications proposed here relate to the
Commission regulations currently in effect. The Commission notes
that its proposal regarding position limits includes amendments to
the text of certain Commission regulations. See Position Limits for
Derivatives (November 5, 2013). If both of the proposals are
adopted, conforming technical changes to reflect the interplay
between the two amendments may be necessary.
—————————————————————————
Therefore, the Commission is proposing to modify the text to
clarify that paragraph (a) of rule 150.4 states the general requirement
to aggregate positions a person may hold in various accounts, and
paragraph (b) of the rule sets out the exemptions to the aggregation
requirement that may apply. The Commission believes that this format
clarifies that the exemptions in rule 150.4(b) are alternatives; that
is, aggregation is not required to the extent that any of the
exemptions in rule 150.4(b) may apply.
In rule 150.4(b), the Commission is proposing text for rule
150.4(b)(1) that is substantially similar to existing regulation
150.4(c). The Commission believes that stating this provision as the
first exemption will clarify that any person that is a limited partner,
limited member, shareholder or other similar type of pool participant
holding positions in which the person by power of attorney or otherwise
directly or indirectly has a 10 percent or greater ownership or equity
interest in a pooled account or positions may apply this exemption.
That is, if the requirements of this exemption are satisfied with
respect to a person, then the person need not determine if the
requirements of the exemption in paragraph (b)(2) or (b)(3) are
satisfied. The text of paragraphs (b)(2) and (b)(3), in turn, state
that they apply to persons with an ownership or equity interest in an
owned entity, other than an interest in a pooled account which is
subject to paragraph (b)(1).
Proposed rule 150.4(b)(1) states that for any person that is a
limited partner, limited member, shareholder or other similar type of
pool participant holding positions in which the person by power of
attorney or otherwise directly or indirectly has a 10 percent or
greater ownership or equity interest in a pooled account or positions,
aggregation of the accounts or positions of the pool is not required,
except as provided in paragraphs (b)(1)(i), (b)(1)(ii) or (b)(1)(iii).
Although existing regulation 150.4(c) does not contain any explicit
statement of this rule, the lack of an aggregation requirement in these
circumstances is implicit in the existing regulation’s statement that
aggregation is required only in certain specified circumstances. Thus,
proposed rule 150.4(b)(1)(i) states explicitly a principle that is
implicit in the existing regulation.132 Paragraphs (b)(1)(i),
(b)(1)(ii) and (b)(1)(iii) of proposed rule 150.4 set out the
circumstances in which aggregation requirements apply; these
circumstances are substantially similar to those covered by paragraphs
[[Page 68964]]
(c)(1), (c)(2) and (c)(3) of existing regulation 150.4, but the text of
the rule has been modified to simplify the wording of the
provisions.133
—————————————————————————
132 This modification to the rule is not intended to effect a
substantive change. Rather, it is intended to state explicitly a
rule that the Commission has applied since at least 1979. See note
100, above.
133 The revised text also includes references to a “limited
member” in addition to the references in the existing regulation to
a limited partner in a pool.
—————————————————————————
Paragraphs (b)(4) to (b)(8) of rule 150.4 set forth other
exemptions that may apply in various circumstances. The exemption for
certain accounts held by FCMs in paragraph (b)(4) is substantially the
same as existing regulation 150.4(d), except that it has been rephrased
in a form of a statement of when an exemption is available, instead of
the statement in the existing regulation that the aggregation
requirement applies unless certain conditions are met. Paragraph (b)(5)
sets forth the exemption for accounts carried by an IAC that is
substantially similar to existing regulation 150.3(a)(4). Paragraphs
(b)(6), (b)(7) and (b)(8) set forth the exemptions for underwriting,
broker-dealer activity and circumstances where laws restrict
information sharing that are discussed in more detail above. Paragraph
(b)(9) describes how higher-tier entities may apply an exemption
pursuant to a notice filed by an owned entity.
The Commission solicits comment as to whether the revised text of
rule 150.4 is easy to understand and apply.
D. Underwriting
1. Part 151 Proposed Approach
As noted above, regulation 151.7(g) includes an exemption from
aggregation where an ownership interest is in an unsold allotment of
securities. In the Part 151 Aggregation Proposal, the Commission noted
that the ownership interest of a broker-dealer 134 in an entity based
on the ownership of securities acquired as part of reasonable activity
in the normal course of business as a dealer is largely consistent with
the ownership of an unsold allotment of securities covered by the
underwriting exemption in regulation 151.7(g). In both circumstances,
the ownership interest is likely transitory and not to hold for
investment purposes. Accordingly, the Commission proposed to include an
aggregation exemption in regulation 151.7(g) for such activity.135
—————————————————————————
134 Broker-dealers are those persons registered as such with
the SEC, see 15 U.S.C. 78o, or similarly registered with a foreign
regulatory authority.
135 The Commission specifically noted that this proposed
exemption would not apply to registered broker-dealers that acquire
an ownership interest in securities with the intent to hold for
investment purposes.
—————————————————————————
However, the Commission noted in the Part 151 Aggregation Proposal
that this exemption would not have applied where a broker-dealer
acquires more than a 50 percent ownership interest in another entity
because such acquisition would not be consistent with holding a
transitory interest for the purpose of market making and runs a higher
risk of coordinated trading.136 Therefore, a broker-dealer that
acquires a greater than 50 percent ownership interest in another entity
would be required to aggregate the positions of that entity, in the
absence of another aggregation exemption.
—————————————————————————
136 The proposed rules would encompass within the proposed
exemption a broker-dealer’s ownership of securities in anticipation
of demand or as part of routine life cycle events, if the activity
was in the normal course of the person’s business as a broker-
dealer.
—————————————————————————
The Commission requested comment on whether ownership of stock, by
a broker-dealer registered with the SEC or similarly registered with a
foreign regulatory authority, that is acquired as part of reasonable
activity in the normal course of business as a dealer, without other
ownership interests or indicia of control or concerted action, warrants
aggregation.
2. Commenters’ Views
FIA commented on the Part 151 Aggregation Proposal, saying that the
underwriting exemption should not require that ownership be acquired
“as part of [the] reasonable activity” of a broker-dealer, because
the normal course requirement is sufficient and the additional
requirement that the acquisition be part of reasonable activity creates
uncertainty.137 FIA also said that broker-dealers should be able to
use the underwriting exemption for any level of ownership, i.e., even a
more than 50 percent ownership interest, or, alternatively, the
ownership interests that a broker-dealer holds in its capacity as a
broker-dealer should not be aggregated with ownership interests held by
the broker-dealer or its affiliates in any other capacity.138
—————————————————————————
137 CL-FIA.
138 CL-FIA.
—————————————————————————
3. Proposed Rule
The Commission continues to believe that any acquisition by a
broker-dealer of a greater than 50 percent ownership interest in an
owned entity (other than in a distribution of securities directly by an
issuer or through an underwriter) requires aggregation, and further
relief from this requirement is not appropriate. For example, if a
broker-dealer has a 49 percent ownership interest in an entity and then
acquires a 2 percent ownership interest in the same entity in the
normal course of the broker-dealer’s activity, aggregation of the owned
entity’s positions should be required.
On the other hand, the Commission is proposing an exemption from
aggregation where an ownership interest is in an unsold allotment of
securities in proposed rule 150.4(b)(7) that is essentially the same as
the exemption in regulation 151.7(g). However, proposed rule
150.4(b)(7) does not include the phrase “as part of reasonable
activity,” as was suggested by a commenter on the Part 151 Aggregation
Proposal, because the Commission proposes to interpret the phrase
“reasonable activity” to be effectively synonymous with the phrase
“normal course of business” in this context.
The Commission solicits comment as to all aspects of proposed rule
150.4(b)(7). In particular, the Commission solicits comment as to the
appropriateness of the proposed treatment of ownership interests
acquired in the normal course of the broker-dealer’s activity.
E. Independent Account Controller for Eligible Entities
1. Part 151 Proposed Approach
As noted above, regulation 150.3(a)(4) provides an eligible entity
with an exemption from aggregation of the eligible entity’s customer
accounts that are managed and controlled by independent account
controllers. The definition of eligible entity in regulation 150.1(d)
includes “the limited partner or shareholder in a commodity pool the
operator of which is exempt from registration under Sec. 4.13 of this
chapter. . . .” However, with regard to a CPO that is exempt under
regulation 4.13, the definition of an independent account controller in
regulation 150.1(e)(5) only extends to “a general partner of a
commodity pool the operator of which is exempt from registration under
Sec. 4.13 of this chapter.” At the time the Commission expanded the
IAC exemption to include regulation 4.13 commodity pools, market
participants generally structured such pools as limited
partnerships.139
—————————————————————————
139 See 63 FR 38532.
—————————————————————————
The Commission understands that today, not all regulation 4.13
commodity pools are formed as partnerships. For example, regulation
4.13 pools may be formed as limited liability companies and have
managing members, not general partners. Accordingly, in the Part 151
Aggregation Proposal, the Commission proposed to expand the definition
of independent account controller to
[[Page 68965]]
include the managing member of a limited liability company, and to
amend the definitions of eligible entity and independent account
controller to specifically provide for regulation 4.13 commodity pools
established as limited liability companies.
2. Commenters’ Views
One commenter said that the independent account controller rule
should be expanded to apply to any person with a role equivalent to a
general partner in a limited partnership or managing member of a
limited liability company, to accommodate various structures that are
used for commodity pools in jurisdictions outside the U.S.140
—————————————————————————
140 CL-AIMA.
—————————————————————————
Another commenter addressed 4.13 pools more broadly, and said that
the Commission’s rules should treat ownership of 4.13 pools in the same
way that the rules treat ownership of operating companies.141 In
particular, this commenter said that the Commission should eliminate
the requirement that the positions of a 4.13 pool be aggregated with
the positions of any person that owns more than 25% of the 4.13
pool.142
—————————————————————————
141 CL-ABC.
142 CL-ABC.
—————————————————————————
3. Proposed Rule
The Commission proposes to adopt rule 150.4(b)(5) to take the place
of the existing IAC rule in regulation 150.3(a)(4), so that the IAC
exemption is in the regulatory section providing for aggregation of
positions. Proposed rule 150.4(b)(5) is substantially similar to
existing regulation 150.3(a)(4) except that, in response to the
commenters, the Commission proposes to modify it (and the related
definitions in regulation 150.1) so that it could be applied with
respect to any person with a role equivalent to a general partner in a
limited liability partnership or a managing member of a limited
liability company.
Regarding the treatment of regulation 4.13 pools in a manner that
is equivalent to the treatment of operating companies, the Commission
believes that this is a matter that could be the subject of relief
granted under CEA section 4a(a)(7).143 Persons wishing to seek such
relief should apply to the Commission stating the particular facts and
circumstances that justify the relief.
—————————————————————————
143 Section 4a(a)(7) of the CEA provides authority to the
Commission to grant relief from the position limits regime.
—————————————————————————
The Commission solicits comment as to all aspects of the proposed
rule 150.4(b)(5) and the related amendments to regulation 150.1. In
particular, the Commission solicits comment as to the appropriateness
of treating limited liability companies that are commodity pools in the
same way as limited liability partnerships that are commodity pools.
Commenters are invited to provide information regarding the
considerations that determine whether commodity pools are, in practice,
structured as limited liability companies or limited liability
partnerships and whether there are any relevant differences in the two
types of entities. Also, what are the facts and circumstances that
commenters believe would justify relief under CEA section 4a(a)(7)?
III. Related Matters
A. Considerations of Costs and Benefits
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors.
On May 30, 2012, the Commission proposed, partially in response to
a petition for interim relief from part 151’s provision for the
aggregation of positions across accounts,144 certain modifications to
its policy for aggregation under the part 151 position limits regime
(the “Part 151 Aggregation Proposal”). In an order dated September
28, 2012, the District Court for the District of Columbia vacated part
151 of the Commission’s regulations. The Commission is now proposing
modifications to part 150 of the Commission’s regulations that are
substantially similar to the modifications proposed to part 151.
—————————————————————————
144 A copy of the petition (the “aggregation petition”) can
be found on the Commission’s Web site at www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf. The
aggregation petition was originally filed by the Working Group of
Commercial Energy Firms; certain members of the group later
reconstituted as the Commercial Energy Working Group. Both groups
(hereinafter, collectively, the “Working Groups”) presented one
voice with respect to the aggregation petition.
—————————————————————————
The Part 151 Aggregation Proposal provided the public with an
opportunity to comment on the Commission’s considerations of costs and
benefits of the proposed rules. In the Part 151 Aggregation Proposal,
the Commission explained its position that the proposed changes to the
aggregation policy would, on net, lower costs for market participants
without lessening the effectiveness of the Commission’s position limits
regime. The Commission requested comment on all aspects of its
consideration of costs and benefits, including identification and
assessment of any costs and benefits not discussed therein. In
addition, the Commission requested that commenters provide data and any
other information or statistics that they believe supports their
positions with respect to the Commission’s consideration of costs and
benefits.
The modifications to part 150 proposed herein reflect the
Commission’s consideration of the comments that were received on the
proposed amendments to part 151. The Commission summarizes the proposed
modifications to part 150 below, including those provisions proposed to
be modified or amended in response to public comment on the Part 151
Aggregation Proposal, describes expected costs and benefits of the
proposed regulations, requests public comment on its considerations of
costs and benefits, and considers the proposed regulations in light of
the five factors outlined in Section 15(a).145
—————————————————————————
145 The Commission notes that the opinions and beliefs
expressed herein are preliminary assertions based on comments from
previous releases, and are subject to change after consideration of
any further comments. The Commission welcomes public comment on all
aspects of this release in order to better inform its policy
determinations.
—————————————————————————
1. Background
As discussed above, the Commission’s historical approach to
position limits generally includes three components: (1) The level of
the limits, which set a threshold that restricts the number of
speculative positions that a person may hold in the spot-month, in any
individual month, and in all months combined, (2) an exemption for
positions that constitute bona fide hedging transactions, and (3) rules
to determine which accounts and positions a person must aggregate for
the purpose of determining compliance with the position limit levels.
The proposed rules address the third component of the Commission’s
position limits regime–aggregation–which is set out in regulation
150.4. This regulation generally requires that
[[Page 68966]]
unless a particular exemption applies, a person must aggregate all
positions for which that person: (1) Controls the trading decisions, or
(2) has a 10 percent or greater ownership interest in an account or
position; and in doing so the person must treat positions that are held
by two or more persons pursuant to an express or implied agreement or
understanding as if they were held by a single person.
2. Part 151 Aggregation Proposal
As noted above, the Commission received the aggregation petition on
January 19, 2012.146 The aggregation petition requested interim
relief under CEA section 4a(a)(7) from, among other things, part 151’s
provision for aggregation of positions across accounts. The Commission
also received letters that were generally supportive of the aggregation
petition. In addition, several commenters opined on the aggregation
rules in connection with the Commission’s request for comment on the
spot-month position limits on cash-settled contracts established on an
interim final basis in November 2011.147 As further discussed in the
Part 151 Aggregation Proposal, the aggregation petition and the interim
final regulation commenters asserted that the Commission should clarify
regulation 151.7(i), which provides an exemption where the sharing of
information would cause a violation of federal law, and expand the
exemption to include circumstances in which the sharing of information
would cause a violation of state or foreign law. In addition, the
aggregation petition and commenters to the interim final regulation
requested that the Commission create an aggregation exemption for owned
non-financial entities. In this connection, some interim final
regulation commenters argued that the Commission should only aggregate
on the basis of control and not ownership. Finally, one interim final
regulation commenter requested that the Commission expand the exemption
provided in Sec. 151.7(g) for the ownership interests of broker-
dealers connected with specific market-making activity.
—————————————————————————
146 See note 18, supra.
147 See Proposed Rules, 77 FR at 31769, fn. 24.
—————————————————————————
As regards the violation-of-laws exemption in Sec. 151.7(i), the
Part 151 Aggregation Proposal clarified that the exemption would apply
where the sharing of information presents a “reasonable risk” of
violating the applicable law(s), retained the requirement to submit an
opinion of counsel, and expanded the violation-of-laws exemption to
include state law and the law of foreign jurisdictions.
Proposed rule 151.7(b)(1) in the Part 151 Aggregation Proposal
provided that any person with an ownership or equity interest in an
entity (financial or non-financial) of between 10 percent and 50
percent (inclusive) may disaggregate the owned entity’s positions upon
demonstrating compliance with each of several specified indicia of
independence. The proposed indicia were that such person and the owned
entity: (1) Do not have knowledge of the trading decisions of the
other; (2) trade pursuant to separately developed and independent
trading systems; (3) have in place policies and procedures to preclude
sharing knowledge of, gaining access to, or receiving data about,
trades of the other; (4) do not share employees that control the
trading decisions of the other; and (5) maintain a risk management
system that does not allow the sharing of trade information or trading
strategies between entities.
The Commission also proposed to expand the exemption for the
underwriting of securities in regulation 151.7(g) to include ownership
interests acquired through the market-making activities of an
affiliated broker dealer. The Part 151 Aggregation Proposal proposed to
exempt from aggregation ownership interests acquired as part of a
person’s reasonable market-making activity in the normal course of
business as a broker-dealer registered with the SEC or comparable
registration in a foreign jurisdiction, so long as there is no other
ownership interests or indicia of control or concerted action. The
Commission said in the Part 151 Aggregation Proposal that this
exemption would apply to ownership interests that are likely transitory
and not for investment purposes.
Proposed rule 151.7(j) in the Part 151 Aggregation Proposal
extended filing relief to “higher-tier” entities–i.e., entities with
an ownership interest in the entity that is itself the owner of an
entity and the subject of a filing for relief from aggregation. As
such, the proposed rule allowed higher-tier entities to rely on
exemption notices filed by owned entities. The Part 151 Aggregation
Proposal explained that such an exemption would reduce the burden of
filing exemption notices by eliminating redundancies.
The Commission also proposed in the Part 151 Aggregation Proposal
to amend the IAC exemption in regulation 151.7(f), which includes
commodity pools exempt from registration under Sec. 4.13 that are
structured as limited partnerships, to also encompass commodity pools
structured as limited liability companies.
As discussed below, the Commission received comments on the Part
151 Aggregation Proposal.148 The amendments now being proposed to
regulation 150.4 reflect the Commission’s consideration of the comments
that were received on the Part 151 Aggregation Proposal. Thus, the
discussion below covers the amendments in the Part 151 Aggregation
Proposal and the comments on those proposed amendments.149 The
Commission considers these comments, discusses the current proposed
amendments to the aggregation provisions in Sec. 150.4, considers the
costs and benefits of the current proposal, and evaluates the current
proposal in light of the five enumerated factors of Section 15(a)(2) of
the CEA.
—————————————————————————
148 The written comments are available on the Commission’s Web
site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1208.
149 For additional background on part 150 and part 151 and the
existing provisions for aggregation, see the Part 151 Aggregation
Proposal.
—————————————————————————
3. Comments on the Part 151 Aggregation Proposal
The Commission received numerous comments regarding the proposed
changes to the aggregation policy in Sec. 151.7. This section
summarizes the issues raised in those comments relevant to the
Commission’s considerations of costs and benefits; a more thorough
discussion of comments relating to each provision of the Part 151
Aggregation Proposal can be found in section II of this release.
The proposed owned-entity exemption and its attendant indicia of
independence was a topic in the majority of comments. Several
commenters requested the Commission extend the owned entity exemption
to a person with a greater than 50 percent ownership in the owned
entity, so long as the person and the owned entity can both demonstrate
independence.150 These commenters generally objected to the 50
percent ceiling on the grounds that ownership above 50 percent is
potentially indicative of control but does not equate to control, and
that ownership of an entity regardless of control over that entity is
not an appropriate measure to determine aggregation.151 Some
commenters asserted that the “bright-line test” of 50
[[Page 68967]]
percent ownership is arbitrary.152 Another claimed that passive
ownership poses little risk of coordinated trading and that requiring
aggregation even when management and trading are independent inhibits
legitimate commercial activity.153 Some commenters expressed concern
that the aggregation standards may require information sharing and
coordination between entities that had previously constructed barriers
to preclude such activity, and that relaxing those barriers to comply
with aggregation standards may create antitrust concerns.154
—————————————————————————
150 CL-ABC, CL-AGA, CL-AIMA, CL-API, CL-Barclays, CL-CMC, CL-
COPE, CL-EEI, CL-FIA, CL-Iberdrola, CL-ISDA/SIFMA, CL-MFA, CL-WGCEF.
151 CL-AGA, CL-MFA, CL-PEGCC, CL-WGCEF, CL-API, CL-Atmos, CL-
CMC, CL-Chamber, CL-EEI.
152 CL-AGA, CL-API, CL-COPE.
153 CL-FIA.
154 CL-WGCEF, CL-CMC, CL-COPE.
—————————————————————————
Conversely, other commenters expressed support for the Commission’s
proposed 50 percent ceiling as reasonable and appropriate.155 Two
commenters suggested that the Commission should not expand the
exemption for owned entities.156
—————————————————————————
155 CL-Better Markets, Chris Barnard on June 21, 2012 (“CL-
Barnard”).
156 CL-IAMAW, CL-IATP.
—————————————————————————
Commenters presented several alternatives to the 50 percent
threshold. Some commenters suggested that ownership over 50 percent
should create a “rebuttable presumption,” requiring entities to
demonstrate why ownership above that threshold does not result in
trading control or information sharing.157 Others supported
disaggregation relief for an entity with greater than 50 percent
ownership only in circumstances in which the Commission had
specifically approved a request for relief.158 One commenter
requested an exemption specifically for private equity investment funds
that meet certain criteria.159 Another requested an exemption for
pension plans to free them from aggregating a plan sponsor’s corporate
positions with the plan’s positions given that pension plan managers
are subject to fiduciary responsibilities to the plans they
manage.160 In lieu of a new rule on owned entities, one commenter
urged the Commission to rely on Form 40 reports and raise the
presumptive control standard to 50 percent instead of 10 percent, thus
never requiring aggregation below 50 percent ownership.161
—————————————————————————
157 CL-ISDA/SIFMA, CL-WGCEF, CL-PEGCC.
158 CL-AIMA, CL-API, CL-Atmos, CL-MFA.
159 CL-PEGCC.
160 CL-ABC.
161 CL-Barclays.
—————————————————————————
Commenters also expressed concerns about the costs associated with
the owned-entity exemption–in particular, the direct and indirect
costs of the 50 percent “ceiling” for disaggregation imposed by Sec.
151.7(b)(1)(ii). Several noted that developing a system to coordinate
trading among aggregated entities will be costly for market
participants.162 One commenter said it would be costly to implement a
system to monitor when ownership of an entity exceeds 10 percent.163
—————————————————————————
162 CL-API, CL-Chamber, CL-CMC.
163 CL-Barclays.
—————————————————————————
More specifically, two commenters said that the rules would require
entities that are currently operated and managed separately, but who
have common upstream ownership greater than 50 percent, to implement
information sharing systems solely to comply with the Commission’s
position limits regime. These commenters noted that these systems would
be costly to implement without providing a corresponding benefit
because these entities are not currently operating in concert.164
Similarly, another commenter said that aggregation is impractical for
commercial entities engaged in independent operations under common
ownership and may put such entities at a competitive disadvantage.165
Another commenter noted that automatic aggregation at 50 percent would
require sophisticated information controls and expensive trade
monitoring systems.166
—————————————————————————
164 CL-COPE, CL-Iberdrola.
165 CL-Chamber.
166 CL-WGCEF.
—————————————————————————
Commenters also stated concerns about costs of complying with the
50 percent “ceiling” for private funds and pension plans. One
commenter noted that private funds would need entirely new (and costly)
programs to monitor, allocate, and coordinate trading across portfolio
companies though the fund company was not previously involved in
trading.167 Another commenter had the same concern regarding the
costs incurred by pension plans, which do not currently collect
position or trading information from owned collective investment
vehicles, to monitor positions in real-time across potentially hundreds
of these vehicles.168
—————————————————————————
167 CL-PEGCC.
168 CL-ABC.
—————————————————————————
Commenters were also concerned that the automatic aggregation at 50
percent would lead to indirect costs by unnecessarily limiting hedging,
because commonly owned companies will have to remain below position
limits unless a bona fide hedging exemption is available.169
Commenters were also concerned about potential impacts on investment in
other entities; one opined that the rules would discourage investment
because owners would have to be more deeply involved in the operations
of owned companies, including by overseeing trading.170 One commenter
said that automatic aggregation at 50 percent would hinder management
and could limit joint-venture formation.171
—————————————————————————
169 CL-API, CL-Chamber, CL-PEGCC.
170 CL-CMC, CL-Chamber.
171 CL-WGCEF.
—————————————————————————
Commenters also weighed in on the other aspects of the Commission’s
proposed rules. Regarding the filing of exemptions, one commenter noted
that the Commission’s estimated costs of aggregation filings appeared
to be correct. This commenter also disputed the validity of the Working
Group’s “fear of vast new information infrastructure” and said that
entities affected by the provisions will have the resources to apply
for and receive the proposed exemptions from aggregation.172
—————————————————————————
172 CL-IATP.
—————————————————————————
Regarding the violation-of-laws exemption, several commenters
generally expressed support for the “reasonable risk” of violation
standard,173 and the proposed exemption for federal, state, or
foreign laws.174 One commenter expressed that the exemption should be
limited to violations of federal law, and that exemption from
aggregation for potential violations is impractical and should not be
allowed.175 Further, some commenters opined that a memorandum of law,
prepared by internal, as opposed to outside, counsel, should suffice,
thereby mitigating outside legal fees.176 Another commenter noted it
had no objection to the proposed opinion of counsel requirement,177
while others expressed support for the requirement as proposed, on
grounds that aggregation relief should be available in only the most
clear-cut cases.178
—————————————————————————
173 CL-EEI, CL-FIA.
174 CL-ISDA/SIFMA.
175 CL-IATP.
176 CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.
177 CL-Atmos.
178 CL-Better Markets, CL-IATP.
—————————————————————————
Some commenters asserted that aggregation should be applied on a
pro-rata basis to avoid the double-counting of positions and a
potential limit on trading that may affect liquidity.179 One
commenter said that the aggregation requirements would cause pension
plans to reconsider investing in collective investment vehicles. This
commenter also maintained that the current federal position limits
regime has had little effect on commodity pools
[[Page 68968]]
because position limits were imposed on only nine agricultural
products.180
—————————————————————————
179 CL-ABC, CL-Barclays, CL-FIA.
180 CL-ABC.
—————————————————————————
One commenter noted that the Part 151 Aggregation Proposal to allow
higher-tier entities to rely on filings by subsidiaries strikes an
appropriate cost balance.181 Another commenter expressed support for
the alternative of a single aggregate notice filing, that filing should
be effective retroactively, and that sister affiliates of the filing
entity should be able to rely on the filing.182
—————————————————————————
181 CL-IATP.
182 CL-FIA.
—————————————————————————
4. The Proposed Amendments to Part 150
a. Aggregation of Positions in Owned Entities
The Commission is proposing two exemptions concerning the
aggregation of positions in owned entities. First, as proposed in the
Part 151 Aggregation Proposal, the Commission is proposing to allow a
person to disaggregate the positions of an owned entity provided such
person demonstrates compliance with the conditions of the exemption.
Such conditions include ownership of less that 50 percent of the owned
entity, independent trading systems, prohibition of the sharing of
trading knowledge between the entities, and the other criteria found in
proposed regulations 150.4(b)(2)(i)(A-E). Second, the Commission is
proposing to allow persons with a greater than 50 percent ownership
interest to apply for relief in accordance with proposed regulation
150.4(b)(3), subject to the conditions of that section and the approval
of the Commission or its delegate.
As noted above and in the Part 151 Aggregation Proposal, the
Commission’s general policy on aggregation is derived from CEA Section
4a(a)(1), which directs the Commission to aggregate positions based on
separate considerations of ownership, control, or persons acting
pursuant to an express or implied agreement. The Commission’s
historical approach to its statutory aggregation obligation has thus
included both ownership and control factors in a manner designed to
prevent evasion of prescribed position limits. The Commission continues
to believe that ownership of an entity is an appropriate criterion for
aggregation of that entity’s positions.
Some commenters on the Part 151 Aggregation Proposal opposed the
requirement that a person own 50 percent or less of another entity in
order to obtain relief from the aggregation requirement, asserting that
an ownership stake of greater than 50 percent does not necessarily
indicate control. However, as explained in part II.B.3. above, this
requirement of 50 percent or less ownership is in line with the
language in CEA section 4a, the legislative history of that section,
subsequent regulatory developments, and the Commission’s historical
practices in this regard. Moreover, the ability for persons owning 50
percent or less of another entity (subject to establishing the indicia
of independence) to disaggregate the positions of the owned entity
would substantially liberalize the Commission’s approach to aggregation
for position limits. The Commission does not consider this ceiling on
disaggregation to be arbitrary; rather, ownership above 50 percent of
an entity is a level at which there is a strong likelihood that a
person would be able to use its ownership interest to directly or
indirectly influence the owned entity’s accounts or positions. As noted
above, 50 percent ownership is a standard used by other government
agencies and reflects a general understanding that greater than 50
percent ownership level poses substantial potential for direct or
indirect control over an owned entity. Accordingly, the Commission
views the 50 percent ceiling to be a reasonable outer limit in most
cases on the general availability of aggregation exemptions, even for
passively-owned entities.
However, the Commission recognizes that in certain specific
circumstances it may be appropriate to allow exemptions from
aggregation of an owned entity’s positions, even at greater than 50
percent ownership. In particular, the Commission notes that while, in
many instances, ownership of more than 50 percent of an entity requires
the owner to consolidate the financial statements of the owned entity,
consolidation is not always required. Thus, as discussed in more detail
in section II.B3.b of this release, the proposed amendments to part 150
include a provision for a person with more than 50 percent ownership of
an owned entity, but that does not consolidate that entity in its
financial statements, to apply to the Commission for aggregation relief
on a case-by-case basis, provided the applicant can demonstrate
adherence to stringent indicia of independence. Notwithstanding that it
represents a relaxation from historical practice, the Commission
believes that allowing case-by-case applications for disaggregation
addresses commenters’ concerns without jeopardizing the effectiveness
of the Commission’s position limits regime.
The Commission expects no material negative effects on market
quality as a result of the proposed relief from aggregation that would
be available to persons that hold ownership interests in other
entities. The Commission does not believe that a material reduction in
hedging will result from the proposed requirement that, to obtain
relief from aggregation based on notice only, a person must own 50
percent or less of an entity, because hedge exemptions would be
available to any entity regardless of position aggregation. In
addition, the proposed aggregation exemptions are more permissive than
the 10 percent threshold currently applied. Impacts from the proposed
regulations on investment activity where the investor desires a passive
interest should also be minor, as these proposed regulations permit a
passive investor to have a larger ownership interest and still claim an
exemption from aggregation. As noted above, prior rules required
aggregation at a 10 percent ownership level, so these proposed
regulations allowing for relief from aggregation at higher ownership
levels should lower the overall impact of aggregation on market quality
factors.
The Commission requests comment on its proposed amendments to
regulation 150.4. Are there other potential impacts on market quality
factors that the Commission should consider? What costs and benefits
may attend the proposed owned entity exemptions in proposed regulations
150.4(b)(2) and 150.4(b)(3) that the Commission should consider?
b. Consideration of Alternative Approaches to Aggregation of Positions
in Owned Entities
The Commission believes that the approach reflected in these
proposed regulations–a bright-line ceiling on the availability of
notice relief from aggregation at 50 percent ownership, with the
potential for case-by-case relief in appropriate circumstances–is
preferable to the various alternatives suggested by commenters for a
variety of reasons.
Several commenters to the Part 151 Aggregation Proposal suggested
that the aggregation requirements should be loosened further than was
proposed by allowing persons with a more than 50 percent ownership
interest in another entity to obtain relief from aggregation by
demonstrating independent trading by the two entities. While this
approach would make relief from the aggregation requirements available
to more entities in more different situations, the
[[Page 68969]]
Commission believes, as noted above, that CEA Section 4a(a)(1) requires
the aggregation of positions of an owned entity and that a 50 percent
ownership interest is a reasonable indicator that a person is the owner
of an entity and therefore aggregation should be required. The
Commission notes that the proposed amendments to regulation 150.4 would
allow an entity with a more than 50 percent ownership interest in
another entity to apply for relief from the aggregation requirement on
a case-by-case basis if it meets the other conditions in regulation
150.4(b)(3). Through an exemption application, such entities may be
able to rebut the presumption that greater than 50 percent ownership
results in trading control or information sharing; however, the
Commission does not believe it is appropriate to grant such entities a
broader exemption based only on a notice filing, because of the
importance of the ownership standard in the statute as described above.
The Commission has not proposed the commenters’ alternative because,
while to loosen the standards as requested might lower immediate
compliance burdens, the Commission believes it would also lessen the
effectiveness of the position limits regime.
Another commenter on the Part 151 Aggregation Proposal urged that
the Commission not require aggregation of positions and instead rely on
information reported on Form 40. However, the Commission notes that not
necessarily all subsidiaries file those reports, and in any case the
Commission believes that effective and efficient compliance with
position limit regulations, including compliance with aggregation
requirements, is better served when it is primarily the responsibility
of each market participant. The Commission believes that each entity
can track its own compliance more efficiently compared to the
Commission tracking the compliance of all the market participants
involved; thus, the Commission does not endorse the shifting of the
compliance burden from large traders to the Commission. For these
reasons, the Commission believes that this proposed alternative does
not have advantages that would justify its acceptance, and instead it
could potentially impede compliance with the position limits regime.
The Commission believes that aggregation on a pro-rata basis, as
suggested by some commenters, would be administratively burdensome for
both owners of financial interests and the Commission. For example,
since the level of financial interest in a particular company may
change over time, it would be burdensome to determine and monitor the
appropriate pro rata allocation on a daily basis. Moreover, a pro rata
approach would be inconsistent with the Commission’s historical
requirement of aggregation of all the relevant positions of owned
entities, absent an exemption. This is consistent with the view that a
holder of a significant ownership interest in another entity may have
the ability to influence all the trading decisions of that entity in
which such ownership interest is held. For these reasons, the
Commission declines to propose amending the policy in Sec. 150.4 to
require a pro-rata aggregation of positions.
c. Other Sec. 150.4 Exemptive Relief
The Commission is proposing the violation-of-laws exemption largely
as previously adopted in part 151 with the proposed changes in the Part
151 Aggregation Proposal, with one amendment. The Commission has
proposed the alternative posed by commenters to allow a memorandum of
law, which can be prepared by internal counsel, to satisfy the
requirement that the applicant explain the potential for a violation of
law. This requirement is intended to provide the Commission with the
ability to review the legal basis for the asserted regulatory
impediment to the sharing of information, particularly where the
asserted impediment arises from laws and/or regulations that the
Commission does not directly administer; to consult with other federal
regulators as to the accuracy of the opinion; and to coordinate the
development of rules surrounding information sharing and aggregation
across accounts in the future. The Commission believes that a
memorandum of law prepared by internal counsel could provide the
information and legal analysis to accomplish these goals, and a formal
opinion of counsel is not required. Thus, the proposed amendments to
part 150 include the requirement suggested by commenters on the Part
151 Aggregation Proposal.
The Commission requests comment as to the costs and benefits of
proposed rule 150.4(b)(8). In particular, the Commission requests
comment as to the relative costs and benefits of requiring a written
memorandum of law, rather than an opinion of counsel, regarding the
reasonable risk of a violation of law.
Regarding higher-tier entities, the Commission is proposing
regulation 150.4(b)(9), which is identical to previously proposed
regulation 151.7(j). The exemption in proposed regulation 150.4(b)(9)
would allow higher-tier entities to rely on exemption notices filed by
the owned entity, with respect to the accounts or positions
specifically identified in the notice. In response to the suggestion of
one Part 151 Aggregation Proposal commenter that aggregate notice
filings should be permitted, the Commission notes, as discussed above,
that entities would be able to utilize the exemption in the manner most
efficient for their enterprise. However, the Commission is not
persuaded by the commenter’s assertion that the filing should be
permitted to be effective retroactively, because retroactive
application would result in administrative difficulty in monitoring the
scope of exemptions from aggregation and negatively affect the
Commission staff’s surveillance efforts.
The Commission is also proposing exemptions for underwriting
activity in proposed regulation 150.4(b)(6) and for broker dealer
activity in proposed regulation 150.4(b)(7). The Commission believes
that such activity may present less of a risk of coordinated trading
because in both circumstances, the ownership interest is likely
transitory and not held for investment purposes.
Finally, consistent with the approach taken in 151.7(d), proposed
rule 150.4(d) will require aggregation of investments in accounts with
substantially identical trading strategies.
5. Costs and Benefits
In the Part 151 Aggregation Proposal, the Commission stated its
goal in proposing to amend the aggregation provisions of part 151:
It is the Commission’s goal that this proposal uphold part 151’s
regulatory aims without diminishing its effectiveness. In so doing,
the Commission adheres to its belief that aggregation represents a
key element to prevent evasion of prescribed position limits and
that its historical approach towards aggregation–one that
appropriately blends consideration of ownership and control
indicia–remains sound.” 183
—————————————————————————
183 77 FR 31767 at 31779.
Similarly, in proposing these amendments to part 150, the Commission
aims to achieve an appropriate balance between reducing costs for
market participants and maintaining the effectiveness of part 150’s
regulatory objectives. The Commission believes that the regulations
proposed herein would contribute to that goal by maintaining the
Commission’s historical approach to aggregation while simultaneously
updating that approach with thoughtful exemptions that relieve the
burdens of
[[Page 68970]]
aggregation for those market participants who can demonstrate
compliance with certain criteria and who choose to avail themselves of
the exemptions–without undermining the effectiveness of the
Commission’s position limits regime.
In adopting the now-vacated part 151, the Commission noted that the
amendments to regulation 151.7 largely tracked regulation 150.4 and
therefore reflected continuity in the position limits regime. In this
release, the Commission is proposing to provide the same exemptions
that it had provided in regulation 151.7, along with the additional
exemptions proposed in the Part 151 Aggregation Proposal, with some
changes to reflect the views of commenters on that release.184
—————————————————————————
184 In regulation 151.7, the Commission added a requirement
that accounts trading pursuant to identical trading strategies be
aggregated. The Commission also provided exemptions for the
underwriters of securities and for instances in which the sharing of
information between persons would cause either person to violate
federal law or regulations adopted thereunder. The Commission
proposed in the Part 151 Aggregation Proposal to extend the
violation-of-laws exemption to include state law and the laws of a
foreign jurisdiction; to include an exemption for broker-dealers
engaged in market-making activity; to allow higher-tier entities to
file notices on behalf of lower-tier entities; to expand the
applicability of the IAC exemption to include limited liability
companies; and to provide a limited exemption for entities owning
greater than 10 but less than 50 percent of another entity.
—————————————————————————
Using existing part 150 as the standard for comparison, the
Commission will consider the incremental costs and benefits that arise
from these proposed amendments. That is, if these proposed regulations
are not adopted, the aggregation standards that would apply would be
those described in regulation 150.4 as it currently exists.
Although the Commission anticipates certain costs as a result of
the proposed regulations–including a greater number of entities
preparing and filing notices and memoranda of law, among other costs,
since the availability of relief from aggregation has been expanded–
the Commission believes that the regulations proposed herein, on a net
basis, would cause market participants that use the exemptions in the
regulations to incur a smaller burden as compared to the burden they
would have incurred under regulation 150.4.
a. Costs
There are a myriad of ways a market participant could conceivably
ensure proper compliance with the proposed amendments to regulation
150.4, depending on the particular circumstances of each market
participant. In general, however, the Commission anticipates that
entities who wish to take advantage of the exemptions in proposed
regulation 150.4 will incur direct costs associated with the following:
(1) Developing a system for aggregating positions across owned
entities; (2) initially determining which owned entities, other
persons, or transactions qualify for any of the exemptions in
regulation 150.4; (3) developing and maintaining some system of
determining the scope of such exemptions over time; (4) potentially
amending current operational structures to achieve eligibility for such
exemptions; and (5) preparing and filing notices of exemption with the
Commission, including memoranda of law if claiming the violation-of-
laws exemption.185
—————————————————————————
185 The Commission notes that direct costs associated with how
a particular entity aggregates its positions would be dependent upon
that entity’s individual ownership structure, how and why the entity
chooses to avail themselves of any particular exemption, and the
methods employed by the entity to ensure compliance. Thus, as noted
in the Part 151 Aggregation Proposal, costs relating to this rule
are highly entity-specific; actual costs may be higher or lower than
the Commission can anticipate accurately.
—————————————————————————
To a large extent, market participants have incurred many of these
costs to comply with existing regulation 150.4. For example, market
participants that are affected by the existing aggregation requirement
should already have a system in place for aggregating positions across
owned entities. This rulemaking does not increase the costs of
complying with the basic aggregation requirements of part 150, and in
fact may decrease those costs by providing for relief from the
aggregation requirements in certain situations. Because the Commission
and DCMs generally have required aggregation of positions starting at a
10 percent ownership threshold under the current regulatory
requirements of part 150 and the acceptable practice found in the prior
version of part 38, the Commission expects that market participants
active on DCMs have developed systems of aggregating positions across
owned entities.186
—————————————————————————
186 The 10 percent threshold has been in place for the nine
agricultural contracts with federal limits for decades, and for
other contracts where limits were imposed by DCMs and enforced by
the Commission. See supra, note 39 (citing to the statement of
policy on aggregation issued in 1979, where the Commission codified
its view, that, except in certain limited circumstances, a financial
interest in an account at or above 10 percent “will constitute the
trader as an account owner for aggregation purposes.” 44 FR 33839,
33843, June 13, 1979).
—————————————————————————
Thus, the main direct costs associated with the proposed amendments
to regulation 150.4, relative to the standard of existing
regulation150.4, would be those incurred by entities as they determine
whether they may be eligible for the proposed exemptions, and as they
make subsequent filings required by the exemptions. For example, the
Commission recognizes that there may be costs to market participants to
adapt their systems in order to allow such systems to be used to
determine whether persons qualify for the exemptions from the
aggregation requirement proposed herein. Some entities may also incur
direct costs to modify existing operational procedures–such as
firewalls and reporting schemes–in order to be eligible to claim an
exemption.
The Commission does not believe that these proposed regulations
would result in material indirect costs to market participants or the
public. For market participants, these proposed regulations provide for
relief in certain circumstances from the requirement to aggregate
positions. For the public, the Commission believes that these proposed
regulations appropriately balance the need for exemptions from
aggregation in certain circumstances with the public interest in
maintaining the effectiveness of the Commission’s position limits
regime.
The direct costs of the proposed regulations are impracticable to
quantify in the aggregate because such costs are heavily dependent on
the characteristics of each entity’s current systems, its corporate
structure, its use of derivatives, the specific modifications it would
implement in order to qualify for an exemption, and other
circumstances. However, the Commission believes that market
participants would choose to incur the costs of qualifying for and
using the exemptions in the proposed regulations only if doing so is
less costly than complying with the position limits. Thus, by providing
these market participants with a lower cost alternative (i.e.,
qualifying for and using the exemptions) the proposed regulations may
ease the overall compliance burden resulting from position limits, for
it is reasonable to assume that no entity will elect the exemption if
the benefits of doing so do not justify the costs. Accordingly, the
Commission anticipates that notwithstanding the additional costs of
determining eligibility and filing exemptions, the net result of the
proposed rules for impacted market participants would be a reduction in
costs as compared to the current standard in regulation 150.4.
In the Part 151 Aggregation Proposal, the Commission requested
“that commenters submit data from which the Commission can consider
and quantify the costs of the proposed rules” because it recognized
that “costs associated with
[[Page 68971]]
the aggregation of positions are highly variable and entity-specific.”
No commenter on that rule provided data, leaving the Commission without
additional data or another basis to quantify the incremental direct
costs to determine eligibility and file for exemptions beyond those
previously estimated by the Commission.
One commenter asserted that the compliance with the rules would
cost in excess of the $5.9 million estimate stated in the Part 151
Aggregation Proposal; however, the Commission notes that this comment
relates to an estimate of costs relating to now-vacated regulation
151.7 and not the costs relating to the proposed rules in this release.
Another commenter, without providing estimates, described a list of
costs that could be incurred by each affected entity, including: (1)
Evaluating its business structure and determine whether or not it
qualifies for disaggregation relief; (2) planning for being compelled
to aggregate should corporate structure change; (3) designing, testing,
and implementing systems to aggregate positions across multiple
entities across jurisdictions to ensure intraday compliance with
position limits; and (4) incurring the “as yet unknown and ongoing
cost of complying” with the proposed rules. The Commission again notes
that entities who have been transacting in futures markets have been
subject to these aggregation requirements for decades, and should have
means of aggregating positions across multiple owned entities.
Some of the costs mentioned above likely relate to the imposition
of the Commission’s aggregation provision on swaps contracts as well as
on the additional contract markets that would have been subject to
federal position limits under the now-vacated part 151. Although part
151 is no longer in effect, the Commission has proposed, in accordance
with the Dodd-Frank Act revisions to CEA section 4a, amendments to part
150 that would, among other things: expand the number of contract
markets subject to federal position limits; impose speculative limits
on swaps contracts; and require exchanges to conform their aggregation
policies to the Commission’s aggregation policy in Sec. 150.4.187
That proposed rulemaking thus may have significant implications for the
Commission’s considerations of costs and benefits of the instant
proposal.
—————————————————————————
187 See Position Limits for Derivatives (November 5, 2013).
—————————————————————————
Should that rule be adopted as proposed, the aggregation policies
proposed herein would apply on a federal level to commodity derivative
contracts, including swaps, based on an additional 19 commodities. This
expansion may create additional compliance costs for futures market
participants, who would have to expand current procedures for
aggregating futures positions in order to include swaps positions, as
well as for swaps market participants, who would be required to develop
a system to comply with aggregation policies or expand already existing
policies and procedures to incorporate the aggregation rules. Further,
should the other proposed rulemaking be adopted as proposed, exchanges
would be required to conform their aggregation policies to the
Commission’s aggregation policy. As such, all contracts with
speculative position limits, including exempt commodity contracts,
would utilize the Commission’s aggregation policy, including the
amendments to that policy proposed in this rulemaking.
Until and unless that proposal is finalized by the Commission, part
150 applies to only the nine contracts enumerated in current Sec.
150.2; in that case, the Commission believes that many of the costs
described by commenters would be substantially less than previously
estimated. The Commission requests that commenters submit data from
which the Commission can quantify the costs of the proposed rules
amending Sec. 150.4. The Commission also requests that commenters
provide data that would help the Commission to compare the potential
cost implications of the instant proposal in the event that the other
amendments to part 150 are adopted to the potential cost implications
in the event that they are not.
The Commission understands that the additional exemptions proposed
herein may create additional costs to file the proper exemptive notices
in accordance with regulations 150.4(c) and 150.4(d). However, the
exemptions are elective, so no entity is required to make this filing
if that entity determines the costs of doing so do not justify the
potential benefit resulting from the exemption. Thus, the Commission
does not anticipate the costs of obtaining any of the exemptions to be
overly burdensome. Nor does the Commission anticipate the costs would
be so great as to discourage entities from utilizing available
exemptions, as applicable.
In accordance with the Paperwork Reduction Act (PRA) the Commission
has estimated the costs of the paperwork required to claim the proposed
exemptions. As stated in the PRA section of this release, the
Commission estimates that 240 entities will submit a total of 340
responses per year and incur a total burden of 7,100 labor hours at a
cost of approximately $852,000 annually in order to claim exemptive
relief under regulation 150.4.188 This burden includes a recounting
of the estimates included in the final regulations promulgating now
vacated part 151, as those exemptions are being re-proposed in part
150; however, the estimates have been reduced from that rulemaking
because of the relatively smaller sphere of impact for part 150 as
compared to part 151. That is, as part 151 extended federal position
limits to swap contracts, the impact of that rule was broader than the
impact anticipated for the proposed regulations herein. Should the
proposed amendments to other sections of part 150 be adopted, the
Commission anticipates the PRA burden would increase accordingly.
—————————————————————————
188 See Section III.B of this release for a more detailed
summary of the Commission’s PRA burden estimates.
—————————————————————————
The Commission requests comment on its consideration of the costs
imposed by the proposed regulations. Are there other direct or indirect
costs that the Commissions should consider? Has the Commission
accurately characterized the nature of the costs to be incurred?
Commenters are specifically encouraged to submit both qualitative and
quantitative estimates of the potential costs associated with the
proposed changes to Sec. 150.4, as well as data or other information
to support such estimates.
b. Benefits
As discussed above, the Commission’s goal in proposing amendments
to its aggregation policy in regulation 151.7 was to reduce costs for
market participants without jeopardizing the effectiveness of its
aggregation policy and by extension its position limits regime.
Similarly, the Commission believes that the proposed amendments to
regulation 150.4 would help to realize that goal, essentially
benefiting both market participants (through lower costs) and the
market at large (through an effective position limits regime).
The Commission continues to view aggregation as an essential part
of its position limits regime. The proposed regulations include
exemptions from the aggregation policy, the purpose of which is to
prevent evasion of position limits through coordinated trading. The
Commission believes that because the proposed exemptions would require
demonstration of eligibility and qualification for an entity to take
advantage of them, only those entities
[[Page 68972]]
whose activities impose a lesser risk of coordinated trading would be
exempted from the aggregation requirements. In this way, the Commission
believes that the exemptions that would be available through these
proposed regulations would not inhibit the effectiveness of the
Commission’s aggregation policy in particular or position limits regime
in general.
However, for those entities who represent a lesser risk of
coordinated trading–as demonstrated by their eligibility to obtain an
applicable exemption–the proposed rule represents a benefit in the
form of lower costs of complying with the Commission’s position limits
regime while preserving the important protections of the existing
aggregation policy. Based on the comments received on the part 151
Aggregation Proposal, the Commission has attempted where possible to
minimize the regulatory burden of applying for the exemption–for
example, allowing a memorandum of law prepared by internal counsel
instead of a formal opinion–to increase the net benefits available to
market participants. The Commission also proposed an avenue for certain
entities to apply for relief on a case-by-case basis, providing
additional flexibility for market participants.
The Commission requests comment on its considerations of the
benefits of the proposed rules. Are there other benefits to markets,
market participants, and/or the public that the Commission should
consider? Commenters are specifically encouraged to include both
quantitative and qualitative assessments of the potential benefits of
the proposed regulations in Sec. 150.4, as well as data or other
information to support such assessments.
6. Section 15(a) Considerations
As the Commission has long held, position limits are an important
regulatory tool that is designed to prevent concentrated positions of
sufficient size to manipulate or disrupt markets. The aggregation of
accounts for purposes of applying position limits represents an
integral component that impacts the effectiveness of those limits. The
rules proposed herein would amend the Commission’s longstanding
aggregation policy to introduce certain exemptions. The Commission
believes these proposed regulations would preserve the important
protections of the existing aggregation policy, but at a lower cost for
market participants.
a. Protection of Market Participants and the Public
The Commission believes these proposed rules would not materially
affect the level of protection of market participants and the public
provided by the aggregation policy reflected currently in regulation
150.4. Given that the account aggregation standards are necessary to
implement an effective position limit regime, it is important that the
exemptions proposed herein be sufficiently tailored to exempt from
aggregation only those accounts that pose a low risk of coordinated
trading. The owned-entity exemption would maintain the Commission’s
historical presumption threshold of 10 percent ownership or equity
interest and make that presumption rebuttable only where several
conditions indicative of independence are met. This proposed exemption
focuses on the conditions that impact trading independence. In
addition, by providing an avenue to apply for relief when ownership is
greater than 50 percent of the owned entity, the proposed rules would
allow market participants greater flexibility in meeting the
requirements of the position limits regulations, provided they are
eligible to apply. The Commission believes that these proposed
exemptions would allow the Commission to direct its resources to
monitoring those entities that pose a higher risk of coordinated
trading and thus a higher risk of circumventing position limits,
without reducing the protection of market participants and the public
that the Commission’s aggregation policy affords.
The Commission believes the proposed exemptions would reduce costs
for market participants without compromising the integrity or
effectiveness of the Commission’s aggregation policy.
b. Efficiency, Competition, and Financial Integrity of Markets
As discussed above, the Commission does not believe that the
proposed regulations would negatively impact market quality indicators,
such as liquidity or incentive for investment, to the detriment of the
efficiency, competitiveness, or integrity of derivatives markets.
Rather, the Commission believes that these proposed regulations would
balance appropriately the need to preserve account aggregation as a
tool to uphold the integrity of the part 151 position limit regime,
while also providing for relief from the aggregation requirements where
they are not necessary to prevent coordinated speculative trading. The
Commission expects the proposed rules to further the Commission’s
mission to deter and prevent manipulative behavior while maintaining
sufficient liquidity for hedging activity and protecting the price
discovery process. Prior rules required aggregation at a 10 percent
ownership level, so these regulations, which propose relief from
aggregation at higher ownership levels, should lower the overall impact
of aggregation on market quality factors without imposing unnecessary
or inappropriate restrictions on trading.
c. Price Discovery
Similarly, because the Commission has structured the exemptions in
these proposed regulations to maintain the effectiveness of the
position limits regime in part 150, the Commission believes that these
rules would not impact the price discovery process, which the position
limit regime (including the account aggregation provisions in
regulation 150.4) is designed to protect. Because the exemptions in and
of themselves do not directly impact the formation of prices–only the
aggregation of positions–the rules would not impact the price
discovery process.
d. Risk Management
The Commission has stated previously that the imposition of
position limits requires market participants to ensure they do not
amass positions of sufficient size to disrupt the orderly flow of the
market or to influence unduly the formation of prices. In so doing,
market participants protect themselves–and the market as a whole–from
the disruption that such large positions could cause, when traded
improperly.189 The proposed rules would allow entities to not
aggregate positions in circumstances where the Commission has
determined that the positions are at a lesser risk of disrupting the
market through the coordinated trading of affiliated entities. Thus,
the Commission believes these rules, if adopted, would not lessen the
effectiveness of the sound risk management practices that the position
limits regime promotes. The Commission does not expect the proposed
regulations to materially inhibit the use of derivatives for hedging,
because hedge exemptions are available to any entity regardless of
position aggregation and the proposed regulations would be more
permissive than the 10 percent threshold for
[[Page 68973]]
aggregation that applied in existing regulation 150.4.
—————————————————————————
189 76 FR 71626 at 71675.
—————————————————————————
e. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations related to the costs and benefits of the rules.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (“RFA”) requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.190 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).191 The
requirements related to the proposed amendments fall mainly on
registered entities, exchanges, FCMs, swap dealers, clearing members,
foreign brokers, and large traders. The Commission has previously
determined that registered DCMs, FCMs, swap dealers, major swap
participants, eligible contract participants, SEFs, clearing members,
foreign brokers and large traders are not small entities for purposes
of the RFA.192 While the requirements under the proposed rulemaking
may impact non-financial end users, the Commission notes that position
limits levels apply only to large traders. Accordingly, the Chairman,
on behalf of the Commission, hereby certifies, on behalf of the
Commission, pursuant to 5 U.S.C. 605(b), that the actions proposed to
be taken herein would not have a significant economic impact on a
substantial number of small entities. The Chairman made the same
certification in the Proposal,193 and the Commission did not receive
any comments on the RFA in relation to the proposed rulemaking.
—————————————————————————
190 44 U.S.C. 601 et seq.
191 5 U.S.C. 601(2), 603-05.
192 See Policy Statement and Establishment of Definitions of
“Small Entities” for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619, Apr. 30, 1982 (DCMs, FCMs, and large traders)
(“RFA Small Entities Definitions”); Opting Out of Segregation, 66
FR 20740, 20743, Apr. 25, 2001 (eligible contract participants);
Position Limits for Futures and Swaps; Final Rule and Interim Final
Rule, 76 FR 71626, 71680, Nov. 18, 2011 (clearing members); Core
Principles and Other Requirements for Swap Execution Facilities, 78
FR 33476, 33548, June 4, 2013 (SEFs); A New Regulatory Framework for
Clearing Organizations, 66 FR 45604, 45609, Aug. 29, 2001 (DCOs);
Registration of Swap Dealers and Major Swap Participants, 77 FR
2613, Jan. 19, 2012, (swap dealers and major swap participants); and
Special Calls, 72 FR 50209, Aug. 31, 2007 (foreign brokers).
193 See 77 FR 31780.
—————————————————————————
C. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act (“PRA”) imposes certain requirements
on Federal agencies in connection with their conducting or sponsoring
any collection of information as defined by the PRA. 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 issued by the Office of Management and Budget (“OMB”). Certain
provisions of the proposed regulations would result in amendments to a
previously-approved collection of information requirements within the
meaning of the PRA. Therefore, the Commission is submitting to OMB for
review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11 the
information collection requirements proposed in this rulemaking
proposal as an amendment to the previously-approved collection
associated with OMB control number 3038-0013.
If adopted, responses to this collection of information would be
mandatory. The Commission will protect proprietary information
according to the Freedom of Information Act and 17 CFR part 145, headed
“Commission Records and Information.” In addition, the Commission
emphasizes that section 8(a)(1) of the Act strictly prohibits the
Commission, unless specifically authorized by the Act, from making
public “data and information that would separately disclose the
business transactions or market positions of any person and trade
secrets or names of customers.” The Commission also is required to
protect certain information contained in a government system of records
pursuant to the Privacy Act of 1974. In January of 2012, the Commission
received a petition requesting relief under section 4a(a)(7) of the CEA
and clarification of certain aggregation requirements in regulation
151.7.
On May 30, 2012, the Commission published in the Federal Register a
notice of proposed modifications to part 151 of the Commission’s
regulations. The modifications addressed the policy for aggregation
under the Commission’s position limits regime for 28 exempt and
agricultural commodity futures and options contracts and the physical
commodity swaps that are economically equivalent to such contracts. In
an Order dated September 28, 2012, the District Court for the District
of Columbia vacated part 151 of the Commission’s regulations. The
Commission is now proposing modifications to the aggregation provisions
of part 150 of the Commission’s regulations that are substantially
similar to the aggregation modifications proposed to part 151, except
that the modifications address the policy for aggregation under the
Commission’s position limits regime for futures and option contracts on
nine agricultural commodities set forth in part 150.
The Commission is also proposing to amend other sections of part
150 in a separate rulemaking that would, among other things: Expand the
number of contract markets subject to federal position limits; impose
speculative limits on swaps contracts; and require exchanges to conform
their aggregation policies to the Commission’s aggregation policy in
part 150.4.194 Given the increase in scope proposed in the other
rulemaking, the Commission anticipates a corresponding increase in the
PRA burdens arising from this proposal should the amendments to other
sections of part 150 be adopted. Unless and until that rulemaking is
finalized, however, the instant proposal applies only to the nine
commodities enumerated in current Sec. 150.2. The Commission requests
comment regarding the impact on its PRA analysis should the amendments
to part 150 proposed in the separate rulemaking be adopted.
—————————————————————————
194 See Position Limits for Derivatives (November 5, 2013).
—————————————————————————
Specifically, regulation 150.4(b)(2) proposes an exemption for a
person to disaggregate the positions of a separately organized entity
(“owned entity”). To claim the exemption, a person would need to meet
certain criteria and file a notice with the Commission in accordance
with regulation 150.4(c). The notice filing would need to demonstrate
compliance with certain conditions set forth in regulations
150.4(b)(2)(i)(A)-(E). Similar to other exemptions from aggregation,
the notice filing would be effective upon submission to the Commission,
but the Commission may call for additional information as well as
reject, modify or otherwise condition such relief. Further, such person
is obligated to amend the notice filing in the event of a material
change to the filing.
The proposed rules also contain proposed regulation 150.4(b)(3)
which establishes a similar but separate owned-entity exemption with
more intensive qualifications for exemption. To claim the exemption, a
person would
[[Page 68974]]
need to meet certain criteria above and beyond that imposed by
regulation 150.4(b)(2) and file an application for exemption with the
Commission in accordance with regulation 150.4(c). The notice filing
would need to demonstrate compliance with certain conditions as well as
additional information that could inform the Commission’s decision to
grant or not to grant the person’s application. Similar to other
exemptions from aggregation, the notice filing would be effective upon
submission to the Commission, but the Commission may call for
additional information as well as reject, modify or otherwise condition
such relief. Further, such person is obligated to amend the notice
filing in the event of a material change to the filing.
The Commission is also proposing to amend the definitions of
eligible entity and independent account controller in part 150.1 and
150.4(5) to specifically provide for regulation 4.13 commodity pools
established as limited liability companies. In addition, the Commission
is proposing to amend the definition of independent account controller
to specifically provide for commodity pool operators that operate
excluded pools as defined under regulation 4.5(a)(4) of the
Commission’s regulations. These amendments would likely expand the
number of entities that can file for the independent account controller
aggregation exemption.
The proposal includes two provisions in proposed regulations
150.4(b)(6) and 150.4(b)(7) providing exemptions from aggregation for
underwriting agents and broker-dealers engaging in market making
activity, respectively. Both exemptions are self-executing and do not
require a notice filing.
The proposal also includes proposed regulation 150.4(b)(8) which
provides an exemption from aggregation where the sharing of information
between persons would cause either person to violate federal law. The
exemption would apply to a situation where the sharing of information
creates a reasonable risk of a violation of federal, state, or foreign
law or regulations adopted thereunder. The rules also propose a
requirement that market participants file a notice demonstrating
compliance with the condition, including an internal memorandum of
counsel. The memorandum allows Commission staff to review the legal
basis for the asserted regulatory impediment to the sharing of
information, and is particularly helpful where the asserted impediment
arises from laws and/or regulations that the Commission does not
directly administer. Further, Commission staff will have the ability to
consult with other federal regulators as to the accuracy of the
opinion, and to coordinate the development of rules surrounding
information sharing and aggregation across accounts in the future.
Finally, the proposed rules propose relief from notice filings for
“higher-tier” entities, which, under proposed regulation 150.4(b)(9),
may rely on the filings submitted by owned entities. A “higher-tier”
entity need not submit a separate notice pursuant to the notice filing
requirements to rely upon the notice filed by an owned entity as long
as it complies with conditions of the applicable aggregation exemption.
2. Methodology and Assumptions
It is not possible at this time to precisely determine the number
of respondents affected by the proposed rules. Many of the regulations
that impose PRA burdens are exemptions that a market participant may
elect to take advantage of, meaning that without intimate knowledge of
the day-to-day business decisions of all its market participants, the
Commission could not know which participants, or how many, may elect to
obtain such an exemption. Further, the Commission is unsure of how many
participants not currently in the market may be required to or may
elect to incur the estimated burdens in the future.
These limitations notwithstanding, the Commission has made best-
effort estimations regarding the likely number of affected entities for
the purposes of calculating burdens under the PRA. The Commission used
its proprietary data, collected from market participants, to estimate
the number of respondents for each of the proposed obligations subject
to the PRA by estimating the number of respondents who may be close to
a position limit and thus may file for relief from aggregation
requirements.
The Commission’s estimates concerning wage rates are based on 2011
salary information for the securities industry compiled by the
Securities Industry and Financial Markets Association (“SIFMA”). The
Commission is using a figure of $120 per hour, which is derived from a
weighted average of salaries across different professions from the
SIFMA Report on Management & Professional Earnings in the Securities
Industry 2011, modified to account for an 1800-hour work-year, adjusted
to account for the average rate of inflation in 2012. This figure was
then multiplied by 1.33 to account for benefits 195 and further by
1.5 to account for overhead and administrative expenses.196 The
Commission anticipates that compliance with the provisions would
require the work of an information technology professional; a
compliance manager; an accounting professional; and an associate
general counsel. Thus, the wage rate is a weighted national average of
salary for professionals with the following titles (and their relative
weight); “programmer (average of senior and non-senior)” (15%
weight), “senior accountant” (15%) “compliance manager” (30%), and
“assistant/associate general counsel” (40%). All monetary estimates
have been rounded to the nearest hundred dollars.
—————————————————————————
195 The Bureau of Labor Statistics reports that an average of
32.8% of all compensation in the financial services industry is
related to benefits. This figure may be obtained on the Bureau of
Labor Statistics Web site, at http://www.bls.gov/news.release/ecec.t06.htm. The Commission rounded this number to 33% to use in
its calculations.
196 Other estimates of this figure have varied dramatically
depending on the categorization of the expense and the type of
industry classification used (see, e.g., BizStats at http://www.bizstats.com/corporation-industry-financials/finance-insurance-52/securities-commodity-contracts-other-financial-investments-523/commodity-contracts-dealing-and-brokerage-523135/show and Damodaran
Online at http://pages.stern.nyu.edu/~adamodar/pc/datasets/
uValuedata.xls. The Commission has chosen to use a figure of 50% for
overhead and administrative expenses to attempt to conservatively
estimate the average for the industry.
—————————————————————————
The Commission welcomes comment on its assumptions and estimates.
3. Reporting Burdens
Proposed regulation 150.4(b)(2) would require qualified persons to
file a notice in order to claim exemptive relief from aggregation.
Further, proposed regulation 150.4(b)(2)(ii) states that the notice is
to be filed in accordance with proposed regulation 150.4(c), which
requires a description of the relevant circumstances that warrant
disaggregation and a statement that certifies that the conditions set
forth in the exemptive provision have been met. Regulation 150.4(b)(3)
specifies that qualified persons may request an exemption from
aggregation in accordance with proposed regulation 150.4(c). Such a
request would be required to include a description of the relevant
circumstances that warrant disaggregation and a statement certifying
the conditions have been met. Persons claiming these exemptions would
be required to submit to the Commission, as requested, such information
as relates to the claim for exemption. An updated or amended notice
must be filed with the Commission upon any material change.
[[Page 68975]]
The release also proposes to extend relief available under
150.4(b)(5) to additional entities; the Commission expects that, as a
result of the expanded exemptive relief available to these entities, a
greater number of persons will file exemptive notices under
150.4(b)(5). The Commission also expects entities to file for relief
under proposed regulation 150.4(b)(8), which allows for entities to
file a notice, including a memorandum of law, in order to claim the
exemption.
Given the expansion of the exemptions that market participants may
claim, the Commission anticipates an increase in the number of notice
filings. However, because of the relief for “higher-tier” entities
under regulation 150.4(b)(9) the Commission expects that increase to be
offset partially by a reduction in the number of filings by “higher-
tier” entities. Thus, the Commission anticipates a net increase in the
number of filings under regulation 150.4 as a result of the adoption of
these proposed rules. The Commission believes that this increase will
create an increase in the annual labor burden. However, because
entities have already incurred the capital, start-up, operating, and
maintenance costs to file other exemptive notices–such as those
currently allowed for independent account controllers and futures
commission merchants under regulation 150.4–the Commission does not
anticipate an increase in those costs.
The Commission estimates that 100 entities will each file two
notices annually under proposed regulation 150.4(b)(2), at an average
of 20 hours per filing. Thus, the Commission approximates a total per
entity burden of 40 labor hours annually. At an estimated labor cost of
$120, the Commission estimates a cost of approximately $4,800 per
entity for filings under proposed regulation 150.4(b)(2).
The Commission estimates that 25 entities will each file one notice
annually under proposed regulation 150.4(b)(3), at an average of 30
hours per filing. Thus, the Commission approximates a total per entity
burden of 30 labor hours annually. At an estimated labor cost of $120,
the Commission estimates a cost of approximately $3,600 per entity for
filings under proposed regulation 150.4(b)(3).
The Commission estimates that 75 entities will each file one notice
annually under proposed regulation 150.4(b)(5), at an average of 10
hours per filing. Thus, the Commission approximates a total per entity
burden of 10 labor hours annually. At an estimated labor cost of $120,
the Commission estimates a cost of approximately $1,200 per entity for
filings under proposed regulation 150.4(b)(5).
The Commission estimates that 40 entities will each file one notice
annually under proposed regulation 150.4(b)(8), including the requisite
memorandum of law, at an average of 40 hours per filing. Thus, the
Commission approximates a total per entity burden of 40 labor hours
annually. At an estimated labor cost of $120,197 the Commission
estimates a cost of approximately $4,800 per entity for filings under
proposed regulation 150.4(b)(8).
—————————————————————————
197 See above, text accompanying note 196.
—————————————————————————
In sum, the Commission estimates that 240 entities will submit a
total of 340 responses per year and incur a total burden of 7,100 labor
hours at a cost of approximately $852,000 annually in order to claim
exemptive relief under regulation 150.4.
4. Comments on Information Collection
The Commission invites the public and other federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (1) Evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility; (2) evaluate the accuracy of the Commission’s
estimate of the burden of the proposed collections of information; (3)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) minimize the burden
of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by email at [email protected]. Please provide the Commission with a copy of
comments submitted so that all comments can be summarized and addressed
in the final regulation preamble. Refer to the Addresses section of
this notice for comment submission instructions to the Commission. A
copy of the supporting statements for the collection of information
discussed above may be obtained by visiting RegInfo.gov. OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication of this release. Consequently,
a comment to OMB is most assured of being fully considered if received
by OMB (and the Commission) within 30 days after the publication of
this notice of proposed rulemaking.
As noted above, the following proposed amendments to part 150 may
require conforming technical changes if the Commission also adopts any
proposed amendments to its regulations regarding position limits.198
—————————————————————————
198 See Position Limits for Derivatives (November 5, 2013).
—————————————————————————
List of Subjects in 17 CFR Part 150
Position limits, Bona fide hedging, Referenced contracts.
For the reasons discussed in the preamble, the Commission proposes
to amend 17 CFR part 150 as follows:
PART 150–LIMITS ON POSITIONS
0
1. The authority citation for part 150 is revised to read as follows:
Authority: 7 U.S.C. 6a, 6c, and 12a(5), as amended by Title VII
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010).
0
2. Amend Sec. 150.1 to revise paragraphs (d), (e)(2), and (e)(5) to
read as follows:
Sec. 150.1 Definitions.
* * * * *
(d) Eligible entity means a commodity pool operator; the operator
of a trading vehicle which is excluded, or which itself has qualified
for exclusion from the definition of the term “pool” or “commodity
pool operator,” respectively, under Sec. 4.5 of this chapter; the
limited partner, limited member or shareholder in a commodity pool the
operator of which is exempt from registration under Sec. 4.13 of this
chapter; a commodity trading advisor; a bank or trust company; a
savings association; an insurance company; or the separately organized
affiliates of any of the above entities:
(1) Which authorizes an independent account controller
independently to control all trading decisions with respect to the
eligible entity’s client positions and accounts that the independent
account controller holds directly or indirectly, or on the eligible
entity’s behalf, but without the eligible entity’s day-to-day
direction; and
(2) Which maintains:
(i) Only such minimum control over the independent account
controller as is consistent with its fiduciary responsibilities to the
managed positions and accounts, and necessary
[[Page 68976]]
to fulfill its duty to supervise diligently the trading done on its
behalf; or
(ii) If a limited partner, limited member or shareholder of a
commodity pool the operator of which is exempt from registration under
Sec. 4.13 of this chapter, only such limited control as is consistent
with its status.
(e) * * *
(2) Over whose trading the eligible entity maintains only such
minimum control as is consistent with its fiduciary responsibilities to
the managed positions and accounts to fulfill its duty to supervise
diligently the trading done on its behalf or as consistent with such
other legal rights or obligations which may be incumbent upon the
eligible entity to fulfill;
* * * * *
(5) Who is:
(i) Registered as a futures commission merchant, an introducing
broker, a commodity trading advisor, or an associated person of any
such registrant, or
(ii) A general partner, managing member or manager of a commodity
pool the operator of which is excluded from registration under Sec.
4.5(a)(4) of this chapter or Sec. 4.13 of this chapter, provided that
such general partner, managing member or manager complies with the
requirements of Sec. 150.4(c).
* * * * *
Sec. 150.3 [Amended]
0
3. Amend Sec. 150.3 as follows:
0
a. Remove the semicolon and the word “or” at the end of paragraph
(a)(3);
0
b. Add a period at the end of paragraph (a)(3); and
0
c. Remove paragraph (a)(4).
0
4. Revise Sec. 150.4 to read as follows:
Sec. 150.4 Aggregation of positions.
(a) Positions to be aggregated–(1) Trading control or 10 percent
or greater ownership or equity interest. For the purpose of applying
the position limits set forth in Sec. 150.2, unless an exemption set
forth in paragraph (b) of this section applies, all positions in
accounts for which any person, by power of attorney or otherwise,
directly or indirectly controls trading or holds a 10 percent or
greater ownership or equity interest must be aggregated with the
positions held and trading done by such person. For the purpose of
determining the positions in accounts for which any person controls
trading or holds a 10 percent or greater ownership or equity interest,
positions or ownership or equity interests held by, and trading done or
controlled by, two or more persons acting pursuant to an expressed or
implied agreement or understanding shall be treated the same as if the
positions or ownership or equity interests were held by, or the trading
were done or controlled by, a single person.
(2) Substantially identical trading. Notwithstanding the provisions
of paragraph (b) of this section, for the purpose of applying the
position limits set forth in Sec. 150.2, any person that, by power of
attorney or otherwise, holds or controls the trading of positions in
more than one account or pool with substantially identical trading
strategies, must aggregate all such positions.
(b) Exemptions from aggregation. For the purpose of applying the
position limits set forth in Sec. 150.2, and notwithstanding the
provisions of paragraph (a)(1) of this section, but subject to the
provisions of paragraph (a)(2) of this section, the aggregation
requirements of this section shall not apply in the circumstances set
forth in this paragraph (b).
(1) Exemption for ownership by limited partners, shareholders or
other pool participants. Any person that is a limited partner, limited
member, shareholder or other similar type of pool participant holding
positions in which the person by power of attorney or otherwise
directly or indirectly has a 10 percent or greater ownership or equity
interest in a pooled account or positions need not aggregate the
accounts or positions of the pool with any other accounts or positions
such person is required to aggregate, except that such person must
aggregate the pooled account or positions with all other accounts or
positions owned or controlled by such person if such person:
(i) Is the commodity pool operator of the pooled account;
(ii) Is a principal or affiliate of the operator of the pooled
account, unless:
(A) 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;
(B) The person does not have direct, day-to-day supervisory
authority or control over the pool’s trading decisions;
(C) The person, if a principal of the operator of the pooled
account, maintains only such minimum control over the commodity pool
operator as is consistent with its responsibilities as a principal and
necessary to fulfill its duty to supervise the trading activities of
the commodity pool; and
(D) The pool operator has complied with the requirements of
paragraph (c) of this section on behalf of the person or class of
persons; or
(iii) Has, by power of attorney or otherwise directly or
indirectly, a 25 percent or greater ownership or equity interest in a
commodity pool, the operator of which is exempt from registration under
Sec. 4.13 of this chapter.
(2) Exemption for certain ownership of greater than 10 percent in
an owned entity. Any person with an ownership or equity interest in an
owned entity of 10 percent or greater but not more than 50 percent
(other than an interest in a pooled account subject to paragraph (b)(1)
of this section), need not aggregate the accounts or positions of the
owned entity with any other accounts or positions such person is
required to aggregate, provided that:
(i) Such person, including any entity that such person must
aggregate, and the owned entity:
(A) Do not have knowledge of the trading decisions of the other;
(B) Trade pursuant to separately developed and independent trading
systems;
(C) Have and enforce written procedures to preclude each from
having knowledge of, gaining access to, or receiving data about, trades
of the other. Such procedures must include document routing and other
procedures or security arrangements, including separate physical
locations, which would maintain the independence of their activities;
(D) Do not share employees that control the trading decisions of
either; and
(E) Do not have risk management systems that permit the sharing of
trades or trading strategy; and
(ii) Such person complies with the requirements of paragraph (c) of
this section.
(3) Exemption for certain ownership of greater than 50 percent in
an owned entity. Any person with a greater than 50 percent ownership or
equity interest in an owned entity (other than an interest in a pooled
account subject to paragraph (b)(1) of this section), need not
aggregate the accounts or positions of the owned entity with any other
accounts or positions such person is required to aggregate, provided
that:
(i) Such person certifies to the Commission that the owned entity
is not required under U.S. generally accepted accounting principles to
be, and is not, consolidated on the financial statement of such person;
(ii) Such person, including any entity that such person must
aggregate, and the owned entity meet the requirements of paragraphs
(b)(2)(i)(A) through (E) of this section and such person demonstrates
to the Commission that procedures are in place that are
[[Page 68977]]
reasonably effective to prevent coordinated trading decisions by such
person, any entity that such person must aggregate, and the owned
entity;
(iii) Each representative (if any) of the person on the owned
entity’s board of directors (or equivalent governance body) certifies
that he or she does not control the trading decisions of the owned
entity;
(iv) Such person certifies to the Commission that either all of the
owned entity’s positions qualify as bona fide hedging transactions or
the owned entity’s positions that do not so qualify do not exceed 20
percent of any position limit currently in effect, and agrees with the
Commission that:
(A) If such certification becomes untrue for any owned entity of
the person, such person will aggregate the accounts or positions of the
owned entity with any other accounts or positions such person is
required to aggregate; however, after a period of three complete
calendar months in which such person aggregates such accounts or
positions and all of the owned entity’s positions qualify as bona fide
hedging transactions, such person may make such certification again and
be permitted to cease such aggregation;
(B) Any owned entity of the person shall, upon call by the
Commission at any time, make a filing responsive to the call,
reflecting only such owned entity’s positions and transactions, and not
reflecting the inventory of the person or any other accounts or
positions such person is required to aggregate (this requirement shall
apply regardless of whether the owned entity or the person is subject
to Sec. 18.05 of this chapter); and
(C) Such person shall inform the Commission, and provide to the
Commission any information that the Commission may request, if any
owned entity engages in coordinated activity regarding the trading of
such owned entity, such person, or any other accounts or positions such
person is required to aggregate, even if such coordinated activity does
not conflict with any of the requirements of paragraphs (b)(2)(i)(A) to
(b)(2)(i)(E) of this section;
(v) The Commission finds, in its discretion, that such person has
satisfied the conditions of this paragraph (b)(3);
(vi) Such person, when first requesting disaggregation relief under
this paragraph, complies with the requirements of paragraph (c)(2) of
this section; and
(vii) Such person complies with the requirements of paragraph
(c)(1) of this section if, subsequent to a Commission finding that the
person has satisfied the conditions of this paragraph (b)(3), there is
a material change to the information provided to the Commission in the
person’s original filing under paragraph (c)(2) of this section.
(4) Exemption for accounts held by futures commission merchants. A
futures commission merchant or any affiliate of a futures commission
merchant need not aggregate positions it holds 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 of its affiliates, if:
(i) A person other than the futures commission merchant or the
affiliate directs trading in such an account;
(ii) 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;
(iii) 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; and
(iv) The futures commission merchant or the affiliate has complied
with the requirements of paragraph (c) of this section.
(5) Exemption for accounts carried by an 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.
150.1(e), except for the spot month in physical-delivery commodity
contracts, provided that the eligible entity has complied with the
requirements of paragraph (c) of this section, and that the overall
positions held or controlled by such independent account controller may
not exceed the limits specified in Sec. 150.2.
(i) 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:
(A) 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 to the managed
positions and accounts and necessary to fulfill its duty to supervise
diligently the trading done on its behalf;
(B) Trade such accounts pursuant to separately developed and
independent trading systems;
(C) Market such trading systems separately; and
(D) 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.
(6) Exemption for underwriting. A person need not aggregate the
positions or accounts of an owned entity if the ownership or equity
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.
(7) Exemption for broker-dealer activity. A broker-dealer
registered with the Securities and Exchange Commission, or similarly
registered with a foreign regulatory authority, need not aggregate the
positions or accounts of an owned entity if such broker-dealer does not
have greater than a 50 percent ownership or equity interest in the
owned entity and the ownership or equity interest is based on the
ownership of securities acquired in the normal course of business as a
dealer, provided that such person does not have actual knowledge of the
trading decisions of the owned entity.
(8) Exemption for information sharing restriction. A person need
not aggregate the positions or accounts of an owned entity if the
sharing of information associated with such aggregation (such as, only
by way of example, information reflecting the transactions and
positions of a such person and the owned entity) creates a reasonable
risk that either person could violate state or federal law or the law
of a foreign jurisdiction, or regulations adopted thereunder, provided
that such person does not have actual knowledge of information
associated with such aggregation, and provided further that such person
has filed a prior notice pursuant to paragraph (c) of this section and
included with such notice a written memorandum of law explaining in
detail the basis for the conclusion that
[[Page 68978]]
the sharing of information creates a reasonable risk that either person
could violate state or federal law or the law of a foreign
jurisdiction, or regulations adopted thereunder. However, the exemption
in this paragraph shall not apply where the law or regulation serves as
a means to evade the aggregation of accounts or positions. All
documents submitted pursuant to this paragraph shall be in English, or
if not, accompanied by an official English translation.
(9) Exemption for higher-tier entities. If an owned entity has
filed a notice under paragraph (c) of this section, any person with an
ownership or equity interest of 10 percent or greater in the owned
entity need not file a separate notice identifying the same positions
and accounts previously identified in the notice filing of the owned
entity, provided that:
(i) Such person complies with the conditions applicable to the
exemption specified in the owned entity’s notice filing, other than the
filing requirements; and
(ii) Such person does not otherwise control trading of the accounts
or positions identified in the owned entity’s notice.
(iii) Upon call by the Commission, any person relying on the
exemption in this paragraph (b)(9) 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.
(c) Notice filing for exemption. (1) Persons seeking an aggregation
exemption under paragraph (b)(1)(ii), (b)(2), (b)(3)(vii), (b)(4),
(b)(5), or (b)(8) of this section shall file a notice with the
Commission, which shall be effective upon submission of the notice, and
shall include:
(i) A description of the relevant circumstances that warrant
disaggregation; and
(ii) A statement of a senior officer of the entity certifying that
the conditions set forth in the applicable aggregation exemption
provision have been met.
(2) Persons with a greater than 50 percent ownership or equity
interest in an owned entity seeking an aggregation exemption under
paragraph (b)(3)(vi) of this section shall file a request with the
Commission, which shall not become effective unless and until the
Commission finds, in its discretion, that such person has satisfied the
conditions of paragraph (b)(3) of this section, and shall include:
(i) A description of the relevant circumstances that warrant
disaggregation;
(ii) A statement of a senior officer of the entity certifying that
the conditions set forth in paragraph (b)(3) of this section have been
met;
(iii) A demonstration that procedures are in place that are
reasonably effective to prevent coordinated trading decisions by such
person, any entity that such person must aggregate, and the owned
entity; and
(iv) All certifications required under paragraph (b)(3) of this
section.
(3) Upon call by the Commission, any person claiming an aggregation
exemption under this section shall provide such information
demonstrating that the person meets the requirements of the exemption,
as is requested by the Commission. Upon notice and opportunity for the
affected person to respond, the Commission may amend, suspend,
terminate, or otherwise modify a person’s aggregation exemption for
failure to comply with the provisions of this section.
(4) In the event of a material change to the information provided
in any notice filed under this paragraph (c), an updated or amended
notice shall promptly be filed detailing the material change.
(5) Any notice filed under this paragraph (c) shall be submitted in
the form and manner provided for in paragraph (d) of this section.
(d) 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 using the format, coding
structure, and electronic data transmission procedures approved in
writing by the Commission. Unless otherwise provided in this section,
the notice shall be effective upon filing. When the reporting entity
discovers errors or omissions to past reports, the entity shall so
notify the Commission and file corrected information in a form and
manner and at a time as may be instructed by the Commission or its
designee.
(e) Delegation of authority to the Director of the Division of
Market Oversight. (1) The Commission hereby delegates, until it orders
otherwise, to the Director of the Division of Market Oversight or such
other employee or employees as the Director may designate from time to
time, the authority:
(i) In paragraph (b)(3) of this section:
(A) To determine, after consultation with the General Counsel or
such other employee or employees as the General Counsel may designate
from time to time, if a person has satisfied the conditions of
paragraph (b)(3) of this section; and
(B) To call for additional information from a person claiming the
exemption in paragraph (b)(3) of this section, reflecting such owned
entity’s positions and transactions (regardless of whether the owned
entity or the person is subject to Sec. 18.05 of this chapter).
(ii) In paragraph (b)(9)(iii) of this section to call for
additional information from a person claiming the exemption in
paragraph (b)(9)(i) of this section.
(iii) In paragraph (d) of this section 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.
(2) The Director of the Division of Market Oversight may submit to
the Commission for its consideration any matter which has been
delegated in this section.
(3) Nothing in this section prohibits the Commission, at its
election, from exercising the authority delegated in this section.
Issued in Washington, DC, on November 8, 2013, by the
Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.
Appendices to Aggregation of Positions–Commission Voting Summary and
Statement of Chairman
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 Chilton,
O’Malia, and Wetjen voted in the affirmative; no Commissioner voted
in the negative.
Appendix 2–Statement of Chairman Gary Gensler
I support the proposed rule that would modify the CFTC’s
aggregation provisions for limits on speculative positions.
As we move forward on position limits for futures and swaps, it
is important to concurrently implement reforms to the Commission’s
current regulations regarding which positions are totaled up as
being owned or controlled by a particular entity. These total,
aggregated positions under common control are then subject to the
speculative position limits, taking into consideration any relevant
exemptions.
We live in a time when companies often have numerous affiliated
entities, sometimes
[[Page 68979]]
measured in the hundreds or thousands. Thus, it is appropriate to
look at how speculative position limits apply across the enterprise.
When Lehman Brothers failed, it had 3,300 legal entities within its
corporate family. The question is–do you count all those 3,300
legal entities that Lehman Brothers once controlled, or do you apply
a limit for each and every one of the 3,300? If we chose the second,
that would be, in practice, a loophole around congressional intent.
That’s why this issue of aggregation comes into play.
The proposal generally provides for aggregation when various
entities are under common control. For instance, if the ownership
interest is greater than 50 percent, it will be presumed to be
aggregated and part of the group.
The proposal provides for certain exemptions from aggregation
for the following reasons:
Where sharing of information would violate or create
reasonable risk of violating a federal, state or foreign
jurisdiction law or regulation;
Where an ownership interest is less than 50 percent and
trading is independently controlled;
Where an ownership interest is greater than 50 percent
in a non-consolidated entity whose trading is independently
controlled, and an applicant certifies that such entity’s positions
either qualify as bona fide hedging positions or do not exceed 20
percent of any position limit; or
Where ownership of less than 50 percent results from
broker-dealer activities in the normal course of business.
[FR Doc. 2013-27339 Filed 11-14-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: November 15, 2013
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