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Federal Register, Volume 80 Issue 188 (Tuesday, September 29, 2015)
[Federal Register Volume 80, Number 188 (Tuesday, September 29, 2015)]
[Proposed Rules]
[Pages 58365-58382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24596]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 150
RIN 3038-AD82
Aggregation of Positions
AGENCY: Commodity Futures Trading Commission.
ACTION: Supplemental notice of proposed rulemaking.
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SUMMARY: On November 15, 2013, the Commodity Futures Trading Commission
(“Commission” or “CFTC”) published in the Federal Register a notice
of proposed modifications to part 150 of the Commission’s regulations.
The modifications addressed 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
also noted that if the Commission’s proposed 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 are finalized, the proposed modifications would also apply to
the position limits regime for those contracts and swaps. The
Commission is now proposing a revision to its proposed modification to
the aggregation provisions of part 150, which addresses when
aggregation is required on the basis of ownership of a greater than 50
percent interest in another entity.
DATES: Comments must be received on or before November 13, 2015.
ADDRESSES: You may submit comments, identified by RIN 3038-AD82, by any
of the following methods:
CFTC Web site: http://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the Web site.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures
[[Page 58366]]
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.
Please submit your comments using only one of these methods.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that may be exempt from disclosure under the Freedom of Information Act
(“FOIA”), a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
Sec. 145.9 of the Commission’s regulations, 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the FOIA.
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
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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. The Commission
has proposed to amend its position limits regime so that it would
extend to 28 exempt and agricultural commodity futures and options
contracts and the physical commodity swaps that are economically
equivalent to such contracts. See Position Limits for Derivatives,
78 FR 75680 (Dec. 12, 2013).
3 See 17 CFR 150.2.
4 See 17 CFR 150.3.
5 See 17 CFR 150.4.
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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
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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).
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B. Proposed Modifications to the Policy for Aggregation Under Part 150
of the Commission’s Regulations
On November 15, 2013, the Commission proposed to amend regulation
150.4, and certain related regulations, to include rules to determine
which accounts and positions a person must aggregate (the “2013
Aggregation Proposal”).11 Among other elements, the 2013 Aggregation
Proposal included a notice filing procedure, effective upon submission,
to permit a person in specified circumstances to disaggregate the
positions of a separately organized entity (“owned entity”), if such
person has between a 10 percent and 50 percent ownership or equity
interest in the owned entity.12 The notice filing would need to
demonstrate compliance with certain conditions set forth in the
proposed rule. Under the 2013 Aggregation Proposal, persons with a
greater than 50 percent ownership or equity interest in the owned
entity would have to apply on a case-by-case basis to the Commission
for permission to disaggregate, and await the Commission’s decision as
to whether certain conditions specified in the proposed rule had been
satisfied and therefore disaggregation would be permitted.13
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11 See Aggregation, Position Limits for Futures and Swaps, 78
FR 68946 (Nov. 15, 2013). The 2013 Aggregation Proposal was
substantially similar to aggregation rules that had been adopted in
part 151 of the Commission’s regulations in 2011, see Position
Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011) as
proposed to be amended in May 2012, see Aggregation, Position Limits
for Futures and Swaps, 77 FR 31767 (May 30, 2012).
In an Order dated September 28, 2012, the District Court for the
District of Columbia vacated part 151 of the Commission’s
regulations, including those aggregation rules. See International
Swaps and Derivatives Association v. United States Commodity Futures
Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 2012). The revised
position limit levels in amended section 150.2 were not vacated.
12 See 2013 Aggregation Proposal, 78 FR at 68958-59.
13 See id. at 68959-61.
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The 2013 Aggregation Proposal reflected the Commission’s long-
standing incremental approach to exemptions from the aggregation
requirement for persons owning a financial interest in an entity. In
the 2013 Aggregation Proposal, the Commission reaffirmed its belief
that ownership of an entity is an appropriate criterion for aggregation
of that entity’s positions, noting that section 4a(a)(1) of the CEA
provides that “[i]n 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.” 14 The Commission
explained that as early as 1957, the Commission’s predecessor (the
Commodity Exchange Authority) issued determinations requiring that
accounts in which a
[[Page 58367]]
person has a financial interest be included in aggregation.15
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14 See id. at 68956, citing 7 U.S.C. 6a(a)(1).
15 See 2013 Aggregation Proposal, 78 FR at 68956, citing
Administrative Determination 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.”). The Commission’s predecessor, and later the Commission,
provided the aggregation standards for purposes of position limits
in its regulation 18.01 (within the large trader reporting rules).
See Supersedure of Certain Regulations, 26 FR 2968 (Apr. 7, 1961).
In its Statement of Policy on Aggregation of Accounts and
Adoption of Related Reporting Rules, 44 FR 33839 (June 13, 1979)
(“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 Revision of Federal Speculative Position
Limits, 64 FR 24038 (May 5, 1999) (“1999 Amendments”). 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 Position Limits for Futures and Swaps,
76 FR 71626 (Nov. 18, 2011).
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Regarding the threshold level at which an exemption from
aggregation on the basis of ownership would be available, the
Commission noted in the 2013 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.16
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16 See 2013 Aggregation Proposal, 78 FR at 68958.
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The Commission noted that while other of its rulemakings prior to
the 2013 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.17
Further, the Commission reiterated its belief in incremental
development of aggregation exemptions over time.18 Consistent with
that incremental approach, in the 2013 Aggregation Proposal the
Commission considered the additional information provided and the
concerns raised by commenters on the May 2012 aggregation proposal and
proposed two new tiers of relief from the ownership criteria of
aggregation–relief on the basis of a notice filing, effective upon
submission, by persons holding an interest of between 10 percent and 50
percent in an owned entity, and relief on the basis of an application
by persons holding an interest of more than 50 percent in an owned
entity.19 Each of these procedures for relief in the 2013 Aggregation
Proposal is described briefly below.
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17 See id. at 68951, citing Exemptions from Speculative
Position Limits for Positions which have a Common Owner but which
are Independently Controlled and for Certain Spread Positions;
Proposed Rule, 53 FR 13290, 13292 (Apr. 22, 1988).
18 See 2013 Aggregation Proposal, 78 FR at 68951, citing
Aggregation, Position Limits for Futures and Swaps, 77 FR 31767,
31773 (May 30, 2012). This incremental approach to account
aggregation standards reflects the Commission’s historical practice.
See, e.g., Exemptions from Speculative Position Limits for Positions
Which Have a Common Owner But Which are Independently Controlled and
for Certain Spread Positions; Final Rule 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.);
Exemption From Speculative Position Limits for Positions Which Have
a Common Owner, But Which Are Independently Controlled, 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 the 1999 Amendments (the Commission
expanded the list of eligible entities to include many of the
entities commenters requested in the 1991 rulemaking).
19 See 2013 Aggregation Proposal, 78 FR at 68958-61.
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1. Disaggregation Relief for Ownership or Equity Interests of 50
Percent or Less
Proposed rule Sec. 150.4(b)(2), as set out in the 2013 Aggregation
Proposal, 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.20 However, proposed rule Sec.
150.4(b)(2), as set out in the 2013 Aggregation Proposal, 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.21 The notice filing
would have to demonstrate compliance with certain conditions set forth
in proposed rule Sec. 150.4(b)(2). 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 Sec. 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.
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20 For purposes of aggregation, the Commission continues to
believe that contingent ownership rights, such as an equity call
option, would not constitute an ownership or equity interest.
21 Under the 2013 Aggregation Proposal, 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 Sec. 150.4(a)(2). The exemptions in
proposed rule Sec. 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 revisions proposed here would not change
these aspects of the 2013 Aggregation Proposal.
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The Commission preliminarily based the 2013 Aggregation Proposal’s
limit of 50 percent on the ownership interest in another entity on a
belief that the limit would be a reasonable, “bright line” standard
for determining when aggregation of positions is required, even where
the ownership interest is passive.22 The 2013 Aggregation Proposal
explained that majority ownership (i.e., over 50 percent) is indicative
of control, and this standard would address the Commission’s concerns
about circumvention of
[[Page 58368]]
position limits by coordinated trading or direct or indirect influence
between entities. For these reasons, the Commission preliminarily
believed that aggregation based upon an ownership or equity interest of
greater than 50 percent would be appropriate to address the heightened
risk of direct or indirect influence over the owned entity.23
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22 See 2013 Aggregation Proposal, 78 FR at 68959.
23 See id.
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Referring to 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 stated its
belief that a pro rata approach could be administratively burdensome
for both owners and the Commission.24 For example, the Commission
explained, 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 also noted that
it 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.
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24 See id.
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2. Disaggregation Relief for Ownership or Equity Interests of Greater
Than 50 Percent
The 2013 Aggregation Proposal also included a provision for
disaggregation relief for ownership or equity interests of greater than
50 percent, which was consistent with the Commission’s preliminary view
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 explained that, in its view, 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, the Commission believed that in
general this “bright line” approach would provide administrative
certainty.25
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25 See id.
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Nonetheless, the Commission considered points raised by commenters
in this regard, and concluded that in some situations disaggregation
relief may be appropriate even for a person holding a majority
ownership interest, on the conditions that the owned entity is not
required to be, and is not, consolidated on the financial statement of
the person, the person can demonstrate that the person does not control
the trading of the owned entity, based on the criteria in proposed rule
Sec. 150.4(b)(2)(i), and both the person and the owned entity have
procedures in place that are reasonably effective to prevent
coordinated trading.26
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26 See id.
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The Commission acknowledged that to provide such relief in order to
address issues raised by commenters would represent a break by the
Commission from past practice, but it explained that it has authority
to provide such relief pursuant to section 4a(a)(7) of the CEA, which
authorizes the Commission to provide relief from the requirements of
the position limits regime.27
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27 See id.
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Consequently, the 2013 Aggregation Proposal included a provision
(proposed rule Sec. 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
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 Sec. 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,28
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28 The Commission pointed 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.
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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 for that entire 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 clarified that the proposed 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. 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.29
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29 See 2013 Aggregation Proposal, 78 FR at 68960.
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The Commission also explained that, under the 2013 Aggregation
Proposal, it would interpret factors 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), to be favorable to granting relief from the aggregation
requirement.30 The Commission also noted that if a person with
greater than 50 percent ownership of an owned entity could not meet the
conditions in proposed rule Sec. 150.4(b)(3), the person could apply
to the Commission for relief from aggregation under CEA section
4a(a)(7).31 The Commission noted 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
[[Page 58369]]
the Commission may consider to be relevant in determining whether to
grant relief.32
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30 See id.
31 See id. Section 4a(a)(7) of the CEA provides authority to
the Commission to grant relief from the position limits regime.
32 See id. The 2013 Aggregation Proposal also included amended
rule Sec. 150.1(e)(5) and proposed rule Sec. 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 Sec.
4.5(a)(4)) to be treated as an IAC, on the condition that an IAC
notice filing is made as required under rule Sec. 150.4(c). See id.
at 68961. The aspects of the 2013 Aggregation Proposal related to
proposed rule Sec. Sec. 150.1(e)(5) and 150.4(b)(5) are not
affected by the revisions discussed herein.
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II. Proposed Rules
A. Proposed Revision To Allow for Relief to Owners of More Than 50
Percent of an Owned Entity Based on Notice Filing
In light of the language in section 4a of the CEA, 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.33 However,
the Commission is also mindful that, as discussed by commenters on the
2013 Aggregation Proposal, aggregation of positions held by owned
entities may in some cases be impractical, burdensome, or not in
keeping with modern corporate structures. Therefore, the Commission is
proposing a limited revision to the 2013 Aggregation Proposal that
would permit all owners of 10 percent or more of an owned entity (i.e.,
the owners of up to and including 100 percent of an owned entity) to
disaggregate the positions of the owned entity in the circumstances
specified in proposed rule Sec. 150.4(b)(2). All other aspects of the
2013 Aggregation Proposal, including the proposed criteria for
disaggregation relief and other aspects not discussed herein, remain
the same.
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33 See 1999 Amendments, 64 FR at 24044 (“[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; Proposed Rule, 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.
—————————————————————————
The Commission has the authority to revise its proposed relief
under section 4a(a)(7) of the CEA, which authorizes the Commission to
provide relief from the requirements of the position limits regime. The
reasons for this proposed revision are discussed below.
B. Commenters’ Views
Commenters on the 2013 Aggregation Proposal generally praised the
proposed relief for owners of between 10 percent and 50 percent of an
owned entity, but asserted that the proposed application procedures for
owners of a more than 50 percent equity or ownership interest were
unnecessary and inappropriate.34
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34 The comments on the 2013 Aggregation Proposal are available
on the Commission’s Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1427. Commenters also addressed
other aspects of the 2013 Aggregation Proposal, but since those
other aspects remain the same under this revision to the proposal,
it is unnecessary to address those comments at this time.
—————————————————————————
A few commenters opposed providing aggregation relief for owners of
more than 10 percent of an owned entity. Better Markets, Inc. (“Better
Markets”), an organization that advocates for financial reform,
commented that allowing disaggregation of majority-owned subsidiaries
would ignore the clear language of CEA section 4a(a)(1) and “would
allow traders to easily circumvent Position Limits by creating multiple
subsidiaries and dividing its positions among them.” 35 Better
Markets said the Commission must therefore not allow any disaggregation
relief for owners holding a more than 10 percent interest in an owned
entity.36 Occupy the SEC, another organization that advocates for
financial reform, said that the provision for relief for owners of more
than 50 percent of an owned entity should be removed because “there
can be no plausible justification for exempting largely interconnected
firms from the position limits regime,” and in any case the proposed
relief for greater than 50 percent owners would be of little use
because it “adds a veritable gauntlet of conditions [in proposed rule
150.4(b)(3)] that few companies will be able to pass.” 37
—————————————————————————
35 Better Markets, Inc. on February 10, 2014 (“CL-Better
Markets”) at 2-3.
36 CL-Better Markets at 3.
37 Occupy the SEC on August 7, 2014 at 5-6. Occupy the SEC did
not comment on the provision for disaggregation relief for owners
holding between a 10 percent and a 50 percent interest in an owned
entity.
Another commenter, Chris Barnard, said that he initially took a
negative view of providing relief for owners of more than 50 percent
of an owned entity, but concluded such relief was acceptable because
of the strength of the conditions in proposed rule Sec.
150.4(b)(3). Chris Barnard on January 16, 2014 at 1-2.
—————————————————————————
The Futures Industry Association (“FIA”), a trade association,
commented that the Commission should permit majority-owned affiliates
to be disaggregated regardless of whether the entities are required to
consolidate financial statements.38 The FIA opined that conditioning
disaggregation of majority-owned affiliates on the lack of a
requirement for consolidated financial statements would be arbitrary,
because the accounting principles “are wholly unrelated to the
question of actual control of day-to-day trading decisions and
positions.” 39 The FIA requested that the Commission amend the
proposal to allow a person to rebut the presumption of control of a
majority-owned affiliate solely by demonstrating that the person does
not control the trading and positions of the owned entity through,
among other things, effective procedures that prevent coordinated
trading.40 The FIA recommended that the Commission remove the
condition for each representative of the board of directors to certify
that he or she does not control the trading decisions of the owned
entity.41
—————————————————————————
38 Futures Industry Association on February 6, 2014 (“CL-
FIA”) at 4, 8 and 10-11.
39 CL-FIA at 10.
40 CL-FIA at 10. The FIA commented that because the exemption
for majority-owned entities would be effective only after a
Commission determination, the Commission would have discretion on a
case-by-case basis to review facts and circumstances. CL-FIA at 10.
41 CL-FIA at 10-11.
—————————————————————————
Other commenters said that the Commission should provide the same
disaggregation relief for owners of more than 50 percent of an owned
entity as is proposed to be provided for owners of 50 percent or less.
For example, the Asset Management Group of the Securities Industry and
Financial Markets Association said that the Commission should extend
“the owned entity exemption at proposed [rule] 150.4(b)(2) to include
all third party ownership interests (greater than 50 [percent]) that do
not involve actual common trading control.” 42 The Center for
Capital Markets Competitiveness of the U.S. Chamber of Commerce said
that the requirement in proposed rule Sec. 150.4(b)(3) to submit an
application to the Commission and await its approval would be
unworkable in practice and not provide any apparent regulatory
benefit.43
—————————————————————————
42 The Asset Management Group of the Securities Industry and
Financial Markets Association on February 10, 2014 at 6. The
Coalition of Physical Energy Companies, on February 10, 2014 at 3-8,
also said that the “Greater Than 50 Percent” category should be
eliminated and such situations treated in accordance with proposed
rule Sec. 150.4(b)(2).
43 Center for Capital Markets Competitiveness of the U.S.
Chamber of Commerce on February 10, 2014 at 9. ICE Futures U.S.,
Inc., a designated contract market (“DCM”), agreed that the
requirements in proposed rule Sec. 150.4(b)(3) would be unworkable,
and suggested that the Commission should “[a]t a minimum,” revise
the rule to reflect an objective process for action within a
specified time. ICE Futures U.S., Inc. on February 10, 2014 at 3.
Similar comments were made by the American Gas Association on
February 10, 2014 at 5-11, the Commercial Energy Working Group on
February 10, 2014 at 2-8, the Managed Funds Association on February
10, 2014 at 9-15, and the Private Equity Growth Capital Council on
February 10, 2014 (“CL-PEGCC”) at 3-8.
—————————————————————————
[[Page 58370]]
The Commodity Markets Council recommended that the Commission not
require aggregation based solely on ownership of legal entities, but
instead extend the IAC exemption to all separately organized companies,
whether or not they are affiliated.44 The Natural Gas Supply
Association (“NGSA”) recommended that the Commission leave the
current rules on aggregation in place unchanged, because “[u]nder the
status quo, the Commission may bring enforcement action against an
investor if it directs or otherwise controls the trading of an owned
entity whose positions it claims it does not control.” 45
—————————————————————————
44 Commodity Markets Council on February 10, 2014 (“CL-CMC”)
at 16-17. In a separate comment letter, the Commodity Markets
Council recommended that affiliated companies not be required to
aggregate their positions when (1) the companies are authorized to
control trading decisions on their own, (2) the owner maintains only
such minimum control as is consistent with its fiduciary
responsibilities to supervise diligently the trading of the owned
entity (or other applicable responsibilities), (3) the companies
actually trade independently, and (4) the companies have no
knowledge of each other’s trading decisions. Commodity Markets
Council on July 25, 2014 (“CL-CMC II”) at 5-6.
45 Natural Gas Supply Association on February 10, 2014 (“CL-
NGSA”) at 39-43.
—————————————————————————
MidAmerican Energy Holdings Company (“MidAmerican”), an energy
services company which is controlled by Berkshire Hathaway, Inc.
(“Berkshire”), commented that, absent aggregation relief for
majority-owned affiliates that are consolidated for accounting
purposes, the proposed position limits would impose “serious
regulatory costs and consequences” to establish an extensive
compliance monitoring and coordination program across independently
managed, disparate businesses, and would be contrary to policies,
procedures, systems, and controls established to provide functional and
legal separation for individual operating businesses.46 MidAmerican
explained that Berkshire and its industrial operating businesses are
generally managed on a decentralized basis, with no centralized or
integrated business functions and minimal involvement by Berkshire’s
corporate headquarters in day-to-day business activities of MidAmerican
or Berkshire’s other operating businesses.47 MidAmerican recommended
that the Commission provide for disaggregation upon a notice filing by
a group of majority-owned entities that meet the four criteria in the
proposal or, if the group does not meet all four criteria in the
proposal, provide for the group to rely on the submission of an
application for relief until the Commission has acted on the
application.48
—————————————————————————
46 MidAmerican Energy Holdings Company on February 7, 2014
(“CL-MidAmerican”) at 1-2.
47 CL-MidAmerican at 2.
48 CL-MidAmerican at 3. MidAmerican recommended an application
for relief by majority-owned affiliates not meeting all four
criteria would need to rebut the assumption of control over
majority-owned subsidiaries and meet two conditions: (1) The
requirements applicable to entities with 50 percent or less common
ownership; and (2) The requirement that representatives of board
members of an entity covered by the relief request attest to the
absence of trading control. MidAmerican recommended that the
Commission consider the following factors that may rebut the
assumption of control over majority-owned subsidiaries: (1) Separate
trading accounts and broker relationships for each entity; (2)
periodic certification from an officer of the requesting entity that
the policies and procedures designed to prevent trading-level
control or coordination remain in place and are effective; (3) lack
of common guarantor and/or provision of independent credit support;
(4) lack of cross-default or cross-acceleration provisions in
trading contracts; (5) maintenance of separate identifiable assets;
(6) maintenance of separate lines of business (i.e., the business of
one entity is not dependent upon the other); and (7) any other
structural, legal, or regulatory barriers limiting control and
interdependencies among affiliated entities. CL-MidAmerican at 4-5.
—————————————————————————
CME Group (“CME”), a holding company for a number of DCMs, stated
that the Commission did not identify any basis or justification for the
various features of the proposed aggregation regime.49 CME contended
that features of the 2013 Aggregation Proposal (regarding the owned
entity aggregation rules, the IAC exemption, and the “substantially
identical trading strategies” rule) are not in accordance with law,
arbitrary and capricious, an unexplained departure from the
Commission’s administrative precedent, and not more permissive than
existing aggregation standards.50 The Commodity Markets Council and
the NGSA were also of the opinion that the 2013 Aggregation Proposal
was not supported by the Commission’s administrative precedent.51 CME
and NGSA asserted that section 4a(a)(1) of the CEA provides no basis
for requiring aggregation of positions held by another person in the
absence of control of such other person.52 CME also stated that rule
Sec. 150.4(b) generally exempts a commodity pool’s participants with
an ownership interest of 10 percent or greater from aggregating the
positions held by the pool.53 Finally, CME and NGSA contended that
two of the Commission’s enforcement cases indicate that the Commission
has viewed aggregation as being required only where there is common
trading control.54
—————————————————————————
49 CME Group on February 10, 2014 (“CL-CME”) at 9.
50 CL-CME at 2, 6, and 10-11. CME opined that under the
Commission’s precedent, a 10 percent or more ownership or equity
interest in an account is an indicia of trading control, but this
precedent does not support a requirement for aggregation based on a
10 percent or more ownership or equity interest in an entity. CL-CME
at 11. CME reasoned that the Commission’s use of the term
“account” has never referred to an owned entity that itself has
accounts, that the 1979 Aggregation Policy suggests the Commission
contemplated a definition of “account” that means no more than a
personally owned futures trading account, and that the 1999
Amendments to the aggregation rules were focused on directly owned
accounts. CL-CME at 11-12.
51 The Commodity Markets Council said that under the
Commission’s precedents “[l]egal affiliation [between companies]
has been an indicium but not necessarily sufficient for position
aggregation.” CL-CMC at 16.
NGSA said that the Commission has never specifically required
aggregation solely on the basis of ownership of another legal
person. CL-NGSA at 42. To support its view, NGSA said that the 1979
Aggregation Policy and the 1999 Amendments apply to only trading
accounts that are directly or personally held or controlled by an
individual or legal entity, the Commission’s large trader rules
require aggregation of multiple accounts held by a particular
person, not the accounts of a person and its owned entities, and
regulation Sec. 18.04(b) distinguishes between owners of the
“reporting trader” and the owners of the “accounts of the
reporting trader.” Id. at 42-43.
52 CL-CME at 5-6; CL-NGSA at 41. CME commented that the
Commission failed to consider the statutorily required factors,
because CME asserts it is false that prior rules required
aggregation of owned entity positions at a 10 percent ownership
level. CL-CME at 8.
NGSA contended that “CEA section 4a(a)(1) only allows the
Commission to require the aggregation of positions on ownership
alone when those positions are directly owned by a person. The
positions of another person are only to be aggregated when the
person has direct or indirect control over the trading of another
person.” CL-NGSA at 41.
53 CL-CME at 13. CME noted that 63 FR 38525 at 38532 n. 27
(July 17, 1998) (proposal to amend regulation 150.3 to include the
separately incorporated affiliates of a CPO, CTA or FCM as eligible
entities for the exemption relief of regulation 150.3) states:
“Affiliated companies are generally understood to include one
company that owns, or is owned by, another or companies that share a
common owner.” CL-CME at 13 n. 52. CME also asserted that the term
“principals” under regulation Sec. 3.1(a)(2)(ii) include entities
that have a direct ownership interest that is 10 percent or greater
in a lower tier entity, such as the parent of a wholly-owned
subsidiary. From these two provisions, CME concluded that the
corporate parent of a wholly-owned CPO would be affiliated with, and
a principal of, its wholly-owned subsidiary.
54 See CL-CME at 14-15, citing In the Matter of Vitol Inc. et
al., Docket No. 10-17 (Sept. 14, 2010), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfvitolorder09142010.pdf (“In the Matter of Vitol”)
and In the Matter of Citigroup Inc. et al., Docket No. 12-34 (Sept.
21, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcitigroupcgmlorder092112.pdf (“In the Matter of Citigroup”).
NGSA contended that In the Matter of Vitol was based on facts
that would be relevant only if common trading control was necessary
for aggregating the positions of affiliated companies. See CL-NGSA
at 43. NGSA did not discuss In the Matter of Citicorp.
—————————————————————————
[[Page 58371]]
C. Revised Proposed Rule
In view of the points raised by commenters on the 2013 Aggregation
Proposal and upon further review of the matter, the Commission is
proposing to revise the proposal to delete proposed rule Sec. Sec.
150.4(b)(3) and 150.4(c)(2), and to change proposed rule Sec.
150.4(b)(2) so that it would apply to all persons with an ownership or
equity interest in an owned entity of 10 percent or greater (i.e., an
interest of up to and including 100%) in the same manner as proposed
rule Sec. 150.4(b)(2) would apply, before this revision, to owners of
an interest of between 10 percent and 50 percent. The Commission is
also proposing conforming changes in proposed rule Sec. 150.4(b)(7),
to delete a cap of 50 percent on the ownership or equity interest for
broker-dealers to disaggregate, and in proposed rule Sec.
150.4(e)(1)(i), to delete a delegation of authority referencing
proposed rule Sec. 150.4(b)(3).55 The entirety of the Commission’s
aggregation-related proposed amendments to part 150, as set out in the
2013 Aggregation Proposal as revised herein, is set forth at the end of
this notice.
—————————————————————————
55 The Commission also proposes to delete a cross-reference to
proposed rule Sec. 150.4(b)(3)(vii) in proposed rule Sec.
150.4(c)(1).
—————————————————————————
The Commission finds merit in the comments of the FIA that
ownership of a greater than 50 percent interest in an entity (and the
related consolidation of financial statements) may not mean that the
owner actually controls day-to-day trading decisions of the owned
entity. The Commission believes that, on balance, the overall purpose
of the position limits regime (to diminish the burden of excessive
speculation which may cause unwarranted changes in commodity prices)
would be better served by focusing the aggregation requirement on
situations where the owner is, in view of the circumstances, actually
able to control the trading of the owned entity.56 The Commission
reasons that the ability to cause unwarranted changes in the price of a
commodity derivatives contract would result from the owner’s control of
the owned entity’s trading activity.
—————————————————————————
56 The Commission notes in this regard that there may be
significant burdens in meeting the requirements of proposed rule
Sec. 150.4(b)(3) even where there is no control the trading of the
owned entity, as was suggested by the Center for Capital Markets
Competitiveness of the U.S. Chamber of Commerce, the Asset
Management Group of the Securities Industry and Financial Markets
Association and the other commenters. See supra nn. 42 and 43.
—————————————————————————
The Commission has considered the views of Better Markets and other
commenters who warned that inappropriate relief from the aggregation
requirements could allow circumvention of position limits through the
use of multiple subsidiaries. However, the Commission believes that the
criteria in proposed rule Sec. 150.4(b)(2)(i), which must be satisfied
in order to disaggregate, will appropriately indicate whether an owner
has control of or knowledge of the trading activity of the owned
entity. The disaggregation criteria require that the two entities not
have knowledge of each other’s trading and, moreover, have and enforce
written procedures to preclude such knowledge.57 And, in fact, as
noted in the 2013 Aggregation Proposal, the Commission has applied, and
expects to continue to apply, certain of the same conditions in
connection with the IAC exemption to ensure independence of trading
between an eligible entity and an affiliated independent account
controller. If the disaggregation criteria are satisfied, therefore,
the Commission preliminarily believes that disaggregation may be
permitted even if the owner has a greater than 50 percent ownership or
equity interest in the owned entity. Even in the case of majority
ownership, if the disaggregation criteria are satisfied, the ability of
an owner and the owned entity to act together to engage in excessive
speculation or to cause unwarranted price changes should not differ
significantly from that of two separate individuals.
—————————————————————————
57 See 2013 Aggregation Proposal, 78 FR at 68961, referring to
regulation Sec. 150.3(a)(4) (proposed to be replaced by proposed
rule Sec. 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 points out that finalization of proposed rule Sec.
150.4(b)(2), which would allow persons with ownership or equity
interests in an owned entity of up to and including 100 percent to
disaggregate the positions of the owned entity if certain conditions
were satisfied, would not mean that there would be no aggregation on
the basis of ownership. Rather, aggregation would still be the
“default requirement” for the owner of a 10 percent or greater
interest in an owned entity, unless the conditions of proposed rule
Sec. 150.4(b)(2) are satisfied.58
—————————————————————————
58 The Commission noted in the 2013 Aggregation Proposal that
if there were no aggregation on the basis of ownership, it would
have to apply a control test in all cases, which would pose
significant administrative challenges to individually assess control
across all market participants. See 2013 Aggregation Proposal, 78 FR
at 68956. Further, the Commission considered that if the statute
required aggregation only if the existence of control were proven,
market participants may be able to use an ownership interest to
directly or indirectly influence the account or position and thereby
circumvent the aggregation requirement. See id. On further review
and after considering the comments of the FIA and others, the
Commission believes that the disaggregation criteria in proposed
rule Sec. 150.4(b)(2)(i) provide an effective, easily implemented
means of applying a “control test” to determine if disaggregation
should be allowed, without creating a loophole through which market
participants could circumvent the aggregation requirement.
—————————————————————————
Furthermore, satisfaction of the criteria of proposed rule Sec.
150.4(b)(2) would not mean that an owner and owned entity would be
entirely immune from aggregation in all circumstances. For example,
aggregation is and would continue to be required under both current
regulation Sec. 150.4(a) and proposed rule Sec. 150.4(a)(1) if two or
more persons act pursuant to an express or implied agreement; and this
aggregation requirement would apply whether the two or more persons are
an owner and owned entity(ies) that meet the conditions in proposed
rule Sec. 150.4(b)(2), or are unaffiliated individuals. The Commission
intends to continue to enforce the requirement of aggregation when two
persons are acting together pursuant to an express or implied agreement
regardless of whether the two persons are unaffiliated or if one person
has an ownership interest in the other.
In determining whether the criteria in proposed rule Sec.
150.4(b)(2) are an appropriate test for owners of more than 50 percent
of an owned entity, the Commission notes the comments of MidAmerican
regarding the relevant variances in corporate structures. MidAmerican
stated that there are instances where one entity has a 100 percent
ownership interest in another entity, yet does not control day-to-day
business activities of the owned entity. Also, in this situation the
owned entity would not have knowledge of the activities of other
entities owned by the same owner, nor would it raise the heightened
concerns, triggered when one entity both owns and controls trading of
another entity, that the owner would necessarily act in a coordinated
manner with other owned entities.
The Commission also appreciates that a requirement to aggregate the
positions of majority-owned subsidiaries could
[[Page 58372]]
require corporate groups to establish procedures to monitor and
coordinate trading activities across disparate owned entities, which
could have unpredictable consequences. The Commission recognizes that
these consequences could include not only the cost of establishing
these procedures, but also the impairment of corporate structures which
were established to insure that the various owned entities engage in
business independently. This independence may serve important purposes
which could be lost if the aggregation requirement were imposed too
widely.
Further, the Commission notes that for those corporate groups that
establish policies and controls to separate different operating
businesses, the disaggregation criteria in proposed rule Sec.
150.4(b)(2)(i) should be relatively familiar and easy to satisfy. That
is, the disaggregation criteria and their application to corporate
groups like MidAmerican’s group are in line with prudent corporate
practices that are maintained for longstanding, well-accepted reasons.
The Commission does not intend that the aggregation requirement
interfere with these structures.59
—————————————————————————
59 In the 2013 Aggregation Proposal, the Commission noted that
if the aggregation rules adopted by the Commission would be a
precedent for aggregation rules enforced by designated contract
markets and swap execution facilities, it would be even more
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. See 2013 Aggregation Proposal, 78 FR at 68596, n.
103. The Commission believes that by implementing an approach to
aggregation that is in keeping with longstanding corporate
practices, the proposed revisions promote the goal of setting out
“bright line” rules that are relatively easy to apply while not
being susceptible to circumvention.
—————————————————————————
MidAmerican and the Commodity Markets Council proposed various
alternative criteria which could be used to determine whether the
positions of an owner and owned entity could be disaggregated.60
However, after considering these suggestions, the Commission does not
believe that the suggested criteria are significantly different from
the criteria in proposed rule Sec. 150.4(b)(2)(i) in the 2013
Aggregation Proposal. Also, some of the suggested criteria appear to be
suitable for particular situations, but not necessarily all corporate
groups.61 Overall, the Commission believes that the criteria in
proposed rule Sec. 150.4(b)(2)(i) are appropriate and suitable for
determining when disaggregation is permissible due to a lack of control
and shared knowledge of trading activities. 62
—————————————————————————
60 See, e.g., CL-MidAmerican at 4-5, CL-CMC II at 5-6.
61 For example, MidAmerican recommended factors such as
whether the owner and the owned entity have separate trading
accounts, separate assets, separate lines of business, independent
credit support and other specific indications of separation. See CL-
MidAmerican at 4-5. In the Commission’s view, criteria such as these
are specific manifestations of the general principles stated in
proposed rule Sec. 150.4(b)(2)(i) that the owner and the owned
entity not have knowledge of the trading decisions of the other and
trade pursuant to separately developed and independent trading
systems. Similarly, whether the two entities do or do not have
separate assets or separate lines of business would not necessarily
indicate whether they are engaged in coordinated trading.
62 As stated in the 2013 Aggregation Proposal, the Commission
proposes that the criteria in proposed rule Sec. 150.4(b)(2)(i)
would be interpreted and applied in accordance with the Commission’s
past practices. 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);
1999 Amendments, 64 FR at 24044 (intent in issuing final aggregation
rule “merely to codify the 1979 Aggregation Policy, including the
continued efficacy of the [1992] interpretative letter”).
—————————————————————————
In response to the assertions of CME and NGSA, the Commission
reiterates its belief, as stated in the 2013 Aggregation Proposal, that
ownership of an entity is an appropriate criterion for aggregation of
that entity’s positions, due in part to the direction in section
4a(a)(1) of the CEA that all positions held by a person should be
aggregated.
The Commission has explained that this interpretation is supported
by Congressional direction and Commission precedent from as early as
1957 and continued through 1999.63 For example, in 1968, Congress
amended the aggregation standard in CEA section 4a to include positions
“held by” one trader for another,64 supporting the view that an
owner should aggregate the positions held by an owned entity (because
the owned entity is holding the positions for the owner). During the
Commission’s 1986 reauthorization, points similar to those raised now
by CME and NGSA were considered and rejected. At that time, witnesses
at Congressional hearings suggested that “aggregation of positions
based on ownership without actual control unnecessarily restricts a
trader’s use of the futures and options markets,” but the
Congressional committee did not recommend any changes to the statute
based on these suggestions.65
—————————————————————————
63 See 2013 Aggregation Proposal, 78 FR at 68956.
64 See Pub. L. 90-258, Sec. 2, 82 Stat. 26 (1968). The Senate
Report accompanying the 1968 amendment stated that “all of the
changes made by this section incorporate longstanding administrative
interpretations reflected in orders of the [Commodity Exchange]
Commission.” S. Rep. No. 947, 90th Cong. 2d Sess. (1968) at page 5.
65 See H.R. Rep. No. 624, 99th Cong., 2d Sess. (1986) at page
43. The Report noted that:
During the subcommittee hearings on reauthorization, several
witnesses expressed dissatisfaction with the manner in which certain
market positions are aggregated for purposes of determining
compliance with speculative limits fixed under Section 4a of the
Act. The witnesses suggested that, in some instances, aggregation of
positions based on ownership without actual control unnecessarily
restricts a trader’s use of the futures and options markets. In this
connection, concern was expressed about the application of
speculative limits to the market positions of certain commodity
pools and pension funds using multiple trading managers who trade
independently of each other. The Committee does not take a position
on the merits of the claims of the witnesses.
Id.
—————————————————————————
In 1988, the Commission reviewed petitions by the Managed Futures
Trade Association and the Chicago Board of Trade which argued against
aggregation based only on ownership.66 In response to the petition,
however, the Commission stated that:
—————————————————————————
66 The Managed Futures Trade Association petition requested
that the Commission amend the aggregation standard for exchange-set
speculative position limits in regulation Sec. 1.61(g) (now
regulation Sec. 150.5(g)), by adding a proviso to exclude the
separate accounts of a commodity pool where trading in those
accounts is directed by unaffiliated CTAs acting independently. See
Exemption From Speculative Position Limits for Positions Which Have
a Common Owner but Which Are Independently Controlled; Proposed
Rule, 53 FR 13290, 13291-92 (Apr. 22, 1988). The petition argued the
ownership standard, as applied to “multiple-advisor commodity
pools, is unfair and unrealistic” because while the commodity pool
may own the positions in the separate accounts, the CPO does not
control trading of those positions (the unaffiliated CTA does) and
therefore the pool’s ownership of the positions will not result in
unwarranted price fluctuations. See id. at 13292.
The petition from the Chicago Board of Trade (which is now a
part of CME) sought to revise the aggregation standard so as not to
require aggregation based solely on ownership without control. See
id.
Both ownership and control have long been included as the
appropriate aggregation criteria in the Act and Commission
regulations. Generally, inclusion of both criteria has resulted in a
bright-line test for aggregating positions. And as noted above,
although the factual circumstances surrounding the control of
accounts and positions may vary, ownership generally is clear.
. . . In the absence of an ownership criterion in the
aggregation standard, each potential speculative position limit
violation would have to be analyzed with regard to the individual
circumstances surrounding the degree of trading control of the
positions in question. This would greatly increase uncertainty.67
67 See id. In response to the petitions, however, the
Commission proposed the IAC exemption, which provides “an
additional exemption from speculative position limits for positions
of commodity pools which are traded in separate accounts by
unaffiliated account controllers acting independently.” Id.
—————————————————————————
Contrary to CME’s and NGSA’s contentions, the aggregation
[[Page 58373]]
requirement in CEA section 4a is not phrased in terms of whether the
owner holds an interest in a trading account. In fact, the word
“account” does not even appear in the statute.68 CME and NGSA
incorrectly contend that the Commission has limited its interpretation
of the term “account” to include only a personally owned futures
trading account; the Commission has not. In 1986, for example, the
Commission considered a comment that the use of the term “account”
means a direct interest in a specific futures trading account, and
rejected this view, writing that the Commission “has generally
interpreted and applied these rules more broadly” and that “[t]o
conduct effective market surveillance and enforce speculative limits,
the Commission must know the relationship in terms of financial
interest or control between traders as well as that between a trader
and trading accounts.” 69 CME and NGSA also misread the 1999
Amendments, which specifically stated that “the Commission. . .
interprets the `held or controlled’ criteria as applying separately to
ownership of positions or to control of trading decisions .” 70 CME
misconstrues the 1999 amendments’ reference to the Commission’s large-
trader reporting system as being related to the aggregation rules for
the position limits regime.71 But the 1999 amendments are consistent,
because they included an explanation of situations in which reporting
could be required based on both control and ownership.72 And, CME’s
citation to exemptions for aggregation for certain commodity pools 73
simply prove too much–the reason these exemptions are in place is
because aggregation would be required due to ownership or control of
the commodity pools if the exemptions were not available.
—————————————————————————
68 As noted above, section 4a(a)(1) of the CEA provides that
“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.” 7 U.S.C. 6a(a)(1).
69 See Reports Filed by Contract Markets, Futures Commission
Merchants, Clearing Members, Foreign Brokers and Large Traders;
Final Rule, 51 FR 4712, 4716 (Feb. 7, 1986) (referring to the use of
the term “account” in regulation 18.04, which required reports
relating to persons whose accounts are controlled by the reporting
trader and persons who have a financial interest of 10 percent or
more in the account of the trader) (emphasis added).
70 See 1999 Amendments, 64 FR at 24043 and fn. 26 (referring
to rule 18.01 requirement of aggregation for reporting purposes when
a trader “holds, has a financial interest in or controls positions
in more than one account”).
71 See CL-CME at 12, citing the 1999 Amendments, 64 FR at
24043.
72 The Commission stated that its “routine large trader
reporting system is set up so that it does not double count
positions which may be controlled by one and traded for the
beneficial ownership of another. In such circumstances, although the
routine reporting system will aggregate the positions reported by
FCMs using only the control criterion, the staff may determine that
certain accounts or positions should also be aggregated using the
ownership criterion or may by special call receive reports directly
from a trader.” 1999 Amendments, 64 FR at 24043 and fn. 26.
73 See CL-CME at 13, citing rule Sec. 150.4(b) and (c).
—————————————————————————
Last, CME and NGSA misread the Commission’s enforcement history,
which in fact does not contradict the Commission’s traditional view of
aggregation of owned entity positions as being required on the basis of
either control or ownership. The first case cited by CME and NGSA did
not enforce the Commission’s aggregation standard, but rather section
9(a)(4) of the CEA, which makes it unlawful for any person willfully to
conceal any material fact to a board of trade acting in furtherance of
its official duties under the Act.74 In this case, respondent
companies willfully failed to disclose to a DCM the true nature of the
relationship and the limited nature of the barriers to trading
information flow between two companies.75 Nowhere does the case speak
to whether aggregation standards may be applied based on either or both
of ownership or control.
—————————————————————————
74 See In the Matter of Vitol at 2.
75 See id.
—————————————————————————
In describing the second case it cites, CME seems to have made
assumptions that never appear in the Commission’s decision. The only
facts actually cited as relevant in this case were that a company and
its two wholly-owned subsidiaries acted as counterparties in over-the-
counter swaps contracts, engaged in futures trading, and held aggregate
net-long positions in excess of the Commission’s all-months position
limits.76 Nowhere did the Commission find, as erroneously described
by CME, that the companies off-set the “same risk acquired from
similarly situated counterparties.” 77 Nor did the Commission find,
as CME incorrectly asserts, that the subsidiaries traded as agents for
the corporate parent.78
—————————————————————————
76 See In the Matter of Citigroup at 2-3. The Commission’s
order specifically stated that “The positions of Citigroup’s
wholly-owned subsidiaries, including CGML, in December 2009 are
subject to aggregation pursuant to Commission Regulation Sec.
150.4(a)-(b).” See id. at 2, n. 2.
77 See CL-CME at 15.
78 See id. Rather, the Commission’s order found the parent
company liable for the violations of its wholly-owned subsidiaries
under section 2(a)(1)(B) of the CEA because the actions of the
wholly-owned subsidiaries occurred within the scope of their
employment, office, or agency with respect to the parent company.
See In the Matter of Citigroup at 4, citing CEA section 2(a)(1)(B)
and regulation 1.2.
—————————————————————————
The Commission solicits comment on all aspects of the revision to
its proposed modification of rule 150.4 described herein. Commenters
are invited to address whether proposed rule Sec. 150.4(b)(2), as
revised, appropriately furthers the overall purposes of the position
limits regime while not creating opportunities for circumvention of the
aggregation requirement.
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 November 15, 2013, the Commission proposed certain modifications
to its policy for aggregation under the part 150 position limits regime
(i.e., the 2013 Aggregation Proposal).79 The 2013 Aggregation
Proposal provided the public with an opportunity to comment on the
Commission’s cost-and-benefit considerations of the proposed
amendments, including identification and assessment of any costs and
benefits not discussed therein. In particular, the Commission requested
that commenters provide data or any other information that they believe
supports their positions with respect to the Commission’s
considerations of costs and benefits.
—————————————————————————
79 See 2013 Aggregation Proposal, 78 FR at 68958-59.
—————————————————————————
In this release, the Commission proposes to revise the 2013
Aggregation Proposal so that any person who owns 10 percent or more of
another entity would be permitted to disaggregate the positions of the
entity under a unified set of conditions and procedures. All other
aspects of the 2013 Aggregation Proposal, including the proposed
criteria for disaggregation relief, remain the same.
In the following, the Commission provides a general background for
the 2013 proposed amendments and the
[[Page 58374]]
current 2015 proposed revisions and discusses commenters’ responses to
the 2013 Aggregation Proposal that are relevant to its considerations
of costs and benefits. The Commission further considers the expected
costs and benefits of the 2015 proposed revisions in light of the five
factors outlined in section 15(a).
Using the existing regulation 150.4 as the baseline for
comparison,80 the Commission considers in this section the
incremental costs and benefits that arise from the proposed 2015
revisions.81 That is, if the proposed 2015 revisions are not adopted,
the aggregation standards that would apply would be those described in
the Commission’s existing regulation 150.4. The 2013 Aggregation
Proposal set forth the costs and benefits of the Commission’s proposed
amendments of existing regulation 150.4. All aspects of the 2013
Aggregation Proposal’s considerations of costs and benefits remain the
same other than those related specifically to the instant proposal to
allow persons owning 10 percent or more of another entity to
disaggregate the positions of the entity under a unified set of
conditions and procedures. Thus, while the existing regulation 150.4
serves as the baseline for this consideration of costs and benefits, we
also discuss as appropriate for clarity the differences from the 2013
Aggregation Proposal.
—————————————————————————
80 17 CFR 150.4.
81 As expressed throughout this preamble, all aspects of the
amendments as proposed in the 2013 Aggregation Proposal, except as
explicitly modified by the revisions discussed in this 2015 release,
remain the same.
—————————————————————————
1. Background
As discussed in the preamble, the Commission’s historical approach
to position limits in current part 150 generally consists of three
components: (1) The level of each limit, which sets 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 certain other types of transactions; and (3) standards
to determine which accounts and positions a person must aggregate for
the purpose of determining compliance with the position limit levels.
The third component of the Commission’s position limits regime–
aggregation–is set out in regulation 150.4.82 Regulation 150.4
requires that unless a particular exemption applies, a person must
aggregate all positions for which that person: (1) Controls the trading
decisions, or (2) has at least a 10 percent ownership or equity
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.83
—————————————————————————
82 17 CFR 150.4.
83 17 CFR 150.4(b), (c), and (d).
—————————————————————————
The 2013 Aggregation Proposal set forth conditions and procedures
to grant a person permission to disaggregate the positions of a
separately organized entity (“owned entity”). The permission or
exemption is dependent on the person’s level of ownership or equity
interest in the owned entity. In the 2013 Aggregation Proposal, the
ownership or equity-interest levels were divided into two categories:
(1) A person with an interest of between 10 percent and 50 percent
would be permitted to disaggregate the positions, upon filing a notice
demonstrating compliance with certain requirements specified in the
proposed amendments; (2) a person with a greater than 50 percent
interest would have to apply on a case-by-case basis to the Commission
for permission, and await the Commission’s decision as to whether
certain prerequisites enumerated in the 2013 Aggregation Proposal had
been met.84
—————————————————————————
84 Note that no aggregation would be required if the ownership
or equity interest is below 10 percent.
—————————————————————————
2. Comments on the 2013 Aggregation Proposal
In response to the 2013 Aggregation Proposal, several commenters
raised concerns about the costs and benefits associated with the
proposed changes to regulation 150.4. CME declared that the Commission
failed to consider adequately the costs and benefits of “every
aspect” of the 2013 Aggregation Proposal.85 Yet, for the most part,
commenters did not identify specific monetary costs or provide any
quantitative information to support their arguments. Instead, they made
the general statements that requiring owners without actual control to
aggregate positions would weaken the ability of largely passive
investors to provide capital investment and generate returns for their
beneficiaries,86 and that it would run contrary to certain
established corporate structures to provide functional and legal
separation for individual operating businesses.87
—————————————————————————
85 CL-CME at 6. See also CL-MidAmerican at 1.
86 CL-SIFMA at 1.
87 CL-MidAmerican at 2.
—————————————————————————
NGSA and PEGCC expressed concern over attendant compliance costs
for persons with greater than 50 percent interest in an owned
entity.88 NGSA and MidAmerican asserted that the proposal would
require new position-trading surveillance and compliance systems for
owned entities, and involve more intraday coordination.89 NGSA
identified another general cost: constraints on risk management
programs when an owned entity’s commodity trading is restricted to 20
percent of positions.90 PEGCC characterized the exemption-application
process as unworkable because of the unlimited waiting period for
Commission review and approval.91 As a result, the Commission’s
approach would create uncertainty for applicants and burden Commission
staff resources.92 Furthermore, during the waiting period, applicants
would have to expend costs to develop interim compliance programs.93
—————————————————————————
88 CL-NGSA at 39; CL-PEGCC.
89 CL-NGSA at 39; CL-MidAmerican at 2.
90 CL-NGSA at 40.
91 CL-PEGCC at 4, 5.
92 CL-PEGCC at 4.
93 Id.
—————————————————————————
Commenters also suggested alternatives to the exemption processes
proffered in the 2013 Aggregation Proposal. Several commenters advised
the Commission to accept a notice filing.94 PEGCC also recommended
that the Commission modify the certifications requirement for the
proposed greater than 50 percent ownership exemption. Instead of
producing certifications from the owner entity and board members, PEGCC
proposed that the Commission require a certification from the owner
entity only.95 They also recommended that the Commission eliminate
the grace period for seeking re-certification after the person loses
its greater than 50 percent ownership exemption for failing to meet a
condition.96 PEGCC remarked that the Commission had failed to provide
any rationale for the grace period, and stated that the person should
be able to apply for re-certification once it loses its status.97
—————————————————————————
94 See, e.g., CL-PEGCC at 6.
95 CL-PEGCC at 7.
96 Id.
97 Id.
—————————————————————————
3. The Current Proposal
The Commission is proposing to revise the 2013 Aggregation Proposal
to delete proposed rule Sec. 150.4(b)(3) and Sec. 150.4(c)(2), and to
change proposed rule Sec. 150.4(b)(2), so that the latter provision
would apply to all persons with an ownership or equity interest in an
owned entity of 10 percent or greater. More precisely, under these
proposed revisions, a person with at least a 10
[[Page 58375]]
percent interest would not be required to aggregate an owned entity’s
positons, if such person files a notice attesting to no trading control
and implementation of firewalls to prevent access to relevant
information, among other conditions. The Commission is also proposing
conforming changes in other sections of proposed rule 150.4.98
—————————————————————————
98 See earlier sections of this preamble for a discussion on
all proposed revisions to regulation 150.4.
—————————————————————————
As discussed in Section III.A.2, commenters raised concerns and
suggested several alternatives for the exemptive category covering
owners with a greater-than-50-percent interest. The Commission
recognizes that the proposed amendments for this category in the 2013
Aggregation Proposal may impose burdens on certain market participants.
It has embraced some of the commenters’ suggestions and revised the
requirements for those market participants seeking relief from the
aggregation obligations accordingly. The Commission welcomes comment on
all aspects regarding the cost-and-benefit considerations of the 2015
proposed revisions. Commenters are encouraged to suggest additional
alternatives that may result in a superior cost-and-benefit profile,
and provide support for their position both qualitatively and
quantitatively.
4. Costs and Benefits
As noted in the preamble, 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 designed to prevent evasion of prescribed position limits. The
Commission continues to believe that these factors together constitute
an appropriate criterion for aggregation of that entity’s positions.
The Commission believes that the revisions proposed herein would
maintain the Commission’s historical approach to aggregation while
adding thoughtful exemptions to relieve market participants from
unnecessary burdens due to aggregation. Moreover, the proposed
exemptions would only apply under legitimate conditions. As a result,
the Commission’s aggregation policy is more focused on targeting market
participants that pose an actual risk of engaging in the activities
which the position limits regime is intended to prevent.
a. Benefits
The primary purpose of requiring positions of owned entities to be
aggregated is to prevent evasion of prescribed position limits through
coordinated trading. The Commission recognizes, however, that an overly
restrictive or prescriptive aggregation policy may result in
unnecessary burdens or unintended consequences. Such unintended
consequences may take the form of reduced liquidity because imposing
aggregation requirements on owned entities that are not susceptible to
coordinated trading would unnecessarily restrict their ability to trade
commodity derivatives contracts. Moreover, as argued by some
commenters, requiring passive investors to aggregate the positions of
entities they own may potentially diminish capital investments in their
businesses,99 or interfere with existing decentralized business
structures.100 By providing exemptive relief to market participants
under legitimate circumstances–for instance, the demonstration of no
control over trading–potential negative effects on derivatives markets
would be reduced.
—————————————————————————
99 SIFMA Letter at p. 1.
100 MidAmerican Letter at p. 2.
—————————————————————————
The proposed 2015 revisions would also benefit market participants
by mitigating their compliance burdens associated with the aggregation
requirements as well as the position limits requirements more
generally. Under the proposed exemptions, eligible market participants
would not have to establish and maintain the infrastructure necessary
to aggregate positions across owned entities. Further, an eligible
entity with legitimate hedging needs and whose aggregated positions are
above the position limits thresholds in the absence of any exemption
would have the option of applying for an aggregation exemption instead
of applying for a bona fide hedging exemption.
Finally, under the proposed 2015 revisions, the same set of
exemption standards and procedures would apply to a person with any
level of ownership or equity interest in the owned entity being
considered–as long as the level is high enough to trigger the
aggregation requirements (i.e., at least 10 percent). This unified
exemptive framework facilitates legal clarity and consistency. It also
further mitigates the burdens facing market participants. Consider, for
example, a parent-holding company that has different levels of
ownership or equity interest in its various subsidiaries. Under the
proposed unified framework, such parent-holding company would not need
to establish and maintain multiple sets of systems for the purpose of
obtaining aggregation exemptions for each of these subsidiaries.
The Commission requests comment on its considerations of the
benefits of the proposed 2015 revisions. Commenters are specifically
encouraged to include both quantitative and qualitative assessments of
these benefits, as well as data or other information to support such
assessments.
b. Costs
To a large extent, market participants may already have incurred
many of the compliance costs associated with existing regulation 150.4.
The Commission and DCMs generally have required aggregation of
positions starting at a 10 percent interest threshold under the current
regulatory requirements of part 150 as well as the acceptable practices
found in the prior version of part 38. The Commission therefore
believes that market participants active on DCMs have already developed
systems for aggregating positions across owned entities.101
—————————————————————————
101 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 15 (citing to the 1979 Aggregation
Policy, 44 FR at 33843, 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”).
—————————————————————————
The Commission anticipates there are two main types of direct costs
associated with the 2015 proposed revisions. First, there would be
initial costs incurred by entities as they develop and maintain systems
to determine whether they may be eligible for the proposed exemptions.
Second, there would be costs related to subsequent filings required by
the exemptions. In addition, some entities may also sustain direct
costs for modifying existing operational protocols–such as firewalls
and reporting schemes–to be eligible to claim an exemption. It is
difficult to quantify these direct costs because such costs are heavily
dependent on the individual characteristics of each entity’s current
systems, its corporate structure, and its use of commodity derivatives,
among other attributes.
Should the Commission’s other proposed amendments to the position
[[Page 58376]]
limits regime in part 150 be adopted as proposed,102 the aggregation
requirements would cover a greater set of commodity derivative
contracts. Part 150 applies currently to futures and options contracts
referencing nine commodities as stated in regulation 150.2. The other
2013 proposed amendments would expand the list, and would apply on a
federal level to commodity derivative contracts, including swaps, based
on an additional 19 commodities. This expansion would likely create
additional compliance costs for futures market participants because
they would have to broaden current procedures for aggregating futures
positions to include swaps positions, as well as for swaps market
participants, who would be required to develop and maintain systems to
comply with the aggregation rules. Further, exchanges would be required
to conform their aggregation policies to the Commission’s aggregation
policy. However, the revisions proposed herein provide exemptive relief
from these requirements.
—————————————————————————
102 See Position Limits for Derivatives, 78 FR 75680 (December
12, 2013).
—————————————————————————
In accordance with the Paperwork Reduction Act, the Commission has
quantified the filing costs required to claim the proposed exemptions
discussed in Section III.C below. The Commission estimates that 240
entities will submit exemption claims for a total of 340 responses per
year. The 240 entities will incur a total burden of 6,850 labor hours
at a cost of approximately $822,000 annually to claim exemptive relief
under regulation 150.4, as proposed herein.103
—————————————————————————
103 See Section III.C 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 2015 revisions. Commenters are specifically
encouraged to submit both qualitative and quantitative estimates of the
potential costs, as well as data or other information to support such
estimates.
5. Section 15(a) Considerations
a. Protection of Market Participants and the Public
As pointed out above, the proposed aggregation exemptions would be
granted to an entity only upon demonstrating lack of trading control as
well as the implementation of information firewalls. These conditions
help to ensure that the effectiveness of the Commission’s aggregation
policy is not jeopardized, thereby protecting the public.
b. Efficiency, Competition, and Financial Integrity of Markets
An important rationale for providing aggregation exemptions is to
avoid overly restricting commodity derivatives trading of owned
entities not susceptible to coordinated trading. As discussed above,
such trading restrictions may potentially result in reduced liquidity
in commodity derivatives markets, diminished investment by largely
passive investors, or distortions of existing decentralized business
structures. Thus, the proposed exemptions help promote efficiency and
competition, and protect market integrity by helping to prevent these
undesirable consequences.
c. Price Discovery
By avoiding overly restricting commodity derivatives trading of
those entities that are not susceptible to coordinated trading, the
proposed exemptions may help improve liquidity by encouraging more
market participation. This might improve the price discovery function
or it might have only a negligible effect on the price discovery
function of relevant derivative markets.
d. Risk Management
The imposition of position limits helps to restrict market
participants from amassing positions that are of sufficient size
potentially to cause sudden or unreasonable fluctuations or unwarranted
changes in the price of a commodity derivatives contract, or to be used
to manipulate the market price. The proposed exemptions would allow an
owner to disaggregate the positions of an owned entity in circumstances
where the Commission has determined that the positions are less of a
risk of disrupting market operation through coordinated trading. The
Commission believes that the proposed exemptions would not materially
inhibit the use of commodity derivatives for hedging, as bona fide
hedging exemptions are available to any entity regardless of
aggregation of positions and exemptions from aggregation.
e. Other Public Interest Considerations
As pointed out above, the proposed aggregation exemptions would
mitigate market participants’ compliance burdens with the aggregation
requirements and the position limits requirements more generally. The
Commission has not identified any other public interest considerations
related to the costs and benefits of the proposed exemptive relief. The
Commission requests comment on any potential public interest
considerations, as well as data or other information to support such
considerations.
6. Section 15(b) Considerations
Section 15(b) of the CEA requires the Commission to consider the
public interest to be protected by the antitrust laws and to endeavor
to take the least anticompetitive means of achieving the objectives,
policies and purposes of the CEA, before promulgating a regulation
under the CEA or issuing certain orders. The Commission preliminarily
believes that the proposed exemptive relief will be consistent with the
public interest protected by the antitrust laws. The proposal would
broaden the availability of one category of relief from the aggregation
requirement to more owners and owned entities, retaining conditions
intended to address the Commission’s concerns about circumvention of
position limits by coordinated trading or direct or indirect influence
between entities. The Commission requests comment on any considerations
related to the public interest to be protected by the antitrust laws
and potential anticompetitive effects of the proposal, as well as data
or other information to support such considerations.
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.104 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).105 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.106 While the
[[Page 58377]]
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 2013 Aggregation
Proposal,107 and the Commission did not receive any comments on the
RFA.
—————————————————————————
104 44 U.S.C. 601 et seq.
105 5 U.S.C. 601(2), 603-05.
106 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).
107 See 78 FR 68973.
—————————————————————————
C. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act (“PRA”), 44 U.S.C. 3501 et seq.,
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 rules would result
in amendments to 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, titled
“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.
On November 15, 2013, the Commission published in the Federal
Register a notice of proposed modifications to part 150 of the
Commission’s regulations (i.e., the 2013 Aggregation Proposal). The
modifications addressed 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, and noted that the
modifications would also apply to the position limits regimes for 28
exempt and agricultural commodity futures and options contracts and the
physical commodity swaps that are economically equivalent to such
contracts, if such regimes are finalized. The Commission is now
proposing a revision to its 2013 Aggregation Proposal.
Specifically, the Commission is now proposing that all persons
holding a greater than 10 percent ownership or equity interest in
another entity could avail themselves of an exemption in proposed rule
Sec. 150.4(b)(2) to disaggregate the positions of the owned entity. To
claim the exemption, a person would need to meet certain criteria and
file a notice with the Commission in accordance with proposed rule
Sec. 150.4(c). The notice filing would need to demonstrate compliance
with certain conditions set forth in proposed rule Sec.
150.4(b)(2)(i)(A) through (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 Commission now proposes to delete
rule Sec. 150.4(b)(3) from its proposal. This rule would have
established a similar but separate owned-entity exemption with more
intensive qualifications for exemption.
2. Methodology and Assumptions
It is not possible at this time to precisely determine the number
of respondents affected by the proposed revision to the 2013
Aggregation Proposal. The proposed revision relates to 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 108 and further by
1.5 to account for overhead and administrative expenses.109 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
[[Page 58378]]
monetary estimates have been rounded to the nearest hundred dollars.
—————————————————————————
108 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.
109 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. Collections of Information
Proposed rule Sec. 150.4(b)(2) would require qualified persons to
file a notice in order to claim exemptive relief from aggregation.
Further, proposed rule Sec. 150.4(b)(2)(ii) states that the notice is
to be filed in accordance with proposed rule Sec. 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. Previously proposed
rule Sec. 150.4(b)(3) (which the Commission is now deleting from the
proposal) would have specified that qualified persons may request an
exemption from aggregation in accordance with proposed rule Sec.
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.
In the 2013 Aggregation Proposal, the Commission estimated that 100
entities will each file two notices annually under proposed rule Sec.
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 rule Sec.
150.4(b)(2).
The Commission also estimated that 25 entities would each file one
notice annually under proposed rule Sec. 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 rule Sec. 150.4(b)(3).
For this proposed revision to the 2013 Aggregation Proposal, the
Commission estimates that the 25 entities that would have filed one
notice annually under proposed rule Sec. 150.4(b)(3) will instead file
those notices under proposed rule Sec. 150.4(b)(2). The burden for
each such filing would be reduced by 10 hours (i.e., 30 hours minus 20
hours) and $1,200 (i.e., 10 hours times $120 per hour).
Thus, while the Commission estimates that the effect of this
proposed revision will not change the number of entities making filings
or the number of responses in order to claim exemptive relief under
proposed rule 150.4 (so the estimate in the 2013 Aggregation Proposal
that 240 entities will submit a total of 340 responses per year will
remain the same),110 the total burden will be reduced to 6,850 labor
hours (from 7,100 labor hours) at a cost of approximately $822,000
(instead of $852,000) annually.
—————————————————————————
110 In the 2013 Aggregation Proposal, the Commission estimated
that 75 entities would each file one notice annually under proposed
rule Sec. 150.4(b)(5) at an average of 10 labor hours and cost of
approximately $1,200 per filing, and that 40 entities would each
file one notice annually under proposed rule Sec. 150.4(b)(8) at an
average of 40 labor hours and cost of approximately $4,800 per
filing. These estimates remain unchanged.
—————————————————————————
4. Information Collection Comments
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 document 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.
Finally, it should be noted that 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.111
—————————————————————————
111 See Position Limits for Derivatives, 78 FR 75680 (December
12, 2013).
—————————————————————————
List of Subjects in 17 CFR Part 150
Bona fide hedging, Position limits, Referenced contracts.
For the reasons discussed in the preamble, the Commodity Futures
Trading 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. Revise paragraphs (d) and (e)(2) and (5) of Sec. 150.1 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 58379]]
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.
(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 (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) [Reserved]
(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
[[Page 58380]]
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.
(ii) [Reserved]
(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 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 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 paragraph (b)(9) of this section shall provide to the
Commission such information concerning the person’s claim for
exemption. Upon notice and opportunity for the affected person to
respond, the Commission may amend, suspend, terminate, or otherwise
modify a person’s aggregation exemption for failure to comply with the
provisions of this section.
(c) Notice filing for exemption. (1) Persons seeking an aggregation
exemption under paragraph (b)(1)(ii), (b)(2), (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) [Reserved]
(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 paragraph (c) of this section, an updated or
amended notice shall promptly be filed detailing the material change.
(5) Any notice filed under paragraph (c) of this section 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
[[Page 58381]]
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) [Reserved]
(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 September 23, 2015, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Aggregation of Positions Supplemental Notice of Proposed
Rulemaking–Commission Voting Summary, Chairman’s Statement, and
Commissioner’s Statement
Appendix 1–Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2–Statement of Chairman Timothy G. Massad
As part of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Congress mandated that the CFTC adopt limits to
address the risk of excessive speculation in physical commodity
derivative contracts. In 2013, the Commission proposed these rules
on “position limits.” These proposed rules included guidelines to
determine which accounts and positions a person with an ownership
interest must aggregate to determine compliance. In addition, the
Commission separately proposed an exemption process from this
“aggregation” requirement.
Today, we are proposing a simplification of that exemption
process. Instead of requiring a participant that has a 50 percent or
more interest in an entity to apply for and obtain prior approval
from the Commission, our proposal would rely on a notice filing. If
that participant files a notice attesting to the Commission that it
has no control over the trading of that entity, and that firewalls
are in place to prevent access to information, then it need not wait
for the CFTC’s review and approval. This notice filing process is
similar to what the Commission uses in many other areas.
This should create a more practical, efficient rule. It is
important to note that the proposed change does not alter the
standard of when aggregation is required. Moreover, the Commission
retains its authority to call for additional information and modify
or terminate an exemption for failure to comply with the standard.
Today’s proposed modification is part of our ongoing
consideration of the substantial public input the Commission
received on its 2013 position limits proposal. As we continue to
consider that input and work on a final rule, I want to underscore
that the Commission appreciates the importance and complexity of
these issues, and we intend to take the time necessary to get it
right. We hope to have more to say about issues related to position
limits in the coming months.
Appendix 3–Statement of Commissioner J. Christopher Giancarlo
I support these proposed changes to the aggregation rules
because I believe they make the position limits regime more
workable. However, this is just the first of many steps needed to
make the CFTC’s approach to position limits less harmful to the risk
management activities of American farmers, energy producers,
manufacturers, risk-hedgers and trading institutions that do
business around the globe. We must avoid at all costs adopting
flawed government regulations that prevent our markets from
operating effectively at a time of plunging commodity prices.1
That means not displacing the everyday commercial judgement of
farmers and businesses with a small set of allowable hedging options
pre-selected by a Washington Commission with limited experience in
commercial risk management.
—————————————————————————
1 See Ira Iosebashvili and Tatyana Shumsky, Investors Flee
Commodities, The Wall Street Journal, Jul. 20, 2015, available at
http://www.wsj.com/articles/investors-flee-commodities-1437434367;
See also Veronica Brown and Pratima Desai, Speculators Show Global
Commodities Rout Still Has Legs, Reuters, Jul. 27, 2015, available
at http://www.reuters.com/article/2015/07/27/us-markets-commodities-rout-idUSKCN0Q11TJ20150727.
—————————————————————————
As I recently stated,2 the CFTC must change the proposed
requirement that a market participant aggregate trading positions
across subsidiaries over which it has no control or in which it may
only be invested on a short-term basis. The proposal from 2013
essentially requires a market participant to apply for permission
from the CFTC before it can disaggregate a position if the
participant owns more than fifty percent of an entity, even if it
has zero control or influence over that entity. This approach does
not reflect the realities of modern commerce in which global trading
firms may often have many unconnected subsidiaries that neither
communicate nor share trading strategies or market position
information.
—————————————————————————
2 See Keynote Address by Commissioner J. Christopher
Giancarlo, 7th Annual Capital Link Global Commodities, Energy &
Shipping Forum, Sept. 16, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-8.
—————————————————————————
I commend the CFTC staff for taking into account public comments
and putting forward a revised rule proposal that better recognizes
the varied corporate structures of contemporary market participants.
I am hopeful that today’s proposal will serve as the basis for a
workable solution to the flawed approach to aggregation in the
previous proposal.
In addition, today’s proposal would relieve the Commission of
the obligation to conduct a detailed, individualized inquiry into
the relationships of the owned entities of a majority-owner
applicant that seeks to disaggregate its trading positions across a
global corporate enterprise. I agree with commenters that
characterized the 2013 process as unworkable and a burden on
already-limited Commission resources.
Furthermore, this proposed reform appears considerably more
attentive to liquidity concerns than the 2013 proposal. By
permitting majority owners that lack trading control to file a
disaggregation notice with immediate effect rather than navigating a
case-by-case Commission approval process, the 2015 framework
significantly reduces barriers to disaggregation, thereby possibly
increasing market participation.
One area discussed at length in the current proposal is the
issue of control of a corporate entity. Specifically, I invite
public comment on whether there should be a removal of the
presumption of control of an entity for all minority ownership
interests. This would allow the exclusion now available to minority
owners with a stake below ten percent, while retaining the
presumption for interests exceeding fifty percent.
In addition, I am concerned that, by requiring an owner to
aggregate an owned entity’s positions when its affiliates have risk-
management systems that permit the sharing of trades or trading
strategy, the proposed rule may stymie critical risk-mitigation
efforts. Owners and their affiliates may need to share information
regarding trades or trading strategy to verify compliance with
applicable credit limits as well as restrictions and collateral
requirements for inter-affiliate transactions, among other risk-
management and compliance-related objectives.3
—————————————————————————
3 Letter from Walt Lukken, President and Chief Executive
Officer, Futures Industry Association, to Melissa Jurgens,
Secretary, CFTC (Feb. 6, 2014), at 8-9, available at https://secure.fia.org/downloads/Aggregation_Comment_Letter_020614.pdf.
—————————————————————————
Accordingly, I invite public comment on whether the Commission
should consider modifying the current proposal to clarify that
owners and their affiliates may share such trading information as is
necessary for effective risk safeguards without forfeiting
[[Page 58382]]
eligibility for disaggregation. If the Commission remains concerned
that this accommodation will facilitate coordinated trading, it
might require affiliates sharing trading data to restrict
dissemination of the information to those responsible for compliance
and risk-management efforts, maintaining internal firewalls to
conceal the information from employees who develop or execute
trading strategies.
I also welcome public comment on whether the Commission should
consider modifying the proposed rule to clarify that an owner filing
a notice of trading independence in order to claim an exemption from
aggregation under this rule need only make subsequent filings in the
event of a material change in the owner’s degree of control over its
subsidiary’s positions. The text of the proposed rule does not
appear to require periodic filings following the initial notice of
trading independence, but the Commission’s calculation of the
proposal’s costs seems to assume that such filings will be made on
an annual basis.
I encourage the public to comment on my above concerns and
propose potential solutions if appropriate.
[FR Doc. 2015-24596 Filed 9-28-15; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: September 29, 2015
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