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Federal Register, Volume 81 Issue 113 (Monday, June 13, 2016)
[Federal Register Volume 81, Number 113 (Monday, June 13, 2016)]
[Proposed Rules]
[Pages 38457-38514]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12964]
[[Page 38457]]
Vol. 81
Monday,
No. 113
June 13, 2016
Part V
Commodity Futures Trading Commission
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17 CFR Parts 37, 38, and 150
Position Limits for Derivatives: Certain Exemptions and Guidance;
Proposed Rule
Federal Register / Vol. 81 , No. 113 / Monday, June 13, 2016 /
Proposed Rules
[[Page 38458]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 37, 38, and 150
RIN 3038-AD99
Position Limits for Derivatives: Certain Exemptions and Guidance
AGENCY: Commodity Futures Trading Commission.
ACTION: Supplemental notice of proposed rulemaking.
———————————————————————–
SUMMARY: The Commodity Futures Trading Commission (“Commission” or
“CFTC”) is proposing revisions and additions to regulations and
guidance proposed in 2013 concerning speculative position limits in
response to comments received on that proposal. The Commission is
proposing new alternative processes for designated contract markets
(“DCMs”) and swap execution facilities (“SEFs”) to recognize
certain positions in commodity derivative contracts as non-enumerated
bona fide hedges or enumerated anticipatory bona fide hedges, as well
as to exempt from federal position limits certain spread positions, in
each case subject to Commission review. In this regard, the Commission
proposes to amend certain of the regulations proposed in 2013 regarding
exemptions from federal position limits and exchange-set position
limits to take into account these new alternative processes. In
connection with these changes, the Commission proposes to further amend
certain relevant definitions, including to clearly define the general
definition of bona fide hedging for physical commodities under the
standards in CEA section 4a(c). Separately, the Commission proposes to
delay for DCMs and SEFs that lack access to sufficient swap position
information the requirement to establish and monitor position limits on
swaps.
DATES: Comments must be received on or before July 13, 2016.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD99,
by any of the following methods:
CFTC Web site: http://comments.cftc.gov;
Mail: Secretary of the Commission, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581;
Hand delivery/courier: Same as Mail, above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that may be exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
CFTC regulations at 17 CFR part 145.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,
Division of Market Oversight, (202) 418-5452, [email protected]; Riva
Spear Adriance, Senior Special Counsel, Division of Market Oversight,
(202) 418-5494, [email protected]; Lee Ann Duffy, Assistant General
Counsel, Office of General Counsel, 202-418-6763, [email protected]; or
Steven Benton, Industry Economist, Division of Market Oversight, (202)
418-5617, [email protected]; Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission has long established and enforced speculative
position limits for futures and options contracts on certain
agricultural commodities in accordance with the Commodity Exchange Act
(“CEA” or “Act”).1 The part 150 federal 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, an 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 (that is, position
limits established by the Commission, as opposed to exchange-set
limits) on certain enumerated agricultural contracts; the listed
commodities are referred to as enumerated agricultural commodities.
The position limits on these agricultural contracts are referred to
as “legacy” limits because these contracts on agricultural
commodities have been subject to federal position limits for
decades. See also Position Limits for Derivatives, 78 FR 75680 at
75723, note 370 and accompanying text (Dec. 12, 2013) (“December
2013 position limits proposal”).
3 See 17 CFR 150.2.
4 See 17 CFR 150.3.
5 See 17 CFR 150.4.
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In late 2013, the CFTC proposed to amend its part 150 regulations
governing speculative position limits. These proposed amendments were
intended to conform to the requirements of part 150 to particular
changes to the CEA introduced by the Wall Street Transparency and
Accountability Act of 2010 (”Dodd-Frank Act”).6 The proposed
amendments included the adoption of federal position limits for 28
exempt and agricultural commodity futures and option contracts and
swaps that are “economically equivalent” to such contracts.7 In
addition, the
[[Page 38459]]
Commission proposed to require that DCMs and SEFs that are trading
facilities (collectively, “exchanges”) establish exchange-set limits
on such futures, options and swaps contracts.8 Further, the
Commission proposed to (i) revise the definition of bona fide hedging
position (which includes a general definition with requirements
applicable to all hedges, as well as an enumerated list of bona fide
hedges),9 (ii) revise the process for market participants to request
recognition of certain types of positions as bona fide hedges,
including anticipatory hedges and hedges not specifically enumerated in
the proposed bona fide hedging definition; 10 and (iii) revise the
exemptions from position limits for transactions normally known to the
trade as spreads.11
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6 The Commission previously had issued proposed and final
rules in 2011 to implement the provisions of the Dodd-Frank Act
regarding position limits and the bona fide hedge definition.
Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011);
Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011).
A September 28, 2012, order of the U.S. District Court for the
District of Columbia vacated the November 18, 2011 rule, with the
exception of the rule’s amendments to 17CFR 150.2. International
Swaps and Derivatives Association v. United States Commodity Futures
Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 2012). See generally
the materials and links on the Commission’s Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The Commission issued the December 2013 position limits
proposal, among other reasons, to respond to the District Court’s
decision in ISDA v. CFTC. See generally the materials and links on
the Commission’s Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/PositionLimitsforDerivatives/index.htm.
7 See CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5) (providing that
the Commission establish limits on economically equivalent
contracts); CEA section 4a(a)(6), 7 U.S.C. 6a(a)(6) (directing the
Commission to establish aggregate position limits on futures,
options, economically equivalent swaps, and certain foreign board of
trade contracts in agricultural and exempt commodities
(collectively, “referenced contracts”)). See December 2013
position limits proposal 78 FR at 75825. Under the December 2013
position limits proposal, “referenced contracts” would have been
defined as futures, options, economically equivalent swaps, and
certain foreign board of trade contracts, in physical commodities,
and been subject to the proposed federal position limits. The
Commission proposed that federal position limits would apply to
referenced contracts, whether futures or swaps, regardless of where
the futures or swaps positions were established. See December 2013
positions limits proposal at 78 FR 75826 (proposed Sec. 150.2).
8 See December 2013 position limits proposal 78 FR at 75754-8.
Consistent with DCM Core Principle 5 and SEF Core Principle 6, the
Commission proposed at Sec. 150.5(a)(1) that for any commodity
derivative contract that is subject to a speculative position limit
under Sec. 150.2, [a DCM] or [SEF] that is a trading facility shall
set a speculative position limit no higher than the level specified
in Sec. 150.2.
9 See December 2013 position limits proposal 78 FR at 75706-
11, 75713-18.
10 See December 2013 position limits proposal 78 FR at 75718.
11 See December 2013 position limits proposal 78 FR at 75735-
6. CEA section 4a(a)(1), 7 U.S.C. 6a(a)(1), permits the Commission
to exempt transactions normally known to the trade as “spreads”
from federal position limits.
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II. Proposal To Supplement and Revise the December 2013 Position Limits
Proposal
The CFTC is now proposing revisions and additions to regulations
and guidance proposed in 2013 concerning speculative position limits in
response to comments received on that proposal. The Commission is
proposing new alternative processes for DCMs and SEFs to recognize
certain positions in commodity derivative contracts as non-enumerated
bona fide hedges or enumerated anticipatory bona fide hedges, as well
as to exempt from federal position limits certain spread positions, in
each case subject to Commission review. In this regard, the Commission
proposes to amend certain of the regulations proposed in 2013 regarding
exemptions from federal position limits and exchange-set position
limits to take into account these new alternative processes. In
connection with these changes, the Commission proposes to further amend
certain relevant definitions, including to clearly define the general
definition of bona fide hedging for physical commodities under the
standards in CEA section 4a(c). Separately, the Commission proposes to
delay for DCMs and SEFs that lack access to sufficient swap position
information the requirement to establish and monitor position limits on
swaps at this time.
Because this proposal supplements the December 2013 position limits
proposal, it must be read in conjunction with that notice of proposed
rulemaking, such that where this supplemental proposal sets out a
proposed rule text in full, as in four definitions which this
supplement proposes to amend, the rule text is intended to replace what
was proposed in the December 2013 position limits proposal. Where this
supplemental proposal reserves a subsection proposed in the December
2013 position limits proposal, the intention is to provide additional
time for Commission consideration of that subsection. For the avoidance
of doubt, the Commission is still reviewing comments received on such
reserved subsections and does not seek further comment on such reserved
subsections.
A. Proposed Guidance Regarding Exchange-Set Limitations on Swap
Positions
As noted above, in December 2013 the Commission proposed federal
position limits on futures and swaps in physical commodities.12 Since
that time, the Commission has worked with industry to improve the
quality of swap position reporting to the Commission under part 20.13
In light of the improved quality of the swap position reporting, the
Commission intends to rely on part 20 swap position data, given
adjustments for obvious errors (e.g., data reported based on a unit of
measure, such as an ounce, rather than a futures equivalent number of
contracts), to establish initial levels of federal non-spot month
limits on futures and swaps in a final rule. Moreover, the Commission
notes that the improved quality allows the Commission to utilize part
20 swap position data when monitoring market participants’ compliance
with such federal position limits on futures and swaps.
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12 CEA section 4a(a)(5) requires federal position limits for
swaps that are “economically equivalent” to futures and options
that are subject to mandatory position limits under CEA section
4a(a)(2). See December 2013 position limits proposal at 78 FR 75681-
5 (providing the Commission’s interpretation of the statute as
mandating that the Commission impose limits on futures, options, and
swaps, in agricultural and exempt commodities).
13 The Commission stated in the December 2013 position limits
proposal that it preliminarily had decided not to use the swaps data
then reported under part 20 for purposes of setting the initial
levels of the proposed single and all-months-combined positions
limits due to concerns about the reliability of such data. December
2013 position limits proposal, 78 FR at 75533. The Commission also
stated that it might use part 20 swaps data should it determine such
data to be reliable, in order to establish higher initial levels in
a final rule. Id. at 75734.
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However, the Commission notes that with respect to exchange-set
limits on swaps, exchanges, on the other hand, generally do not have
access to swap position information. Unlike futures contracts–which
are proprietary to a particular DCM and typically cleared at a single
DCO affiliated with the DCM–swaps in a particular commodity are not
proprietary to any particular trading facility or platform. Market
participants may execute swaps involving a particular commodity on or
subject to the rules of multiple exchanges or, in some circumstances,
over the counter (“OTC”). Further, under the Commission regulations,
data with respect to a particular swap transaction may be reported to
any swap data repository (“SDR”).14
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14 See Sec. Sec. 45.3, 45.4, and 45.10 of the Commission’s
regulations, 17 CFR 45.3, 45.4, and 45.10. See generally CEA
sections 4r (reporting and recordkeeping for uncleared swaps) and 21
(swap data repositories), 7 U.S.C. 6r and 24a.
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In addition, it should be noted that although CEA section 2(h)(8)
requires that swap transactions required to be cleared under CEA
section 2(h)(7) must be traded on either a DCM or a SEF if a DCM or SEF
“makes the swap available to trade,” 15 there currently is neither
a requirement for mandatory clearing of a swap on a physical
commodity,16 nor has a swap on a physical commodity been made
available to trade.17 Consequently, swaps on physical commodities may
use means of execution other than on a DCM or SEF.
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15 CEA section 2(h)(8), 7 U.S.C. 2(h)(8) (the “trading
mandate”).
16 See CEA section 2(h) and part 50 of the Commission’s
regulations. 7 U.S.C. 2(h) and 17 CFR part 50.
17 For example, under rule 37.10, a swap execution facility
may make a swap available to trade, pursuant to CEA section 2(h)(8).
See current list of swaps made available to trade at http://www.cftc.gov/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf.
—————————————————————————
Even if an exchange had access to cleared swap data from a
particular DCO, an exchange may need access to data from additional
DCOs in order to have a sufficient understanding of a market
participant’s cleared swap position, because a market participant may
clear economically equivalent swaps on multiple DCOs. Further, DCO
cleared swap data would not provide an exchange with data regarding
economically equivalent uncleared swaps. While SDR data would include
[[Page 38460]]
swap data regarding both cleared and uncleared swaps, such data would
need to be converted to a futures-equivalent position in order to
measure compliance with an exchange-set limit set at a level no higher
than that of the federal position limit. The Commission acknowledges
that if an exchange does not have access to sufficient data regarding
individual market participants’ open swap positions, then it cannot
effectively monitor swap position limits.
In light of the above, and based on (i) comments received on the
December 2013 position limits proposal; 18 (ii) viewpoints expressed
during a Roundtable on Position Limits; 19 (iii) several Commission
advisory committee meetings that each provided a focused forum for
participants to discuss some aspects of the December 2013 position
limits proposal; 20 and (iv) information obtained in the course of
ongoing Commission review of SEF registration applications,21 the
Commission has determined to revise and amend certain parts of the
December 2013 position limits proposal. The Commission proposes to
temporarily delay for exchanges that lack access to sufficient swap
position information the requirement to establish and monitor position
limits on swaps by: (i) Adding Appendix E to part 150 to provide
guidance regarding Sec. 150.5; and (ii) revising guidance on DCM Core
Principle 5 and SEF Core Principle 6.22
—————————————————————————
18 Comments on the December 2013 position limits proposal are
accessible on the Commission’s Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1436.
19 A transcript of the June 19, 2014 Roundtable on Position
Limits is available on the Commission’s Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission_061914-trans.pdf.
20 Information regarding the December 9, 2014 and September
22, 2015 meetings of the Agricultural Advisory Committee, sponsored
by Chairman Massad, is accessible on the Commission’s Web site at
http://www.cftc.gov/About/CFTCCommittees/AgriculturalAdvisory/aac_meetings. Information regarding February 26, 2015 and the July
29, 2015 meetings of the Energy & Environmental Markets Advisory
Committee (“EEMAC”), sponsored by Commission Giancarlo, is
accessible on the Commission’s Web site at http://www.cftc.gov/About/CFTCCommittees/EnergyEnvironmentalMarketsAdvisory/emac_meetings.
21 Added by the Dodd-Frank Act, section 5h(a) of the CEA, 7
U.S.C. 7b-3, requires SEFs to register with the Commission. See
generally “Core Principles and Other Requirements for Swap
Execution Facilities,” 78 FR 33476 (Aug. 5, 2013). Information
regarding the SEF application process is available on the
Commission’s Web site at http://www.cftc.gov/IndustryOversight/TradingOrganizations/SEF2/sefhowto.
22 DCM Core Principle 5, Position Limitations or
Accountability, is contained in CEA section 5(d)(5), 7 U.S.C.
7(d)(5). SEF Core Principle 6, Position Limits or Accountability, is
contained in CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6).
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The CEA requires in SEF Core Principle 6(B) that a SEF: (i) Set its
exchange-set limit on swaps at a level no higher than that of the
federal position limit; and (ii) monitor positions established on or
through the SEF for compliance with the federal position limit and any
exchange-set limit.23 Similarly, for any contract subject to a
federal position limit, including a swap contract, DCM Core Principle
5(B) requires that DCMs must set a position limit at a level no higher
than that of the federal position limit.24
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23 CEA section 5h(f)(6)(B), 7 U.S.C. 7b-3(f)(6)(B) (SEF Core
Principle 6(B)). The Commission codified SEF Core Principle 6(B),
added by the Dodd-Frank Act, in Sec. 37.600 of its regulations, 17
CFR 37.600. See generally Core Principles and Other Requirements for
Swap Execution Facilities, 78 FR 33476, 33533-4 (June 4, 2013).
24 CEA section 5(d)(5)(B), 7 U.S.C. 7(d)(5)(B) (DCM Core
Principle 5(B)). The Commission codified DCM Core Principle 5(B), as
amended by the Dodd-Frank Act, in Sec. 38.300 of its regulations,
17 CFR 38.300. See generally Core Principles and Other Requirements
for Designated Contract Markets, 77 FR 36612, 36639 (June 19, 2012).
—————————————————————————
The December 2013 position limits proposal specified that federal
position limits would apply to referenced contracts,25 whether
futures or swaps, regardless of where the futures or swaps positions
are established.26 Consistent with DCM Core Principle 5 and SEF Core
Principle 6, the Commission proposed at Sec. 150.5(a)(1) that, for any
commodity derivative contract that is subject to a speculative position
limit under Sec. 150.2, [a DCM] or [SEF] that is a trading facility
shall set a speculative position limit no higher than the level
specified in Sec. 150.2.27
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25 Under the December 2013 position limits proposal,
“referenced contracts” are defined as futures, options,
economically equivalent swaps, and certain foreign board of trade
contracts, in physical commodities, and are subject to the proposed
federal position limits. See December 2013 position limits proposal
78 FR at 75825.
26 See December 2013 positions limits proposal at 78 FR 75826
(proposed Sec. 150.2).
27 See December 2013 position limits proposal at 78 FR 75754-
8.
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Three commenters on proposed regulation Sec. 150.5 recommended
that the Commission not require SEFs to establish position limits.28
Two noted that because SEF participants may use more than one
derivatives clearing organization (“DCO”), a SEF may not know when a
position has been offset.29 Further, during the ongoing SEF
registration process,30 a number of persons applying to become
registered as SEFs told the Commission that they lack access to
information that would enable them to knowledgeably establish position
limits or monitor positions.31 The Commission observes that this
information gap would also be a concern for DCMs in respect of swaps,
because DCMs lacking access to swap position information also would not
be able to reliably establish position limits on swaps or monitor swap
positions.
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28 Commodity Markets Council (“CMC”), on February 10, 2014,
(“CL-CMC-59634”), at 14-15; Futures Industry Association
(“FIA”), on March 30, 2015 (“CL-FIA-60392”), at 10. One
commenter stated that SEFs should be exempt from the requirement to
set positions limits because SEFs are in the early stages of
development and could be harmed by limits that restrict liquidity.
International Swaps and Derivatives Association, Inc. (“ISDA”) and
Securities Industry and Financial Markets Association (“SIFMA”),
on February 10, 2014 (“CL-ISDA/SIFMA-59611”), at 35.
29 CL-CMC-59634 at 14-15; CL-FIA-60392 at 10.
30 Under CEA section 5h(a)(1), no person may operate a
facility for trading swaps unless the facility is registered as a
SEF or DCM. 7 U.S.C. 7b-3(a)(1).
31 For example, in a submission to the Commission under part
40 of the Commission’s regulations, BGC Derivative Markets, L.P.
states that “[t]he information to administer limits or
accountability levels cannot be readily ascertained. Position limits
or accountability levels apply market-wide to a trader’s overall
position in a given swap. To monitor this position, a SEF must have
access to information about a trader’s overall position. However, a
SEF only has information about swap transactions that take place on
its own Facility and has no way of knowing whether a particular
trade on its facility adds to or reduces a trader’s position. And
because swaps may trade on a number of facilities or, in many cases,
over-the-counter, a SEF does not know the size of the trader’s
overall swap position and thus cannot ascertain whether the trader’s
position relative to any position limit. Such information would be
required to be supplied to a SEF from a variety of independent
sources, including SDRs, DCOs, and market participants themselves.
Unless coordinated by the Commission operating a centralized
reporting system, such a data collection requirement would be
duplicative as each separate SEF required reporting by each
information sources.” BGC Derivative Markets, L.P., Rule Submission
2015-09 (Oct. 6, 2015), available at http://www.cftc.gov/filings/orgrules/rule100615bgcsef001.pdf.
—————————————————————————
The Commission acknowledges that, if an exchange does not have
access to sufficient data regarding individual market participants’
open swap positions, then it cannot effectively monitor swap position
limits. The Commission believes that most exchanges do not have access
to sufficient swap position information to effectively monitor swap
position limits.32 In this regard, the Commission believes that an
exchange would have or could have access to sufficient swap position
information to effectively monitor swap position limits if, for
example: (1) It had access to daily information about its market
participants’ open swap positions; or (2) it knows that its market
participants regularly engage on its exchange in large volumes of
speculative trading activity
[[Page 38461]]
(it may gain that knowledge through surveillance of heavy trading
activity), that would cause reasonable surveillance personnel at an
exchange to inquire further about a market participant’s intentions
33 and total open swap positions.
—————————————————————————
32 The Commission is aware of one SEF that may have access to
sufficient swap position information by virtue of systems
integration with affiliates that are CFTC registrants and shared
personnel. This SEF requires that all of its listed swaps be cleared
on an affiliated DCO, which reports to an affiliated SDR.
33 For instance, heavy trading activity at a particular
exchange might cause that exchange to ask whether a market
participant is building a large speculative position or whether the
heavy trading activity is merely the result of a market participant
making a market across several exchanges.
—————————————————————————
It is possible that an exchange could obtain an indication of
whether a swap position established on or through a particular exchange
is increasing a market participant’s swap position beyond a federal or
exchange-set limit, if that exchange has data about some or all of a
market participant’s open swap position from the prior day and combines
it with the transaction data from the current day, to obtain an
indication of the market participant’s current open swap position. By
way of example, part 20 requires clearing organizations, clearing
members and swap dealers to report to the Commission routine position
reports for physical commodity swaps; the part 20 swaps data identifies
for the Commission a market participant’s reported open swap positions
from the prior trading day. If part 20 swaps data were made available
to an exchange, it could use it to add to any swap positions
established on or through that exchange during the current trading day
to get an indication of a potential position limit violation.34 The
indication would alert the exchange to contact the market participant
to inquire about that participant’s total open swap position.
—————————————————————————
34 Nonetheless, that market participant may have conducted
other swap transactions in the same commodity, away from a
particular exchange, that reduced its swap position.
—————————————————————————
While this indication would not include the market participant’s
activity transacted away from that particular exchange, the Commission
believes that such monitoring would comply with the requirement in CEA
section 5h(f)(6)(B)(ii) that the SEF monitor positions established on
or through the SEF for compliance with the limits set by the Commission
and the SEF. However, the Commission understands that exchanges
generally do not currently have access to a data source that identifies
a market participant’s reported open swap positions from the prior
trading day.35 The Commission does not believe that it would be
practicable for an exchange to require that market participants self-
report their total open swap positions.36 And with only the
transaction data from a particular exchange, it would be impracticable,
if not impossible, for that exchange to monitor and enforce position
limits for swaps.
—————————————————————————
35 As noted above, although the Commission receives swaps
position data pursuant to Part 20, the Commission has not made this
information available to any exchange.
36 An exchange could theoretically obtain swap position data
directly from market participants, for example, by requiring a
market participant to report its swap positions, as a condition of
trading on the exchange. However, the Commission thinks it is
unlikely that a single exchange would unilaterally impose a swaps
reporting regime on market participants.
The Commission abandoned the approach of requiring market
participants to report futures positions directly to the Commission
many years ago. See Reporting Requirements for Contract Markets,
Futures Commission Merchants, Members of Exchanges and Large
Traders, 46 FR 59960 (Dec. 8, 1981). Instead, the Commission and
DCMs rely on a large trader reporting system where futures positions
are reported by sources other than the position holder itself,
including futures commission merchants, clearing members and foreign
brokers. See generally part 19 of the Commission’s regulations, 17
CFR part 19. See also, for example, the discussion of an exchange’s
large trader reporting system in the Division of Market Oversight
Rule Enforcement Review of the Chicago Mercantile Exchange and the
Chicago Board of Trade, July 26, 2013, at 24-7, available at http://www.cftc.gov/idc/groups/public/@iodcms/documents/file/rercmecbot072613.pdf.
Further, as noted above, exchanges do not have authority to
demand swap position data from derivative clearing organizations or
swap data repositories; nor do exchanges have general authority to
demand market participants’ swap position data from clearing members
of DCOs or swap dealers (as the Commission does under part 20).
—————————————————————————
Moreover, the Commission has neither required any DCO 37 or SDR
38 to provide such swap data to exchanges,39 nor provided any
exchange with access to swaps data collected under part 20 of the
Commission’s regulations.40
—————————————————————————
37 Core principle M for DCOs addresses information sharing
only for the purpose of the DCO’s carrying out its risk management
program as “appropriate and applicable,” but does not address
information sharing for other purposes, and does not address
information sharing with exchanges. CEA section 5b(c)(2)(M), 7
U.S.C. 7a-1(c)(2)(M), and Sec. 39.22, 17 CFR 39.22. The Commission
has access to DCO information relating to trade and clearing details
under Sec. 39.19, 17 CFR 39.19, as is necessary to conduct its
oversight of a DCO. However, the Commission has not used its general
rulemaking authority under CEA section 8a(5), 7 U.S.C. 12a(5), to
require DCOs to provide registered entities access to swap
information, although the Commission could impose such a requirement
by rule. CEA section 5b(c)(2)(A)(i), 7 U.S.C. 7a-1(c)(2)(A)(i).
38 An SDR has a duty to provide direct electronic access to
the Commission, or a designee of the Commission who may be a
registered entity (such as an exchange). CEA section 21(c)(4), 7
U.S.C. 24a(c)(4). See 76 FR 54538 at 54551, note 141 and
accompanying text (Sept. 1, 2011). However, the Commission has not
designated any exchange as a designee of the Commission for that
purpose. Further, the Commission has not used its general rulemaking
authority under CEA section 8a(5), 7 U.S.C. 12a(5), to require SDRs
to provide registered entities (such as exchanges) access to swap
information, although the Commission could impose such a requirement
by rule. CEA section 21(a)(3)(A)(ii), 7 U.S.C. 24a(a)(3)(A)(ii).
39 Even if such information were to be made available to
exchanges, the swaps positions would need to be converted to
futures-equivalent positions for purposes of monitoring position
limits on a futures-equivalent basis, which would place an
additional burden on exchanges. See December 2013 positions limits
proposal at 78 FR75825 for the proposed definition of futures-
equivalent; see also the discussion, below, regarding this current
notice’s amendments to that proposed definition. If at some future
time, the Commission were to consider requiring DCOs or SDRs to
provide swap data to exchanges, or to provide the exchanges with
swap data collected under part 20, the Commission would then
consider the burden that would be placed on the exchange by the need
to convert swap positions into futures equivalents.
40 The part 20 swaps data is reported in futures equivalents,
but does not include data specifying where (e.g., OTC or a
particular exchange) reportable positions in swaps were established.
—————————————————————————
In light of the foregoing, the Commission is proposing a delay in
implementation of exchange-set limits for swaps only, and only for
exchanges without sufficient swap position information. After
consideration of the circumstances described above, and in an effort to
accomplish the policy objectives of the Dodd-Frank Act regulatory
regime, including to facilitate trade processing of any swap and to
promote the trading of swaps on SEFs,41 this current proposal amends
the guidance in the appendices to parts 37 and 38 of the Commission’s
regulations regarding SEF core principle 6 and DCM core principle 5,
respectively. The revised guidance clarifies that an exchange need not
demonstrate compliance with SEF core principle 6 or DCM core principle
5 as applicable to swaps until it has access to sufficient swap
position information, after which the guidance would no longer be
applicable.42 For clarity, this current proposal includes the same
guidance in a new appendix E to proposed part 150 in the context of the
Commission’s proposed regulations regarding exchange-set position
limits.
—————————————————————————
41 See, e.g., CEA sections 5h(b)(1)(B) and 5h(e), 7 U.S.C. 7b-
3(b)(1)(B) and 7b-3(e), respectively.
42 Once the guidance was no longer applicable, a DCM or a SEF
would be required to file rules with the Commission to implement the
relevant position limits and demonstrate compliance with Core
Principle 5 or 6, as appropriate. The Commission notes that, for the
same reasons regarding swap position data discussed above in respect
of CEA section 5h(f)(6)(B), the proposed guidance also would
temporarily delay the requirement for SEFs to comply with their
statutory obligation under CEA section 5h(f)(6)(A).
—————————————————————————
Although the Commission is proposing to delay implementing the core
principles regarding position limits on swaps, nothing in this current
proposal would prevent an exchange from nevertheless establishing
position limits on swaps. However, it does seem unlikely that an
exchange would implement position limits before
[[Page 38462]]
acquiring sufficient swap position information because of the ensuing
difficulty of enforcing such a limit. The Commission believes that
providing the proposed delay for those exchanges that need it both
preserves flexibility for subsequent Commission rulemaking and allows
for phased implementation of limitations on swaps by exchanges, as
practicable.43
—————————————————————————
43 Although this current proposal would provide position
limits relief to SEFs and to DCMs in regards to swaps, it would not
alter the definition of referenced contract (including economically
equivalent swaps) as proposed in December 2013. See December 2013
position limits proposal 78 FR at 75825. The Commission continues to
review and consider comments received regarding the definition of
referenced contract.
—————————————————————————
The Commission observes that courts have upheld relieving regulated
entities of their statutory obligations where compliance is impossible
or impracticable.44 The Commission believes that it would be
impracticable, if not impossible, for an exchange to monitor and
enforce position limits for swaps with only the transaction data from
that particular exchange. Accordingly, the Commission believes that it
is reasonable at this time to delay implementation of this discrete
aspect of position limits, only with respect to swaps position limits,
and only for exchanges that lack access to sufficient swap position
information. The Commission believes that this approach would further
the policy objectives of the Dodd-Frank Act regulatory regime,
including the facilitation of trade processing of swaps and the
promotion of trading swaps on SEFs. While this approach would delay the
requirement for certain exchanges to establish and monitor exchange-set
limits on swaps at this time, the Commission notes that, under the
December 2013 position limits proposal, federal position limits would
apply to swaps that are economically equivalent to futures contracts
subject to federal position limits.
—————————————————————————
44 See, e.g., Ass’n of Irritated Residents v. EPA, 494 F.3d
1027, 1031 (D.C. Cir. 2007) (allowing regulated entities to enter
into consent agreements with EPA–without notice and comment–that
deferred prosecution of statutory violation until such time as
compliance would be practicable); Catron v. County Bd. Of
Commissioners v. New Mexico Fish & Wildlife Serv., 75 F.3d 1429,
1435 (10th Cir.1966) (stating that “Compliance with [the National
Environmental Protection Act] is excused when there is a statutory
conflict with the agency’s authorizing legislation that prohibits or
renders compliance impossible.”). Further, it is axiomatic that
courts will avoid reading statutes to reach absurd or unreasonable
consequences. See, e.g., Griffin v. Oceanic Contractors, Inc., 458
U.S. 564 (1982). To require an exchange to monitor position limits
on swaps, when it currently has extremely limited visibility into a
market participant’s swap position, is arguably absurd and certainly
appears unreasonable.
—————————————————————————
Request for comment (“RFC”) 1. The Commission requests comment on
all aspects of the proposed delay in implementing the requirements of
SEF core principle 6(B) and DCM core principle 5(B) with respect to the
setting and monitoring by exchanges of position limits for swaps. Does
any DCM or SEF currently have access to sufficient data regarding
individual market participants’ open swaps positions to so set and
monitor swaps position limits other than by special call? If yes,
please describe in detail how such access could be obtained.45 If no,
how easy or difficult would it be for an exchange to obtain access to
sufficient swap position information by means of contract or other
arrangements?
—————————————————————————
45 The Commission expects that any DCM or SEF that has access
to sufficient swap position information will report this to the
Commission in a comment letter that will be publicly available in
the comment file for this current proposal on the Commission’s Web
site.
—————————————————————————
B. Proposal To Amend the Definition of Bona Fide Hedging Position
As discussed below, the Commission is now proposing a general
definition of bona fide hedging position that incorporates only the
standards in CEA section 4a(c)(2), regarding physical commodity
derivatives. Conforming the standards of a general definition of bona
fide hedging position to those of the statute requires eliminating two
components of the general definition of bona fide hedging position in
current Sec. 1.3(z)(1): The incidental test and the orderly trading
requirement.46 Thus, the Commission is now proposing to eliminate the
incidental test and the orderly trading requirement, as discussed
below.
—————————————————————————
46 The inclusion of the incidental test and the orderly
trading requirement in the definition of bona fide hedging has a
long history. As noted in the December 2013 Position Limits
proposal, “In response to the 1974 legislation, the Commission’s
predecessor adopted in 1975 a bona fide hedging definition in Sec.
1.3(z) of its regulations stating, among other requirements, that
transactions or positions would not be classified as hedging unless
their bona fide purpose was to offset price risks incidental to
commercial cash or spot operations, and such positions were
established and liquidated in an orderly manner and in accordance
with sound commercial practices. Shortly thereafter, the newly
formed Commission sought comment on amending that definition. Given
the large number of issues raised in comment letters, the Commission
adopted the predecessor’s definition with minor changes as an
interim definition of bona fide hedging transactions or positions,
effective October 18, 1975.” See December 2013 Position Limits
Proposal at 75703. The Commission is also proposing a non-
substantive change to subsection (1)(ii)(B) of the bona fide hedging
definition by deleting from the definition proposed in the December
2013 position limits proposal the lead in words “such position.”
—————————————————————————
1. December 2013 Proposal
In the December 2013 position limits proposal, the Commission
proposed a new definition of “bona fide hedging position” in proposed
Sec. 150.1, to replace the current definition in Sec. 1.3(z). The
opening paragraph of the proposed definition is a general definition of
a bona fide hedging position. As is the case in the current definition
in Sec. 1.3(z), that general definition contained two requirements for
a bona fide hedging position that are not included in CEA section
4a(c)(2): An incidental test and an orderly trading requirement.47
—————————————————————————
47 See December 2013 Position Limits Proposal at 75706-7
(stating “Bona fide hedging position means any position whose
purpose is to offset price risks incidental to commercial cash,
spot, or forward operations, and such position is established and
liquidated in an orderly manner in accordance with sound commercial
practices, . . .”).
—————————————————————————
The incidental test is a component of the December 2013 proposed
bona fide hedging position definition requiring that the risks offset
by a commodity derivative position must be incidental to the position
holder’s commercial operations.48 The orderly trading requirement is
a component of the December 2013 proposed bona fide hedging position
definition requiring that a bona fide hedge position must be
established and liquidated in an orderly manner in accordance with
sound commercial practices.49
—————————————————————————
48 See December 2013 Position Limits Proposal at 75707.
49 Id.
—————————————————————————
2. Comments on the December 2013 Proposed Definition of Bona Fide
Hedging Position
Commenters generally objected to the inclusion in the general
definition of bona fide hedging position of the incidental test and the
orderly trading requirement. For example, one commenter objected to the
incidental test, since that test is not included in CEA section 4a(c)
with respect to physical commodity hedges.50
—————————————————————————
50 See, e.g., CME Group, Inc. (“CME Group”), on February 10,
2014 (“CL-CME-59718”) at 47.
—————————————————————————
Commenters urged the Commission to eliminate the orderly trading
requirement, because, in the context of the over-the-counter markets,
the concept of orderly trading is not defined, yet the requirement
would impose a duty on end users to monitor market activities to ensure
they do not cause a significant market impact.51 Commenters noted the
anti-disruptive
[[Page 38463]]
trading prohibitions and polices would apply regardless of whether
there is an orderly trading requirement.52 Commenters requested that
if the Commission were to retain the orderly trading requirement, the
Commission interpret such requirement in a manner consistent with the
Commission’s disruptive trading practices interpretation (i.e., a
standard of intentional or reckless conduct); commenters also requested
that the Commission not apply a negligence standard.53
—————————————————————————
51 See Coalition of Physical Energy Companies (“COPE”) on
February 10, 2014 (“CL-COPE-59662”) at 13, Duke Energy Utilities
(“DEU”) on February 10, 2014 (“CL-DEU-59631”) at 5-7, and The
Commercial Energy Working Group (“Working Group”) CL-Working
Group-59693 at 14.
52 Section 747 of the Dodd-Frank Act amended the CEA to
expressly prohibit certain disruptive trading practices.
Specifically, CEA section 4c(a)(5), 7 U.S.C. 6c(a)(5), states that
it is unlawful for a person to engage in any trading, practice, or
conduct on or subject to the rules of a registered entity that (A)
violates bids or offers; (B) demonstrates intentional or reckless
disregard for the orderly execution of transactions during the
closing period; or (C) is, of the character of, or is commonly known
to the trade as, `spoofing’ (bidding or offering with the intent to
cancel the bid or offer before execution). See also, Antidisruptive
Practices Authority, 78 FR 31890 (May 28, 2103) (providing a policy
statement and guidance).
53 See, e.g., FIA on February 7, 2014 (“CL-FIA-59595”), at
5, 33-34, the Edison Electric Institute and the Electric Power
Supply Association (“EEI-EPSA”) on February 10, 2014 “CL-EEI-
EPSA-59602”) at 14-15, CL-ISDA/SIFMA-59611 at 4, 39, CL-CME-59718
at 67, and IntercontinentalExchange, Inc. (“ICE”) on February 10,
2014 (“CL-ICE-59669”) at 11.
—————————————————————————
3. Proposal To Amend the Definition
For the reasons discussed below, and in response to the comments
received, the Commission is proposing to eliminate the incidental test
and orderly trading requirement from the general definition of bona
fide hedging position. For clarity, the Commission is herein
publishing, in proposed Sec. 150.1, a general definition of bona fide
hedging position for physical commodity derivatives that incorporates
only the standards of CEA section 4a(c), but notes that the definition
is subject to further requirements not inconsistent with those
statutory standards and the policy objectives of position limits.
i. Incidental Test
The Commission proposes to eliminate the incidental test. As noted
above, the incidental test and the orderly trading requirement have
been part of the rule 1.3(z)(1) definition of bona fide hedging since
1975.54 These provisions were not separately explained in the 1974
notice proposing the adoption of rule 1.3(z)(1) (the notice observed
only that the “proposed definition otherwise deviates in only minor
ways from the hedging definition presently contained in [CEA section
4a(3)]”).55 The then-current statutory definition of bona fide
hedging position in CEA section 4a(3) used the concepts of “good
faith” (regarding the amount of a commodity a person expects to raise)
and a “reasonable hedge” (regarding hedges of inventory).
—————————————————————————
54 40 FR 11560 (March 12, 1975).
55 See 39 FR 39731 (Nov. 11, 1974). CEA section 4a(3) then
stated that no order issued under its paragraph (1) shall apply to
transactions or positions which are shown to be bona fide hedging
transactions or positions as such terms as shall be defined by the
Commission within one hundred and eighty days after the effective
date of the Commodity Futures Trading Commission Act of 1974 by
order consistent with the purposes of this chapter. 7 U.S.C. 6a(3)
1974. As noted in the Federal Register release adopting the
definition, the definition was proposed pursuant to section 404 of
the Commodity Futures Trading Commission Act of 1974 (P.L. 93-463),
which directed the Secretary of Agriculture to promulgate
regulations defining “bona fide hedging transactions and
positions.” 39 FR at 39731 (Nov. 11, 1974).
—————————————————————————
The Commission adopted the concept of economically appropriate in
1977, after finding its definition of bona fide hedging inadequate due
to changes in commercial practices and the diverse nature of
commodities now under regulation, but did not address whether the
concept of economically appropriate overlapped with the incidental
test.56 The economically appropriate test requires that a bona fide
hedging position be economically appropriate to the reduction of risks
in the conduct and management of a commercial enterprise.57 While in
the 1977 rulemaking defining bona fide hedging the Commission discussed
the concept of economically appropriate as an expansive standard, the
incidental test appears to have simply been left in the definition as
an historical carryover. In the December 2013 position limits proposal,
the Commission noted that it believed the incidental test’s concept of
commercial cash market activities is embodied in the economically
appropriate test for physical commodities in CEA section 4a(c)(2).58
In light of this connection between the concept of commercial cash
market activities and the economically appropriate test, the Commission
notes that it included in the December 2013 positions limits proposal
the intention to apply the economically appropriate test to hedges in
an excluded commodity.59
—————————————————————————
56 42 FR 42748 (August 24, 1977). In the Federal Register
release adopting the amended definition, the Commission stated that
it was adopting amendments to its general regulations to “generally
broaden the scope of the hedging definition to include current
commercial risk shifting practices in the markets now under
regulation. The Commission has also recognized the potential for
market disruption if certain trading practices are carried out
during the delivery period of any future. The definition therefore
restricts the classification of certain transactions and positions
as bona fide hedging during the last five days of trading. In
addition, the Commission has amended its regulations to include
reporting requirements for some new types of bona fide hedging which
will now be recognized.” 42 FR 42718 (Aug. 24, 1977).
57 See CEA section 4a(c)(2)(A)(ii).
58 See December 2013 Proposal at 75707.
59 Id.
—————————————————————————
In both the current and December 2013 proposed definitions of bona
fide hedging position, the incidental test requires a reduction in
price risk. Although the Commission is now proposing to eliminate the
incidental test from the first paragraph of its proposed bona fide
hedge definition, the Commission notes that it interprets risk, in the
economically appropriate test, to mean price risk. Commenters suggested
the Commission adopt a broader interpretation of risk (including, for
example, execution and logistics risk and credit risk).60 However, a
broader interpretation appears to be inconsistent with the policy
objectives of position limits in CEA section 4a(a)(3)(B) regarding
physical commodities, particularly: Diminishing excessive speculation
that causes sudden or unreasonable fluctuations or unwarranted changes
in the price of a commodity; deterring manipulation, squeezes, and
corners; and ensuring the price discovery function is not disrupted.
—————————————————————————
60 See, e.g., CMC on March 30, 2015, (“CL-CMC-60391”) at 2.
—————————————————————————
ii. Orderly Trading Requirement
The Commission proposes to eliminate the orderly trading
requirement. While that provision has been a part of the regulatory
definition of bona fide hedge since 1975,61 and previously was found
in the statutory definition of bona fide hedge prior to the 1974
amendment removing the statutory definition from CEA section 4a(3), the
Commission is not aware of a denial of recognition of a position as a
bona fide hedge as a result of a lack of orderly trading on an
exchange. Further, the Commission notes that the meaning of the orderly
trading requirement is unclear in the context of the over-the-counter
swap market, as well as in the context of permitted off-exchange
transactions (e.g., exchange of derivatives for related positions). In
addition, the Commission observes that disruptive trading activity by a
commercial entity engaged in establishing or liquidating a hedging
position would generally appear to be contrary to its economic
interests. However, the Commission notes that an exchange may use its
own discretion to condition its recognition of a bona fide
[[Page 38464]]
hedging position on an orderly trading requirement.
—————————————————————————
61 See 40 FR 11560 (March 12, 1975).
—————————————————————————
The Commission notes the anti-disruptive trading prohibitions of
CEA section 4c(a)(5), as added by the Dodd-Frank Act, apply to trading
on registered entities, but not to over-the-counter transactions,
regardless of whether the trading is related to hedging activities.
Specifically, the anti-disruptive trading prohibitions in CEA section
4c(a)(5) make it unlawful to engage in trading on a registered entity
that “demonstrates intentional or reckless disregard for orderly
execution of trading during the closing period.” In this regard, the
Commission notes that it also has the authority, under CEA section
4c(a)(6), to prohibit the intentional or reckless disregard for the
orderly execution of transactions on a registered entity outside of the
closing period.
C. Proposed Rules Related to Recognition of Bona Fide Hedging Positions
and Granting of Spread Exemptions
In sections D, E, and F, below, this current proposal discusses
three sets of proposed Commission rules that would enable an exchange
to submit to the Commission exchange rules under which the exchange
could take action to recognize certain bona fide hedging positions and
to grant certain spread exemptions, with regard to both exchange-set
and federal position limits. In each case, the proposed Commission
rules would establish a formal CFTC review process that would permit
the Commission to revoke all such exchange actions.
If the changes in this current proposal are adopted, exchanges
would be able to: (i) Recognize certain non-enumerated bona fide
hedging positions (“NEBFHs”), i.e., positions that are not enumerated
by the Commission’s rules (pursuant to proposed Sec. 150.9); 62 (ii)
grant exemptions to position limits for certain spread positions
(pursuant to proposed Sec. 150.10); 63 and (iii) recognize certain
enumerated anticipatory bona fide hedging positions (pursuant to
proposed Sec. 150.11).64
—————————————————————————
62 See note 73 below.
63 The Commission has authority to exempt spread positions
under CEA section 4a(a)(1), which provides that the Commission may
exempt transactions normally known to the trade as “spreads” from
federal position limits. Under this current proposal, applicants may
rely on an exchange’s grant of a spread exemption absent notice from
such exchange or the Commission to the contrary.
64 Unlike exemptions for spreads, no exemption is needed for
bona fide hedging transactions or positions as under CEA section
4a(c)(1), no rule, regulation or order issued under CEA section
4a(a) applies to transactions or positions shown to be bona fide
hedging transactions or positions. 7 U.S.C. 6a(c)(1). Accordingly,
Commission regulation 1.3(z)((3), for example, provides that upon
request, the Commission may recognize (rather than “exempt”)
certain transactions and positions as bona fide hedges. By notifying
the applicant that the Commission, based on the information
provided, recognizes that the applicant’s position has been shown to
be a bona fide hedge, the Commission is basically providing a safe
harbor from position limits in connection with that position for the
applicant. For ease of administration, the Commission now proposes,
with respect to federal position limits, to extend this recognition
process to exchanges’ “recognition” of positions as NEBFHs or
anticipatory enumerated bona fide hedges with respect to federal
limits subject to subsequent Commission review. Under this current
proposal, positions recognized by exchanges as NEBFHs or
anticipatory enumerated bona fide hedges will not be subject to
federal limits absent notice from an exchange or the Commission to
the contrary. DCMs currently grant non-enumerated exemptions to
exchange-set limits that are consistent with current Sec.
1.3(z)(1), 17 CFR 1.3(z)(3). In addition, DCMs currently grant bona
fide exemptions to exchange-set limits for sales or purchases for
future delivery of unsold anticipated production or unfilled
anticipated requirements consistent with, and enumerated in, Sec.
1.3(z)(2)(i)(B) or Sec. 1.3(z)(2)(ii)(C), 17 CFR 1.3(z)(2) (i)(B)
or 1.3(z)(2)(ii)(C).
—————————————————————————
The Commission’s authority to permit certain exchanges to recognize
positions as bona fide hedging positions is found, in part, in CEA
section 4a(c)(1).65 CEA section 4a(c)(1) provides that no CFTC rule
applies to “transaction or positions which are shown to be bona fide
hedging transactions or positions,” as those terms are defined by
Commission rule consistent with the purposes of the CEA. The Commission
notes that “shown to be” is passive voice, which could encompass
either a position holder or an exchange being able to “show” that a
position is entitled to treatment as a bona fide hedge, and does not
specify that the Commission must determine in advance whether the
position or transaction was shown to be bona fide. The Commission
interprets CEA section 4a(c)(1) to authorize the Commission to permit
certain SROs (i.e., DCMs and SEFs, meeting certain criteria) to
recognize positions as bona fide hedges for purposes of federal limits,
subject to Commission review.
—————————————————————————
65 Further, under CEA section 8a(5), the Commission may make
such rules as, in the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to accomplish any
of the purposes of the CEA.
—————————————————————————
When determining whether to recognize positions as bona fide
hedges, an exchange would be required to apply the standards in the
Commission’s general definition of bona fide hedging position, which
incorporates the standards in CEA section 4a(c)(2),66 and the
exchange’s conclusions would be subject to Commission review and, if
necessary, remediation.67
—————————————————————————
66 CEA section 4a(c)(2), adopted by the Dodd-Frank Act,
directs the Commission to define (including to narrow the scope of)
what constitutes a bona fide hedging position, for the purpose of
implementing federal position limits on physical commodity
derivatives. In response to that directive, in the December 2013
position limits proposal, the Commission proposed to add a
definition of bona fide hedging position in Sec. 150.1, to replace
the definition in current Sec. 1.3(z). See infra notes 104-106 and
accompanying text; see also supra preamble Section II.B.3
(describing the Commission’s current proposal to further amend its
general definition of bona fide hedging position as proposed in the
December 2013 position limits proposal).
67 See infra preamble Section II.D.3 (discussing the proposed
requirements that the exchanges: Make recognitions pursuant to
exchange rules submitted to the Commission; keep related records;
make reports to the Commission; and provide transparency to the
public). After review, the Commission could, for example, revoke or
confirm an exchange-granted exemption. See also proposed Sec.
150.9.
—————————————————————————
In addition, the Commission would permit certain exchanges to
exempt positions normally known to the trade as spreads, subject to a
consideration of the four policy objectives of position limits found in
CEA section 4a(a)(3)(B).68 The Commission notes that nothing in CEA
section 4a(a)(1) prohibits the Commission from exempting such
spreads.69 The Commission interprets this provision as CEA statutory
authority to exempt spreads that are consistent with the other policy
objectives for position limits, such as those in CEA section
4a(a)(3)(B).70 The Commission finds, pursuant to CEA section 8a(5),
that permitting certain exchanges to recognize such spreads, subject to
subsequent Commission review of such actions, is reasonably necessary
to effectuate the CEA’s policy objectives.71
—————————————————————————
68 As discussed below, the proposed rules would require the
exchanges: To issue exemptions pursuant to exchange rules submitted
to the Commission; to keep records; to make reports to the
Commission; and to provide transparency to the public. See infra
Section II.E; see also proposed Sec. 150.10.
69 See CEA section 4a(a)(1) (stating that “[n]othing in this
section shall be construed to prohibit the Commission from . . .
from exempting transactions normally known to the trade as
`spreads’. . .”)
70 CEA section 4a(a)(3)(B) provides that the Commission shall
set limits to the maximum extent practicable, in its discretion–to
diminish, eliminate, or prevent excessive speculation as described
under this section; to deter and prevent market manipulation,
squeezes, and corners; to ensure sufficient market liquidity for
bona fide hedgers; and to ensure that the price discovery function
of the underlying market is not disrupted.” In addition, CEA
section 4a(a)(7) authorizes the Commission to exempt any class of
transaction from any requirement it may establish with respect to
position limits.
71 The Commission notes that the proposed process for exchange
exemptions of spread positions, in a similar manner to the proposed
process for exchange recognition of a position as bona fide hedge,
would require the exchange to apply the standards required under
proposed Sec. 150.10(a)((3)(ii)) (requiring the exchange to
determine that exempting the spread position would further the
purposes of CEA section 4a(3)(B)), and the exchanges conclusions
would be subject to Commission review and, if necessary, remediation
(after review, the Commission could, for example, revoke or confirm
an exchange-granted exemption). See proposed Sec. 150.10.
—————————————————————————
[[Page 38465]]
Further, the Commission would permit certain exchanges to recognize
certain enumerated anticipatory hedging positions under the
Commission’s definition of bona fide hedging position, essentially as
an administrative collection of certain information, but subject to
Commission review. Under proposed Sec. 150.11, the exchange would be
required to follow defined administrative procedures that require the
market participant to file certain information with the exchange,
including the information the market participant would be required to
file with the Commission under Sec. 150.7 as proposed in the December
2013 position limits proposal; in the alternative, the market
participant could choose to file that same information directly with
the Commission under proposed Sec. 150.7.72
—————————————————————————
72 As discussed below, the proposed rules would require the
exchanges: To make administrative recognitions pursuant to exchange
rules submitted to the Commission; to keep records; and to make
reports to the Commission. There is no need for an exchange to
provide transparency to the public in regard to the existence of a
type of enumerated bona fide hedging position, as the enumerated
bona fide hedge positions are already listed in the Commission’s
proposed definition of bona fide hedging position. See infra Section
II.F; see also proposed Sec. 150.11.
—————————————————————————
Each of the exchange-administered processes under proposed
Sec. Sec. 150.9,73 150.10,74 and 150.11 75 would be subject to
Commission review.76 The three proposed processes would allow market
participants to rely on an exchange’s recognition of an NEBFH, spread,
or anticipatory exemption until an exchange or the Commission notifies
them to the contrary. However, the proposed processes would not protect
exchanges or applicants from charges of violations of applicable
sections of the CEA or other Commission regulations, other than
position limits. For instance, a market participant’s compliance with
position limits or an exemption does not confer any type of safe harbor
or good faith defense to a claim that the market participant had
engaged in an attempted manipulation, a perfected manipulation or
deceptive conduct, as is the case under both current Sec. 150.6 as
well as Sec. 150.6 as proposed in the December 2013 position limits
proposal.77
—————————————————————————
73 Specifically, exchanges will be able to: (1) Grant
exemptions from exchange-set limits for NEBFHs pursuant to proposed
Sec. Sec. 150.9, 150.3(a)(1)(i) and Sec. 150.5(a)(2); and (2)
recognize NEBFHs (pursuant to proposed Sec. Sec. 150.9 and
150.3(a)(1)(i)) that will not be subject to federal limits absent
notice from an exchange or the Commission to the contrary.
74 Specifically, exchanges will be able to: (1) Grant
exemptions from exchange-set limits for certain spread positions
pursuant to proposed Sec. Sec. 150.10, 150.3(a)(1)(iv) and
150.5(a)(2); and (2) grant exemptions from federal limits for
certain spread positions pursuant to proposed Sec. Sec. 150.10 and
150.3(a)(1)(iv).
75 Specifically, exchanges will be able to: (1) Grant
exemptions from exchange-set limits for enumerated anticipatory bona
fide hedges pursuant to proposed Sec. Sec. 150.11, 150.3(a)(1)(i)
and Sec. 150.5(a)(2); and (2) recognize enumerated anticipatory
bona fide hedges (pursuant to proposed Sec. Sec. 150.11 and
150.3(a)(1)(i)) that will not be subject to federal limits absent
notice from an exchange or the Commission to the contrary.
76 The three processes are non-exclusive because there are
alternative methods to seek recognition of a position as a bona fide
hedge or to receive an exemption for a spread position, including
requests for no-action letters under Sec. 140.99 or exemptive
relief under CEA section 4a(a)(7), per the December 2013 position
limits proposal. See December 2013 position limits proposal, 78 FR
at 75719-20.
77 See the discussion of Sec. 150.6 as proposed in the
December 2013 position limits proposal, 78 FR at 75746-7.
—————————————————————————
The Commission views this current proposal, enabling exchanges to
elect to administer these three processes, to be suitable since each
process requires that: (i) An exchange submit implementing rules
subject to Commission review, under the ordinary rule submission
procedures of the Commission’s part 40 regulations; (ii) the standards
for receiving the recognition or exemption be those set out under the
statute; 78 (iii) each exchange’s actions under these processes be
reviewed under the Commission’s rule enforcement review program; 79
and (iv) all exchange actions under such implementing rules are subject
to Commission review.80
—————————————————————————
78 See, e.g., proposed Sec. 150.9(a)(3) (requiring exchanges
that elect to process NEBFH applications to solicit sufficient
information to allow it to determine why a derivative position
satisfies the requirements of section 4a(c) of the Act), and
proposed Sec. 150.9(a)(4) (requiring exchanges that elect to
process NEBFH applications to determine whether a derivative
position for which a complete application has been submitted
satisfies the requirements of section 4a(c) of the Act), and
proposed Sec. 150.10(a)(4)(vi) (requiring exchanges that elect to
process spread exemptions applications to determine that exempting a
spread position would further the purposes of CEA section
4a(a)(3)(B)). See also infra discussion in Section II.D.3 and
III.E.2 (each providing discussion of the standards for exchange
determinations).
79 See note 126 for further information regarding the
Commission’s rule enforcement review program.
80 See proposed Sec. Sec. 150.9(a)(d), 150.10(a)(d), and
150.11(a)(d). The Commission notes that its de novo review of
exchange actions may be upon the Commission’s own initiative or in
response to a request for an interpretation under Sec. 140.99 by a
market participant whose application for recognition of a position
as a bona fide hedge was rejected by an exchange.
—————————————————————————
The Commission observes that for decades, exchanges have operated
as self-regulatory organizations (“SROs”).81 These SROs are charged
with carrying out regulatory functions, including, since 2001,
complying with core principles, and operate subject to the regulatory
oversight of the Commission pursuant to the CEA as a whole, and more
specifically, sections 5 and 5h.82 As SROs, exchanges do not act only
as independent, private actors.83 When the Act is read as a whole, as
the Commission noted in 1981, “it is apparent that Congress envisioned
cooperative efforts between the self-regulatory organizations and the
Commission. Thus, the exchanges, as well as the Commission, have a
continuing responsibility in this matter
[[Page 38466]]
under the Act.” 84 The Commission’s approach to its oversight of its
SROs was subsequently ratified by Congress in 1982, when it gave the
CFTC authority to enforce exchange set limits.85 As the Commission
observed in 2010, “since 1982, the Act’s framework explicitly
anticipates the concurrent application of Commission and exchange-set
speculative position limits.” 86 The Commission further noted that
the “concurrent application of limits is particularly consistent with
an exchange’s close knowledge of trading activity on that facility and
the Commission’s greater capacity for monitoring trading and
implementing remedial measures across interconnected commodity futures
and option markets.” 87
—————————————————————————
81 CFTC regulation 1.3(ee) defines SRO to mean a DCM, SEF, or
registered futures association (such as the National Futures
Association). Under the Commission’s regulations, SROs have certain
delineated regulatory responsibilities, which are carried out under
Commission oversight and which are subject to Commission review. See
also note 126 (describing reviews of DCMs carried out by the
Commission).
82 7 U.S.C. 7 and 7 U.S.C. 7b-3, respectively. See also note
126 below.
83 The Commission views as instructive the following examples
of case law addressing grants of authority by an agency (the
Securities and Exchange Commission, the “SEC”) to a self-
regulatory organization (“SRO”) (in the SEC cases the SRO was
NASD, now FINRA), providing insight into the factors addressed by
the court regarding oversight of an SRO.
First, in 1952, the Second Circuit reviewed an SEC order that
failed to set aside a penalty fixed by NASD suspending the defendant
broker-dealer from membership. Citing Sunshine Anthracite Coal Co.
v. Adkins, 310 U.S. 381 (1940), the Second Circuit found that, in
light of the statutory provisions vesting the SEC with power to
approve or disapprove NASD’s rules according to reasonably fixed
statutory standards, and the fact that NASD disciplinary actions are
subject to SEC review, there was “no merit in the contention that
the Maloney Act unconstitutionally delegates power to the NASD.”
R.H. Johnson v. Securities and Exchange Commission, 198 F. 2d 690,
695 (2d Cir. 1952).
In 1977, the Third Circuit, in Todd & Co. v. Securities and
Exchange Commission (“Todd”), 557 F.2d 1008 (3rd Cir. 1977),
likewise concluded that the Act did not unconstitutionally delegate
legislative power to a private institution. The Todd court
articulated critical factors that kept the Maloney Act within
constitutional bounds. First, the SEC had the power, according to
reasonably fixed statutory standards, to approve or disapprove
NASD’s rules before they could go into effect. Second, all NASD
judgments of rule violations or penalty assessments were subject to
SEC review. Third, all NASD adjudications were subject to a de novo
(non-deferential) standard of review by the SEC, which could be
aided by additional evidence, if necessary. Id. at 1012. Based on
these factors, the court found that “[NASD’s] rules and its
disciplinary actions were subject to full review by the SEC, a
wholly public body, which must base its decision on its own
findings” and thus that the statutory scheme was constitutional.
Id., at 1012-13. See also First Jersey Securities v. Bergen, 605
F.2d 690 (1979), applying the same three-part test delineated in
Todd, and then upholding a statutory narrowing of the Todd test.
Further, in 1982, the Ninth Circuit considered the
constitutionality of Congress’ delegation to NASD in Sorrel v.
Securities and Exchange Commission, 679 F. 2d 1323 (9th Cir. 1982).
Sorrel followed R.H. Johnson, Todd and First Jersey in holding that
because the SEC reviews NASD rules according to reasonably fixed
standards, and the SEC can review any NASD disciplinary action, the
Maloney Act does not impermissibly delegate power to NASD.
84 Establishment of Speculative Position Limits, 46 FR 50938,
50939 (Oct. 16, 1981). As the Commission noted at that time that
“[s]ince many exchanges have already implemented their own
speculative position limits on certain contracts, the new rule
merely effectuates completion of a regulatory philosophy the
industry and the Commission appear to share.” Id. at 50940. The
Commission believes this is true for the current proposal.
85 See Futures Trading Act of 1982, Public Law 97-444, 96
Stat. 2299-30 (1983). In 2010, the Commission noted that the 1982
legislation “also gave the Commission, under section 4a(5) of the
Act, the authority to directly enforce violations of exchange-set,
Commission-approved speculative position limits in addition to
position limits established directly by the Commission through
orders or regulations.” Federal Speculative Position Limits for
Referenced Energy Contracts and Associated Regulations, 75 FR 4144,
4145 (Jan. 36, 2010) (“2010 Position Limits Proposal for Referenced
Energy Contracts”). Section 4a(5) has since been redesignated as
section 4a(e) of the Act. 7 U.S.C. 4a(e).
86 2010 Position Limits for Referenced Energy Contracts at
4145.
87 Id.
—————————————————————————
The Commission notes that it retains the power to approve or
disapprove the rules of exchanges, under standards set out pursuant to
the CEA, and to review an exchange’s compliance with those rules. By
way of example, the Commission notes that its Division of Market
Oversight would conduct “rule enforcement reviews” 88 of each
exchange’s compliance with the rules it files under this current
proposal. Such reviews would include an examination of how effectively
an exchange administers these three proposed processes, including
review of recognitions and exemptions granted under the rules.
Exchanges, as SROs, are also subject to comprehensive Commission
regulation.89
—————————————————————————
88 See note126 for further information regarding the
Commission’s rule enforcement review program.
89 See, e.g., Sec. 1.52 of the Commission’s regulations, 17
CFR 1.52 (Self-regulatory organization adoption and surveillance of
minimum financial requirements); part 37, 17 CFR part 37 (Swap
Execution Facilities); part 38, 17 CFR part 38 (Designated Contract
Markets); and part 40, 17 CFR part 40 (Provisions Common to
Registered Entities).
—————————————————————————
The Commission–in adopting and administering a regime that permits
certain SROs (i.e., DCMs and SEFs that meet certain criteria) to
recognize positions as bona fide hedges subject to Commission review,
modification, or rejection–proposes building upon the experience and
expertise of the DCMs in administering their own processes for
recognition of bona fide hedging positions under current Sec.
1.3(z).90 Consistent with current market practice, the three proposed
exchange-administered processes will accomplish fact gathering
regarding large positions for the Commission, without much expense of
Commission resources. The information obtained by means of fact
gathering during the application processes will be available to the
Commission at any time upon request and pursuant to the recordkeeping
and recording provisions at proposed Sec. Sec. 150.9 (b) and (c),
150.10(b) and (c), and 150.11(b) and (c). The Commission believes that
the initial disposition of applications through the exchange-
administered processes should establish a reasonable basis for a
Commission determination that an application should be subsequently
approved or denied. The Commission anticipates that exchanges will
advise and consult with Commission staff regarding the effectiveness of
these programs, once implemented by the exchanges, and their utility in
advancing the policy objectives of the Act.
—————————————————————————
90 See note 116, and accompanying text (pointing to ICE
Futures U.S. and CME Group comment letters noting their experience
overseeing position limits, position accountability levels, and the
recognition of bona fide hedges.)
—————————————————————————
Moreover, the Commission is not diluting its ability to recognize
or not recognize bona fide hedging positions 91 or to grant or not
grant spread exemptions. The Commission has reserved to itself the
ability to review any exchange action, and to review any application by
a market participant to an exchange, whether prior to or after
disposition of such application by an exchange. An exchange may ask the
Commission to consider an NEBFH application (proposed Sec.
150.9(a)(8)), spread application (proposed Sec. 150.10(a)(8)), or
enumerated anticipatory bona fide hedge application (proposed Sec.
150.11(a)(6)). The Commission may also on its own initiative at any
time–before or after action by an exchange–review any application
submitted to an exchange for recognition of an NEBFH (proposed Sec.
150.9(d)(1)), a spread exemption (proposed Sec. 150.10(d)(1)), or an
enumerated anticipatory bona fide hedge (proposed Sec.
150.11(d)(1)).92 And, as noted above, market participants will still
be able to request a staff interpretive letter under Sec. 140.99 from
the Commission or seek exemptive relief under CEA section 4a(a)(7) from
the Commission, as an alternative to the three proposed exchange-
administered processes.93
—————————————————————————
91 In connection with recognition of bona fide hedging
positions, the Commission notes that the statute is silent or
ambiguous with respect to the specific issue–whether the CFTC may
authorize SROs to recognize positions as bona fide hedging
positions. CEA section 4a(c) provides that no Commission rule
establishing federal position limits applies to positions which are
shown to be bona fide hedging positions, as such term shall be
defined by the CFTC. As noted above, the “shown to be” phrase is
passive voice, which could encompass either a position holder or an
exchange being able to “show” that a position is entitled to
treatment as a bona fide hedge, and does not specify that the
Commission must be the party determining in advance whether the
position or transaction was shown to be bona fide; the Commission
interprets that provision to permit certain SROs (i.e., DCMs and
SEFs, meeting certain criteria) to recognize positions as bona fide
hedges for purposes of federal limits when done so within a regime
where the Commission can review and modify or overturn such
determinations. Under the proposal, an SRO’s recognition is
tentative, because the Commission would reserve the power to review
the recognition, subject to the reasonably fixed statutory standards
in CEA section 4a(c)(2) (directing the CFTC to define the term bona
fide hedging position). An SRO’s recognition would also be
constrained by the SRO’s rules, which would be subject to CFTC
review under the proposal. The SROs are parties that are subject to
Commission authority, their rules are subject to Commission review
and their actions are subject to Commission de novo review under the
proposal–SRO rules and actions may be changed by the Commission at
any time.
92 Under the review process set forth in proposed Sec. Sec.
150.9(d) and 150.10(d), the Commission will give notice to the
exchange and the applicable applicant that they have 10 business
days to provide any supplemental information to the Commission. The
review process set forth in proposed Sec. 150.11(d) is simpler
because the Commission does not anticipate that applications for
recognition of enumerated anticipatory bona fide hedge positions
would be based on novel facts and circumstances; instead the review
of such an application would focus on whether the application met
the filing requirements contained in proposed Sec. 150.11(a). If
the filing was not complete, then proposed Sec. 150.11(d) would
provide an opportunity to supplement to the applicant and the
exchange.
During the review process, when the Commission considers an
exchange’s disposition of an application, the Commission will
consider not only the Act but the Commission’s relevant regulations
and interpretations. That is, the Commission will apply the same
standards during review as the exchange should or would have applied
in disposing of an application.
93 The December 2013 position limits proposal provides that
market participants can request a staff interpretive letter under
Sec. 140.99 from Commission staff or seek exemptive relief under
CEA section 4a(a)(7) from the Commission. See, e.g., 78 FR at 75719-
20. As noted above, the process of requesting interpretations under
Sec. 140.99 would also be available to market participants whose
application for recognition of a position as a bona fide hedge was
rejected by an exchange. See supra note 76; see also infra note 109
and accompanying text.
—————————————————————————
[[Page 38467]]
The Commission notes that CEA section 8a(5) authorizes the
Commission to make such rules as, in its judgment, are reasonably
necessary to effectuate any of the provisions or to accomplish any of
the purposes of the Act.94 The Commission currently views the
proposed processes to be reasonably necessary to implement CEA section
4a(a)(1), including for the purpose of diminishing, eliminating, or
preventing the burden of excessive speculation.95 As pointed out by
the Commission in 1981: “Section [4a(a)(1)] represents an express
Congressional finding that excessive speculation is harmful to the
market, and a finding that speculative limits are an effective
prophylactic measure. Section 8a(5), accordingly would authorize the
Commission to develop regulations necessary to effectuate the purposes
of the Act, one of which is expressed in section [4a(a)(1)]. Consistent
with this approach, the Commission fashioned rule 1.61 [current rule
150.5] to assure that the exchanges would have an opportunity to employ
their knowledge of their individual contract markets to propose the
position limits they believe most appropriate.” 96
—————————————————————————
94 7 U.S.C. 12a(5).
95 7 U.S.C. 6a(a)(1). The proposal also is reasonably
necessary to accomplish the purposes of the Act delineated in CEA
section 3(b): “to deter and prevent price manipulation or any other
disruptions to market integrity. 7 U.S.C. 5(b). Further, the
proposal is reasonably necessary to accomplish the purposes of the
Act delineated in CEA section 4a(c)(1) “to permit producers,
purchasers, sellers, middlemen, and users of a commodity or a
product derived therefrom to hedge their legitimate anticipated
business needs.” 7 U.S.C. 6a(c)(1).
96 46 FR 50938, 50940 (Oct. 16, 1981). Commission Sec. 1.61
required all contract markets not subject to federal speculative
position limits to adopt and enforce exchange-set speculative
position limits; in 1999, as part of the Commission’s simplification
and reorganization of its position limit rules, the substance of
rule 1.61’s requirements were relocated to Part 150 of the
Commission’s rules, “thereby incorporating within that Part all
Commission rules relating to speculative position limits.” 64 FR
24038, 24040 (May 5, 1999).
—————————————————————————
In addition, section 8a(7) of the Act provides the Commission with
authority to alter or supplement the rules of a registered entity,
including DCMs and SEFs, if the Commission determines that such changes
are necessary or appropriate.97 Consequently, as the Commission noted
in 1981, “CEA section 8a(7) further underscores the fact that Congress
affirmatively contemplated a regulatory system whereby the exchanges
would act in the first instance to adopt rules which would protect
persons producing, handling, processing or consuming any commodity
traded for future delivery. Secondarily, the Commission has express
authority to mandate any modifications to an exchange’s rules to
protect such persons.” 98
—————————————————————————
97 CEA section 8a(7) provides the Commission with authority
“to alter or supplement the rules of a registered entity insofar as
necessary or appropriate by rule or regulation or by order, if after
making the appropriate request in writing to a registered entity
that such registered entity effect on its own behalf specified
changes in its rules and practices, and after appropriate notice and
opportunity for hearing, the Commission determines that such
registered entity has not made the changes so required, and that
such changes are necessary or appropriate for the protection of
persons producing, handling, processing, or consuming any commodity
traded for future delivery on such registered entity, or the product
or byproduct thereof, or for the protection of traders or to insure
fair dealing in commodities traded for future delivery on such
registered entity.” 7 U.S.C. 12a(7).
98 46 FR 50938, 50940 (Oct. 16, 1981). See also the
Commission’s statement in 1999, that the Commission and the
exchanges “share responsibility for enforcement of speculative
position limits,” noting that “the Commission can directly take
enforcement actions against violations of exchange-set speculative
position limits as well as those provided under Commission rules.”
64 FR 24038, note 3 and accompanying text (May 5, 1999).
—————————————————————————
D. Exchange Recognition of Positions as Non-Enumerated Bona Fide Hedges
1. Background
DCMs have for some time set their own position limits on numerous
physical commodity futures contracts pursuant to DCM Core Principle
5.99 DCMs have established exchange-set limits for futures contracts,
including for futures contracts currently subject to Commission-set
limits under current Sec. 150.2, as well as other futures contracts
not subject to federal position limits. Pursuant to the guidance of
current Sec. 150.5(d), DCMs may grant exemptions to exchange-set
position limits for positions that meet the Commission’s general
definition of bona fide hedging position in current Sec.
1.3(z)(1).100 Current Sec. 1.3(z)(2) provides a list of enumerated
bona fide hedging positions. In addition, current Sec. 1.3(z)(3)
provides a procedure for market participants to seek recognition from
the Commission for NEBFHs for contracts subject to federal position
limits under current Sec. 150.2. DCMs generally have granted NEBFH
exemptions pursuant to exchange rules that incorporate the Commission’s
general definition of bona fide hedging positions in current Sec.
1.3(z)(1).
—————————————————————————
99 7 U.S.C. 7(d)(5). As explained in the December 2013
position limits proposal, “the CFMA core principles regime
concerning position limitations or accountability for exchanges had
the effect of undercutting the mandatory rules promulgated by the
Commission in Sec. 150.5. Since the CFMA amended the CEA in 2000,
the Commission has retained Sec. 150.5, but only as guidance on,
and acceptable practice for, compliance with DCM core principle 5.”
December 2013 position limits proposal, 78 FR at 75754.
Prior to the Commodity Futures Modernization Act of 2000
(“CFMA”), DCMs set position limits pursuant to the requirements of
Sec. 150.5, adopted on May 5, 1999. 17 CFR 150.5; see 64 FR 24038
(May 5, 1999) (codifying various policies related to the requirement
that DCMs set speculative position limits); see also 46 FR 50938
(Oct. 16, 1981) (requiring DCMs to set speculative position limits
in active futures markets for which no exchange or Commission
imposed limits were then in effect). There are only nine commodity
futures contracts currently subject to federal position limits
pursuant to Sec. 150.2 of the Commission’s regulations. 17 CFR
150.5.
100 17 CFR 1.3(z)(1).
—————————————————————————
In contrast to the longstanding DCM experience monitoring position
limits on futures contracts and granting exemptions to those exchange-
set limits on futures contracts, exchanges generally do not currently
administer speculative position limits on swaps. Previously, facilities
operating under CEA section 2(h)(3) as exempt commercial markets
(“ECMs”) were subject to CFTC regulation under authority granted by
Congress in 2008 (although that authority was subsequently superseded
by the Dodd-Frank Act).101 Under that 2008 authority, the Commission
issued guidance that an ECM should establish spot month position limits
on any swap contract that the Commission determined to be a significant
price discovery contract (“SPDC”).102 However, since the Dodd-Frank
Act, exchanges have “futurized” (or converted into futures contracts)
those SPDCs.103 Thus, the Commission understands that exchanges
generally do
[[Page 38468]]
not currently have speculative position limits applicable to swaps
contracts.
—————————————————————————
101 The CFTC Reauthorization Act of 2008, H.R. 2419, sec.
13201 (May 22, 2008) (promulgating 7 U.S.C. 2(h)(7(C)(ii)(IV) (Core
Principles Applicable to Significant Price Discovery Contracts–
Position Limitations or Accountability). The Dodd-Frank Act amended
CEA section 2(h), effective July 16, 2011, H.R. 4173, sec. 734(a)
(July 21, 2010), replacing the provisions governing ECMs with
clearing requirements in regards to swaps.
102 17 CFR part 36. It should be noted that prior to the Dodd-
Frank Act, ECMs could require clearing of swaps at a particular DCO
and, thus, could gain access to information on open positions in a
particular swap from a single affiliated DCO. The Dodd-Frank Act
altered the playing field, providing market participants with a
choice as to which DCO they wish to use. CEA section 5h(f)(11)(B)
generally does not permit a SEF to impose any material
anticompetitive burden on clearing. 7 U.S.C. 7b-3(f)(11)(B).
103 In 2012, ICE (which listed the only contracts that had
been determined by the Commission to be SPDCs) “futurized” the
SPDC contracts listed on its ECM by listing them instead on its DCM
(as it noted at that time, its plan was to “convert 251 Energy
Contracts to futures contracts that would be listed for trading on
the Exchange’s electronic trading platform,” along with a request
that the Commission issue an order transferring the swap open
interest carried at the DCO for the ICE ECM OTC contracts to futures
and options open interest carried at the DCO for ICE, the DCM. ICE
Submission No. 12-45, August 15, 2012).
—————————————————————————
CEA section 4a(c) provides generally that federal position limits
do not apply to positions that are shown to be bona fide hedging
positions.104 CEA section 4a(c)(2), adopted by the Dodd-Frank Act,
directs the Commission to narrow the scope of what constitutes a bona
fide hedging position, for the purpose of implementing federal position
limits on physical commodity derivatives, within specific
parameters.105 In response to that directive, the Commission proposed
to add a definition of bona fide hedging position in Sec. 150.1, to
replace the definition in current Sec. 1.3(z).106
—————————————————————————
104 7 U.S.C. 6a(c)(1).
105 CEA section 4a(c)(2) generally requires the Commission to
define a bona fide hedging position as a position that: (a) Meets
three tests (a position (1) is a substitute for activity in the
physical marketing channel (“temporary substitute test”), (2) is
economically appropriate to the reduction of risk, and (3) arises
from the potential change in value of current or anticipated assets,
liabilities or services); or (b) reduces the risk of a swap that was
executed opposite a counterparty for which such swap would meet the
three tests (“pass-through swap offset requirement”). 7 U.S.C.
6a(c)(2). In contrast, the definition of a bona fide hedge in
current Sec. 1.3(z): Does not include the temporary substitute
test, but instead includes guidance that a bona fide hedging
position should normally represent a substitute for transactions in
the physical marketing channel; and does not include the pass-
through swap offset requirement. See December 2013 positions limits
proposal at 75708-9.
106 See December 2013 position limits proposal 78 FR at 75706,
75823.
—————————————————————————
The December 2013 position limits proposal would replace the
process for Commission recognition of NEBFHs under current Sec.
1.3(z)(3) 107 and Sec. 1.47 108 of the Commission’s regulations
with proposed Sec. 150.3(e), which would provide guidance for persons
seeking non-enumerated hedging exemptions through the filing of a
petition under section 4a(a)(7) of the Act or by requesting an
interpretation under Sec. 140.99.109 When discussing non-enumerated
hedges in the December 2013 position limits proposal, the Commission
noted that “[u]nder the proposal for physical commodities, additional
enumerated hedges could only be added to the definition of bona fide
hedging position by way of notice and comment rulemaking,” and asked
whether it should “adopt, as an alternative, an administrative
procedure that would allow the Commission to add additional enumerated
bona fide hedges without requiring notice and comment rulemaking.”
110 The Commission recognized that “there are complexities to
analyzing the various price risks applicable to particular commercial
circumstances in order to determine whether a hedge exemption is
warranted.” 111
—————————————————————————
107 17 CFR 1.3(z)(3) (providing authority for the Commission
to recognize bona fide hedge positions other than those enumerated
in Sec. 1.3(z)(2)).
108 17 CFR 1.47 (providing a process for persons to
demonstrate NEBFH falls within the scope of Sec. 1.3(z)(1)). As
noted in the December 2013 position limits proposal, “Section 1.47
of the Commission’s regulations was removed and reserved by the
vacated part 151 Rulemaking. On September 28, 2012, the District
Court for the District of Columbia vacated the part 151 Rulemaking
with the exception of the amendments to Sec. 150.2. 887 F. Supp. 2d
259 (D.D.C. 2012). Vacating the part 151 Rulemaking, with the
exception of the amendments to Sec. 150.2, means that as things
stand now, it is as if the Commission had never adopted any part of
the part 151 Rulemaking other than the amendments to Sec. 150.2.
That is, . . . Sec. 1.47 is still in effect.” December 2013
position limits proposal, 78 FR at 75740, note 478. The full text of
current Sec. 1.47 can be found at https://www.gpo.gov/fdsys/pkg/CFR-2010-title17-vol1/pdf/CFR-2010-title17-vol1-sec1-47.pdf. See 17
CFR 1.3(z) (2010). Similarly, the full text of current Sec.
1.3(z)(3) can be found at https://www.gpo.gov/fdsys/pkg/CFR-2010-title17-vol1/pdf/CFR-2010-title17-vol1-sec1-3.pdf. See 17 CFR 1.3(z)
(2010).
109 7 U.S.C. 6a(a)(7) and 17 CFR 140.99, respectively.
110 December 2013 position limits proposal, 78 FR at 75718.
111 Id. at 75703.
—————————————————————————
Historically, the Commission has recognized bona fide hedges where
a demonstrated physical price risk has been shown.112 In addition,
when summarizing the disposition of the Working Group petition requests
in the December 2013 position limits proposal, the Commission observed
that “context is essential to determining the nature of any price risk
that has been realized and could support the existence of a bona fide
hedge,” and “the only way to evaluate the nature of any price risk
would be for the Commission to be provided with particulars of the
transaction.” 113
—————————————————————————
112 Id.
113 Id. at 75719-20. As noted above, under the December 2013
position limits proposal, the Commission could consider the facts
and circumstances if the party either requested a staff interpretive
letter under Sec. 140.99 or exemptive relief under CEA section
4a(a)(7). See also note 76 and accompanying text.
—————————————————————————
2. Comments on the December 2013 Process for Recognition of a Position
as a Bona Fide Hedge
Some commenters have suggested that the Commission permit exchanges
to process applications for non-enumerated bona fide hedges
(“NEBFHs”).114 For example, ICE Futures U.S. (“ICE Futures U.S.”)
commented that the Commission should not now undertake the daily
administration of NEBFHs when its resources are limited,115 and
stated that it has extensive, direct experience overseeing position
limits, position accountability levels, and the recognition of bona
fide hedges.116 “The
[[Page 38469]]
rules and procedures developed and used by . . . [ICE Futures U.S.] to
perform this important function were designed to incorporate the
specific needs and differing practices of the commercial participants
in each of its markets as those needs and practices have developed over
time.” 117 These commenters generally espoused the view that the
Commission should continue in its broad oversight role in the granting
of hedge exemptions and should not begin to become involved in the
daily administration of hedge exemptions. One academic suggested that
permitting the exchanges to process NEBFH applications would be
acceptable so long as the Commission surveils the work of the
exchanges.118
—————————————————————————
114 See, e.g., comment of Tom LaSala, CME Group, that “the
exchanges would be open to a 1.47-like process” where the exchanges
would review requests for recognition of non-enumerated bona fide
hedge positions on behalf of the Commission, Transcript, Roundtable
on Position Limits, June 19, 2014, p. 125, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff061914; Futures
Industry Association (FIA), on July 31, 2014 (“CL-FIA-59931”), at
8 (recommending exchange review of non-enumerated hedge applications
in the first instance); ISDA and SIFMA on July 7, 2014 (“CL-ISDA/
SIFMA-59917”), at 4 (suggesting that the Commission include in the
final rulemaking a process for market participants to apply to
registered exchanges for bona fide hedging exemptions); Natural Gas
Supply Association (“NGSA”) on Aug. 4, 2014 (“CL-NGSA-59941”),
at 9 (requesting the Commission to consider using ICE and CME Group
to continue to administer hedge exemptions); Working Group on March
30, 2015 (“CL-Working Group-60396”), at 6 (recommending that DCMs
be able to grant bona fide hedge exemptions in the energy industry
either on an enumerated or non-enumerated basis); International
Energy Credit Association (“IECreditAssn”) on Aug. 4, 2014 (“CL-
IECreditAssn-59957”), at 6 (stating that “the [IECreditAssn] is
generally supportive of a pre-approval procedure for nonenumerated
hedging exemptions, whereby a commercial end-user could first seek
and obtain review and approval by a CFTC-regulated Exchange”); ICE
on March 30, 2015 (“CL-ICE-60387”), at 8 (noting that “the
exchanges should continue to exercise the authority to grant non-
enumerated hedge exemption requests pursuant to their rules and
procedures”); COPE on March 30, 2015 (“CL-COPE-60388”), at 6-8
(supporting Working Group’s suggestion that DCMs administer
enumerated and non-enumerated hedge exemptions). See also Plains
All-American Pipeline, L.P. (“PAAP”) on Aug. 4, 2014 (“CL-PAAP-
59951”), at 3-4; BG Group Energy Merchants (“BG Energy”) on March
30, 2015 (“CL-BG Energy-60383”), at 7-8; Sempra Energy
(“Sempra”) on March 30, 2015 (“CL-SEMP-60384”), at 5. Contra
Occupy the SEC on Aug. 7, 2014 (“CL-OSEC-59972”) at 4 (maintaining
that permitting exchanges to “self-define” hedging exceptions
“would likely create an environment conducive to producing a `race
to the bottom’ among exchanges as they would have incentives to
attract and retain participants seeking to take advantage of the
loosest rules”); Institute for Agriculture and Trade Policy on
March 30, 2015 (“CL-IATP-60394”) at 3 (arguing that the Commission
should not permit the exchanges “to manage position limits”). See
also Transcript, Agricultural Advisory Committee Meeting, Sept. 22,
2015, pp. 124-51 available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/aac_transcript092215.pdf (discussing
exchange-administered processes for NEBFHs); Transcript, Energy and
Environmental Markets Advisory Committee Meeting, Feb. 26, 2015, pp.
239-44, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript022615.pdf (offering a
general discussion touching on alternative processes).
115 ICE Futures U.S., on March 30, 2015 (“CL-ICEUS-60378”),
at 3-4. See also CL-CME-60406, at 5 (stating that “CME Group is
sympathetic to the fact that the Commission faces resource
constraints that would prevent it from administering a workable non-
enumerated hedge exemption in real time . . . .”).
116 CL-ICEUS-60378 at 1. See also CL-CME-60406 at 5 (noting
that “[E]xchanges have years of experience reviewing requests for
hedge exemptions and approving or denying those requests based on a
facts-and-circumstances approach.”); statement of R. Oppenheimer on
behalf of the Working Group, Energy and Environmental Markets
Advisory Committee meeting, July 29, 2015 (asserting that “The
exchanges have the knowledge, the expertise, and the regulatory
incentive to carefully scrutinize the exemption process, and they
already engage in a parallel process for their own interest in self-
regulating and ensuring convergence and orderly liquidation of
futures contracts as they come to expiry.”)
117 CL-ICEUS-60378 at 1.
118 John Parsons, Transcript, Roundtable on Position Limits,
June 19, 2014, at 135-6.
—————————————————————————
3. Proposed NEBFH Recognition Process
In light of DCM experience in granting NEBFH exemptions to
exchange-set position limits for futures contracts, and after
consideration of comments recommending exchange review of NEBFH
requests, the Commission now proposes to permit exchanges to recognize
NEBFHs with respect to the proposed federal speculative position
limits. Under proposed Sec. 150.9, an exchange, as an SRO 119 that
is under Commission oversight and whose rules are subject to Commission
review,120 could establish rules under which the exchange could
recognize as NEBFHs positions that meet the general definition of bona
fide hedging position in proposed Sec. 150.1, which implements the
statutory directive in CEA section 4a(c) for the general definition of
bona fide hedging positions in physical commodities.121 The
exchange’s recognition would be subject to review by the Commission.
Exchange recognition of a position as a NEBFH would allow the market
participant to exceed the federal position limit to the extent that it
relied upon the exchange’s recognition unless and until such time that
the Commission notified the market participant to the contrary.122
The Commission could issue such a notification in accordance with the
proposed review procedures. That is, if a party were to hold positions
pursuant to a NEBFH recognition granted by the exchange, such positions
would not be subject to federal position limits, unless or until the
Commission were to determine that such NEBFH recognition is
inconsistent with the CEA or CFTC regulations thereunder. Under this
framework, the Commission would continue to exercise its authority in
this regard by reviewing an exchange’s determination and verifying
whether the facts and circumstances in respect of a derivative position
satisfy the requirements of the general definition of bona fide hedging
position proposed in Sec. 150.1.123 If the Commission determined
that the exchange-granted recognition was inconsistent with section
4a(c) of the Act and the Commission’s general definition of bona fide
hedging position in Sec. 150.1 and so notified a market participant
relying on such recognition, the market participant would be required
to reduce the derivative position or otherwise come into compliance
with position limits within a commercially reasonable amount of time.
—————————————————————————
119 As noted above, under the Commission’s regulations, SROs
have certain delineated regulatory responsibilities, which are
carried out under Commission oversight and which are subject to
Commission review. See also, note 126 (describing reviews of DCMs
carried out by the Commission).
120 See CEA section 5c(c), 7 U.S.C. 7a-2(a) (providing
Commission with authority to review rules and rule amendments of
registered entities, including DCMs).
121 As previously noted, Congress has required in CEA section
4a(c) that the Commission, within specific parameters, define what
constitutes a bona fide hedging position for the purpose of
implementing federal position limits on physical commodity
derivatives, including, as previously stated, the inclusion in new
section 4a(c)(2) of a directive to narrow the bona fide hedging
definition for physical commodity positions from that currently in
Commission regulation Sec. 1.3(z). See supra notes 32 and 105 and
accompanying text; see also December 2013 positions limits proposal
at 75705. In response to that mandate, the Commission proposed in
its December 2013 position limits proposal to add a definition of
bona fide hedging position in Sec. 150.1, to replace the definition
in current Sec. 1.3(z) See 78 FR at 75706, 75823.
For the avoidance of doubt, the Commission is still reviewing
comments received on these provisions. The Commission intends to
finalize the general definition of bona fide hedging position based
on the standards of CEA section 4a(c), and may further define the
bona fide hedging position definition consistent with those
standards.
122 See generally the discussion of proposed Sec. 150.9(d)
and the requirements regarding the review of applications by the
Commission, below. The Commission notes that exchange participation
is voluntary, not mandatory and that exchanges could elect not to
administer the process. Market participants could still request a
staff interpretive letter under Sec. 140.99 or seek exemptive
relief under CEA section 4a(a)(7), per the December 2013 position
limits proposal. The process does not protect exchanges or
applicants from charges of violations of applicable sections of the
CEA or other Commission regulations. For instance, a market
participant’s compliance with position limits or an exemption
thereto would not confer any type of safe harbor or good faith
defense to a claim that he had engaged in an attempted manipulation,
a perfected manipulation or deceptive conduct; see the discussion of
Sec. 150.6 (Ongoing application of the Act and Commission
regulations) as proposed in the December 2013 position limits
proposal, 78 FR at 75746-7.
123 See, e.g. the general discussion of the Commission’s
review process proposed in Sec. 151.9(c), which would support the
Commission’s surveillance program by facilitating the tracking of
NEBFHs recognized by exchanges, keeping the Commission informed of
the manner in which an exchange is administering its procedures for
recognizing such NEBFHs.
—————————————————————————
The Commission believes that permitting exchanges to so recognize
NEBFHs is consistent with its statutory obligation to set and enforce
position limits on physical commodity contracts, because the Commission
is retaining its authority to determine ultimately whether any NEBFH so
recognized is in fact a bona fide hedging position. The Commission’s
authority to set position limits does not extend to any position that
is shown to be a bona fide hedging position.124 Further, most, if not
all, DCMs already have a framework and application process to recognize
non-enumerated positions, for purposes of exchange-set limits, as
within the meaning of the general bona fide hedging definition in Sec.
1.3(z)(1).125 The Commission has a long history of overseeing the
performance of the DCMs in granting appropriate exemptions under
current exchange rules regarding exchange-set position limits 126 and
[[Page 38470]]
believes that it would be efficient and in the best interest of the
markets, in light of current resource constraints,127 to rely on the
exchanges to initially process applications for recognition of
positions as NEBFHs. In addition, because many market participants are
familiar with current DCM practices regarding bona fide hedges,
permitting DCMs to build on current practice may reduce the burden on
market participants. Moreover, the process outlined below should reduce
duplicative efforts because market participants seeking recognition of
an NEBFH would be able to file one application for relief, only to an
exchange, rather than to both an exchange with respect to exchange-set
limits and to the Commission with respect to federal limits.128
—————————————————————————
124 CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1). See also supra
note 65.
125 Rulebooks for some DCMs can be found in the links to their
associated documents on the Commission’s Web site at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=TradingOrganizations.
126 The Commission bases this view on its long experience
overseeing DCMs and their compliance with the requirements of CEA
section 5 and part 38 of the Commission’s regulations, 17 CFR part
38. Under part 38, a DCM must comply, on an initial and ongoing
basis, with twenty-three Core Principles established in section 5(d)
of the CEA, 7 U.S.C. 7(d), and part 38 of the CFTC’s regulations and
with the implementing regulations under part 38. The Division of
Market Oversight’s Market Compliance Section conducts regular
reviews of each DCM’s ongoing compliance with core principles
through the self-regulatory programs operated by the exchange in
order to enforce its rules, prevent market manipulation and customer
and market abuses, and ensure the recording and safe storage of
trade information. These reviews are known as rule enforcement
reviews (“RERs”). Some periodic RERs examine a DCM’s market
surveillance program for compliance with Core Principle 4,
Monitoring of Trading, and Core Principle 5, Position Limitations or
Accountability. On some occasions, these two types of RERs may be
combined in a single RER. Market Compliance can also conduct
horizontal RERs of the compliance of multiple exchanges in regard to
particular core principles. In conducting an RER, the Division of
Market Oversight (DMO) staff examines trading and compliance
activities at the exchange in question over an extended time period
selected by DMO, typically the twelve months immediately preceding
the start of the review. Staff conducts extensive review of
documents and systems used by the exchange in carrying out its self-
regulatory responsibilities; interviews compliance officials and
staff of the exchange; and prepares a detailed written report of
findings. In nearly all cases, the RER report is made available to
the public and posted on CFTC.gov. See materials regarding RERs of
DCMs at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf on the Commission’s Web site. Recent RERs conducted
by DMO covering DCM Core Principle 5 and exemptions from position
limits have included the Minneapolis Grain Exchange, Inc. (“MGEX”)
(June 5, 2015), ICE Futures U.S. (July 22, 2014), the Chicago
Mercantile Exchange (“CME”) and the Chicago Board of Trade
(“CBOT”) (July 26, 2013), and the New York Mercantile Exchange
(May 19, 2008). While DMO may sometimes identify deficiencies or
make recommendations for improvements, it is the Commission’s view
that it should be permissible for DCMs to process applications for
exchange recognition of positions as NEBFHs. Consistent with the
fifteen SEF core principles established in section 5h(f) of the CEA,
7 U.S.C. 7b-3(f), and with the implementing regulations under part
37, 17 CFR part 37, the Commission will perform similar RERs for
SEFs. The Commission’s preliminary view is that it should be
permissible for SEFs to process applications as well, after
obtaining the requisite experience administering exchange-set
position limits discussed below.
127 Since the enactment of the Dodd-Frank Act, Commissioners,
CFTC staff, and public officials have expressed repeatedly and
publicly that Commission resources have not kept pace with the
CFTC’s expanded jurisdiction and increased responsibilities. The
Commission anticipates there may be hundreds of applications for
NEBFHs. This is based on the number of exemptions currently
processed by DCMs. For example, under the existing process, during
the period from June 15, 2011 to June 15, 2012, the Market
Surveillance Department of ICE Futures U.S. received 142 exemption
applications, 121 of which related to bona fide hedging requests,
while 21 related to arbitrage or cash-and-carry requests; 92 new
exemptions were granted. Rule Enforcement review of ICE Futures
U.S., July 22, 2014, p. 40. Also under the existing process, during
the period from November 1, 2010 to October 31, 2011, the Market
Surveillance Group from the CME Market Regulation Department took
action on and approved 420 exemption applications for products
traded on CME and CBOT, including 114 new exemptive applications,
295 applications for renewal, 10 applications for increased levels,
and one temporary exemption on an inter-commodity spread. Rule
Enforcement Review of the Chicago Mercantile Exchange and the
Chicago Board of Trade, July 26, 2013, p. 54. These statistics are
now a few years old, and it is possible that the number of
applications under the processes outlined in this proposal will
increase relative to the number of applications described in the
RERs. The CFTC would need to shift substantial resources, to the
detriment of other oversight activities, to process so many requests
and applications and has determined, as described below, to permit
exchanges to process applications initially. The Commission
anticipates it will regularly, as practicable, check a sample of the
exemptions granted, including in cases where the facts warrant
special attention, retrospectively as described below, including
through RERs.
128 One commenter specifically requested that the Commission
streamline duplicative processes. American Gas Association (“AGA”)
on March 30, 2015 (“CL-AGA-60382”) at 12 (stating that “AGA . . .
urges the Commission to ensure that hedge exemption requests and any
hedge reporting do not require duplicative filings at both the
exchanges and the Commission, and therefore recommends revising the
rules to streamline the process by providing that an applicant need
only apply to and report to the exchanges, while the Commission
could receive any necessary data and applications by coordinating
data flow between the exchanges and the Commission.”). See also
CL–Working Group–60396 (explaining that “To avoid employing
duplicative efforts, the Commission should simply rely on DCMs to
administer bona fide hedge exemptions from federal speculative
position limits as they carry out their core duties to ensure
orderly markets.”)
—————————————————————————
i. Proposed Sec. 150.9(a)–Requirements For Exchange Application
Process
a. Submission of Exchange Rules Under Part 40
The Commission contemplates in proposed Sec. 150.9(a)(1) that
exchanges may voluntarily elect to process NEBFH applications by filing
new rules or rule amendments with the Commission pursuant to part 40 of
the Commission’s regulations. The Commission anticipates that,
consistent with current practice, most exchanges will self-certify such
new rules or rule amendments pursuant to Sec. 40.6. The self-
certification process should be a low burden for exchanges, especially
for those that already recognize non-enumerated positions meeting the
general definition of bona fide hedging position in Sec.
1.3(z)(1).129 In the Commission’s view, allowing DCMs to continue to
follow current practice, and extend that practice to exchange
recognition of NEBFHs for purposes of the federal position limits, will
permit the Commission to more effectively allocate its limited
resources to oversight of the exchanges’ actions.130
—————————————————————————
129 DCMs currently process applications for exemptions from
exchange-set position limits for certain NEBFHs and enumerated
anticipatory bona fide hedges, as well as for exemptions from
exchange-set position limits for certain spread positions, pursuant
to CFMA-era regulatory guidance. See note 102, above, and
accompanying text. This practice continues because, among other
things, the Commission has not finalized the rules proposed in the
December 2013 position limits proposal.
As noted above and as explained in the December 2013 position
limits proposal, while current Sec. 150.5 regarding exchange-set
position limits pre-dates the CFMA “the CFMA core principles regime
concerning position limitations or accountability for exchanges had
the effect of undercutting the mandatory rules promulgated by the
Commission in Sec. 150.5. Since the CFMA amended the CEA in 2000,
the Commission has retained Sec. 150.5, but only as guidance on,
and acceptable practice for, compliance with DCM core principle 5.”
December 2013 position limits proposal 78 FR at 75754.
The DCM application processes for bona fide hedge exemptions
from exchange-set position limits generally reference or incorporate
the general definition of bona fide hedging position contained in
current Sec. 1.3(z)(1), and the Commission believes the exchange
processes for approving non-enumerated bona fide hedge applications
are at least to some degree informed by the Commission process
outlined in current Sec. 1.47.
130 If the Commission becomes concerned about an exchange’s
general processing of NEBFH applications, the Commission may review
such processes pursuant to a periodic rule enforcement review or a
request for information pursuant to Commission regulation Sec.
37.5. Separately, under proposed Sec. 150.9(d), the proposal
provides that the Commission may review a DCM’s determinations in
the case of any specific NEBFH application.
—————————————————————————
RFC 2. Are there any facts and circumstances specific to DCMs that,
for purposes of exchange limits, currently recognize non-enumerated
positions meeting the general definition of bona fide hedging position
in Sec. 1.3(z)(1), that the Commission should accommodate in any final
regulations regarding the processing of NEBFH applications?
RFC 3. Are there any concerns regarding an exchange that elects to
stop processing NEBFH applications? For example, what should be the
status of a previously recognized NEBFH, if the exchange that
recognized a NEBFH no longer provides for an annual review?
b. Requirements for an Exchange To Process Applications
Proposed Sec. 150.9(a)(1) provides that exchange rules must
incorporate the general definition of bona fide hedging position in
Sec. 150.1. It also provides that, with respect to a commodity
derivative position for which an exchange elects to process NEBFH
applications, (i) the position must be in a commodity derivative
contract that is a referenced contract; (ii) the exchange must list
such commodity derivative contract for trading; (iii) such commodity
derivative contract must be actively traded on such exchange; (iv) such
exchange must have established position limits for such commodity
derivative contract; and (v) such exchange must have at least one year
of experience administering exchange-set position limits for such
commodity derivative contract. The requirement for one year of
experience is intended as a proxy for a minimum level of expertise
gained in monitoring futures or swaps trading in a particular physical
commodity.
[[Page 38471]]
The Commission believes that the exchange NEBFH process should be
limited only to those exchanges that have at least one year of
experience overseeing exchange-set position limits in an actively
traded referenced contract in a particular commodity because an
individual exchange may not be familiar enough with the specific needs
and differing practices of the commercial participants in those markets
for which the exchange does not list any actively traded referenced
contract in a particular commodity. Thus, if a referenced contract is
not actively traded on an exchange that elects to process NEBFH
applications for positions in such referenced contract, that exchange
might not be incentivized to protect or manage the relevant commodity
market, and its interests might not be aligned with the policy
objectives of the Commission as expressed in CEA section 4a. The
Commission expects that an individual exchange will describe how it
will determine whether a particular listed referenced contract is
actively traded in its rule submission, based on its familiarity with
the specific needs and differing practices of the commercial
participants in the relevant market.131
—————————————————————————
131 For example, a DCM (“DCM A”) may list a commodity
derivative contract (“KX,” where “K” refers to contract and
“X” refers to the commodity) that is a referenced contract,
actively traded, and DCM A has the requisite experience and
expertise in administering position limits in that one contract KX.
DCM A can therefore recognize NEBFHs in contract KX. But DCM A is
not limited to recognition of just that one contract KX-DCM A can
also recognize any other contract that falls within the meaning of
referenced contract for commodity X. So a market participant could,
for example, apply to DCM A for recognition of a position in any
contract that falls within the meaning of referenced contract for
commodity X. However, that market participant would still need to
seek separate recognition from each exchange where it seeks an
exemption from that other exchange’s limit for a commodity
derivative contract in the same commodity X.
—————————————————————————
The Commission is also mindful that some market participants, such
as commercial end users in some circumstances, may not be required to
trade on an exchange, but may nevertheless desire to have a particular
derivative position recognized as a NEBFH. The Commission believes that
commercial end users should be able to avail themselves of an
exchange’s NEBFH application process in lieu of requesting a staff
interpretive letter under Sec. 140.99 or seeking CEA section 4a(a)(7)
exemptive relief. This is because the Commission believes that
exchanges that list particular referenced contracts will have enough
information about the markets in which such contracts trade and will be
sufficiently familiar with the specific needs and differing practices
of the commercial participants in such markets in order to
knowledgeably recognize NEBFHs for derivatives positions in commodity
derivative contracts included within a particular referenced contract.
The Commission also views this to be consistent with the efficient
allocation of Commission resources.
RFC 4. Are there circumstances in which the Commission should
permit an exchange to process an NEBFH application for a position in a
commodity derivative contract where that contract is a referenced
contract that is not actively traded on such exchange or for which the
exchange has less than one year of experience administering position
limits?
RFC 5. Should the Commission define “actively traded” in terms of
a minimum monthly volume of trading, such as an average monthly trading
volume of 1,000 futures-equivalent contracts over a twelve month
period?
RFC 6. Are there any concerns if a market participant applies for
recognition of a NEBFH on one exchange, intending to execute the trades
comprising the recognized position away from that exchange (e.g., over
the counter)?
RFC 7. Are there concerns regarding the applicability of NEBFH
positions in the spot month? Should the Commission, parallel to the
requirements of current regulation 1.3(z)(2) (i.e., the “five-day
rule”), provide that such positions not be recognized as NEBFH
positions during the lesser of the last five days of trading or the
time period for the spot month? 132
—————————————————————————
132 17 CFR 1.3(z)(2). See also, e.g., the “bona fide hedging
position” definition proposed in the December 2013 position limits
proposal, 78 FR at 75823-24.
—————————————————————————
RFC 8. If the Commission permits NEBFH positions to be held into
the spot month, should recognition of NEBFH positions be conditioned
upon additional filings to the exchange–similar to the proposed Form
504 filings required for the proposed conditional spot month limit
exemption? 133 As proposed, Form 504 would require additional
information on the market participant’s cash market holdings for each
day of the spot month period. Under this alternative, market
participants would submit daily cash position information to the
exchanges in a format determined by the exchange, which would then be
required to forward that information to the Commission in a process
similar to that proposed under Sec. 150.9(c)(2).
—————————————————————————
133 The conditional spot month limit exemption and the related
Form 504 were discussed in the December 2013 position limits
proposal (78 FR 75680 at 75736-8). A copy of the proposed form was
submitted to the Federal Register (id. at 75803-8) to ensure the
public has the opportunity to comment on the information required by
the proposed form. The Commission estimated the number of market
participants that would be required to file the form in the December
2013 position limits proposal (id. at 75783). Commenters are
encouraged to review and comment on the proposed Form 504 under the
context of this current proposal.
—————————————————————————
RFC 9. Alternatively, if the Commission permits NEBFH positions to
be held into the spot month, should the Commission require market
participants to file the Form 504 with the Commission? Under this
alternative, the relevant cash market information would be submitted
directly to the Commission, eliminating the need for the exchange to
intermediate, although the Commission could share such a filing with
the exchanges. The Commission would adjust the title of the Form 504 to
clarify that the form would be used for all daily spot month cash
position reporting purposes, not just the proposed requirements of the
conditional spot month limit exemption in proposed Sec. 150.3(c).
Consistent with the restrictions regarding the offset of risks
arising from a swap position in CEA section 4a(c)(2)(B), proposed Sec.
150.9(a)(1) would not permit an exchange to recognize an NEBFH
involving a commodity index contract and one or more referenced
contracts. That is, an exchange may not recognize an NEBFH where a bona
fide hedge position could not be recognized for a pass through swap
offset of a commodity index contract.134
—————————————————————————
134 This is consistent with the Commission’s interpretation in
the December 2013 position limits proposal that CEA section
4a(c)(2)(b) is a direction from Congress to narrow the scope of what
constitutes a bona fide hedge in the context of index trading
activities. “Financial products are not substitutes for positions
taken or to be taken in a physical marketing channel. Thus, the
offset of financial risks from financial products is inconsistent
with the proposed definition of bona fide hedging for physical
commodities.” December 2013 position limits proposal, 78 FR at
75740. See also the discussion of the temporary substitute test in
the December 2013 position limits proposal, 78 FR at 75708-9.
—————————————————————————
c. Exchanges May Establish a Dual-Track Application Process
Proposed Sec. 150.9(a)(2) permits an exchange to establish a less
expansive application process for NEBFHs previously recognized and
published on such exchange’s Web site than for NEBFHs based on novel
facts and circumstances. This is because the Commission believes that
some lesser degree of scrutiny may be adequate for applications
involving recurring fact patterns, so long as the applicants are
[[Page 38472]]
similarly situated. However, the Commission understands that DCMs
currently use a single-track application process to recognize non-
enumerated positions, for purposes of exchange limits, as within the
meaning of the general bona fide hedging definition in Sec.
1.3(z)(1).135 The Commission does not know whether any exchange will
elect to establish a separate application process for NEBFHs based on
novel versus non-novel facts and circumstances, or what the salient
differences between the two processes might be, or whether a dual-track
application process might be more likely to produce inaccurate results,
e.g., inappropriate recognition of positions that are not bona fide
hedges within the parameters set forth by Congress in CEA section
4a(c).136 In proposing to permit separate application processes for
novel and non-novel NEBFHs, the Commission seeks to provide flexibility
for exchanges, but will insist on fair and open access for market
participants to seek recognition of compliant positions as NEBFHs.
—————————————————————————
135 17 CFR 1.3(z)(1).
136 7 U.S.C. 6a(c). The Commission notes that it could, under
the proposal, review determinations made by a particular exchange,
for example, that recognizes an unusually large number of bona fide
hedges, relative to those of other exchanges.
—————————————————————————
RFC 10. Would separate application processes for novel and non-
novel NEBFHs be more likely to produce inaccurate results, e.g.,
inappropriate recognition of positions that are not bona fide hedges
within the parameters set forth by Congress in section 4a(c) of the
Act?
d. Market Participant’s Facts and Circumstances
The Commission believes that there is a core set of information and
materials necessary to enable an exchange to determine, and the
Commission to verify, whether the facts and circumstances attendant to
a position satisfy the requirements of CEA section 4a(c). Accordingly,
the Commission proposes to require in Sec. 150.9(a)(3)(i), (iii) and
(iv) that all applicants submit certain factual statements and
representations. Proposed Sec. 150.9(a)(3)(i) requires a description
of the position in the commodity derivative contract for which the
application is submitted and the offsetting cash positions.137
Proposed Sec. 150.9(a)(3)(iii) requires a statement concerning the
maximum size of all gross positions in derivative contracts to be
acquired during the year after the application is submitted.138
Proposed Sec. 150.9(a)(3)(iv) requires detailed information regarding
the applicant’s activity in the cash markets for the commodity
underlying the position for which the application is submitted during
the past three years.139 These proposed application requirements are
similar to existing requirements for recognition under current Sec.
1.48 of a NEBFH.
—————————————————————————
137 See Sec. 1.47(b)(1), 17 CFR 1.47(b)(1), requiring a
description of the futures positions and the offsetting cash
positions.
138 See Sec. 1.47(b)(4), 17 CFR 1.47(b)(4), requiring the
maximum size of gross futures positions which will be acquired
during the following year.
139 See Sec. Sec. 1.47(b)(6), 1.48(b)(1)(i) and (2)(i), 17
CFR 1.47(b)(6), 1.48(b)(1)(i) and 2(i), requiring three years of
history of production or usage.
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The Commission also proposes to require in Sec. 150.9(a)(3)(ii)
and (v) that all applicants submit detailed information to demonstrate
why the position satisfies the requirements of CEA section 4a(c) 140
and any other information necessary to enable the exchange to
determine, and the Commission to verify, whether it is appropriate to
recognize such a position as an NEBFH.141 The Commission anticipates
that such detailed information may include both a factual and legal
analysis indicating why recognition is justified for such applicant’s
position. The Commission expects that if the materials submitted in
response to proposed Sec. 150.9(a)(3)(ii) are relatively
comprehensive, requests for additional information pursuant to proposed
Sec. 150.9(a)(3)(v) will be relatively infrequent. Nevertheless, the
Commission believes that it is important to include the requirement in
proposed Sec. 150.9(a)(3)(v) that applicants submit any other
information necessary to enable the exchange to determine, and the
Commission to verify, that it is appropriate to recognize a position as
a non-enumerated bona fide hedge so that DCMs can protect and manage
their markets.
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140 Although many commenters have requested that the
Commission retain the pre-Dodd Frank Act standard contained in
current Sec. 1.3(z), 17 CFR 1.3(z), there is explicit and implicit
support in the comments on the December 2013 position limits
proposal for pegging what applicants must demonstrate to the current
statutory provision as amended by the Dodd-Frank Act. One commenter
requested that the Commission “publicly clarify that hedge
positions are bona fide when they satisfy the hedge definition
codified by Congress in section 4a(c)(2) of the Act, as added by the
Dodd-Frank Act.” CME Group, on Feb. 10, 2014 (“CL-CME-59718”), at
46. Another commenter supported a “process for Commission approval
of a `non-enumerated’ hedge that . . . complies with the statutory
definition of the term `bona fide hedge.’ ” NGSA on Feb. 10, 2014
(“CL-NGSA-59673”), at 2.
CEA section 4a(c)(2) contains standards for positions that
constitute bona fide hedges. The Commission expects that exchanges
will consider the Commission’s relevant regulations and
interpretations, when determining whether a position satisfies the
requirements of CEA section 4a(c)(2). However, exchanges may
confront novel facts and circumstances with respect to a particular
applicant’s position, dissimilar to facts and circumstances
previously considered by the Commission. In these cases, an exchange
may request assistance from the Commission; see the discussion of
proposed Sec. 150.9(a)(8), below.
141 See Sec. 1.47(b)(2), 17 CFR 1.47(b)(2), requiring
detailed information to demonstrate that the futures positions are
economically appropriate to the reduction of risk in the conduct and
management of a commercial enterprise. See also Sec. 1.47(b)(3), 17
CFR 1.47(b)(3), requiring, upon request, such other information
necessary to enable the Commission to determine whether a particular
futures position meets the requirements of the general definition of
bona fide hedging. Under current application processes, market
participants provide similar information to DCMs, make various
representations required by DCMs and agree to certain terms imposed
by DCMs with respect to exemptions granted. The Commission has
recognized that DCMs already consider any information they deem
relevant to requests for exemptions from position limits. See, e.g.,
Rule Enforcement Review of ICE Futures U.S., July 22, 2014, p. 41.
—————————————————————————
Under the proposal, the Commission would permit an exchange to
recognize a smaller than requested position for purposes of exchange-
set limits. For instance, an exchange might recognize a smaller than
requested position that otherwise satisfies the requirements of CEA
section 4a(c) if the exchange determines that recognizing a larger
position would be disruptive to the exchange’s markets. This is
consistent with current exchange practice. This is also consistent with
DCM and SEF core principles. DCM core principle 5(A) provides that,
“[t]o reduce the potential threat of market manipulation or congestion
(especially during trading during the delivery month), the board of
trade shall adopt for each contract of the board of trade, as is
necessary and appropriate, position limitations or position
accountability for speculators.” 142 SEF core principle 6(A)
contains a similar provision.143
—————————————————————————
142 CEA section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A); Sec. 38.300,
17 CFR 38.300. The Commission proposed, consistent with previous
Commission determinations, a preliminary finding that speculative
position limits are necessary in the December 2013 position limits
proposal. December 2013 position limits proposal, 78 FR at 75685.
143 CEA Sec. 5h(f)(6)(A), 7 U.S.C. 7b-3(f)(6)(A); Sec.
38.300, 17 CFR 38.300.
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By requiring in proposed Sec. 150.9(a)(3) that all applicants
submit a core set of information and materials, the Commission
anticipates that all exchanges will develop similar NEBFH application
processes. However, the Commission intends that exchanges have
sufficient discretion to accommodate the needs of their market
participants. The Commission also intends to promote fair and open
access for market participants to obtain recognition of compliant
derivative positions as NEBFHs.
[[Page 38473]]
RFC 11. Is the proposed core set of information required of market
participants adequate for an exchange to review applications for
NEBFHs?
e. Application Process Timeline
Proposed Sec. 150.9(a)(4) sets forth certain timing requirements
that an exchange must include in its rules for the NEBFH application
process. A person intending to rely on an exchange’s recognition of a
position as a NEBFH would be required to submit an application in
advance and to reapply at least on an annual basis. This is consistent
with commenters’ views and DCMs’ current annual exemption review
process.144 Proposed Sec. 150.9(a)(4) would require an exchange to
notify an applicant in a timely manner whether the position was
recognized as a NEBFH or rejected, including the reasons for any
rejection.145 On the other hand, and consistent with the status quo,
proposed Sec. 150.9(a)(4) would allow the exchange to revoke, at any
time, any recognition previously issued pursuant to proposed Sec.
150.9 if the exchange determines the recognition is no longer in accord
with section 4a(c) of the Act.146
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144 See, e.g., statement of Ron Oppenheimer on behalf of the
Working Group (supporting an annual NEBFH application), statement of
Erik Haas, Director, Market Regulation, ICE Futures U.S.,
(describing the DCM’s annual exemption review process), and
statement of Tom LaSala, Chief Regulatory Officer, CME Group,
(envisioning market participants applying for NEBFHs on a yearly
basis), transcript of the EEMAC open meeting, July 29, 2015, at 40,
53, and 58, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript072915.pdf.
145 See, e.g., statement of Ron Oppenheimer on behalf of the
Working Group (noting that exchanges retain the ability to revoke an
exemption if market circumstances warrant), transcript of the EEMAC
open meeting, July 29, 2015, at 57, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript072915.pdf.
146 As noted above, the current proposal does not impair the
ability of any market participant to request an interpretation under
Sec. 140.99 for recognition of a position as a bona fide hedge if
an exchange rejects their recognition application or revokes
recognition previously issued. See supra note 78 and accompanying
text.
—————————————————————————
The Commission does not propose to prescribe time-limited periods
(e.g., a specific number of days) for submission or review of NEBFH
applications. The Commission proposes only to require that an applicant
must have received recognition for a NEBFH position before such
applicant exceeds any limit then in effect, and that the exchange
administer the process, and the various steps in the process, in a
timely manner. This means that an exchange must, in a timely manner,
notify an applicant if a submission is incomplete, determine whether a
position is an NEBFH, and notify an applicant whether a position will
be recognized, or the application rejected. The Commission anticipates
that rules of an exchange may nevertheless set deadlines for various
parts of the application process. The Commission does not believe that
reasonable deadlines or minimum review periods are inconsistent with
the general principle of timely administration of the application
process. An exchange could also establish different deadlines for a
dual-track application process. The Commission believes that the
individual exchanges themselves are in the best position to evaluate
how quickly each can administer the application process, in order best
to accommodate the needs of market participants. In addition to review
of an exchange’s timeline when it submits its rules for its application
process under part 40, the Commission would review the exchange’s
timeliness in the context of a rule enforcement review.
RFC 12. The Commission invites comment regarding the discretion
proposed for exchanges to process NEBFH applications in a timely
manner.
f. NEBFH Deemed Recognized Upon Exchange Recognition
Proposed Sec. 150.9(a)(5) makes it clear that the position will be
deemed to be recognized as a NEBFH when an exchange recognizes it;
proposed Sec. 150.9(d) provides the process through which the
exchange’s recognition would be subject to review by the
Commission.147 As noted above, DCMs currently exercise discretion
with regard to exchange-set limits to approve exemptions meeting the
general definition of bona fide hedge. The Commission works
cooperatively with DCMs to enforce compliance with exchange-set
speculative position limits. The Commission believes a continuation of
this cooperative process, and an extension to the proposed federal
position limits, would be consistent with the policy objectives in CEA
section 4a(3)(B).148
—————————————————————————
147 See supra notes 121-123 and accompanying text; see also
the discussion of proposed Sec. 150.9(d), review of applications by
the Commission, below. Exchange recognition of a position as a NEBFH
would allow the market participant to exceed the federal position
limit until such time that the Commission notified the market
participant to the contrary, pursuant to the proposed review
procedure that the exchange action was dismissed. That is, if a
party were to hold positions pursuant to a NEBFH recognition granted
by the exchange, such positions would not be subject to federal
position limits, unless or until the Commission were to determine
that such NEBFH recognition is inconsistent with the CEA or CFTC
regulations thereunder. Under this framework, the Commission would
continue to exercise its authority in this regard by reviewing an
exchange’s determination and verifying whether the facts and
circumstances in respect of a derivative position satisfy the
requirements of the Commission’s general definition of bona fide
hedging position in Sec. 150.1. If the Commission determines that
the exchange-granted recognition is inconsistent with section 4a(c)
of the Act and the Commission’s general definition of bona fide
hedging position in Sec. 150.1, a market participant would be
required to reduce the derivative position or otherwise come into
compliance with position limits within a commercially reasonable
amount of time.
148 7 U.S.C. 6a(3)(B).
—————————————————————————
g. Market Participant Reporting Requirements
Proposed Sec. 150.9(a)(6) requires exchanges that elect to process
NEBFH applications to promulgate reporting rules for applicants who
own, hold or control positions recognized as NEBFHs. The Commission
expects that the exchanges will promulgate enhanced reporting rules in
order to obtain sufficient information to conduct an adequate
surveillance program to detect and potentially deter excessively large
positions that may disrupt the price discovery process. At a minimum,
these rules should require applicants to report when an NEBFH position
has been established, and to update and maintain the accuracy of such
reports. These rules should also elicit information from applicants
that will assist exchanges in complying with proposed Sec. 150.9(c)
regarding exchange reports to the Commission.
RFC 13. Should the Commission provide further guidance regarding
the types of information that exchanges should seek to elicit from
reporting rules with respect to NEBFH positions?
h. Transparency to Market Participants
Proposed Sec. 150.9(a)(7) requires an exchange to publish on its
Web site, no less frequently than quarterly, a description of each new
type of derivative position that it recognizes as a NEBFH. The
Commission envisions that each description would be an executive
summary. The description must include a summary describing the type of
derivative position and an explanation of why it qualifies as a NEBFH.
The Commission believes that the exchanges are in the best position
when quickly crafting these descriptions to accommodate an applicant’s
desire for trading anonymity while promoting fair and open access for
market participants to information regarding which positions might be
recognized as NEBFHs. As discussed below, the Commission proposes to
spot check these summaries pursuant to proposed Sec. 150.9(e).
RFC 14. Should the Commission prescribe that exchanges publish any
[[Page 38474]]
specific information regarding recognized NEBFHs based on novel facts
and circumstances?
RFC 15. Should the Commission require exchanges to publish summary
statistics, such as the number of recognized NEBFHs based on non-novel
facts and circumstances?
i. Requests for Commission Consideration
An exchange may elect to request the Commission review an NEBFH
application that raises novel or complex issues under proposed Sec.
150.9(a)(8), using the process set forth in proposed Sec. 150.9(d),
discussed below.149 If an exchange makes a request pursuant to
proposed Sec. 150.9(a)(8), the Commission, as would be the case for an
exchange, would not be bound by a time limitation. This is because the
Commission proposes only that NEBFH applications be processed in a
timely manner.150 Essentially, this proposed provision largely
preserves the Commission’s review process under current Sec.
1.47,151 except that a market participant first seeks recognition of
a NEBFH from an exchange.
—————————————————————————
149 If the exchange determines to request under proposed Sec.
150.9(a)(8) that the Commission consider the application, the
exchange must, under proposed Sec. 150.9(a)(4)(v)(C), notify an
applicant in a timely manner that the exchange has requested that
the Commission review the application. This provision provides the
exchanges with the ability to request Commission review early in the
review process, rather than requiring the exchanges to process the
request, make a determination and only then begin the process of
Commission review provided for under proposed Sec. 150.9(d). The
Commission notes that although most of its reviews would occur after
the exchange makes its determination, the Commission could, as
provided for in proposed Sec. 150.9(d)(1), initiate its review, in
its discretion, at any time.
150 Novel facts and circumstances may present particularly
complex issues that could benefit from extended consideration, given
the Commission’s current resource constraints.
151 17 CFR 1.47.
—————————————————————————
RFC 16. Does the proposed flexibility for exchanges to request
Commission review provide market participants with a sufficient process
for review of a potential NEBFH?
ii. Proposed Sec. 150.9(b)–Recordkeeping Requirements
Proposed Sec. 150.9(b) outlines recordkeeping requirements for
exchanges that elect to process non-enumerated bona fide hedge
applications under proposed Sec. 150.9(a). Exchanges must maintain
complete books and records of all activities relating to the processing
and disposition of applications in a manner consistent with the
Commission’s existing general regulations regarding recordkeeping,152
with certain minor conforming changes. In consideration of the fact
that DCMs currently recognize NEBFHs for periods of up to a year and
that the proposal would require annual updates, the Commission proposes
that exchanges keep books and records until the termination, maturity,
or expiration date of any recognition of a NEBFH and for a period of
five years after such date. Five years should provide an adequate time
period for Commission reviews, whether that be a review of an
exchange’s rule enforcement or a review of a market participant’s
representations.
—————————————————————————
152 Requirements regarding the keeping and inspection of all
books and records required to be kept by the Act or the Commission’s
regulations are found at Sec. 1.31, 17 CFR 1.31. DCMs and SEFs are
already required to maintain records of their business activities in
accordance with the requirements of Sec. 1.31 and 17 CFR 38.951.
—————————————————————————
Exchanges would be required to store and produce records pursuant
to current Sec. 1.31 of the Commission’s regulations, and would be
subject to requests for information pursuant to other applicable
Commission regulations including, for example, Sec. 38.5. Consistent
with current Sec. 1.31,153 the Commission expects that these records
would be readily accessible until the termination, maturity, or
expiration date of the recognition and during the first two years of
the subsequent five year period.154 The Commission does not intend in
proposed Sec. 150.9(b)(1) to create any new obligation for an exchange
to record conversations with applicants, which includes their
representatives; however, the Commission does expect that an exchange
would preserve any written or electronic notes of verbal interactions
with such parties.
—————————————————————————
153 Proposed Sec. 150.9(b) is analogous to the requirement in
Sec. 1.31 for records to be kept regarding any swap or related cash
forward transaction until the termination, maturity, expiration,
transfer, assignment, or novation date of such transaction and for a
period of five years after such date. 17 CFR 1.31(a)(1). Other
Commission requirements for swap record retention take a similar
approach: DCMs must retain required records with respect to each
swap throughout the life of the swap and for a period of at least
five years following the final termination of the swap, 17 CFR
45.2(c), and the records that exchanges are required to retain shall
be readily accessible throughout the life of the swap and for two
years following the final termination of the swap, 17 CFR
45.2(e)(1).
154 In addition, the Commission expects that records required
to be maintained by an exchange pursuant to this section would be
readily accessible during the pendency of any application, and for
two years following any disposition that did not recognize a
derivative position as a bona fide hedge.
—————————————————————————
Finally, the Commission emphasizes that parties who avail
themselves of exemptions under proposed Sec. 150.3(a), as revised
herein, are subject to the recordkeeping requirements of Sec.
150.3(g), as well as requests from the Commission for additional
information under Sec. 150.3(h), each as proposed in the December 2013
position limits proposal. The Commission may request additional
information, for example, in connection with review of an
application.155
—————————————————————————
155 In the December 2013 position limits proposal, persons
claiming exemptions under proposed Sec. 150.3 must still “maintain
complete books and records concerning all details of their related
cash, forward, futures, options and swap positions and transactions.
Furthermore, such persons must make such books and records available
to the Commission upon request under proposed Sec. 150.3(h), which
would preserve the `special call’ rule set forth in current 17 CFR
150.3(b).” 78 FR 75741 (footnote omitted).
—————————————————————————
iii. Proposed Sec. 150.9(c)–Exchange Reporting
The Commission proposes, in Sec. 150.9(c)(1), to require an
exchange that elects to process NEBFH applications to submit a weekly
report to the Commission. The proposed report would provide information
regarding each commodity derivative position recognized by the exchange
as an NEBFH during the course of the week. Information provided in the
report would include the identity of the applicant seeking such
recognition, the maximum size of the derivative position that is
recognized by the exchange as an NEBFH,156 and, to the extent that
the exchange determines to limit the size of such bona fide hedge
position under the exchange’s own speculative position limits program,
the size of any limit established by the exchange.157 The Commission
envisions that the proposed report would specify the maximum size and/
or size limitations by contract month and/or type of limit (e.g. spot
month, single month, or all-months-combined), as applicable.158 The
proposed report would also provide information regarding any revocation
of,
[[Page 38475]]
or modification to the terms and conditions of, a prior determination
by the exchange to recognize a commodity derivative position as an
NEBFH. In addition, the report would include any summary of a type of
recognized NEBFH that was, during the course of the week, published or
revised on the exchange’s Web site pursuant to proposed Sec.
150.9(a)(7).
—————————————————————————
156 An exchange could determine to recognize all, or a
portion, of the commodity derivative position in respect of which an
application for recognition has been submitted, as an NEBFH,
provided that such determination is made in accordance with the
requirements of proposed Sec. 150.9 and is consistent with the Act
and the Commission’s regulations.
157 As proposed in the December 2013 position limits proposal,
Sec. 150.5(a)(2)(iii) provides, inter alia, that for any commodity
derivative contract that is subject to a speculative position limit
under Sec. 150.2, an exchange may limit bona fide hedging positions
which the exchange determines are not in accord with sound
commercial practices, or which exceed an amount that may be
established and liquidated in an orderly fashion. Such proposal
largely mirrors the second half of current Sec. 150.5(d), although
updated to specify DCMs instead of “contract markets” as well as
to include SEFs.
158 An exchange could determine to recognize all, or a
portion, of the commodity derivative position in respect of which an
application for recognition has been submitted, as an NEBFH, for
different contract months or different types of limits (e.g., a
separate limit level for the spot month).
—————————————————————————
The proposed weekly report would support the Commission’s
surveillance program by facilitating the tracking of NEBFHs recognized
by exchanges,159 keeping the Commission informed of the manner in
which an exchange is administering its procedures for recognizing such
NEBFHs. For example, the report would make available to the Commission,
on a regular basis, the summaries of types of recognized NEBFHs that an
exchange posts to its Web site pursuant to proposed Sec. 150.9(a)(7).
This would facilitate any review by the Commission of such summaries,
pursuant to proposed Sec. 150.9(e), and would help to ensure, if the
Commission determines that revisions to a summary are necessary, that
such revisions are carried out in a timely manner by the exchange.
—————————————————————————
159 The Commission believes that the exchange’s assignment of
a unique identifier to each of the non-enumerated bona fide hedge
applications that the exchange receives, and, separately, the
exchange’s assignment of a unique identifier to each type of
commodity derivative position that the exchange recognizes as an
NEBFH, would assist the Commission’s tracking process. Accordingly,
the Commission suggests that, as a “best practice,” the exchange’s
procedures for processing NEBFH applications contemplate the
assignment of such unique identifiers. Pursuant to proposed Sec.
150.9(c)(1)(i), an exchange that assigns such unique identifiers
would be required to include the identifiers in the exchange’s
weekly report to the Commission.
—————————————————————————
In certain instances, information included in the proposed weekly
report may prompt the Commission to request records required to be
maintained by an exchange pursuant to proposed Sec. 150.9(b). For
example, it is proposed that, for each derivative position recognized
by the exchange as an NEBFH, or any revocation or modification of such
recognition, the report would include a concise summary of the
applicant’s activity in the cash markets for the commodity underlying
the position. It is the Commission’s expectation that this summary
would focus on the facts and circumstances upon which an exchange based
its determination to recognize a commodity derivative position as an
NEBFH, or to revoke or modify such recognition. In light of the
information provided in the summary, or any other information included
in the proposed weekly report regarding the position, the Commission
may decide that it is appropriate to request the exchange’s complete
record of the application for recognition of the position as an NEBFH–
in order to determine, for example, whether the application presents
novel or complex issues that merit additional analysis pursuant to
proposed Sec. 150.9(d)(2), or to evaluate whether the disposition of
the application by the exchange was consistent with section 4a(c) of
the Act and the general definition of bona fide hedging position in
Sec. 150.1.
Proposed Sec. 150.9(c)(2) would require an exchange to submit to
the Commission any report made to the exchange by an applicant,
pursuant to proposed Sec. 150.9(a)(6), notifying the exchange that the
applicant owns or controls a commodity derivative position that the
exchange has recognized as an NEBFH.160 Unless the Commission
instructs otherwise,161 the exchange would be required to submit such
applicant reports to the Commission no less frequently than
monthly.162 The exchange’s submission of these reports would provide
the Commission with notice that an applicant has taken a commodity
derivative position that the exchange has recognized as an NEBFH, and
would also show the applicant’s offsetting positions in the cash
markets. Requiring an exchange to submit these applicant reports to the
Commission would therefore support the Commission’s surveillance
program, by facilitating the tracking of NEBFHs recognized by the
exchange, and helping the Commission to ensure that an applicant’s
activities conform to the terms of recognition that the exchange has
established.
—————————————————————————
160 Proposed Sec. 150.9(a)(6) would require an exchange to
have in place rules requiring an applicant to report to the exchange
when the applicant owns, holds or controls a commodity derivative
position that the exchange has recognized as an NEBFH, and for the
applicant to report its offsetting cash positions. Pursuant to
proposed Sec. 150.9(a)(6), such rules must require an applicant to
update and maintain the accuracy of any such report to the exchange.
Accordingly, a exchange’s submission to the Commission pursuant to
proposed Sec. 150.9(c)(2) would be expected to include any updates,
corrections or other modifications made by an applicant to a report
previously submitted to the exchange.
161 The Commission proposes, in Sec. 150.9(f)(1)(ii), to
delegate to the Director of the Commission’s Division of Market
Oversight, or such other employee or employees as the Director may
designate from time to time, the authority to provide instructions
regarding the submission to the Commission of information required
to be reported by an exchange pursuant to proposed Sec. 150.9(c).
162 Proposed Sec. 150.9(c)(2) addresses the submission by the
exchange of applicant reports to the Commission. The timeframe
within which an applicant would be required to report to the
exchange that the applicant owns or controls a commodity derivative
position that the exchange has recognized as an NEBFH, would be
established by the exchange in its rules, as appropriate and in
accordance with proposed Sec. 150.9(a)(6). An exchange could decide
to require such a report from an applicant more frequently than
monthly.
—————————————————————————
Proposed Sec. 150.9(c)(3)(i) and (ii) would require an exchange,
unless instructed otherwise by the Commission,163 to submit weekly
reports under proposed Sec. 150.9(c)(1), and applicant reports under
proposed Sec. 150.9(c)(2). Proposed Sec. 150.9(c)(3)(i) and (ii)
contemplate that, in order to facilitate the processing of such
reports, and the analysis of the information contained therein, the
Commission will establish reporting and transmission standards, and may
require reports to be submitted to the Commission using an electronic
data format, coding structure and electronic data transmission
procedures approved in writing by the Commission, as specified on the
Forms and Submissions page at www.cftc.gov.164 Proposed Sec.
150.9(c)(3)(iii) would require such reports to be submitted to the
Commission no later than 9:00 a.m. Eastern time on the third business
day following the report date, unless the exchange is otherwise
instructed by the Commission.165
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163 The Commission proposes to delegate to the Director of the
Commission’s Division of Market Oversight, or such other employee or
employees as the Director may designate from time to time, the
authority to provide instructions for such submissions in proposed
Sec. 150.9(f)(1)(ii).
164 The Commission proposes, in Sec. 150.9(f)(1)(ii), to
delegate to the Director of the Commission’s Division of Market
Oversight, or such other employee or employees as the Director may
designate from time to time, the authority to specify on the Forms
and Submissions page at www.cftc.gov the manner for submitting to
the Commission information required to be reported by an exchange
pursuant to proposed Sec. 150.9(c), and to determine the format,
coding structure and electronic data transmission procedures for
submitting such information.
165 Proposed Sec. 150.9(c)(2) would require reports submitted
to an exchange pursuant to proposed Sec. 150.9(a)(6), from
applicants owning or controlling commodity derivative positions that
the exchange has recognized as NEBFHs, to be submitted to the
Commission no less frequently than monthly. For purposes of proposed
Sec. 150.9(c)(2), the timeframe set forth in proposed Sec.
150.9(c)(3)(iii) would be calculated from the date of a exchange’s
submission to the Commission, and not from the date of an
applicant’s report to the exchange.
—————————————————————————
RFC 17. The Commission requests comment on all aspects of the
proposed reporting requirements.
iv. Proposed Sec. 150.9(d)–Review of Applications by the Commission
One participant at the June 19, 2014 Roundtable on Position Limits
commented that if the Commission were to permit exchanges to administer
a process for NEBFHs, the Commission should continue to do “a certain
amount
[[Page 38476]]
of de novo analysis and review.” 166 The Commission agrees. Proposed
Sec. 150.9(d) provides for Commission review of applications to ensure
that the processes administered by the exchange, as well as the results
of such processes, are consistent with the requirements of CEA section
4a(c) of the Act and the Commission’s regulations thereunder.167 The
Commission proposes to review records required to be maintained by an
exchange pursuant to proposed Sec. 150.9(b); however, the Commission
may request additional information under proposed Sec. 150.9(d)(1)(ii)
if, for example, the Commission finds additional information is needed
for its own review.
—————————————————————————
166 John Parsons, Roundtable on Position Limits, June 19,
2014, transcript at p. 135.
167 See supra note 66 and accompanying text. As noted above,
under the proposal, the SRO’s recognition is tentative, because the
Commission would reserve the power to review the recognition,
subject to the reasonably fixed statutory standards in CEA section
4a(c)(2) (directing the CFTC to define the term bona fide hedging
position) that are incorporated into the Commission’s proposed
general definition of bona fide hedging position in Sec. 150.1. The
SRO’s recognition would also be constrained by the SRO’s rules,
which would be subject to CFTC review under the proposal. The SROs
are parties subject to Commission authority, their rules are subject
to Commission review and their actions are subject to Commission de
novo review under the proposal–SRO rules and actions may be changed
by the Commission at any time. In addition, it should be noted that
the exchange is required to make its determination consistent with
both CEA section 4a(c) and the Commission’s general definition of
bona fide hedging position in Sec. 150.1. Further, the Commission
notes that CEA section 4a(c)(1) requires a position to be shown to
be bona fide as defined by the Commission.
—————————————————————————
The Commission could decide to review a pending application prior
to disposition by an exchange, but anticipates that it will most likely
review applications after some action has already been taken by an
exchange. The Commission’s proposal in Sec. 150.9(d)(2) and (3)
requires the Commission to notify the exchange and the applicable
applicant that they have 10 business days to provide any supplemental
information. This approach provides the exchanges and the particular
market participant with an opportunity to respond to any issues raised
by the Commission.
During the period of any Commission review of an application, an
applicant could continue to rely upon any recognition previously
granted by the exchange. If the Commission determines that remediation
is necessary, the Commission would provide for a commercially
reasonable amount of time for the market participant to comply with
limits after announcement of the Commission’s decision under proposed
Sec. 150.9(d)(4). In determining a commercially reasonable amount of
time, the Commission may consider factors such as current market
conditions and the protection of price discovery in the market.168
—————————————————————————
168 In the December 2013 position limits proposal, when
discussing the provision of a commercially reasonable time period as
necessary to exit the market in an orderly manner, the Commission
stated that, generally, it “believes such time period would be less
than one business day.” 78 FR 75680 at 75713.
—————————————————————————
RFC 18. The Commission requests comments on all aspects of the
proposed review process.
v. Proposed Sec. 150.9(e)–Commission Review of Summaries
While the Commission proposes to rely on the expertise of the
exchanges to summarize and post executive summaries of NEBFHs to their
respective Web sites under proposed Sec. 150.9(a)(7), it also
proposes, in Sec. 150.9(e), to review such executive summaries to
ensure they provide adequate disclosure to market participants of the
potential availability of relief from speculative position limits. The
Commission believes that an adequate disclosure would include generic
facts and circumstances sufficient to alert similarly situated market
participants to the possibility of receiving recognition of a NEBFH.
Such market participants may use this information to help evaluate
whether to apply for recognition of a NEBFH. Thus, adequate disclosure
should help ensure fair and open access to the application process. Due
to resource constraints, the Commission may not be able to pre-clear
each summary, so the Commission proposes to spot check executive
summaries after the fact.
E. Process for Exemption From Position Limits for Certain Spread
Positions
1. Background
The Commission proposes to permit exchanges, by rule, to exempt
from federal position limits certain spread transactions, as authorized
by CEA section 4a(a)(1),169 and in light of the provisions of CEA
section 4a(a)(3)(B) and CEA section 4a(c)(2)(B).170 In particular,
CEA section 4a(a)(1) provides the Commission with authority to exempt
from position limits transactions normally known to the trade as
“spreads” or “straddles” or “arbitrage” or to fix limits for such
transactions or positions different from limits fixed for other
transactions or positions. The Dodd-Frank Act amended the CEA by adding
section 4a(a)(3)(B), which now directs the Commission, in establishing
position limits, to ensure, to the maximum extent practicable and in
its discretion, “sufficient market liquidity for bona fide hedgers.”
171 In addition, the Dodd-Frank Act amendments to the CEA in section
4a(c)(2)(B) limited the definition of a bona fide hedge to only those
positions (in addition to those included under CEA section 4a(c)(2)(A))
172 resulting from a swap that was executed opposite a counterparty
for which the transaction would qualify as a bona fide hedging
transaction, in the event the party to the swap is not itself using the
swap as a bona fide hedging transaction. In this regard, the Commission
interprets this statutory definition to preclude spread exemptions for
a swap position that was executed opposite a counterparty for which the
transaction would not qualify as a bona fide hedging transaction.
—————————————————————————
169 7 U.S.C. 6a(a)(1) (authorizing the Commission to exempt
transactions normally known to the trade as “spreads”). DCMs
currently process applications for exemptions from exchange-set
position limits for certain spread positions pursuant to CFMA-era
regulatory parameters. See note 101 for further background.
It should be noted that, in current Sec. 150.3(a)(3), the
Commission exempts spread positions “between single months of a
futures contract and/or, on a futures-equivalent basis, options
thereon, outside of the spread month, in the same crop year,”
subject to certain limitations. 17 CFR 150.3(a)(3).
170 7 U.S.C. 6a(a)(3)(B) and 7 U.S.C. 6a(c)(2)(B),
respectively.
171 CEA section 4a(a)(3)(B) also directs the Commission, in
establishing position limits, to diminish, eliminate, or prevent
excessive speculation; to deter and prevent market manipulation,
squeezes, and corners; and to ensure that the price discovery
function of the underlying market is not disrupted.
172 7 U.S.C. 6a(c)(2)(A). As explained above in note 66, CEA
section 4a(c)(2) generally requires the Commission to define a bona
fide hedging position as a position that in CEA section 4a(c)(2)(A):
Meets three tests (a position (1) is a substitute for activity in
the physical marketing channel, (2) is economically appropriate to
the reduction of risk, and (3) arises from the potential change in
value of current or anticipated assets, liabilities or services);
or, in CEA section 4a(c)(2)(B), reduces the risk of a swap that was
executed opposite a counterparty for which such swap would meet the
three tests.
—————————————————————————
Prior to the passage of the Dodd-Frank Act, the Commission
exercised its exemptive authority pertaining to spread transactions in
promulgating current Sec. 150.3. Current Sec. 150.3 provides that the
position limits set in Sec. 150.2 may be exceeded to the extent such
positions are spread or arbitrage positions between single months of a
futures contract and/or, on a futures-equivalent basis, options
thereon, outside of the spot month, in the same crop year; provided,
however, that such spread or arbitrage positions, when combined with
any other net positions in the single month, do not exceed the all-
months limit set forth in Sec. 150.2. In addition, the Commission has
permitted DCMs, in setting their own position
[[Page 38477]]
limits under the terms of current Sec. 150.5(a), to exempt spread,
straddle or arbitrage positions or to fix limits that apply to such
positions which are different from limits fixed for other
positions.173
—————————————————————————
173 Current Sec. 150.5 applies as non-exclusive guidance and
acceptable practices for compliance with DCM core principle 5. See
December 2013 position limits proposal, 78 FR at 75750-2.
—————————————————————————
The December 2013 position limits proposal deleted the exemption in
current Sec. 150.3(a)(3) for spread or arbitrage positions between
single months of a futures contract or options thereon, outside the
spot month; the Commission instead proposed to maintain the current
practice in Sec. 150.2 of setting single-month limits at the same
levels as all-months limits, rendering the “spread” exemption
unnecessary.174 In particular, the spread exemption set forth in
current Sec. 150.3(a)(3) permits a spread trader to exceed single
month limits only to the extent of the all months limit. Since Sec.
150.2 as proposed in the December 2013 position limits proposal sets
single month limits at the same level as all months limits, the
existing spread exemption no longer provides useful relief.
—————————————————————————
174 December 2013 position limits proposal, 78 FR at 75736.
—————————————————————————
Further, the December 2013 position limits proposal would codify
guidance in proposed Sec. 150.5(a)(2)(ii) to allow an exchange to
grant exemptions from exchange-set position limits for intramarket and
intermarket spread positions (as those terms are defined in Sec. 150.1
as proposed in the December 2013 position limits proposal) involving
commodity derivative contracts subject to the federal limits. To be
eligible for exemption under Sec. 150.5(a)(2)(ii) as proposed in the
December 2013 position limits proposal, intermarket and intramarket
spread positions would have to be outside of the spot month for
physical delivery contracts, and intramarket spread positions could not
exceed the federal all-months limit when combined with any other net
positions in the single month. As proposed in the December 2013
position limits proposal, Sec. 150.5(a)(2)(iii) would require traders
to apply to the exchange for any exemption, including spread
exemptions, from its speculative position limit rules.
Several commenters have requested that the Commission provide a
spread exemption to federal position limits.175 Of these commenters,
most urged the Commission to recognize spread exemptions in the spot
month as well as non-spot months.176 Several of these commenters
noted that the Commission’s proposal would permit exchanges to grant
spread exemptions for exchange-set limits in commodity derivative
contracts subject to Federal limits, and recommended that the
Commission establish a process for granting such spread exemptions for
purposes of Federal limits.177
—————————————————————————
175 See, e.g., CL-CMC-59634 at 15; Olam International Ltd. on
February 10, 2014 (“CL-Olam-59658”) at 7; CME Group on February
10, 2014 (“CL-CME -59718”) at 69-71; Citadel LLC on February 10,
2014 (“CL-Citadel-59717”) at 8, 9; Armajaro Asset Management
(“Amajaro”) on February 10, 2014 (“CL-Armajaro-59729”) at 2; ICE
Futures U.S. on February 10, 2014 (“CL-ICEUS-59645”) at 8-10.
176 See CL-CMC-59634 at 15; CL-Olam-59658 at 7; CL-CME-59718
at 71; CL-Armajaro-59729 at 2; CL-ICEUS-59645 at 8-10.
177 See CL-Olam-59658 at 7; CL-CME-59718 at 71; CL-ICEUS-59645
at 10.
—————————————————————————
In response to these comments, the Commission now proposes to
permit exchanges to process and grant applications for spread
exemptions from federal position limits. Most, if not all, DCMs already
have rules in place to process and grant applications for spread
exemptions from exchange-set position limits pursuant to Part 38 of the
Commission’s regulations (in particular, current Sec. Sec. 38.300 and
38.301) and current Sec. 150.5. As noted above, the Commission has a
long history of overseeing the performance of the DCMs in granting
appropriate spread exemptions under current exchange rules regarding
exchange-set position limits and believes that it would be efficient,
and in the best interest of the markets, in light of current resource
constraints, to rely on the exchanges to process applications for
spread exemptions from federal position limits. In addition, the
Commission observes because many market participants may be familiar
with current DCM practices regarding spread exemptions, permitting DCMs
to build on current practice may lower the burden on market
participants and reduce duplicative filings at the exchanges and the
Commission. As noted, this plan would permit exchanges to provide
market participants with spread exemptions, pursuant to exchange rules
submitted to the Commission; however, the Commission would retain the
authority to review–and, if necessary, reverse–the exchanges’
actions.
RFC 19. Would permitting exchanges to process applications for
spread exemptions from federal limits, subject to Commission review,
provide for an efficient implementation of the Commission’s statutory
authority to exempt such spread positions?
2. Spread Exemption Proposal
i. Proposed Sec. 150.10(a)–Requirements for Application Process
The Commission contemplates in proposed Sec. 150.10(a)(1) that
exchanges may voluntarily elect to process spread exemption
applications, by filing new rules or rule amendments with the
Commission pursuant to part 40 of the Commission’s regulations.178
The proposed process under Sec. 150.10(a) is substantially similar to
that described above for proposed Sec. 150.9(a). For example, proposed
Sec. 150.10(a)(1) provides that, with respect to a commodity
derivative position for which an exchange elects to process spread
exemption applications, (i) the exchange must list for trading at least
one component of the spread or must list for trading at least one
contract that is a referenced contract included in at least one
component of the spread; and (ii) any such exchange contract must be
actively traded and subject to position limits for at least one year on
that exchange. As noted with respect to the process outlined above for
proposed Sec. 150.9(a), the Commission believes it is appropriate that
an exchange may process spread exemptions only if it has at least one
year of experience overseeing exchange-set position limits in an
actively traded referenced contract that is in the same commodity as
that of at least one component of the spread. The Commission believes
that an exchange may not be familiar enough with the specific needs and
differing practices of the participants in those markets for which an
individual exchange does not list any actively traded referenced
contract in a particular commodity. If a component of a spread is not
actively traded on an exchange that elects to process spread exemption
applications, such exchange might not be incentivized to protect or
manage the relevant commodity market, and the interests of such
exchange might not be aligned with the policy objectives of the
Commission as expressed in CEA section 4a(a)(3)(B). The Commission
expects that an individual exchange will describe how it will determine
whether a particular component of a spread is actively traded in its
rule submission, based on its familiarity with the specific needs and
differing practices of the participants in the relevant market.
—————————————————————————
178 See note 63, regarding Commission authority to recognize
spreads under CEA section 4a(a)(1). Any action of the exchange to
recognize a spread, pursuant to rules filed with the Commission,
would be subject to review and revocation by the Commission.
—————————————————————————
[[Page 38478]]
Consistent with the restrictions regarding the offset of risks
arising from a swap position in CEA section 4a(c)(2)(B), proposed Sec.
150.10(a)(1) would not permit an exchange to recognize a spread between
a commodity index contract and one or more referenced contracts. That
is, an exchange may not grant a spread exemption where a bona fide
hedge position could not be recognized for a pass through swap offset
of a commodity index contract.179
—————————————————————————
179 This proposal is consistent with the Commission’s
interpretation in the December 2013 position limits proposal that
CEA section 4a(c)(2)(b) is a mandate from Congress to narrow the
scope of what constitutes a bona fide hedge in the context of index
trading activities. “Financial products are not substitutes for
positions taken or to be taken in a physical marketing channel.
Thus, the offset of financial risks from financial products is
inconsistent with the proposed definition of bona fide hedging for
physical commodities.” December 2013 position limits proposal, 78
FR at 75740. See also the discussion of the temporary substitute
test, id. at 75708-9.
—————————————————————————
The Commission notes that for inter-commodity spreads in which
different components of the spread are traded on different exchanges,
the exemption granted by one exchange would be recognized by the
Commission as an exemption from federal limits for the applicable
referenced contract(s), but would not bind the exchange(s) that list
the other components of the spread to recognize the exemption for
purposes of that other exchange(s)’ position limits. In such cases, a
trader seeking such inter-commodity spread exemptions would need to
apply separately for a spread exemption from each exchange-set position
limit.
Proposed Sec. 150.10(a)(2) specifies the type of spreads that an
exchange may exempt from position limits, including calendar spreads;
quality differential spreads; processing spreads (such as energy
“crack” or soybean “crush” spreads); and product or by-product
differential spreads. This list is not exhaustive, but reflects common
types of spread activity that may enhance liquidity in commodity
derivative markets, thereby facilitating the ability of bona-fide
hedgers to put on and offset positions in those markets. For example,
trading activity in many commodity derivative markets is concentrated
in the nearby contract month, but a hedger may need to offset risk in
deferred months where derivative trading activity may be less active. A
calendar spread trader could provide such liquidity without exposing
himself or herself to the price risk inherent in an outright position
in a deferred month. Processing spreads can serve a similar function.
For example, a soybean processor may seek to hedge his or her
processing costs by entering into a “crush” spread, i.e., going long
soybeans and short soybean meal and oil. A speculator could facilitate
the hedger’s ability to do such a transaction by entering into a
“reverse crush” spread (i.e., going short soybeans and long soybean
meal and oil). Quality differential spreads, and product or by-product
differential spreads, may serve similar liquidity-enhancing functions
when spreading a position in an actively traded commodity derivatives
market such as CBOT Wheat against a position in another actively traded
market, such as MGEX Wheat.
The Commission anticipates that a spread exemption request might
include spreads that are “legged in,” that is, carried out in two
steps, or alternatively are “combination trades,” that is, all
components of the spread are executed simultaneously.
This proposal would not limit the granting of spread exemptions to
positions outside the spot month, unlike the existing spread exemption
provisions in current Sec. 150.3(a)(3), or in Sec. 150.5(a)(2)(ii) as
proposed in the December 2013 position limits proposal. The proposal
herein responds to specific requests of commenters to permit spread
exemptions in the spot month. For example, the CME recommended “the
Commission reaffirm in DCMs the discretion to apply their knowledge of
individual commodity markets and their judgement, as to whether
allowing intermarket spread exemptions in the spot month for physical-
delivery contracts is appropriate.” 180
—————————————————————————
180 See CL-CME-59718 at 71.
—————————————————————————
The Commission proposes to revise the December 2013 position limits
proposal in the manner described above because, as noted in the
examples above, permitting spread exemptions in the spot month would
further one of the four policy objectives set forth in section
4a(a)(3)(b) of the Act: To ensure sufficient market liquidity for bona
fide hedgers.181 This policy objective is incorporated into the
proposal in its requirements that: (i) The applicant provide detailed
information demonstrating why the spread position should be exempted
from position limits, including how the exemption would further the
purposes of CEA section 4a(a)(3)(B); 182 and (ii) the exchange
determines whether the spread position (for which a market participant
was seeking an exemption) would further the purposes of CEA section
4a(a)(3)(B).183 Moreover, the Commission retains the ability to
review the exchange rules as well as to review how an exchange enforces
those rules.184
—————————————————————————
181 CEA section 4a(a)(3)(B)(iii); 7 U.S.C. 6a(a)(3)(B)(iii).
See also the discussion of proposed Sec. 150.10(a)(3)(ii), below.
182 See proposed Sec. 150.10(a)(3)(ii).
183 See proposed Sec. 150.10(a)(4)(vi).
184 The Commission could, for example, revoke or confirm
exchange-granted exemptions.
—————————————————————————
The Commission, however, remains concerned, among other things,
about protecting the price discovery process in the core referenced
futures contracts, particularly as those contracts approach expiration.
Accordingly, as an alternative, the Commission is also considering
whether to prohibit an exchange from granting spread exemptions that
would be applicable during the lesser of the last five days of trading
or the time period for the spot month.
RFC 20: Are there concerns regarding the applicability of spread
exemptions in the spot month that the Commission should consider?
Should the Commission, parallel to the requirements of current Sec.
1.3(z)(2), provide that such spread positions not be exempted during
the lesser of the last five days of trading or the time period for the
spot month? 185
—————————————————————————
185 See also supra notes 56 and 132 and accompanying text.
—————————————————————————
RFC 21: If the Commission permits exchanges to grant spread
positions applicable in the spot month, should recognition of NEBFH
positions be conditioned upon additional filings similar to the
proposed Form 504 that is required for the proposed conditional spot
month limit exemption? 186 Proposed Form 504 would require additional
information on the market participant’s cash market holdings for each
day of the spot month period. Under this alternative, market
participants would submit daily cash position information to an
exchange in a format determined by the exchange, which would then be
required to forward that information to the Commission in a process
similar to that proposed under Sec. 150.10(c)(2).
—————————————————————————
186 The conditional spot month limit exemption and the related
Form 504 were discussed in the December 2013 position limits
proposal (78 FR 75680 at 75736-8). A copy of the proposed form was
submitted to the Federal Register (id. at 75803-8) to ensure the
public had the opportunity to comment on the information required by
the proposed form. The Commission estimated the number of market
participants that would be required to file the form in the December
2013 position limits proposal (id. at 75783). Commenters are
encouraged to review and comment on proposed Form 504 in the context
of this current proposal.
—————————————————————————
RFC 22: Alternatively, if the Commission permits exchanges to grant
[[Page 38479]]
spread exemptions applicable in the spot month, should the Commission
require market participants to file proposed Form 504 with the
Commission? Under this alternative, the relevant cash market
information would be submitted directly to the Commission, eliminating
the need for the exchange to intermediate. The Commission would adjust
the title of proposed Form 504 to clarify that the form would be used
for all daily spot month cash position reporting purposes, not just the
proposed requirements of the conditional spot month limit exemption in
proposed Sec. 150.3(c).
Proposed 150.10(a)(3) sets forth a core set of information and
materials that all applicants must submit to enable an exchange to
determine, and the Commission to verify, whether the facts and
circumstances attendant to a position further the policy objectives of
CEA section 4a(a)(3)(B). In particular, the applicant must demonstrate,
and the exchange must determine, that exempting the spread position
from position limits would, to the maximum extent practicable, ensure
sufficient market liquidity for bona fide hedgers, but not unduly
reduce the effectiveness of position limits to diminish, eliminate or
prevent excessive speculation; deter and prevent market manipulation,
squeezes, and corners; and ensure that the price discovery function of
the underlying market is not disrupted.187
—————————————————————————
187 See also infra note 192 and accompanying text (describing
the DCM’s responsibility under its application process to make this
determination in a timely manner).
—————————————————————————
One DCM, ICE Futures U.S., currently grants certain types of spread
exemptions that the Commission is concerned may not be consistent with
these policy objectives.188 ICE Futures U.S. allows “cash-and-
carry” spread exemptions to exchange-set limits, which permit a market
participant to hold a long position greater than the speculative limit
in the spot month and an equivalent short position in the following
month in order to guarantee a return that, at minimum, covers its
carrying charges, i.e., the cost of financing, insuring, and storing
the physical inventory until the next expiration.189 Market
participants are able to take physical delivery in the nearby month and
redeliver the same product in a deferred month, often at a profit. The
Commission notes that while market participants are permitted to re-
deliver the physical commodity, they are under no obligation to do so.
—————————————————————————
188 See ICE Futures U.S. Rule 6.29(e).
189 Carrying charges include insurance, storage fees, and
financing costs, as well as other costs such as aging discounts that
are specific to individual commodities. The ICE Futures U.S. rules
require an applicant to provide: (i) Its cost of carry; (ii) the
minimum spread at which the applicant will enter into a straddle
position and which would result in an profit for the applicant; and
(iii) the quantity of stocks in exchange-licensed warehouses that it
already owns. The applicant’s entire long position carried into the
notice period must have been put on as a spread at a differential
that covers the applicant’s cost of carry. See Rule Enforcement
Review of ICE Futures U.S., July 22, 2014 (“ICE Futures U.S. Rule
Enforcement Review”), at 44-45, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf.
—————————————————————————
ICE Futures U.S.’s rules condition the cash-and-carry spread
exemption upon the applicant’s agreement that “before the price of the
nearby contract month rises to a premium to the second (2nd) contract
month, it will liquidate all long positions in the nearby contract
month.” 190 The Commission understands that ICE Futures U.S.
requires traders to provide information about their expected cost of
carry, which is used by the exchange to determine the levels by which
the trader has to reduce the position. Those exit points are then
communicated to the applicant when the exchange responds to the
trader’s hedge exemption request.
—————————————————————————
190 ICE Futures U.S. Rule 6.29(e) (at the time of the target
period of the ICE Futures U.S. Rule Enforcement Review (June 15,
2011 to June 15, 2012), the cash-and-carry provision currently found
in ICE Futures U.S. Rule 6.29(e) was found in ICE Futures U.S. Rule
6.27(e)). Further, under the exchange’s rules, additional conditions
may also apply.
—————————————————————————
The Commission is considering whether to impose on the exchange a
requirement to ensure exit points in cash-and-carry spread exemptions
are appropriate to facilitate an orderly liquidation in the expiring
futures contract. The Commission is concerned that a large demand for
delivery on cash and carry positions may distort the price of the
expiring futures price upwards. This may particularly be a concern in
those commodity markets where the cash spot price is discovered in the
expiring futures contract.
In a recent Rule Enforcement Review, ICE Futures U.S. opined that
such exemptions are “beneficial for the market, particularly when
there are plentiful warehouse stocks, which typically is the only time
when the opportunity exists to utilize the exemption,” maintaining
that the exchange’s rules and procedures are effective in ensuring
orderly liquidations.191 The Commission remains concerned, however,
about these exemptions and their impact on the spot month price. The
Commission is still reviewing the effectiveness of the exchange’s cash-
and-carry spread exemptions and the procedure by which they are
granted.
—————————————————————————
191 ICE Futures U.S. Rule Enforcement Review, at 45.
—————————————————————————
As an alternative to providing exchanges with discretion to
consider granting cash-and-carry spread exemptions, the Commission is
considering prohibiting cash-and-carry spread exemptions to position
limits. In this regard, the Commission does not grant such exemptions
to current federal position limits. As another alternative, the
Commission is considering permitting exchanges to grant cash-and-carry
spread exemptions, but would require suitable safeguards be placed on
such exemptions. For example, the Commission could require cash-and-
carry spread exemptions be conditioned on a market participant reducing
positions below speculative limit levels in a timely manner once
current market prices no longer permit entry into a full carry
transaction, rather than the less stringent condition of ICE Futures
U.S. that a trader reduce positions “before the price of the nearby
contract month rises to a premium to the second (2nd) contract month.”
RFC 23: Do cash-and-carry spread exemptions further the policy
objectives of the Act, as outlined in proposed Sec. 150.10(a)(3)? Why
or why not? Do cash and carry spread exemptions facilitate an orderly
liquidation? Do these exemptions impede convergence or distort the
price of the expiring futures contract?
RFC 24: If cash-and-carry spread exemptions are allowed, what
conditions should be placed on the exemptions? For example, on what
basis should a trader be required to exit futures positions above
position limit levels? Should such exemptions be conditioned, for
example, to require a market participant to reduce the positions below
speculative limit levels in a timely manner once current market prices
no longer permit entry into a full carry transaction? Are there other
types of spread exemptions that may not further the policy objectives
of CEA section 4a and, thus, should be prohibited or conditioned?
RFC 25: With cash-and-carry spread exemptions still under review by
the Commission, should the proposed rules allow such exemptions to be
granted under proposed Sec. 150.10? Why or why not?
RFC 26: If the proposed rules do not prohibit such exemptions, an
exchange could determine that cash-and-carry spread exemptions–or
another type of spread exemption–further the policy objectives in
proposed Sec. 150.10(a)(3) and so begin to grant such exemptions from
federal position limits. If, after finishing its review, the Commission
[[Page 38480]]
disagrees with the exchange’s determination, is the proposed process in
Sec. 150.10(d) for reviewing exemptions sufficient to address any
concerns raised?
Under the proposal, an exchange’s rules would require an applicant
to submit to the exchange a core set of information and materials that
would include, at a minimum: (i) A description of the spread position
for which the application is submitted, including details on all
components of the spread; (ii) detailed information to demonstrate why
the spread position should be exempted from position limits, including
how the exemption would further the purposes of CEA section
4a(a)(3)(B); and (iii) a statement concerning the maximum size of all
gross positions in derivative contracts to be acquired by the applicant
during the year after the application is submitted. Further, an
exchange would not be permitted to grant a spread exemption request
that would be contrary to the requirements for a pass-through swap
offset position in CEA section 4a(c)(2)(B), which the Commission
interprets to preclude spread exemptions for a swap position that was
executed opposite a counterparty for which the transaction would not
qualify as a bona fide hedging transaction. The requirement that an
applicant specify a maximum size of all gross positions to be acquired
will enable an exchange to more effectively set a cap on a market
participant’s spread position. Such a cap could reasonably take into
account the specific liquidity needs of the marketplace and the ability
of the spread position to be put on and offset in an orderly fashion
and without causing market disruptions. The Commission expects that an
exchange would be particularly attentive to the size of any component
of a spread position it permits to be held in the spot month in light
of its obligation to consider, in granting such spread exemptions, the
goals of deterring and preventing market manipulation, squeezes, and
corners.
RFC 27: Does the application process solicit sufficient information
for an exchange to consider whether a spread exemption would, to the
maximum extent practicable, further the policy objectives of CEA
section 4a(a)(3)(B)? For example, how would an exchange determine
whether an applicant for a spread exemption may provide liquidity, such
that the goal of ensuring sufficient market liquidity for bona-fide
hedgers would be furthered by the spread exemption?
RFC 28: How would exchanges oversee or monitor exemptions that have
been granted, and, if the exchange determines it necessary, revoke the
exemption?
Proposed Sec. 150.10(a)(4) sets forth certain timing requirements
that an exchange must include in its rules for the spread application
process. While these timing requirements are similar to those under
proposed Sec. 150.9(a)(4),192 the exchange under proposed Sec.
150.10(a)(4) must also determine in a timely manner whether the facts
and circumstances attendant to a position further the policy objectives
of CEA section 4a(a)(3)(B).193 Finally, the spread exemption
application processes proposed in Sec. 150.10(a)(5), (6), (7), and (8)
are all substantially similar to those proposed under Sec.
150.9(a)(5), (6), (7), and (8).
—————————————————————————
192 For example, proposed 150.9(a)(4) provides that: (i) A
person intending to rely on a exchange’s exemption from position
limits would be required to submit an application in advance and to
reapply at least on an annual basis; (ii) the exchange would be
required to notify an applicant in a timely manner whether the
position was exempted, and reasons for any rejection; and (iii) the
exchange would be able to revoke, at any time, any recognition
previously issued pursuant to proposed Sec. 150.9 if the exchange
determined the recognition was no longer in accord with section
4a(c) of the Act.
193 See supra note 171 and accompanying text.
—————————————————————————
ii. Recordkeeping and Reporting Requirements, and Review of
Applications and Summaries by Commission
The proposed processes under Sec. 150.10(b) Recordkeeping, Sec.
150.10(c) Reports to the Commission; Sec. 150.10(d) Review of
Applications by the Commission; Sec. 150.10(e) Review of Summaries by
the Commission; and Sec. 150.10(f) Delegation of Authority to the
Director of the Division of Market Oversight are substantially similar
to the corresponding provisions in Sec. 150.9(b) through (f), as
described above.194 Hence, the Commission does not repeat the
discussion here.
—————————————————————————
194 See the discussion of the NEBFH application process in
Sections II(C)(3)(ii)-(v) of the Supplementary Information above.
—————————————————————————
RFC 29: Is it appropriate to have the same processes under Sec.
150.10(b) through (f) for spread exemptions as proposed for NEBFHs
outlined under Sec. 150.09(b) through (f)? If no, explain why and how
those processes should differ.
F. Recognition of Positions as Enumerated Anticipatory Bona Fide Hedges
1. Background
In the December 2013 position limits proposal, the Commission
proposed Sec. 150.7, requirements for anticipatory bona fide hedging
position exemptions,195 to replace current Sec. 1.48,196 which
provides requirements for classification of certain anticipatory bona
fide hedge positions under current Sec. 1.3(z)(2) (i)(B) or (ii)(C) of
the Commission’s regulations. As proposed in the December 2013 position
limits proposal, Sec. 150.7 would require market participants to file
statements with the Commission regarding certain anticipatory hedges,
which would become effective absent Commission action or inquiry ten
days after submission.197 The Commission now proposes to supplement
the process proposed in the December 2013 position limits proposal by
allowing exchanges, as an alternative, to review requests for
recognition of such enumerated anticipatory bona fide hedging
exemptions pursuant to exchange rules submitted to the Commission.
—————————————————————————
195 As proposed in the December 2013 position limits proposal,
Sec. 150.7 provides a process for recognition as bona fide hedge
positions for: Unfilled anticipated requirements, unsold anticipated
production, anticipated royalties, anticipated service contract
payments or receipts, or anticipatory cross-commodity hedges under
the provisions of paragraphs (3)(iii), (4)(i), (4)(iii), 4(iv) or
(5), respectively, of the definition of bona fide hedging position
in Sec. 150.1. These types of anticipatory positions do not
implicate commodity index contracts, in contrast to the positions
discussed in notes 134 and 180 and the accompanying text.
196 17 CFR 1.48 (providing a process for persons to
demonstrate NEBFH falls within the scope of Sec. 1.3(z)(1)). As
noted in the December 2013 position limits proposal, “On September
28, 2012, the District Court for the District of Columbia vacated
the part 151 Rulemaking with the exception of the amendments to
Sec. 150.2. 887 F. Supp. 2d 259 (D.D.C. 2012). Vacating the part
151 Rulemaking, with the exception of the amendments to Sec. 150.2,
means that as things stand now, it is as if the Commission had never
adopted any part of the part 151 Rulemaking other than the
amendments to Sec. 150.2.” December 2013 position limits proposal,
78 FR at 75740, note 478.
Current Sec. 1.48 can be found at https://www.gpo.gov/fdsys/browse/collectionCfr.action?collectionCode=CFR&searchPath=Title+17%2FChapter+I%2FPart+1%2FSubjgrp&oldPath=Title+17%2FChapter+I%2FPart+1&isCollapsed=true&selectedYearFrom=2010&ycord=594.
197 See December 2013 position limits proposal, 78 FR at
75746.
—————————————————————————
In response to the December 2013 position limits proposal, the
Commission has received comments that suggested that the exchanges
would be better equipped to recognize non-enumerated hedge positions
and anticipatory hedging positions.
For example, one commenter noted that the exchanges have a long
history of enforcing position limits and are in a much better position
than the Commission to judge the applicant’s hedging needs and to set
an appropriate level for the hedge.198 According to another
commenter, providing the
[[Page 38481]]
exchanges with the ability to grant hedge exemptions for federal limits
in conjunction with the grant of an exchange hedge exemption would
create consistency and efficiency, and take advantage of the expertise
gained by exchanges in granting hedge exemptions from position limits
over many years.199 A third asserted that the proposed requirement to
file Form 704 is “unduly burdensome and commercially impracticable,”
and requests that the Commission “allow the exchanges to continue to
grant annual hedge exemptions, which do not include onerous reporting
requirements.” 200 A fourth commenter requested that the Commission
consider incorporating the proposed position limits regime into the
existing framework managed by the exchanges, stating that market
participants and exchanges alike are comfortable and have a unique
familiarity with the current futures-exchange-set position limits and
aggregation processes, and have developed an effective working
relationship.201 This commenter also stated its belief that the
current framework regarding hedge exemptions provides commercial market
participants with the efficacy and the timeliness needed to ensure they
are able to hedge their risks.202
—————————————————————————
198 CL-AGA-60382 at 13.
199 PAAP on February 10, 2014 (“CL-PAAP-59664”) at 3.
200 BG Energy on February 10, 2014 (“CL-BG Energy-59656”) at
11.
201 EDF Trading on March 30, 2015 (“CL-EDF-60398”) at 3-4.
202 CL-EDF-60398 at 5.
—————————————————————————
2. Enumerated Anticipatory Bona Fide Hedge Exemption Proposal
While the Commission continues to consider comments regarding
proposed Sec. 150.7, it is expected that a number of anticipatory bona
fide hedging positions will be enumerated in the final rule, as
proposed.203 In this current proposal, the Commission proposes that
exchanges, pursuant to exchange rules submitted to the Commission,
could review requests for recognition of such enumerated anticipatory
bona fide hedging exemptions, as an alternative to the process set
forth in the December 2013 position limits proposal that required
market participants to file a statement with the Commission.204
Similar to the current DCM rule framework and application process noted
above for the recognition of NEBFH positions for purposes of exchange
limits, most, if not all, DCMs already have some sort of framework and
application process allowing market participants to request exemptions
from exchange position limits for anticipatory bona fide hedge
positions.
—————————————————————————
203 As noted above, the December 2013 position limits proposal
provided a process, under Sec. 150.7, for recognition as bona fide
hedging positions for unfilled anticipated requirements, unsold
anticipated production, anticipated royalties, anticipated service
contract payments or receipts, or anticipatory cross-commodity
hedges under the provisions of paragraphs (3)(iii), (4)(i),
(4)(iii), 4(iv) or (5), respectively, of the definition of bona fide
hedging position in Sec. 150.1. See supra note 196 and accompanying
text.
204 See December 2013 position limits proposal, 78 FR at
75746.
—————————————————————————
Proposed Sec. 150.11 would permit exchanges to recognize certain
anticipatory bona fide hedge positions, such as unfilled anticipated
requirements, unsold anticipated production, anticipated royalties,
anticipated service contract payments or receipts, or anticipatory
cross-commodity hedges. Under proposed Sec. 150.11, market
participants could continue to work with exchanges to request the
exemption. In addition, proposed Sec. 150.11 would allow exchanges to
adopt a shorter timeline for processing the exemption applications than
under Sec. 150.7 as proposed in the December 2013 position limits
proposal. Under proposed Sec. 150.11, an exchange could potentially
recognize a position as a bona fide hedge in fewer than ten days after
filing. In contrast, Sec. 150.7 as proposed in the December 2013
position limits proposal, would provide the Commission with a full ten
days after receipt of a filing to reject the position as a bona fide
hedge before a filing would become effective.
The process under proposed Sec. 150.11(a) is like the process
under proposed Sec. 150.9(a) described above. For example, an exchange
with at least one year of experience and expertise administering
position limits could elect to adopt rules to recognize commodity
derivative positions as enumerated anticipatory bona fide hedges.
However, it is different from the process under proposed Sec. 150.9(a)
in that the Commission does not propose to permit separate processes
for applications based on novel versus non-novel facts and
circumstances. The Commission determined to define certain anticipatory
positions as enumerated bona fide hedges when it adopted current Sec.
1.3(z)(2). The December 2013 position limits proposal does not change
this determination. Consequently, the Commission does not anticipate
that applications for recognition of enumerated anticipatory bona fide
hedge positions would be based on novel facts and circumstances. For
the same reason, proposed Sec. 150.11(a) does not require exchanges to
post summaries of any enumerated anticipatory bona fide hedge
positions. Other simplifications follow from this difference.
In addition, the application process established by exchanges under
proposed Sec. 150.11(a) addresses the information exchanges should
elicit in the application process by citing to the information required
under Sec. 150.7(d) as proposed in the December 2013 position limits
proposal. Moreover, the reporting requirements for applicants under
proposed Sec. 150.11(a)(5) differ from the reporting requirements
under proposed Sec. 150.9(a)(6). Under proposed Sec. 150.11(a)(5),
applicants would be required to file a report with the Commission
pursuant to Sec. 150.7 as proposed in the December 2013 position
limits proposal and a copy with the exchange. Proposed Sec.
150.9(a)(6), on the other hand, requires the applicant to file reports
with the exchange recognizing the position, and additionally requires
under proposed Sec. 150.9(c)(2) that the exchange would provide such
information to the Commission on a monthly basis.
RFC 30: The Commission requests comments on all aspects of proposed
Sec. 150.11, including whether the Commission should consider any
other factors in addition to those listed in proposed Sec.
150.11(a)(1)(i), (ii), (iii), (iv) and (v).
Finally, in order to correct some errors, the Commission is
proposing technical edits to Sec. 150.7 as it was proposed in the
December 2013 position limits proposal. The reference to paragraph (f)
in the last sentence in Sec. 150.7(b) as proposed in the December 2013
position limits proposal should instead be a reference to paragraph
(h). And the introductory language to Sec. 150.7(h) as proposed in the
December 2013 position limits proposal, “Sales or purchases of
commodity derivative contracts considered to be bona fide hedging
positions under paragraphs 3(iii)(A) or 4(i) of the bona fide hedging
position definition in Sec. 150.1 . . .” should instead read as “. .
. under paragraphs 3(iii)(A), 4(i), 4(iii) or 4(iv) of the bona fide
hedging position definition in Sec. 150.1, or any cross-commodity
hedges thereof, . . . .”
G. Delegation of Authority
The Commission proposes to delegate certain of its authorities
under proposed Sec. 150.9, Sec. 150.10 and Sec. 150.11 to the
Director of the Commission’s Division of Market Oversight, or such
other employee or employees as the Director may designate from time to
time. Proposed Sec. 150.9(f)(1)(ii), Sec. 150.10(f)(1)(ii) and Sec.
150.11(e)(1)(ii)
[[Page 38482]]
would delegate the Commission’s authority to the Division of Market
Oversight (“DMO”) to provide instructions regarding the submission of
information required to be reported to the Commission by an exchange,
and to specify the manner and determine the format, coding structure,
and electronic data transmission procedures for submitting such
information. Proposed Sec. 150.9(f)(1)(v) and Sec. 150.10(f)(1)(v)
would delegate the Commission’s review authority under proposed Sec.
150.9(e) and Sec. 150.10(e), respectively, to DMO with respect to
summaries of types of recognized non-enumerated bona fide hedges, and
types of spread exemptions, that are required to be posted on an
exchange’s Web site pursuant to proposed Sec. 150.9(a)(7) and Sec.
150.10(a)(7), respectively.
Proposed Sec. 150.9(f)(1)(i), Sec. 150.10(f)(1)(i) and Sec.
150.11(e)(1)(i) would delegate the Commission’s authority to DMO to
agree to or reject a request by an exchange to consider an application
for recognition of an NEBFH or enumerated anticipatory bona fide hedge,
or an application for a spread exemption. Proposed Sec.
150.9(f)(1)(iii), Sec. 150.10(f)(1)(iii) and Sec. 150.11(e)(1)(iii)
would delegate the Commission’s authority to review any application for
recognition of an NEBFH or enumerated anticipatory bona fide hedge, or
application for a spread exemption, and all records required to be
maintained by an exchange in connection with such application. Proposed
Sec. 150.9(f)(1)(iii), Sec. 150.10(f)(1)(iii) and Sec.
150.11(e)(1)(iii) would also delegate the Commission’s authority to
request such records, and to request additional information in
connection with such application from the exchange or from the
applicant.
Proposed Sec. 150.9(f)(1)(iv) and Sec. 150.10(f)(1)(iv) would
delegate the Commission’s authority, under proposed Sec. 150.9(d)(2)
and Sec. 150.10(d)(2), respectively, to determine that an application
for recognition of an NEBFH, or an application for a spread exemption,
requires additional analysis or review, and to provide notice to the
exchange and the particular applicant that they have 10 days to
supplement such application.
The Commission does not propose to delegate its authority under
proposed Sec. 150.9(d)(3) or Sec. 150.10(d)(3) to make a final
determination as to the exchange’s disposition. The Commission believes
that if an exchange’s disposition raises concerns regarding consistency
with the Act or presents novel or complex issues, then the Commission
should make the final determination, after taking into consideration
any supplemental information provided by the exchange or the applicant.
However, the Commission proposes, in Sec. 150.11(e)(iv), to
delegate its authority to determine, under proposed Sec. 150.11(d)(2),
that it is not appropriate to recognize a commodity derivative position
as an enumerated anticipatory bona fide hedge, or that the disposition
by an exchange of an application for such recognition is inconsistent
with the filing requirements of proposed Sec. 150.11(a)(2). The
delegation would also provide DMO with the authority, after any such
determination was made, to grant the applicant a reasonable amount of
time to liquidate its commodity derivative position or otherwise come
into compliance. This proposed combined delegation takes into account
that applications processed by an exchange under proposed Sec. 150.11
would be for positions that should satisfy the requirements for
enumerated hedges set forth in the Commission’s rules, and should
therefore be less likely to raise novel issues of interpretation, or
novel issues with respect to consistency with the filing requirements
of proposed Sec. 150.11(a)(2), than applications processed under
proposed Sec. 150.9 or Sec. 150.10. Such delegation is consistent
with the Commission’s longstanding delegation to DMO of its authority
to review applications for recognition of enumerated bona fide hedges
under current Sec. 1.48, as well as consistent with the more
streamlined approach to Commission review of enumerated anticipatory
bona fide hedge applications in proposed Sec. 150.7.
RFC 31: The Commission invites comments on its proposed delegation
of authority in Sec. 150.11(e)(iv), and on all other aspects of its
proposed delegation of authority in Sec. 150.9(f), Sec. 150.10(f) and
Sec. 150.11(e).
H. Related Changes to Sec. 150.3 and Sec. 150.5–Exemptions and
Exchange-Set Speculative Position Limits
In the December 2013 position limits proposal, the Commission
proposed to replace both current Sec. 150.3, which establishes
exemptions from federal position limits, and current Sec. 150.5(a),
which provides guidance to DCMs for exchange-set position limits. The
changes to Sec. 150.3 as proposed in the December 2013 position limits
proposal would have provided for recognition of enumerated bona fide
hedge positions, but would not have exempted any spread positions from
federal limits. For any commodity derivative contracts subject to
federal position limits, Sec. 150.5(a)(2) as proposed in the December
2013 position limits proposal would have established requirements under
which exchanges could recognize exemptions from exchange-set position
limits, including hedge exemptions and spread exemptions. Because the
Commission is now proposing to permit exchanges to recognize NEBFH
positions under proposed Sec. 150.9, to grant spread exemptions from
federal limits under proposed Sec. 150.10, and to recognize certain
enumerated anticipatory bona fide hedge positions under proposed Sec.
150.11, the Commission proposes corresponding changes to Sec. 150.3
205 and Sec. 150.5(a)(2).
—————————————————————————
205 As noted above, in the regulatory text below where the
CFTC sets out the proposed changes to the CFR, the Commission has
designated certain appendices and subsections, such as appendices
(A) through (D), Sec. 150.3(a)(ii),Sec. 150.3(a)(iii), and Sec.
150.5(a)(3) through (6), among others, as “[Reserved].” For the
avoidance of doubt, the Commission is still reviewing comments
received on such reserved provisions and does not seek further
comment on such reserved provisions. See supra preamble Section II.
—————————————————————————
Further, in the December 2013 position limits proposal, the
Commission proposed Sec. 150.5(b) to establish requirements and
acceptable practices for commodity derivative contracts not subject to
federal position limits. The Commission now proposes to revise Sec.
150.5(b)(5) as proposed in the December 2013 position limits proposal
to permit exchanges to recognize NEBFHs, as well as spreads, to conform
to the instant proposal. The Commission notes that it is no longer
proposing to prohibit recognizing spreads during the spot month,
although such exemptions would not have been permitted under Sec. Sec.
150.5(a)(2) or (b)(5) as proposed in the December 2013 position limits
proposal. Instead, this current proposal would, in part, maintain the
status quo: Exchanges that currently recognize spreads in the spot
month under current Sec. 150.5(a) will be able to continue to do
so.206 However, exchanges would be responsible for determining
whether recognizing spreads, including spreads in the spot month, would
further the policy objectives in section 4a(3) of the Act.
—————————————————————————
206 Under current Sec. 150.5(a), a DCM may exempt from
exchange-set speculative position limits any position normally known
to the trade as a spread, straddle, or arbitrage position.
—————————————————————————
I. Changes to the Definitions of Futures-Equivalent, Intermarket Spread
Position, and Intramarket Spread Position
1. Changes to the Definition of “Futures-Equivalent”
In the December 2013 position limits proposal, the Commission
proposed to broaden the definition of the term “futures-equivalent”
found in current Sec. 150.1(f) of the Commission’s
[[Page 38483]]
regulations,207 and to expand upon clarifications included in the
current definition relating to adjustments and computation times.208
The Dodd-Frank Act amendments to CEA section 4a,209 in part, direct
the Commission to apply aggregate federal position limits to physical
commodity futures contracts and to swaps contracts that are
economically equivalent to such physical commodity futures contracts on
which the Commission has established limits. In order to aggregate
positions in futures, options and swaps contracts, it is necessary to
adjust the position sizes, since such contracts may have varying units
of trading (e.g., the amount of a commodity underlying a particular
swap contract could be larger than the amount of a commodity underlying
a core referenced futures contract). The Commission proposed to adjust
position sizes to an equivalent position based on the size of the unit
of trading of the core referenced futures contract. The December 2013
position limits proposal would extend the current definition of
“futures equivalent” in current Sec. 150.1(f), that is applicable
only to an option contract, to both options and swaps.
—————————————————————————
207 17 CFR 150.1(f) currently defines “futures-equivalent”
only for an option contract, adjusting the open position in options
by the previous day’s risk factor, as calculated at the close of
trading by the exchange.
208 The December 2013 position limits proposal defines
“futures-equivalent” for: (1) An option contact, adjusting the
position size by an economically reasonable and analytically
supported risk factor, computed as of the previous day’s close or
the current day’s close or contemporaneously during the trading day;
and (2) a swap, converting the position size to an economically
equivalent amount of an open position in a core referenced futures
contract. See December 2013 position limits proposal, 78 FR at
75698-9.
209 Amendments to CEA section 4a(1) authorize the Commission
to extend position limits beyond futures and option contracts to
swaps traded on an exchange and swaps not traded on an exchange that
perform or affect a significant price discovery function with
respect to regulated entities. 7 U.S.C. 6a(a)(1). In addition, under
new CEA sections 4a(a)(2) and 4a(a)(5), speculative position limits
apply to agricultural and exempt commodity swaps that are
“economically equivalent” to DCM futures and option contracts. 7
U.S.C. 6a(a)(2) and (5).
—————————————————————————
The Commission now proposes two further clarifications to the
definition of the term “futures-equivalent.” First, the Commission
proposes to address circumstances in which a referenced contract for
which futures equivalents must be calculated is itself a futures
contract. This may occur, for example, when the referenced contract is
a futures contract that is a mini-sized version of the core referenced
futures contract (e.g., the mini-corn and the corn futures
contracts).210 The Commission proposes to clarify in proposed Sec.
150.1 that the term “futures-equivalent” includes a futures contract
which has been converted to an economically equivalent amount of an
open position in a core referenced futures contract. This clarification
mirrors the expanded definition of “futures-equivalent” in the
December 2013 position limits proposal, as it would pertain to swaps.
—————————————————————————
210 Under current Sec. 150.2, for purposes of compliance with
federal position limits, positions in regular sized and mini-sized
contracts are aggregated. The Commission’s practice of aggregating
futures contracts, when a DCM lists for trading two or more futures
contracts with substantially identical terms, is to scale down a
position in the mini-sized contract, by multiplying the position in
the mini-sized contract by the ratio of the unit of trading in the
mini-sized contract to that of the regular sized contract. See
paragraph (b)(2)(D) of app. C to part 38 of the Commission’s
regulations for guidance regarding the contract size or trading unit
for a futures or futures option contract.
—————————————————————————
Second, the Commission proposes to clarify the definition of the
term “futures-equivalent” to provide that, for purposes of
calculating futures equivalents, an option contract must also be
converted to an economically equivalent amount of an open position in a
core referenced futures contract. This clarification addresses
situations, for example, where the unit of trading underlying an option
contract (that is, the notional quantity underlying an option contract)
may differ from the unit of trading underlying a core referenced
futures contract.211
—————————————————————————
211 For an example of a futures-equivalent conversion of a
swaption, see example 6, WTI swaptions, app. A to part 20 of the
Commission’s regulations.
—————————————————————————
These clarifications are consistent with the methodology the
Commission used to provide its analysis of unique persons over
percentages of the proposed position limit levels in the December 2013
position limits proposal.212
—————————————————————————
212 See Table 11 in the December 2013 position limits
proposal, 78 FR at 75731-3.
—————————————————————————
2. Changes to the Definitions of “Intermarket Spread Position” and
“Intramarket Spread Position”
In the December 2013 position limits proposal, the Commission
proposed to add to current Sec. 150.1 new definitions of the terms
“intermarket spread position” and “intramarket spread position.”
213 In connection with its proposal to permit exchanges to process
applications for exemptions from federal position limits for certain
spread positions, the Commission now proposes to expand the definitions
of these terms as proposed in the December 2013 position limits
proposal.
—————————————————————————
213 In the December 2013 position limits proposal, the
Commission proposed to define an “intermarket spread position” as
“a long position in a commodity derivative contract in a particular
commodity at a particular designated contract market or swap
execution facility and a short position in another commodity
derivative contract in that same commodity away from that particular
designated contract market or swap execution facility.” The
Commission also proposed to define an “intramarket spread
position” as “a long position in a commodity derivative contract
in a particular commodity and a short position in another commodity
contract in the same commodity on the same designated contract
market or swap execution facility.” See December 2013 position
limits proposal, 78 FR at 75699-700.
—————————————————————————
The Commission now proposes to define an “intermarket spread
position” to mean “a long (short) position in one or more commodity
derivative contracts in a particular commodity, or its products or its
by-products, at a particular designated contract market, and a short
(long) position in one or more commodity derivative contracts in that
same, or similar, commodity, or its products or its by-products, away
from that particular designated contract market.” Similarly, the
Commission now proposes to define an “intramarket spread position” to
mean “a long position in one or more commodity derivative contracts in
a particular commodity, or its products or its by-products, and a short
position in one or more commodity derivative contracts in the same, or
similar, commodity, or its products or its by-products, on the same
designated contract market.”
The expanded definitions that the Commission now proposes would
take into account that a market participant may take positions in
multiple commodity derivative contracts to establish an intermarket
spread position or an intramarket spread position. The expanded
definitions would also take into account that such spread positions may
be established by taking positions in derivative contracts in the same
commodity, in similar commodities, or in the products or by-products of
the same or similar commodities. By way of example, the expanded
definitions would include a short position in a crude oil derivative
contract and long positions in a gasoline derivative contract and a
diesel fuel derivative contract (collectively, a reverse crack spread).
RFC 32: The Commission invites comment on all aspects of its
proposed expanded definitions of “intermarket spread position” and
“intramarket spread position.”
III. Related Matters
A. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the
[[Page 38484]]
CEA or issuing certain orders. Section 15(a) further specifies that the
costs and benefits shall be evaluated in light of five broad areas of
market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the Section 15(a) factors.
In December 2013, the Commission proposed, among other things, to
establish speculative position limits for 28 contracts, to revise the
process recognizing certain market participant positions as bona fide
hedges, and to revise exemptions for spreads.214 The December 2013
position limits proposal invited the public to comment on the
Commission’s consideration of the costs and benefits of the proposals,
identify and assess any costs and benefits not discussed therein, as
well as, provide possible alternative proposals.
—————————————————————————
214 78 FR 75680-842.
—————————————————————————
As discussed in Sections I and II of this release, the Commission
now proposes: (a) To delay implementing the requirements of SEF core
principle 6(B) and DCM core principle 5(B) with respect to the setting
and monitoring of position limits for swaps; (b) to revise the process
for recognizing certain positions as non-enumerated bona fide hedges;
(c) to revise the process for exempting spreads, as well as expanding
the types of spreads that may be exempted from position limits; and (d)
to add a recognition process for enumerated anticipatory bona fide
hedges. This release, in large part, is a response to comments to the
December 2013 position limits proposal. As discussed earlier,
commenters urged the Commission to rely on the exchanges’ long-standing
experience in overseeing position limits, recognizing bona fide hedges,
and reviewing spreads.
This supplemental proposal adds new provisions to and otherwise
modifies some of the proposed rules identified and discussed in the
December 2013 position limits proposal. The baseline against which the
Commission considers the benefits and costs of this supplemental
proposal is the same as that employed in the December 2013 position
limits proposal: The statutory requirements of the CEA and the
Commission regulations now in effect–in particular the Commission’s
Part 150 regulations and rules 1.47 and 1.48.215
—————————————————————————
215 See chart listing current regulations, December 2013
position limits proposal at 75712.
—————————————————————————
1. Guidance for DCM Core Principle5(B), SEF Core Principle 6(B), and
Part 150
As explained in Section IIA above, the Commission received comments
in response to the December 2013 position limits proposal that most
exchanges do not have the ability to effectively monitor all swap
positions held by a market participant across exchanges. The Commission
now proposes to amend its guidance regarding DCM core principle 5(B)
and SEF core principle 6(B), and add Appendix E to Part 150. The
proposed amendments would have the effect of delaying the
implementation of exchanges’ obligation to adopt swap position limits
until there is sufficient access to swap position information regarding
market participants’ swap positions.
ii. Baseline
The baselines for these changes are DCM Core Principle 5, SEF Core
Principle 6, and Part 150.
iii. Benefits and Costs
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its discretionary actions with respect to rules
and orders. Though guidance, the Commission is also considering the
costs and benefits of changes to the proposed amendments to the
appendices to parts 37, 38, and 150 of the Commission’s regulations. As
discussed in Section IIA, the Commission appreciates that the proposed
amendments to guidance will delay implementation of exchanges’
obligation to monitor and enforce federal position limits for swaps. As
a result, this delay will likely confer benefits and will likely reduce
costs. For instance, exchanges and market participants will benefit
from not investing in technology and personnel to assess position
limits. Instead, both exchanges and market participants will be able to
allocate such resources to other functions, like surveillance and
product innovation, within the businesses. In terms of costs, the
Commission believes that there might be a cost to the market associated
with this delay because excessive positions cannot be monitored in
real-time by exchanges.216
—————————————————————————
216 As stated in Section IIA, the Commission foresees various
possibilities in remediating this current inability to monitor
position limits in real-time in the future.
—————————————————————————
iv. Request for Comment
RFC 33: The Commission requests comment on its consideration of the
benefits and costs associated with the proposed amendments to guidance.
Are there additional costs and benefits that the Commission should
consider? Has the Commission misidentified any costs or benefits?
Commenters are encouraged to include both quantitative and qualitative
assessments of benefits as well as data, or other information of
support for such assessments. Are there additional alternatives that
the Commission has not identified? If so, please describe these
additional alternatives and provide a discussion of the associated
qualitative and quantitative costs and benefits.
2. Section 150.1–Definitions
a. Bona Fide Hedging Position
i. Summary of Changes
As discussed earlier, the Commission proposed in December 2013 a
new definition of bona fide hedging position in proposed Sec. 150.1,
to replace the current definition in Sec. 1.3(z). The December 2013
position limits proposal proposed a general definition of bona fide
hedging position that contained two requirements for a bona fide
hedging position: An incidental test and an orderly trading
requirement.217 The Commission is now proposing the following changes
to proposed Sec. 150.1. First, the Commission is proposing to strike
the opening paragraph to the definition of bona fide hedging position
in proposed Sec. 150.1. By removing the opening paragraph, the
Commission has eliminated the incidental test and orderly trading
requirement from the general definition of bona fide hedging position.
Second, the Commission is proposing to add sub-part 150.1(2)(i)(D)(2)
to the definition of bona fide hedging position. The proposed addition
reiterates the Commission’s authority to permit exchanges to recognize
bona fide positions and those positions are subject to CEA section
4a(c) standards as well as Commission review.
—————————————————————————
217 See December 2013 Position Limits Proposal at 75706-7.
—————————————————————————
ii. Baseline
The baseline for this change is the definition for “bona fide
hedging transactions and positions for excluded commodities,” set
forth in current Sec. 1.3(z).218
—————————————————————————
218 17 CFR 1.3(z).
—————————————————————————
[[Page 38485]]
iii. Benefits and Costs
In the December 2013 position limits proposal, the Commission
discussed the benefits and costs associated with the proposed
amendments to the definition of bona fide hedging position.219 In
this proposal, the Commission proposes changes that were not discussed
in the December 2013 position limits proposal. The changes to the
definition of bona fide hedging position discussed herein provide
substantive benefits and costs.
—————————————————————————
219 December 2013 position limits proposal at 75761-64.
—————————————————————————
In terms of benefits, the Commission has made the definition of
bona fide hedging position conform more closely to the CEA’s statutory
language by eliminating the incidental test. As explained in Section
IIB3(ii), the Commission considers the incidental test superfluous
because the idea of commercial cash market activities is covered in the
economically appropriate test. Therefore, by discarding the incidental
test, market participants benefit from greater regulatory certainty and
less redundancy.
By deleting the orderly trading requirement from the definition of
bona fide hedging position, the Commission seeks to eliminate a source
of potential confusion for exchanges and market participants. The
Commission sets forth a definition that is consistent with the CEA.
More directly, CEA 4c(a)(5) separately states that intentional or
reckless disregard for orderly trading execution is unlawful. Thus,
market participants benefit from having a definition that lessens or
eliminates the confusion between having two different standards, that
is, an orderly-trading requirement and an intentional or reckless
disregard standard.
The addition of proposed sub-part 150.1(2)(i)(D)(2) to the
definition of bona fide hedging position represents a non-substantive
modification. The actual benefits and costs associated with this
proposed sub-part arise from recognitions under proposed Sec.
150.9(a).
iv. Request for Comment
RFC 34: The Commission requests comment on its consideration of the
benefits and costs associated with the proposed revisions to the
definition of “bona fide hedging position.” Are there additional
costs and benefits that the Commission should consider? Has the
Commission misidentified any costs or benefits? Commenters are
encouraged to include both quantitative and qualitative assessments of
benefits as well as data and other information of support for such
assessments.
RFC 35: Futures contracts function to hedge price risk because they
lock-in prices and quantities at designated points in time. Futures
contracts, thereby, create price certainty for market
participants.220 Thus, the Commission believes that bona fide hedging
positions need to ultimately result in hedging against some form of
price risk as discussed in Section IIB3(i), above. Is the Commission
reasonable in concluding that by eliminating the incidental test market
participants will benefit from regulatory certainty and reduced
compliance costs because they need only focus on price risk or other
risks that can be transformed into price risk?
—————————————————————————
220 Futures contracts and futures equivalents are tools by
which market participants can lock-in price risk. They are limited
in that regard. Other derivatives contracts, however, enable market
participants to hedge other types of risk, beyond price risks,
because contract terms and conditions can be tailored to the
specific risks.
—————————————————————————
RFC 36: It is challenging to interpret the orderly-trading
requirement in the context of the over-the-counter swaps market and
permitted off-exchange transactions as discussed in Section IIB3(ii),
above. Given this challenge, is it reasonable for the Commission to
conclude that by eliminating the orderly-trading requirement, market
participants benefit from avoiding the compliances costs of an unclear
requirement?
RFC 37: The Commission recognizes that there exist alternatives to
the proposed definition of “bona fide hedging position.” These
alternatives include: (i) Maintaining the status quo in current Sec.
1.3(z), or (ii) pursuing the changes in the December 2013 position
limits proposal.221 Are there additional alternatives that the
Commission has not identified? If so, please describe these additional
alternatives and provide a discussion of the associated qualitative and
quantitative costs and benefits.
—————————————————————————
221 The costs and benefits of these alternatives were
discussed in the December 2013 position limits proposal at 75761-64.
—————————————————————————
b. Futures Equivalent
i. Summary of Changes
In the December 2013 position limits proposal, the Commission
proposed to expand the definition of “futures-equivalent” from the
narrow scope of an option contract. The term “futures-equivalent,” as
proposed in the December 2013 position limits proposal, would include
certain options contracts and swaps, converted to economically
equivalent amounts. The Commission now proposes two further revisions
to the definition of “futures-equivalent.” First, the Commission
proposes to clarify that the term “futures-equivalent” includes a
futures contract which has been converted to an economically equivalent
amount of an open position in a core referenced futures contract.
Second, the Commission proposes to clarify that, for purposes of
calculating futures equivalents, an option contract must also be
converted into an economically-equivalent amount of an open position in
a core referenced futures contract.
ii. Baseline
The baseline for this change to the definition of “futures
equivalent” is the current Sec. 150.1(f) definition of “futures-
equivalent”.
iii. Benefits and Costs
As explained in the December 2013 position limits proposal, the
Commission’s view is that non-substantive changes to the definitional
provisions of Sec. 150.1 do not have any benefit or cost implications.
With the exception of the term “bona fide hedging position,” any
benefits or costs attributable to substantive definitional changes and
additions to Sec. 150.1 as proposed in the December 2013 position
limits proposal were considered in the discussion of the rule in which
such new or amended term was proposed to be operational.222
—————————————————————————
222 December 2013 position limits proposal at 75761.
—————————————————————————
The Commission also explained in 2013 that the definition of
“futures-equivalent” in current Sec. 150.1(f) was too narrow in
light of the Dodd-Frank Act amendments to CEA section 4a. To conform to
the statutory changes and to fit within the broader position limits
regime, the Commission proposed a more descriptive definition of
“futures-equivalent” in the December 2013 position limits proposal.
Upon further review, the Commission is now proposing to add more
explanatory text to the “futures-equivalent” definition so that it
comports better with the statutory changes. The proposed revisions
reflect more clearly the Commission’s intent as discussed in the
December 2013 position limits proposal. Thus, the Commission believes
that there are no cost or benefit implications to these further
clarifications.
iv. Request for Comment
RFC 38: Are there any benefits or costs associated with the
proposed revisions to the definition of “futures equivalent”? If yes,
commenters are encouraged to include both quantitative and qualitative
assessments of these
[[Page 38486]]
costs and benefits, as well as data or other information to support
such assessments.
RFC 39: The Commission recognizes that one possible alternative to
the clarifications made to the “futures-equivalent” definition is to
retain the definition of “futures-equivalent” as proposed in the
December 2013 position limits proposal. Additional alternatives may
exist as well. The Commission requests comment on whether an
alternative to what is proposed would result in a superior cost-benefit
profile, with support for any such position provided.
c. Intermarket Spread Position and Intramarket Spread Position
i. Summary of Changes
Current part 150 does not contain definitions for the terms
“intermarket spread position” or “intramarket spread position.” In
the December 2013 position limits proposal, the Commission proposed
definitions for both terms. The Commission now proposes to expand the
scope of these two definitions. The expanded definitions would now
include positions in multiple commodity derivative contracts so that
market participants can establish an intermarket spread position or an
intramarket spread position that would be taken into account under the
proposed position limits regime and exemption processes. The expanded
definitions also would cover spread positions established by taking
positions in derivative contracts in the same commodity, in similar
commodities, or in the products or by-products of the same or similar
commodities.
ii. Baseline
Current Sec. 150.1 does not include definitions for the terms
“intermarket spread position” and “intramarket spread position.”
Therefore, the baseline is a market where “intermarket” and
“intramarket” spread positions are not explicitly exempted from
federal position limits.
iii. Benefits and Costs
The proposed changes to “intermarket spread position” and
“intermarket spread positions” broaden the scope of the two terms in
comparison to the definitions proposed in the December 2013 position
limits proposal. In the Commission’s view, the proposed changes are
only operative in proposed Sec. Sec. 150.3, 150.5 and 150.10, which
address exemptions from position limits for certain spread positions.
The two definitions operate in conjunction with proposed Sec. 150.10,
which sets forth a proposed process for exchanges to administer spread
exemptions, because the proposed definitions and proposed Sec. 150.10,
together, will enable market participants to obtain relief from
position limits for these types of spreads, among others.
iv. Request for Comment
RFC 40: Are there benefits or costs associated with the definitions
of “intermarket spread position” and “intramarket spread position”?
If yes, commenters are specifically encouraged to include both
quantitative and qualitative assessments of these costs and benefits,
as well as data or other information to support such assessments.
RFC 41: The Commission recognizes that one possible alternative to
the proposed definitions of “intermarket spread position” and
“intramarket spread position” is to retain the definitions proposed
in the December 2013 position limits proposal. Additional alternatives
may exist as well. The Commission requests comment on whether an
alternative to what is proposed would result in a superior cost-benefit
profile, with support for any such alternative provided.
3. Section 150.3–Exemptions
a. Rule Summary
CEA Section 4a(a)(7) authorizes the Commission to exempt,
conditionally or unconditionally, any person, swap, futures contract,
or option–as well as any class of the same–from the position limits
requirements that the Commission establishes. In the December 2013
position limits proposal, the Commission proposed revisions to current
Sec. 150.3(a) 223 The 2013 revisions would have provided for
Commission recognition of enumerated bona fide hedge positions, and
provided guidance about seeking relief from the Commission for non-
enumerated positions, but would not have exempted any spread positions
from federal limits. In this supplemental proposal, the Commission is
proposing in Sec. 150.3(a)(1) that commodity derivative positions
recognized by exchanges as NEBFHs under proposed Sec. 150.9 or
enumerated anticipatory bona fide hedge positions under proposed Sec.
150.11, and certain exempt spread positions under Sec. 150.10, may
exceed federal position limits established under Sec. 150.2 as
proposed in the December 2013 position limits proposal. Proposed Sec.
150.3(a)(1) should not be read alone but in conjunction with proposed
Sec. Sec. 150.9, 150.10, and 150.11.
—————————————————————————
223 See 17 CFR 150.3 (list of exemptions that may exceed
position limits set forth in Sec. 150.2).
—————————————————————————
As discussed above in more detail, the Commission has proposed to
delay the requirement that exchanges set position limits on swaps
because, among other reasons, of the impracticability of exchanges
being able to enforce swap position limits. As a result, the Commission
believes that it would be unlikely that exchanges would establish
exchange-set limits and, thus, market participants would not have a
need for exemptions to exchange-set limits for swaps.
b. Baseline
The baseline is the same as it was in the December 2013 position
limits proposal: Current Sec. 150.3 of the Commission’s regulations.
c. Benefits and Costs
The costs and benefits associated with the changes to proposed
Sec. 150.3 will be considered in the sections that discuss proposed
Sec. Sec. 150.9, 150.10, and 150.11.
4. Section 150.5–Exemptions From Exchange-Set Limits
a. Rule Summary
In the December 2013 position limits proposal, the Commission
proposed to replace current Sec. 150.5(a), which provides guidance to
exchanges for exchange-set limits. For any commodity derivative
contracts subject to federal position limits, Sec. 150.5(a)(2) as
proposed in the December 2013 position limits proposal, would have
established requirements under which exchanges could recognize
exemptions from exchange-set position limits, including hedge
exemptions and spread exemptions. Because the Commission is now
proposing to permit exchanges to recognize NEBFH positions under
proposed Sec. 150.9, to grant spread exemptions from federal limits
under proposed Sec. 150.10, and to recognize certain enumerated
anticipatory bona fide hedge positions under proposed Sec. 150.11, the
Commission proposes related changes to Sec. 150.5(a)(2). For commodity
derivative contracts not subject to federal position limits, the
Commission now proposes to revise Sec. 150.5(b)(5), as proposed in the
December 2013 position limits proposal, to permit exchanges to
recognize NEBFHs, as well as spreads. The Commission notes that it is
no longer proposing to prohibit recognizing spreads during the spot
month, although such exemptions would not have been permitted under
Sec. Sec. 150.5(a)(2) or (b)(5), as proposed in the December 2013
position limits proposal.
[[Page 38487]]
b. Baseline
The baseline is the same as it was in the December 2013 position
limits proposal: The current reasonable discretion afforded to
exchanges to exempt market participant from their exchange-set position
limits.
c. Benefits and Costs
The costs and benefits associated with the changes to proposed
Sec. 150.5 will be discussed in the sections that discuss proposed
Sec. Sec. 150.9, 150.10, and 150.11.
5. Section 150.9–Exchange Recognition of NEBFHs
In response to comments to the December 2013 position limits
proposal, the Commission now proposes to permit exchanges to elect to
administer a process to recognize certain commodity derivative
positions as NEBFHs under proposed Sec. 150.9. Subject to certain
conditions set forth in proposed Sec. 150.3(a)(1), positions
recognized as NEBFHs by exchanges pursuant to the proposed Sec. 150.9
application process would be exempt from federal position limits.
Proposed Sec. 150.9 works in concert with the following three proposed
rules:
Proposed Sec. 150.3(a)(1)(i), with the effect that
recognized NEBFH positions may exceed federal position limits;
proposed Sec. 150.5(a)(2), with the effect that
recognized NEBFH positions may exceed exchange-set position limits for
contracts subject to federal position limits; and
proposed Sec. 150.5(b)(5), with the effect that
recognized NEBFH positions may exceed exchange-set position limits for
contracts not subject to federal position limits.
a. Rule Summary
The proposed NEBFH process has six sub-parts: (a) Through (f). The
first three sub-parts–Sec. 150.9(a), (b), and (c)–require exchanges
that elect to have an NEBFH process and market participants that seek
relief under the NEBFH process to carry out certain duties and
obligations. The latter three sub-parts–Sec. 150.9(d), (e), and (f)–
delineate the Commission’s role and obligations in reviewing NEBFH
recognition requests.
i. Sec. 150.9(a)–Exchange-Administered NEBFH Application Process
In sub-part (a) of proposed Sec. 150.9, the Commission identifies
the process and information required for an exchange to assess whether
it should grant a market participant’s request that its derivative
position(s) be recognized as an NEBFH. As an initial step under
proposed Sec. 150.9(a)(1), exchanges that voluntarily elect to process
NEBFH applications are required to notify the Commission of their
intention to do so by filing new rules or rule amendments with the
Commission under part 40 of the Commission’s regulations. In proposed
Sec. 150.9(a)(2), the Commission offers guidelines for exchanges to
establish adaptable application processes by permitting different
processes for “novel” versus “substantially similar” applications
for NEBFH recognitions. Proposed Sec. 150.9(a)(3) describes in general
terms the type of information that exchanges should collect from
applicants. Proposed Sec. 150.9(a)(4) obliges applicants and exchanges
to act timely in their submissions and notifications, respectively, and
that exchanges retain revocation authority. Proposed Sec. 150.9(a)(5)
provides that the position will be deemed recognized as an NEBFH when
an exchange recognizes it. Proposed Sec. 150.9(a)(6) instructs
exchanges to have rules requiring applicants that receive NEBFH
recognitions to report those positions and offsetting cash positions.
Proposed Sec. 150.9(a)(7) requires an exchange to publish on their Web
site descriptions of unique types of derivative positions recognized as
NEBFHs based on novel facts and circumstances.
ii. Sec. 150.9(b)–NEBFH Recordkeeping Requirements
Under proposed Sec. 150.9(b), exchanges would be required to
maintain complete books and records of all activities relating to the
processing and disposition of NEBFH applications. As explained in
proposed Sec. 150.9(b)(1) through (b)(2), the Commission instructs
exchanges to retain applicant-submission materials, exchange notes, and
determination documents. Moreover, consistent with current Sec. 1.31,
the Commission expects that these records would be readily accessible
until the termination, maturity, or expiration date of the bona fide
hedge recognition and during the first two years of the subsequent,
five-year retention period.
iii. Sec. 150.9(c)–NEBFH Reporting Requirements
The Commission proposes weekly and monthly reporting obligations by
exchanges for positions recognized as NEBFHs. Both reports also will be
subject to the Commission’s proposed formatting requirements as
explained in proposed Sec. 150.9(c)(3). In addition to submitting
reports to the Commission, proposed Sec. 150.9(c)(1)(ii) provides that
exchanges post NEBFH summaries on their Web sites.
iv. Sec. 150.9(d) and (e)–Commission Review
The Commission proposes that under certain circumstances market
participants and exchanges must respond to Commission requests.
b. Baseline
For the NEBFH process, the baseline for NEBFH subject to federal
position limits is current Sec. 1.47. For NEBFH exemptions to
exchange-set position limits, the baseline is the current exchange
regulations and practices as well as the Commission’s guidance to
exchanges in current Sec. 150.5(d), which provides, generally, that an
exchange may recognize bona fide hedging positions in accordance with
the general definition of bona fide hedging position in current Sec.
1.3(z)(1).
c. Benefits
The Commission recognizes that there are positions that reduce
price risks incidental to commercial operations. For that reason, among
others, such positions that are considered to be bona fide hedging
positions under CEA Section 4a(c) are not subject to position limits.
Market participants have several options regarding bona fide hedging
positions. A market participant could conclude that a commodity
derivative position comports with the definition of bona fide hedging
position under Sec. 150.1, as proposed in the December 2013 position
limits proposal. Also as discussed in the December 2013 position limits
proposal, market participants may request a staff interpretive letter
under Sec. 140.99 or seek exemptive relief under CEA section 4(a)(7).
The Commission proposes in this supplemental proposal another option
for participants to hold commodity derivative positions that exceed
speculative limits: They may file an application with an exchange for
recognition of an NEBFH under proposed Sec. 150.9.
While all of the aforementioned options are viable, proposed Sec.
150.9 in this supplemental proposal outlines a framework similar to
existing exchange practices that recognize non-enumerated bona fide
hedge exemptions to exchange-set limits. These practices are familiar
to many market participants. As a consequence, there are sizeable
benefits to the proposed Sec. 150.9 process that are not easily
quantifiable. The benefits are heavily dependent on the individual
characteristics of the applicant, its use of commodity derivatives, its
commercial needs, and market idiosyncrasies. Because of these varying
characteristics, a qualitative
[[Page 38488]]
discussion is more appropriate, and therefore, discussed herein.
Under proposed Sec. 150.9, the Commission will be able to leverage
exchanges’ existing practices and expertise in administering
exemptions. Thus, proposed Sec. 150.9 should reduce the need to invent
new procedures to recognize NEBFHs. For example, many exchanges already
evaluate hedging strategies in connection with setting and enforcing
exchange-set position limits; thus, many exchanges should be able
readily to identify bona fide hedges.224 Exchanges also may be
familiar with the applicant-market participant’s needs and practices so
there would be an advanced understanding for why certain trading
strategies are pursued. Furthermore, by having the availability of the
exchange’s analysis and a macro-view of the markets, which includes the
Commission’s access to regulatory swap data, the Commission would
likely be better informed should it become necessary for the Commission
to review a determination under proposed Sec. 150.9(d), and determine
whether a commodity derivative position should be recognized as an
NEBFH. This may benefit market participants, in the form of
administrative efficiency, because the Commission would be able to
initiate its review based on materials already submitted by the
applicant under proposed Sec. 150.9, as well as the analysis by the
exchanges.
—————————————————————————
224 See note 108 (for text of 17 CFR 1.47 and discussion). For
a discussion on the history of exemptions, see December 2013
position limits proposal at 75703-06.
—————————————————————————
For applicants seeking recognition of an NEBFH, proposed Sec.
150.9 should reduce duplicative efforts because applicants would be
saved the expense of applying to both an exchange for relief from
exchange-set position limits and to the Commission for relief from
federal limits. Because many exchanges already possess similar
application processes and market participants are probably somewhat
accustomed to the exchanges’ existing application processes,
administrative certainty should be increased in the form of reduced
application-production time by market participants and reduced response
time by exchanges.
Another probable benefit of proposed Sec. 150.9 is the creation
and retention of records that may be used as reference material in the
future for similar bona fide hedge recognition requests either by
relevant exchanges or the Commission. Over time, retained records will
help the Commission to ensure that an exchange’s determinations are
internally consistent and consistent with the Act and the Commission’s
regulations thereunder. There is also the additional benefit that
records would be accessible if they are needed for a potential
enforcement action.
An exchange’s submission of reports under proposed Sec. 150.9(c)
would provide the Commission with notice that an applicant has taken a
commodity derivative position that the exchange has recognized as an
NEBFH, and also would show the applicant’s offsetting positions in the
cash markets. This is beneficial to the public because such reports
would support the Commission’s surveillance program. Reports would
facilitate the tracking of NEBFHs recognized by the exchanges, and
would assist the Commission in ensuring that a market participant’s
activities conform to the exchange’s terms of recognition and to the
Act. The web-posting of summaries also would benefit market
participants in general by providing transparency and open access to
the NEBFH recognition process. In addition, reporting and posting gives
market participants seeking recognition of an NEBFH an understanding of
the types of commodity derivative positions an exchange may recognize
as an NEBFH, thereby providing greater administrative and legal
certainty.
d. Costs
To a large extent, exchanges and market participants have incurred
already many of the compliance costs associated with proposed Sec.
150.9 because most, if not all, exchanges currently administer similar
processes for recognizing NEBFHs. Nevertheless, the Commission has
detailed a number of the readily-quantifiable costs for exchanges and
market participants associated with processing NEBFH recognitions under
proposed Sec. 150.9 in Tables A1 to G1, below. The Commission
estimates that six entities would elect to process NEBFH applications
and file new rules or rule amendments pursuant to part 40 of the
Commission’s regulations. Even though the number of applicants and
associated applications will likely vary based on the referenced
contract, the Commission forecasts the number of applicants based on
the Commission’s past experience. The costs are broken down in the
tables below. In short, most of the quantified costs are related to the
time, effort, and materials that will be spent on producing,
processing, reviewing, granting, and retaining applications for NEBFH
recognitions.
There are, however, other costs that are not easily quantified.
These are qualitative costs that are related to the specific attributes
and needs of individual market participants that are hedging. Given
that qualitative costs are highly-specific, the Commission believes
that market participants would choose to incur Sec. 150.9-related
costs only if doing so is less costly than complying with position
limits and not executing the desired hedge position. Thus, by providing
market participants with an option to apply for relief from speculative
position limits under proposed Sec. 150.9, the Commission believes it
is offering market participants a way to ease overall compliance costs
because it is reasonable to assume that entities would seek recognition
of NEBFHs only if the outcome of doing so justifies the costs. The
Commission also believes that market participants would consider how
the costs of applying for recognition of an NEBFH under proposed Sec.
150.9 would compare to the costs of requesting a staff interpretive
letter under Sec. 140.99, or seeking exemptive relief under CEA
section 4a(a)(7). Likewise, exchanges must consider qualitative costs
in their decision to create an NEBFH application process or revise an
existing program.
The Commission acknowledges that there may also be other costs to
market participants if the Commission disagrees with an exchange’s
decision to recognize an NEBFH under proposed Sec. 150.9 or under an
independent Commission request or review under proposed Sec. 150.9(d)
or (e). These costs would include time and effort spent by market
participants associated with a Commission review. In addition, market
participants would lose amounts that the Commission can neither predict
nor quantify if it became necessary to unwind trades or reduce
positions were the Commission to conclude that an exchange’s
disposition of an NEBFH application is inconsistent with section 4a(c)
of the Act and the general definition of bona fide hedging position in
Sec. 150.
The Commission recognizes that costs may result if the Commission
disagrees with an exchange’s disposition of an NEBFH application under
proposed Sec. 150.9, the Commission, however, believes such situations
would be limited based on the history of exchanges approving similar
applications for exemptions to exchange-set limits. Exchanges have
strong incentives to protect market participants from the harms that
position limits are intended to prevent, such as manipulation, corners,
and squeezes. In addition, an exchange that recognizes a market
participant’s NEBFH that enables the participant to exceed position
limits must then deter
[[Page 38489]]
the same market participant from trading in a manner that causes
adverse price impacts on the market. For example, this might mean that
as part of recognizing a NEBFH, the exchange directs the market
participant to execute no more than ten contracts per day over a five-
day period rather than executing 50 contracts in one trading day. This
approach may be necessary for the exchange to ensure sufficient market
liquidity because the exchange believes that the particular contract
market cannot absorb the execution of 50 contracts by one market
participant in one day without an inordinately large price impact. If
the exchange fails to deter (or instruct), other market participants
will likely face greater costs in the form of transactions fees and
other trading-implementation costs, which includes foregone trading
opportunities because market prices moved against the trader and
prevented the trader from executing at the desired prices. In other
words, the exchange’s mismanagement of the market participant that took
advantage of the NEBFH would cause the other market participants’ costs
to implement trades to increase. Such an outcome would likely discredit
the exchange and the proposed Sec. 150.9 program, as well as reduce
the exchange’s overall trading commissions. The Commission believes
that the exchanges have little incentive to engage in such behavior
because of reputational risk and economic incentives.
i. Costs To Create or Amend Exchange Rules for NEBFH Application
Programs
The Commission believes that exchanges electing to process NEBFH
applications under proposed Sec. 150.9(a) are likely to already
administer similar processes and would need to file with the Commission
amendments to existing exchange rules rather than create new rules. The
exchanges would only have to file amendments once. As discussed in the
Paperwork Reduction Act discussion below, the Commission forecasts an
average annual filing cost of $610 per exchange that files new rules or
modifications per proposed process that an exchange adopts.
Table A1
—————————————————————————————————————-
Total average Total average
Proposed regulation/file or amend rules Total average labor costs per annual cost per
labor hours hour exchange
—————————————————————————————————————-
Sec. 150.9(a)(1)………………………………….. 5 $122 $610
[5 x $122]
—————————————————————————————————————-
ii. Costs To Review Applications Under Proposed Processes
An exchange that elects to process applications also will incur
costs related to the review and disposition of such applications
pursuant to proposed Sec. 150.9(a). For example, exchanges will need
to expend resources on reviewing and analyzing the facts and
circumstances of each application to determine whether the application
meets the standards established by the Commission. Exchanges also will
need to expend effort in notifying applicants of the exchanges’
disposition of recognition or exemption requests. The Commission
believes that exchanges electing to process NEBFH applications under
proposed Sec. 150.9(a) are likely to have processes for the review and
disposition of such applications currently in place. As such, an
e3.xchange’s cost to comply with the proposed rules are likely to be
incrementally less costly than having to create process from inception
because the exchange would already have staff, policies, and procedures
established to accomplish its duties under the proposed rules. Thus,
the Commission has forecast that the average annual cost for each
exchange to process applications for NEBFH recognitions is $122,850.
Table B1
——————————————————————————————————————————————————–
Average total
Total average Total average hours for total Total average Total average
Proposed regulation/review applications applications labor hours per applications labor costs per annual cost per
processed per application reviewed per hour exchange
exchange exchange
——————————————————————————————————————————————————–
Sec. 150.9(a)(2)…………………………………………. 185 5 925 $122 $112,850
[185 x 5] [$122 x 925]
——————————————————————————————————————————————————–
iii. Costs To Post Summaries for NEBFH Recognitions
Exchanges that elect to process the applications under proposed
Sec. 150.9 will incur costs to publish on their Web sites summaries of
the unique types of NEBFH positions. The Commission has estimated an
average annual cost of $18,300 for the web-posting of NEBFH summaries.
[[Page 38490]]
Table C1
——————————————————————————————————————————————————–
Average total
Total average Total average hours for total Total average Total average
Proposed regulation/web-posting summaries per labor hours per applications labor costs per annual cost per
exchange application reviewed per hour exchange
exchange
——————————————————————————————————————————————————–
Sec. 150.9(a)……………………………………………. 30 5 150 $122 18,300
[30 x 5] [150 x $122]
——————————————————————————————————————————————————–
iv. Costs To Market Participants Who Would Seek NEBFH Relief From
Position Limits
Under proposed Sec. 150.9(a)(3), market participants must submit
applications that provide sufficient information to allow the exchanges
to determine, and the Commission to verify, whether it is appropriate
to recognize such position as an NEBFH. These applications would be
updated annually. Proposed Sec. 150.9(a)(6) would require applicants
to file a report with the exchanges when an applicant owns, holds, or
controls a derivative position that has been recognized as an NEBFH.
The Commission estimates that each market participant seeking relief
from position limits under proposed Sec. 150.9 would likely incur
approximately $2,440 annually in application costs.225
—————————————————————————
225 Assuming that exchanges administer exemptions to exchange-
set limits, these costs are incrementally higher.
Table D1
——————————————————————————————————————————————————–
Average total
Number of Total average Total average hours for each Total average Total average
Proposed regulation/market participants seeking market applications labor hours per application labor costs per annual cost per
relief from position limits participants per market application filed per hour market
participant exchange participant
——————————————————————————————————————————————————–
Sec. 150.9(a)(3), (6)……………………… 222 5 4 20 $122 $2,440
[4 x 5] [20 x $122]
——————————————————————————————————————————————————–
v. Costs for NEBFH Recordkeeping
The Commission believes that exchanges that currently process
applications for spread exemptions and bona fide hedging positions
maintain records of such applications as required pursuant to other
Commission regulations, including Sec. 1.31. The Commission, however,
also believes that the proposed rules may confer additional
recordkeeping obligations on exchanges that elect to process
applications for NEBFHs. The Commission estimates that each exchange
electing to administer the proposed NEBFH process would likely incur
approximately $3,660 annually to retain records for each proposed
process.
Table E1
—————————————————————————————————————-
Total average
Total average Total average annual
Proposed regulation/recordkeeping Number of DCMs labor hours for labor costs per recordkeeping
recordkeeping hour cost per
exchange
—————————————————————————————————————-
Sec. 150.9(b)……………………….. 6 30 $122 $3,660
[30 x $122]
—————————————————————————————————————-
vi. Costs for Weekly and Monthly NEBFH Reporting to the Commission
The Commission anticipates that exchanges that elect to process
NEBFH applications will be required to file two types of reports. The
Commission is aware that five exchanges currently submit reports each
month, on a voluntary basis, which provide information regarding
exchange-processed exemptions of all types. The Commission believes
that the content of such reports is similar to the information required
of the reports in proposed rule Sec. 150.9(c), but the frequency of
such required reports would increase under the proposed rule. The
Commission estimates an average cost of approximately $19,032 per
exchange for weekly reports under proposed Sec. 150.9(c).
[[Page 38491]]
Table F1
——————————————————————————————————————————————————–
Total average
Estimated Estimated Average reports Total average annual
Proposed regulation/weekly reporting number of DCMs number of hours annually by labor costs per reporting cost
per response each exchange hour per exchange
——————————————————————————————————————————————————–
Sec. 150.9(c)……………………………………………. 6 3 52 $122 $19,032
[3 x 52 x $122]
——————————————————————————————————————————————————–
For the monthly report, the Commission anticipates a minor cost for
exchanges because the proposed rules would require exchanges
essentially to forward to the Commission notices received from
applicants who own, hold, or control the positions that have been
recognized or exempted. The Commission estimates an average cost of
approximately $2,928 per exchange for monthly reports under proposed
Sec. 150.9(c).
Table G1
——————————————————————————————————————————————————–
Total average
Estimated Average Total average annual
Proposed regulation/monthly reporting Estimated number of hours reports labor costs per reporting
number of DCMs per response annually by hour average cost
each exchange per exchange
——————————————————————————————————————————————————–
Sec. 150.9(c)……………………………………………. 6 2 12 $122 $2,928
[2 x 12 x $122]
——————————————————————————————————————————————————–
vii. Costs Related to Subsequent Monitoring
Exchanges would have additional surveillance costs and duties with
respect to NEBFH that the Commission believes would be integrated with
their existing self-regulatory organization surveillance activities as
an exchange.
e. Request for Comment
RFC 42. The Commission requests comment on its considerations of
the benefits of proposed Sec. 150.9. Are there additional benefits
that the Commission should consider? Has the Commission misidentified
any benefits? Commenters are encouraged to include both quantitative
and qualitative assessments of these benefits, as well as data or other
information to support such assessments.
RFC 43. The Commission requests comment on its considerations of
the costs of proposed Sec. 150.9. Are there additional costs that the
Commission should consider? Has the Commission misidentified any costs?
What other relevant cost information or data, including alternative
cost estimates, should the Commission consider and why? Commenters are
encouraged to include both quantitative and qualitative assessments of
these benefits, as well as data or other information to support such
assessments.
RFC 44. The Commission requests comment on whether a Commission
administered process promotes more consistent and efficient decision-
making. Commenters are encouraged to include both quantitative and
qualitative assessments, as well as data or other information to
support such assessments.
RFC 45. The Commission recognizes there exist alternatives to
proposed Sec. 150.9. These include such alternatives as: (1) Not
permitting exchanges to administer any process to recognize NEBFHs; or
(2) maintaining the status quo. The Commission requests comment on
whether an alternative to what is proposed would result in a superior
cost-benefit profile, with support for any such position provided.
RFC 46. The Commission requests comment on whether the options for
recognizing NEBFHs outlined in the December 2013 position limits
proposal are superior from a cost-benefit perspective to proposed Sec.
150.9.226 If yes, please explain why.
—————————————————————————
226 78 FR at 75711-73.
—————————————————————————
6. Section 150.10–Spread Exemptions
As discussed in Section IID above, the Commission has the authority
under CEA section 4a(a)(1) to exempt certain spreads from position
limits. Before the Dodd-Frank Act, the Commission exempted certain
spreads from position limits under current Sec. 150.3. In the December
2013 position limits proposal, the Commission proposed changing current
Sec. 150.3 to eliminate exemptions for spreads outside the spot month,
and placed limitations on inter- and intramarket spreads.227 After
reviewing comments, the Commission has refined its spread exemption
proposal to permit spread exemptions from federal position limits, and,
combined with changes to the definitions of “intermarket spread
position” and “intramarket spread position,” authorized such spreads
to exceed position limits during spot and non-spot months.
—————————————————————————
227 For cost-benefit discussion on spread exemptions, see
December 2013 position limits proposal at 75774-76.
—————————————————————————
a. Rule Summary
The Commission proposes to authorize exchanges to exempt spread
positions from federal position limits. The proposed Sec. 150.10
process lists four types of spreads as defined and proposed in Sec.
150.1 of the December 2013 positions limits proposal and modified in
this supplemental proposal. Proposed Sec. 150.10 works in concert with
the following three proposed rules:
Proposed Sec. 150.3(a)(1)(iv), with the effect that
exempt spread positions may exceed federal position limits;
proposed Sec. 150.5(a)(2), with the effect that exempt
spread positions may exceed exchange-set position limits for contracts
subject to federal position limits; and
proposed Sec. 150.5(b)(5)(ii)(C), with the effect that
exempt spread positions may exceed exchange-set position limits for
contracts not subject to federal position limits.
[[Page 38492]]
The proposed Sec. 150.10 process is analogous to the application
process for recognition of NEBFHs under proposed Sec. 150.9. The
proposed spread exemption process has six sub-parts: (a) Through (f).
The first three sub-parts–Sec. 150.10(a), (b), and (c)–require
exchanges that elect to have a spread exemption process, and market
participants that seek relief under the spread exemption process, to
carry out certain duties and obligations. The latter four sub-parts–
Sec. 150.10(d), (e), and (f)–delineate the Commission’s role and
obligations in reviewing requests for spread exemptions.
i. Section 150.10(a)–Exchange-Administered Spread Exemption
In sub-part (a) of proposed Sec. 150.10, the Commission identifies
the process and information required for an exchange to grant a market
participant’s request that its derivative position(s) be recognized as
an exempt spread position. As an initial step under proposed Sec.
150.10(a)(1), exchanges that voluntarily elect to process spread
exemption applications are required to notify the Commission of their
intention to do so by filing new rules or rule amendments with the
Commission under part 40 of the Commission’s regulations. In proposed
Sec. 150.10(a)(2), the Commission identifies four types of spreads
that an exchange may approve. Proposed Sec. 150.10(a)(3) describes in
general terms the type of information that exchanges should collect
from applicants. Proposed Sec. 150.10(a)(4) obliges applicants and
exchanges to act timely in their submissions and notifications,
respectively, and require exchanges to retain revocation authority.
Proposed Sec. 150.10(a)(6) instructs exchanges to have rules requiring
applicants who receive spread exemptions to report those positions,
including each component of the spread. Proposed Sec. 150.10(a)(7)
requires exchanges to publish on its Web site a summary describing the
type of spread position and explaining why it was exempted.
ii. Section 150.10(b)–Spread Exemption Recordkeeping Requirements
Exchanges must maintain complete books and records of all
activities relating to the processing and disposition of spread
exemption applications under proposed Sec. 150.10(b). This is similar
to the record retention obligations of exchanges for positions
recognized as NEBFHs.
iii. Section 150.10(c)–Spread Exemption Reporting Requirements
Exchanges would have weekly and monthly reporting obligations for
spread exemptions under proposed Sec. 150.10(c). This is similar to
the reporting obligations of exchanges for positions recognized as
NEBFHs.
b. Baseline
For the proposed spread exemption process for positions subject to
federal limits, the baseline is CEA section 4a(a)(1). In that statutory
section, the Commission is authorized to recognize certain spread
positions. That statutory provision is currently implemented in a
limited calendar-month spread exemption in Sec. 150.3(a)(3). For
exchange-set position limits, the baseline for spreads is the guidance
in current Sec. 150.5(a), which provides generally that exchanges may
recognize exemptions for positions that are normally known to the trade
as spreads.
c. Benefits
CEA section 4a(a)(1) authorizes the Commission to exempt certain
spreads from speculative position limits. In exercising this authority,
the Commission recognizes that spreads can have considerable benefits
for market participants and markets. The Commission now proposes a
spread exemption framework that utilizes existing exchanges-resources
and exchanges-expertise so that fair access and liquidity are promoted
at the same time market manipulations, squeezes, corners, and any other
conduct that would disrupt markets are deterred and prevented. Building
on existing exchange processes preserves the ability of the Commission
and exchanges to monitor markets and trading strategies while reducing
burdens on exchanges that will administer the process, and market
participants, who will utilize the process.
In addition to these benefits, there are other benefits related to
proposed Sec. 150.10 that would inure to markets and market
participant. Yet, there is difficulty in quantifying these benefits
because benefits are dependent on the characteristics, such as
operation size and needs, of the market participants that would seek
spread exemptions, and the markets in which the participants trade.
Accordingly, the Commission considers the qualitative benefits of
proposed Sec. 150.10.
For both exchanges and market participants, proposed Sec. 150.10
would likely alleviate compliance burdens to the status quo. Exchanges
would be able to build on established procedures and infrastructure. As
stated earlier, many exchanges already have rules in place to process
and grant applications for spread exemptions from exchange-set position
limits pursuant to Part 38 of the Commission’s regulations (in
particular, current Sec. 38.300 and Sec. 38.301) and current Sec.
150.5. In addition, exchanges may be able to use the same staff and
electronic resources that would be used for proposed Sec. 150.9 and
Sec. 150.11. Market participants also may benefit from spread-
exemption reviews by exchanges that are familiar with the commercial
needs and practices of market participants seeking exemptions. Market
participants also might gain legal and regulatory clarity and
consistency that would help in developing trading strategies.
Proposed Sec. 150.10 would authorize exchanges to approve spread
exemptions that permit market participants to continue to enhance
liquidity, rather than being restricted by a position limit. For
example, by allowing speculators to execute intermarket and intramarket
spreads in accordance with proposed Sec. 150.3(a)(1)(iv) and Sec.
150.10, speculators would be able to hold a greater amount of open
interest in underlying contract(s), and, therefore, bona fide hedgers
may benefit from any increase in market liquidity. Spread exemptions
might lead to better price continuity and price discovery if market
participants who seek to provide liquidity (for example, through entry
of resting orders for spread trades between different contracts)
receive a spread exemption and, thus, would not otherwise be
constrained by a position limit.
Here are two examples of positions that could benefit from the
spread exemption in proposed Sec. 150.10:
Reverse crush spread in soybeans on the CBOT subject to an
intermarket spread exemption. In the case where soybeans are processed
into two different products, soybean meal and soybean oil, the crush
spread is the difference between the combined value of the products and
the value of soybeans. There are two actors in this scenario: The
speculator and the soybean processor. The spread’s value approximates
the profit margin from actually crushing (or mashing) soybeans into
meal and oil. The soybean processor may want to lock in the spread
value as part of its hedging strategy, establishing a long position in
soybean futures and short positions in soybean oil futures and soybean
meal futures, as substitutes for the processor’s expected cash market
transactions (purchase of the anticipated inputs for
[[Page 38493]]
processing and sale of the anticipated products). On the other side of
the processor’s crush spread, a speculator takes a short position in
soybean futures against long positions in soybean meal futures and
soybean oil futures. The soybean processor may be able to lock in a
higher crush spread, because of liquidity provided by such a speculator
who may need to rely upon a spread exemption. It is important to
understand that the speculator is accepting basis risk represented by
the crush spread, and the speculator is providing liquidity to the
soybean processor. The crush spread positions may result in greater
correlation between the futures prices of soybeans and those of soybean
oil and soybean meal, which means that prices for all three products
may move up or down together in a closer manner.
Wheat spread subject to intermarket spread exemptions.
There are two actors in this scenario: The speculator and the wheat
farmer. In this example, a farmer growing hard wheat would like to
reduce the price risk of her crop by shorting a MGEX wheat futures.
There, however, may be no hedger, such as a mill, that is immediately
available to trade at a desirable price for the farmer. There may be a
speculator willing to offer liquidity to the hedger; the speculator may
wish to reduce the risk of an outright long position in MGEX wheat
futures through establishing a short position in CBOT wheat futures
(soft wheat). Such a speculator, who otherwise would have been
constrained by a position limit at MGEX or CBOT, may seek exemptions
from MGEX and CBOT for an intermarket spread, that is, for a long
position in MGEX wheat futures and a short position in CBOT wheat
futures of the same maturity. As a result of the exchanges granting an
intermarket spread exemption to such a speculator, who otherwise may be
constrained by limits, the farmer might be able to transact at a higher
price for hard wheat than might have existed absent the intermarket
spread exemptions. Under this example, the speculator is accepting
basis risk between hard wheat and soft wheat, reducing the risk of a
position on one exchange by establishing a position on another
exchange, and potentially providing liquidity to a hedger. Further,
spread transactions may aid in price discovery regarding the relative
protein content for each of the hard and soft wheat contracts.
Finally, the Commission is no longer proposing to prohibit
recognizing and exempting spreads during the spot and non-spot month as
explained in the preamble. There may be considerable benefits that
evolve from spreads exempted during the spot month, in particular.
Besides enhancing the opportunity for market participants to use
strategies involving spread trades into the spot month, this proposed
relief may improve price discovery in the spot month for market
participants. And, as in the intermarket wheat example above, the
proposed spread relief in the spot month may better link prices between
two markets, e.g., the price of MGEX wheat futures and the price of
CBOT wheat futures. Put another way, the prices in two different but
related markets for substitute goods may be more highly correlated,
which benefits market participants with a price exposure to the
underlying protein content in wheat generally, rather than that of a
particular commodity.
d. Costs
Similar to proposed Sec. 150.9, exchanges and market participants
may have made already many of the financial outlays for administering
the application process and applying for spread exemptions,
respectively. Because of that history, the Commission is able to
quantify some of the costs that will arise from proposed Sec. 150.10
in Tables A3 through E3, below. Like the costs for proposed Sec.
150.9, the Commission estimates that six entities would elect to
process spread-exemption applications and file new rules or rule
amendments pursuant to part 40 of the Commission’s regulations, and the
number of spread exemption applicants and applications will likely vary
based on the referenced contract. Relying on its past experience, the
Commission forecasts the number of applicants and breaks down the
annual costs in the tables below. Most of the monetary costs are
related to the time, effort, and materials spent for administering and
retaining records for spread exemptions.
Although the Commission is able to quantify some costs, other costs
related to proposed Sec. 150.10 are not easily quantifiable. As
previously stated, other costs are more dependent on individual markets
and market participants seeking a spread exemption, and are more
readily considered qualitatively. Because costs, quantitative or
qualitative, can be particular, the Commission believes that market
participants will determine whether costs associated with seeking a
proposed Sec. 150.10 spread exemption are worth the benefits. If the
costs are too high, then market participants may choose not to apply
for a spread exemption and not to execute a spread transaction that
would exceed position limits. For instance, speculators that execute
exempted spreads would bear the risk of adverse price changes in the
spread, but a speculator who does not receive an exemption may be
unwilling to bear the higher risk of an outright position, if a
position limit would restrict her ability to establish a risk reducing
position in another contract. In general, the Commission believes that
proposed Sec. 150.10 should provide exchanges and market participants
greater regulatory and administrative certainty and that costs will be
small relative to the benefits of having an additional trading tool
under proposed Sec. 150.10.
Note: The activities that are priced in the following Tables A2 to
G2 are similar, if not the same types of activities discussed in the
section affiliated with Tables A1 through G1, for proposed Sec. 150.9.
Unless there is a significant difference in the anticipated acts to
implement proposed Sec. 150.10, the Commission will not re-describe
the activities valued in Tables A2 through G2.
Table A2–Costs To Create or Amend Exchange Rules for Spread-Exemption
Application Reviews
————————————————————————
Proposed Total average Total average
regulation/ file Total average labor costs per annual cost per
or amend rules labor hours hour exchange
————————————————————————
Sec. 5 $122 $610
150.10(a)(1) [5 x $122]
————————————————————————
[[Page 38494]]
Table B2–Costs To Review Spread-Exemption Applications
——————————————————————————————————————————————————–
Average total
Total average Total average hours for total Total average Total average
Proposed regulation/ review applications applications labor hours per applications labor costs per annual cost per
processed per application reviewed per hour exchange
exchange exchange
——————————————————————————————————————————————————–
Sec. 150.10(a)(2)………………………………………… 50 5 250 $122 $30,500
[50 x 5] [$122 x 250]
——————————————————————————————————————————————————–
Table C2–Cost To Post Spread-Exemption Summaries
——————————————————————————————————————————————————–
Average total
Total average Total average hours for total Total average Total average
Proposed regulation/web-posting summaries per labor hours applications labor costs annual cost
exchange per application reviewed per per hour per exchange
exchange
——————————————————————————————————————————————————–
Sec. 150.10(a)…………………………………………… 10 5 50 $122 $6,100
[10 x 5] [50 x $122]
——————————————————————————————————————————————————–
Regarding the following Table D2, note that reports are also
required to be sent to the Commission in the case of exempt spread
positions under Sec. 150.10(a)(5).
Table D2–Costs to Market Participants Who Would Seek Spread-Exemption Relief From Position Limits
——————————————————————————————————————————————————–
Average total
Number of Total average Total average hours for each Total average Total average
Proposed regulation/market participants seeking market applications labor hours application labor costs annual cost
relief from position limits participants per market per filed per per hour per market
participant application exchange participant
——————————————————————————————————————————————————–
Sec. 150.10(a)(3), (6)…………………….. 25 2 3 6 $122 $732
[2 x 3] [6 x $122]
——————————————————————————————————————————————————–
Table E2–Costs for Spread-Exempt Recordkeeping
—————————————————————————————————————-
Total average
Total average Total average annual
Proposed regulation/ recordkeeping Number of DCMs labor hours labor costs recordkeeping
for per hour cost per
recordkeeping exchange
—————————————————————————————————————-
Sec. 150.10(b)………………………. 6 30 $122 $3,660
[30 x $122]
—————————————————————————————————————-
Table F2–Costs for Weekly Spread-Exemption Reporting
——————————————————————————————————————————————————–
Estimated Average Total average
Estimated number of reports Total average annual
Proposed regulation/reporting number of DCMs hours per annually by labor costs reporting cost
response each exchange per hour per exchange
——————————————————————————————————————————————————–
Sec. 150.10(c) [weekly]…………………………………… 6 3 52 $122 $19,032
[3 x 52 x $122]
——————————————————————————————————————————————————–
[[Page 38495]]
Table G2–Costs for Monthly Spread-Exemption Reporting
——————————————————————————————————————————————————–
Total average
Estimated Average Total average annual
Proposed regulation/monthly reporting Estimated number of reports labor costs reporting
number of DCMs hours per annually by per hour average cost
response each exchange per exchange
——————————————————————————————————————————————————–
Sec. 150.10(c)…………………………………………… 6 2 12 $122 $2,928
[2 x 12 x $122]
——————————————————————————————————————————————————–
Exchanges would have additional surveillance costs and duties that
the Commission believes would be integrated with their existing self-
regulatory organization surveillance activities as an exchange. For
example, exchanges that elect to grant spread exemptions will have to
adapt and develop procedures to determine whether a particular spread
exemption furthers the goals of CEA section 4a(a)(3)(B) as well as
monitor whether applicant speculators are, in fact, providing liquidity
to other market participants.
Other costs could arise from proposed Sec. 150.11 if the
Commission disagrees with an exchanges’ disposition of a spread
application, or costs from a Commission request or review under
proposed Sec. 150.11(d) or (e). These costs are not easily quantified
because they depend on the specifics of the Commission’s request or
review.
e. Request for Comment
RFC 47. The Commission requests comment on its considerations of
the benefits of proposed Sec. 150.10. Are there additional benefits
that the Commission should consider? Has the Commission misidentified
any benefits? Commenters are encouraged to include both quantitative
and qualitative assessments of benefits as well as data or other
information of support such assessments.
RFC 48. The Commission requests comment on its considerations of
the costs of proposed Sec. 150.10. Are there additional costs that the
Commission should consider? Has the Commission misidentified any costs?
What other relevant cost information or data, including alternative
cost estimates, should the Commission consider and why? Commenters are
encouraged to include both quantitative and qualitative assessments of
costs as well as data or other information of support such assessments.
RFC 49. The Commission recognizes that there exist alternatives to
proposed Sec. 150.10. These alternatives include: (i) Maintaining the
status quo, or (ii) pursuing the changes in the December 2013 position
limits proposal. The Commission requests comment on whether retaining
the framework for spread exemptions as proposed in the December 2013
position limits proposal is superior from a cost-benefit perspective to
proposed Sec. 150.10. If yes, please explain why. The Commission
requests comment on whether any alternatives to proposed Sec. 150.10
would result in a superior cost-benefit profile, with support for any
such alternative provided.
7. Section 150.11–Enumerated Anticipatory Bona Fide Hedges
After reviewing comments in response to the December 2013 position
limits proposal, the Commission is now proposing another method by
which market participants may have enumerated anticipatory bona fide
hedge positions recognized. As proposed in the December 2013 position
limits proposal, Sec. 150.7 would require market participants to file
statements with the Commission regarding certain anticipatory hedges
which would become effective absent Commission action or inquiry ten
days after submission. The second method in proposed Sec. 150.11 is an
exchange-administered process to determine whether certain enumerated
anticipatory bona fide hedge positions, such as unfilled anticipated
requirements, unsold anticipated production, anticipated royalties,
anticipated service contract payments or receipts, or anticipatory
cross-commodity hedges should be recognized as bona fide hedge
positions. Proposed Sec. 150.11 works in concert with the following
three proposed rules:
Proposed Sec. 150.3(a)(1)(i), with the effect that
recognized anticipatory enumerated bona fide hedge positions may exceed
federal position limits;
proposed Sec. 150.5(a)(2), with the effect that
recognized anticipatory enumerated bona fide hedge positions may exceed
exchange-set position limits for contracts subject to federal position
limits; and
proposed Sec. 150.5(b)(5), with the effect that
recognized anticipatory enumerated bona fide hedge positions may exceed
exchange-set position limits for contracts not subject to federal
position limits.
a. Rule Summary
The proposed Sec. 150.11 process is somewhat analogous to the
application process for recognition of NEBFHs under proposed Sec.
150.9. The proposed Sec. 150.11 recognition process for enumerated
anticipatory bona fide hedge positions has five sub-parts: (a) through
(e). The first three sub-parts–Sec. 150.11(a), (b), and (c)–require
exchanges that elect to have a process for recognizing enumerated
anticipatory bona fide hedge positions, and market participants that
seek position-limit relief for such positions, to carry out certain
duties and obligations. The fourth and fifth sub-parts–Sec.
150.11(d), and (e)–delineate the Commission’s role and obligations in
reviewing requests for recognition of enumerated anticipatory bona fide
hedge positions.
i. Section 150.11(a)–Exchange-Administered Enumerated Anticipatory
Bona Fide Hedge Process
Under proposed Sec. 150.11(a)(1), exchanges that voluntarily elect
to process enumerated anticipatory bona-fide hedge applications are
required to notify the Commission of their intention to do so by filing
new rules or rule amendments with the Commission under part 40 of the
Commission’s regulations. In proposed Sec. 150.11(a)(2), the
Commission identifies certain types of information necessary for the
application, including information required under proposed Sec.
150.7(d). In proposed Sec. 150.11(a)(3), the Commission states that
applications must be updated annually and that the exchanges have ten
days in which to recognize an enumerated anticipatory bona fide hedge.
In addition, exchanges must retain authority to revoke recognitions.
Proposed Sec. 150.11(a)(4) states that once an enumerated anticipatory
bona fide hedge has been recognized by an exchange, the position will
be deemed to be recognized. Proposed Sec. 150.11(a)(5) discusses
[[Page 38496]]
reports that must be filed by applicants holding exempted an enumerated
anticipatory bona fide hedge positions. Proposed 150.11(a)(6) explains
that exchanges may choose to seek Commission review of an application
and the Commission has ten days in which to respond.
ii. Section 150.11(b)–Enumerated Anticipatory Bona Fide Hedge
Recordkeeping Requirements
Exchanges must maintain complete books and records of all
activities relating to the processing and disposition of spread-
exemption applications under proposed Sec. 150.11(b). This is similar
to the record-retention obligations of exchanges for positions
recognized as NEBFHs under proposed Sec. 150.9, and exempted as
spreads under proposed Sec. 150.10.
iii. Section 150.11(c)–Enumerated Anticipatory Bona Fide Hedge
Reporting Requirements
Exchanges would have weekly reporting obligations under proposed
Sec. 150.11(c). Unlike NEBFHs and spreads, exchanges would have no
monthly reporting or web-posting obligations for enumerated
anticipatory bona fide hedges.
b. Baseline
The baseline is the same as it was in the December 2013 position
limits proposal: The current filing process detailed in current Sec.
1.48.
c. Benefits
There are significant benefits that would likely accrue should
proposed Sec. 150.11 be adopted. Similar to the benefits for
recognizing positions as NEBFH positions under Sec. 150.9, recognizing
anticipatory positions as bona fide hedges under Sec. 150.11 would
provide market participants with potentially a more expeditious
recognition process than the Commission proposal for a 10-day
Commission recognition process under proposed 150.7. The benefit of
prompter recognitions, though, is not readily quantifiable, and, in
most circumstances, is subject to the characteristics and needs of
markets as well as market participants. So while it is challenging to
quantify the benefits that would likely be associated with proposed
Sec. 150.11, there are qualitative benefits that the Commission can
discuss.
For example, exchanges would be able to use existing resources and
knowledge in the administration and assessment of enumerated
anticipatory bona fide hedge positions. The Commission and exchanges
have evaluated these types of positions for years (as discussed in the
December position limits proposal). Utilizing this experience and
familiarity would likely produce such benefits as prompt but reasoned
decision making and streamlined procedures. In addition, proposed Sec.
150.11 permits exchanges to act in less than ten days–a timeframe that
would be less than the Commission’s process under current Sec. 1.48,
or under Sec. 150.7 as proposed in the December 2013 position limits
proposal.228 This could potentially enable commercial market
participants to pursue trading strategies in a more timely fashion to
advance their commercial and hedging needs to reduce risk.
—————————————————————————
228 See discussion in December 2013 position limits proposal
at 75745-46.
—————————————————————————
Proposed Sec. 150.11, similar to proposed Sec. 150.9 and Sec.
150.10, also would provide the benefit of enhanced record-retention and
reporting of positions recognized as enumerated anticipatory bona fide
hedges. As previously discussed, records retained for specified periods
would enable exchanges to develop consistent practices and afford the
Commission accessible information for review, surveillance, and
enforcement efforts. Likewise, weekly reporting under Sec. 150.11
would facilitate the tracking of positions, provide transparency to the
enumerated anticipatory bona fide hedge process to the public, and
improve open access and administrative and legal certainty.
d. Costs
The costs for proposed Sec. 150.11 are similar to the costs for
proposed Sec. Sec. 150.9 and 150.10, with many of the cost
considerations not changing. The costs that can be quantified are in
Tables A3 through G3. Other costs associated with proposed Sec.
150.11, like those for proposed Sec. Sec. 150.9 and 150.10, are more
qualitative in nature and hinge on specific market and participant
attributes. With this in mind, the Commission believes that exchanges
and market participants will incur the costs related to Sec. 150.11 if
they believe that administering the process under proposed Sec.
150.11, or applying for recognition under proposed Sec. 150.11 and
establishing a recognized position, respectively, are less costly than
not administering the process under proposed Sec. 150.11 recognitions,
or not executing such trades, respectively.
Other costs could arise from proposed Sec. 150.11 if the
Commission disagrees with an exchange’s disposition of an enumerated
anticipatory bona fide hedge position application, or costs from a
Commission request or review under proposed Sec. 150.11(d) These costs
would include time and effort spent by market participants associated
with a Commission review. In addition, market participants would lose
amounts that the Commission can neither predict nor quantify if it
became necessary to unwind trades or reduce positions were the
Commission to conclude that an exchange’s disposition of an enumerated
anticipatory bona fide hedge application is not appropriate or is
inconsistent with the Act. The Commission believes that such
disagreements will be rare based on the Commission’s past experience
and review of exchanges’ efforts. Nevertheless, the Commission notes
that assessing whether a position is for the reduction of risk arising
from anticipatory needs or excessive speculation is complicated.
Note: For a general description of proposed rules identified in the
following Tables A3 to E3, see Section IIIA5, above.
Table A3–Costs To Create or Amend Exchange Rules for Enumerated Anticipatory Bona Fide Hedge Applications
—————————————————————————————————————-
Total average Total average
Proposed regulation/file or amend rules Total average labor costs per annual cost per
labor hours hour exchange
—————————————————————————————————————-
Sec. 150.11(a)(1)…………………………………… 5 $122 $610
[5 x $122]
—————————————————————————————————————-
[[Page 38497]]
Table B3–Costs To Review Enumerated Anticipatory Bona Fide Hedge Applications
——————————————————————————————————————————————————–
Average total
Total average Total average hours for total Total average Total average
Proposed regulation/review applications applications labor hours per applications labor costs per annual cost per
processed per application reviewed per hour exchange
exchange exchange
——————————————————————————————————————————————————–
Sec. 150.11(a)(2)………………………………………… 50 5 250 $122 $30,500
[$122 x 250]
——————————————————————————————————————————————————–
Table C3–Costs to Market Participants Who Would Seek Enumerated Anticipatory Bona Fide Hedge Relief From Position Limits
——————————————————————————————————————————————————–
Average total
Number of Total average Total average hours for each Total average Total average
Proposed regulation/market participants seeking market applications labor hours per application labor costs per annual cost per
relief from position limits participants per market application filed per hour market
participant exchange participant
——————————————————————————————————————————————————–
Sec. 150.11(a)(2), (6)…………………….. 25 2 3 6 $122 $732
[2 x 3] [6 x $122]
——————————————————————————————————————————————————–
Table D3–Costs for Enumerated Anticipatory Bona Fide Hedge Recordkeeping
—————————————————————————————————————-
Total average
Total average Total average annual
Proposed regulation/recordkeeping Number of DCMs labor hours for labor costs per recordkeeping
recordkeeping hour cost per exchange
—————————————————————————————————————-
Sec. 150.11(b)……………………. 6 30 $122 $3,660
[30 x $122]
—————————————————————————————————————-
Table E3–Costs for Enumerated Anticipatory Bona Fide Hedge Weekly Reporting
——————————————————————————————————————————————————–
Average Total average
Estimated Estimated reports Total average annual
Proposed regulation/weekly reporting number of DCMs number of hours annually by labor costs per reporting cost
per response each exchange hour per exchange
——————————————————————————————————————————————————–
Sec. 150.11(c)…………………………………………… 6 3 52 $122 $19,032
[3 x 52 x $122]
——————————————————————————————————————————————————–
Exchanges would have additional surveillance costs and duties that
the Commission believes would be integrated with their existing self-
regulatory organization surveillance activities as an exchange.
f. Request for Comment
RFC 50. The Commission requests comment on its considerations of
the benefits of proposed Sec. 150.11. Are there additional benefits
that the Commission should consider? Has the Commission misidentified
any benefits? Commenters are encouraged to include both quantitative
and qualitative assessments of these benefits, as well as data or other
information to support such assessments.
RFC 51. The Commission requests comment on its considerations of
the costs of proposed Sec. 150.11. Are there additional costs that the
Commission should consider? Has the Commission misidentified any costs?
What other relevant cost information or data, including alternative
cost estimates, should the Commission consider and why? Commenters are
encouraged to include both quantitative and qualitative assessments of
these costs, as well as data or other information to support such
assessments.
RFC 52. The Commission recognizes that there may exist alternatives
to proposed Sec. 150.11, such as maintaining the status quo, or
adopting only Sec. 150.7 as proposed in the December 2013 position
limits proposal.229 The Commission requests comment on whether
alternatives to proposed Sec. 150.11 would result in a superior cost-
benefit profile, with support for any such alternative provided. The
Commission requests comment on whether the framework for recognizing
enumerated anticipatory bona fide hedging positions as proposed in the
December 2013 position limits proposal would be superior from a cost-
benefit perspective to proposed Sec. 150.11. If yes, please explain
why.
—————————————————————————
229 See December 2013 position limits proposal at 75776-77.
—————————————————————————
8. CEA Section 15(a) Factors
CEA section 15(a) requires the Commission to consider the costs and
benefits of its actions in light of five factors, which it proposes to
do below. The Commission welcomes comments on its discussion of the
proposed rules in this supplemental proposal and the CEA 15(a) factors.
i. Protection of Market Participants and the Public
The imposition of position limits is intended to protect the
markets and market participants from manipulation and excessive
speculation. Yet, there are
[[Page 38498]]
circumstances where position limits may be exceeded by bona fide hedge
positions or spread positions, as provided in the CEA. By proposing the
rules in this supplemental proposal, the Commission is offering market
participants several reasonable alternatives by which they may
establish bona fide hedge positions or spread positions that exceed
position limits. The proposed alternatives require, among other things,
exchanges to document and record their decisions to recognize bona fide
hedge positions or to exempt spread positions. The Commission believes
that the discipline of having exchanges review and document such
decisions protects hedgers, speculators, and markets from abuse of
recognitions and exemptions. In general, exchanges have strong
incentives, such as preserving the revenue from trading, maintaining
credibility, and protecting markets and market participants from
excessive speculation, manipulation, corners, and squeezes. In
addition, the proposed rules would enable the Commission to protect
markets and market participants because the Commission would be able to
perform second-level reviews of exchange-administered processes
regarding exemptions from speculative position limits, if necessary,
and have available documentation for surveillance and enforcement
actions.
RFC 53: Does permitting the exchanges to administer application
processes for NEBFHs, spread exemptions, and enumerated anticipatory
bona fide hedges further the goals of CEA section 4a(a)(3)(B) and
properly protect market participants and the public? Please explain.
RFC 54: Does permitting the exchanges to administer application
processes for NEBFHs, spread exemptions, and enumerated anticipatory
bona fide hedges affect excess speculation? Please explain.
RFC 55: Will the ability to assume larger positions by way of
exemptions under this supplemental proposal facilitate effective market
manipulation by market participants availing themselves of such
exemptions? Are existing safeguards and deterrents to market
manipulation sufficient to prevent manipulation or does the Commission
need to impose position limits without exchange-granted exemptions to
prevent manipulation, prophylactically? Please explain.
ii. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
Market manipulation and excessive speculation harm the efficiency,
competitiveness, and financial integrity of markets. Position limits
are intended to prevent market manipulation and excessive speculation.
There are, however, positions that may exceed position limits, such as
those permitted by proposed Sec. Sec. 150.9, 150.10, and 150.11, that
promote market efficiency and competitiveness. For example, the
proposed rules require an exchange to consider the policy objectives of
position limits, prior to granting a spread exemption. If a market
participant exerts market power, it might adversely affect market
integrity because other market participants might perceive the
underlying pricing process to be unfair. The proposed rules are
designed, in part, to give exchanges the ability and information to
guard against accumulation and exercise of market power that may result
from excessive speculation, and, therefore, promote financial integrity
and confidence in the markets.
RFC 56: Is market integrity adversely affected by the proposed
rules in this supplemental proposal? If so, how might the Commission
mitigate any harmful impact?
RFC 57: Should the Commission provide more guidance to exchanges on
how to assess recognitions under this supplemental proposal, for
example, guidance on cash-and-carry spreads, or any other spreads
involving the spot-month contract?
RFC 58: What costs and benefits would accrue to exchanges and
market participants should the Commission provide additional guidance
to exchanges on how to assess recognitions under this supplemental
proposal? Please explain.
RFC 59: Are there any anti-competitive effects between exchanges,
or exchanges and SEFs, because the rules proposed in this supplemental
proposal have the practical effect of allowing exchanges to recognize
and grant exemptions from position limits? If so, what are they? Please
explain.
iii. Price Discovery
The Commission believes that the recognition and exemption
processes proposed to be administered by exchanges in this supplemental
proposal will foster liquidity and potentially improve price discovery.
Because exchanges possess knowledge about the commercial needs of
market participants and the needs of markets, the proposed rules will
enable exchanges to recognize and exempt positions in a timely and
reasonable manner to help facilitate more stable prices. With more
stable prices, market participants will have the ability to trade in
and out of derivative positions more easily and with lower costs of
execution.
RFC 60: How might the rules proposed in this supplemental proposal
affect price discovery? Please explain.
RFC 61: How might the rules proposed in this supplement proposal
affect liquidity?
RFC 62: Will price discovery be improved on exchanges because of
the exemptions outlined in this supplemental proposal?
RFC 63: How might spread exemptions that go into the spot month
affect price discovery?
RFC 64: What price-discovery costs and benefits would accrue for
spread exemptions that go into the spot month? Please explain.
iv. Sound Risk Management Practices
Under the proposed rules, market participants must explain and
document the methods behind their hedging strategies to exchanges, and
exchanges would have to evaluate them. As a result, the Commission
believes that the exchange-administered processes discussed in this
supplemental proposal should help market participants, exchanges, the
Commission, and the public to understand better the risk management
techniques and objectives of various market participants.
RFC 65: How might the rules proposed in this supplemental proposal
affect sound risk management practices?
v. Other Public Interest Considerations
Except as discussed above, the Commission has not identified any
other public interest considerations.
RFC 66: Are there any other public interest considerations that the
Commission should consider?
RFC 67: The Commission seeks comments on all aspects of its cost
and benefit considerations. To the extent that any of the proposed
rules in this supplemental proposal have an impact on activities
outside the United States, the Commission requests comment on whether
the associated costs and benefits are likely to be different from those
associated with their impact on activities within the United States;
and, if so, in what particular ways and to what extent. While at this
point in time the Commission does not foresee any other costs or
benefits that might be associated with the cross-border implications of
this proposal, it seeks further any comment on this topic. For
instance, would price discovery move to a foreign board of trade
because of this proposed rulemaking? On all issues, commenters are
encouraged to supply data and quantify where practical.
[[Page 38499]]
RFC 68: The Commission requests comment on whether there will be
any lost benefits related to position limits because of the
recognitions and exemptions in the proposed rules in this supplemental
proposal.
9. CEA 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 rules and guidance proposed in this supplemental
notice of proposed rulemaking are consistent with the public interest
protected by the antitrust laws.
The Commission acknowledges that, with respect to exchange
qualifications to recognize or grant NEBFHs, spread exemptions, and
anticipatory bona fide hedges for federal position limit purposes, the
threshold experience requirements that it proposes will advantage
certain more-established incumbent DCMs (“incumbent DCMs”) over
smaller DCMs seeking to expand or future entrant DCMs (collectively
“entrant DCMs”) or SEFs.230 Specifically, incumbent DCMs–based on
their past track records of listing actively traded reference contracts
and setting and administering exchange-set limits applicable to those
contracts for at least a year–will be immediately eligible to submit
rules to the Commission under part 40 to process trader applications
for recognition of NEBFHs, spread exemptions,231 and anticipatory
bona fide hedges; in contrast, entrant DCMs and SEFs will be foreclosed
until such time as they have met the eligibility criteria to do so.
However, subject to consideration of any comments supporting a contrary
view, the Commission does not perceive that an ability to process
applications for NEBFHs, spread exemptions and/or anticipatory bona
fide hedges is a necessary function for a DCM or SEF to compete
effectively as a trading facility. In the event an incumbent DCM
declines to process a trader’s request for hedging recognition or a
spread exemption,232 the trader may seek the recognition or exemption
directly from the Commission in order to trade on an entrant DCM or
SEF. Accordingly, the Commission does not view the proposed threshold
experience requirements as establishing a barrier to entry or
competitive restraint likely to facilitate anticompetitive effects in
any relevant antitrust market for contract trading.233
—————————————————————————
230 Proposed rules Sec. Sec. 150.9(a)(1), 150.10(a)(1), and
150.11(a)(1).
231 In the case of qualifications to exempt certain spread
positions, the contract may be either a referenced contract or a
component of the spread. See proposed rule Sec. 150.10(a)(1)(i).
232 The Commission recognizes that in certain circumstances it
might be in an exchange’s economic interest to deny processing a
particular trader’s application for hedge recognition or a spread
exemption. For example, this might occur in a circumstance in which
a trader has reached the exchange-set limit and the exchange
determines that liquidity is insufficient to maintain a fair and
orderly contract market if the trader’s position increases.
233 See, e.g., Brown Shoe Co. v. U.S., 370 U.S. 294, 324-25
(1962) (“The outer boundaries of a product market are determined by
the reasonable interchangeability of use or the cross-elasticity of
demand between the product itself and the substitutes for it”);
U.S. v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 593 (1957)
(“Determination of the relevant market is a necessary predicate to
finding a violation”); Rebel Oil v. Atl. Richfield Co., 51 F. 3d
1421, 1434 (9th Cir. 1995) (“A `market’ is any grouping of sales
whose sellers, if unified by a monopolist or a hypothetical cartel
would have market power in dealing with any group of buyers,”
quoting Phillip Areeda & Herbert Hovenkamp, Antitrust Law ] 518.1b,
at 534 (Supp. 1993)).
—————————————————————————
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. Is the Commission correct
that the proposed threshold criteria for an exchange to qualify to
process applications for recognition of NEBFHs, spread exemptions, and
enumerated anticipatory bona fide hedges is unlikely to create a
competitive barrier to entry or expansion that will insulate incumbent
DCMs from competition for contract trading or otherwise contribute to
anticompetitive effects in any relevant antitrust market(s) for
contract trading?
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. 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). 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. While the requirements
under the proposed rulemaking may impact non-financial end users, the
Commission notes that position limits levels apply only to large
traders. Accordingly, the Chairman, on behalf of the Commission, hereby
certifies, on behalf of the Commission, pursuant to 5 U.S.C. 605(b),
that the actions proposed to be taken herein would not have a
significant economic impact on a substantial number of small entities.
The Chairman made the same certification in the 2013 Position Limits
Proposal.
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
[[Page 38500]]
records pursuant to the Privacy Act of 1974.
On December 12, 2013, the Commission published in the Federal
Register a notice of proposed modifications to parts 1, 15, 17, 19, 32,
37, 38, 140, and 150 of the Commission’s regulations (as defined above,
the “December 2013 position limits proposal”). The modifications
addressed, among other things, speculative position limits for 28
exempt and agricultural commodity futures and options contracts and the
physical commodity swaps that are “economically equivalent” to such
contracts. The Commission is now proposing revisions to the December
2013 position limits proposal.
Specifically, the Commission is now proposing that the position
limits set forth in Sec. 150.2 may be exceeded to the extent that a
commodity derivative position is recognized, as an NEBFH, exempt spread
position, or enumerated anticipatory bona fide hedge, by a derivatives
contract market or swap execution facility. A designated contract
market or swap execution facility that elects to process applications
pursuant to the proposed rules must file new rules or rule amendments
with the Commission pursuant to Part 40. Such new rules or rule
amendments must comply with certain conditions set forth in proposed
Sec. Sec. 150.9(a), 150.10(a), and/or 150.11(a), as applicable.
Further, such rules must state that in order to apply for an exemption
with a particular designated contract market or swap execution
facility, a person would need to meet certain criteria and file an
application with the relevant derivatives contract market or swap
execution facility in accordance with proposed Sec. Sec. 150.9(a),
150.10(a), or 150.11(a), as applicable.
2. Methodology and Assumptions
It is not possible at this time to accurately determine the number
of respondents affected by the proposed revisions to the December 2013
position limits proposal. This current proposal permits designated
contract markets and swap execution facilities to elect to process
applications for recognition of NEBFHs, exempt spread positions, or
enumerated anticipatory bona fide hedges. Accordingly, the Commission
does not know which, or how many, designated contract markets and swap
execution facilities may elect to offer such recognition processes, or
which, or how many market participants may submit applications.
Further, the Commission is unsure of how many designated contract
markets, swap execution facilities, and market participants not
currently active in the market 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
data currently provided by designated contract markets to estimate the
number of respondents for each of the proposed obligations subject to
the PRA. The Commission estimated the number of exchanges that may
elect to process applications for recognition of NEBFHs, exempt spread
positions, or enumerated anticipatory bona fide hedges, and the number
of market participants who may file for relief from position limit
requirements under the proposed processes. The Commission also used
information from testimony given at Commission advisory committee
meetings. Further, the Commission asked several questions of the five
exchanges that, in the Commission’s knowledge, currently process
applications for exemptions to exchange-set position limits, to
ascertain the burdens on the exchanges that may arise should such
exchanges elect to process applications under proposed Sec. Sec.
150.9, 150.10, and/or 150.11. The Commission received responses to its
questions regarding the administration of current exchange processes
for approving exemptions from position limits from representatives of
four exchanges. The Commission preliminarily believes that the burden
estimates provided by these four exchanges are sufficiently
representative of all potentially affected entities, and is providing
average estimates in order to estimate the potential impact on all
entities, particularly those which do not currently process exemption
applications. Thus, the Commission proposes to use these estimates, as
well as figures provided in testimony from the Energy and Environmental
Markets Advisory Committee and Agricultural Advisory Committee
meetings, to calculate burdens for the purposes of the Paperwork
Reduction Act. The Commission welcomes comment on its estimates and the
methodology described above.
The Commission’s estimates concerning wage rates are based on 2013
salary information for the securities industry compiled by the
Securities Industry and Financial Markets Association (“SIFMA”). The
Commission is using a figure of $122 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 2013, modified to account for an 1800-hour work-year, adjusted
to account for the average rate of inflation in 2013. This figure was
then multiplied by 1.33 to account for benefits, and further by 1.5 to
account for overhead and administrative expenses. The Commission
anticipates that compliance with the provisions would require the work
of an information technology professional; a compliance manager; an
accounting professional; and an associate general counsel. Thus, the
wage rate is a weighted national average of salary for professionals
with the following titles (and their relative weight); “programmer
(average of senior and non-senior)” (15% weight), “senior
accountant” (15%) “compliance manager” (30%), and “assistant/
associate general counsel” (40%). All monetary estimates below have
been rounded to the dollar.
The Commission welcomes comment on its assumptions and estimates.
3. Collections of Information–Information Provided by Reporting
Entities and Recordkeeping Duties
(a) Requirements for Designated Contract Markets and Swaps Execution
Facilities Filing New or Amended Rules Pursuant to Part 40
Proposed Sec. Sec. 150.9(a), 150.10(a), and 150.11(a) require that
designated contract markets and swap execution facilities file new
rules or rule amendments pursuant to Part 40 of this chapter,
establishing or amending its application process for recognition of
NEBFHs, exempt spread positions, or enumerated anticipatory bona fide
hedges, respectively, consistent with the requirements of proposed
Sec. Sec. 150.9, 150.10, and 150.11. Further, proposed Sec. Sec.
150.9(a), 150.10(a), and 150.11(a) require that designated contract
markets and swap execution facilities post to their Web sites a summary
describing the type of derivative positions that are recognized as
exempt non-enumerated hedge positions.
The Commission estimates that, at most, 6 entities will file new
rules or rule amendments pursuant to Part 40 to elect to process NEBFH
applications. The Commission determined this estimate by analyzing how
many exchanges currently list actively traded contracts for the 28
commodities for which federal position limits will be set, because
proposed Sec. Sec. 150.9(a), 150.10(a), and 150.11(a) require a
referenced contract to be listed by and actively traded on any exchange
that elects to process NEBHF applications for
[[Page 38501]]
recognition of positions in such referenced contract. The Commission
anticipates that the exchanges that elect to process NEBFH applications
under proposed Sec. 150.9(a) are likely to have processes for
recognizing such exemptions currently, and so would need to file
amendments to existing exchange rules rather than adopt new rules. This
filing would be required only once. Thus, the Commission approximates
an average per entity burden of 5 labor hours. At an estimated labor
cost of $122, the Commission estimates an average cost of approximately
$610 per entity for filings under proposed Sec. 150.9(a).
Similarly, the Commission anticipates that the exchanges that elect
to process spread exemption applications under proposed Sec. 150.10(a)
are likely to have processes for recognizing such exemptions currently,
and so would need to file amendments to existing exchange rules rather
than adopt new rules. This filing would be required only once. Thus,
the Commission approximates an average per entity burden of 5 labor
hours. At an estimated labor cost of $122, the Commission estimates an
average cost of approximately $610 per entity for filings under
proposed Sec. 150.10(a).
In addition, the Commission anticipates that the exchanges that
elect to process enumerated anticipatory bona fide hedge applications
under proposed Sec. 150.11(a) are likely to have processes for
recognizing such exemptions currently, and so would need to file
amendments to existing exchange rules rather than adopt new rules. This
filing would be required only once. Thus, the Commission approximates
an average per entity burden of 5 labor hours. At an estimated labor
cost of $122, the Commission estimates an average cost of approximately
$610 per entity for filings under proposed Sec. 150.11(a).
Review and Disposition of Applications
An exchange that elects to process applications may incur a burden
related to the review and disposition of such applications pursuant to
proposed Sec. Sec. 150.9(a), 150.10(a), and 150.11(a). The review of
an application is required to include analysis of the facts and
circumstances of such application to determine whether the application
meets the standards established by the Commission. Exchanges are
required to notify the applicant regarding the disposition of the
application, including whether the application was approved, denied,
referred to the Commission, or requires additional information.
The Commission anticipates that the exchanges that elect to process
NEBFH applications under proposed Sec. 150.9(a) are likely to have
processes for the review and disposition of such applications currently
in place. The Commission preliminarily believes that in such cases,
complying with the proposed rules is likely to be less burdensome
because the exchange would already have staff, policies, and procedures
established to accomplish its duties under the proposed rules. Thus,
the Commission estimates that each exchange would process an average of
185 NEBFH applications per year and that each application would require
5 hours to process, for an average per entity burden of 925 labor hours
annually. At an estimated labor cost of $122, the Commission estimates
an average cost of approximately $112,850 per entity under proposed
Sec. 150.9(a).
The Commission anticipates that the exchanges that elect to process
spread exemption applications under proposed Sec. 150.10(a) are likely
to have processes for the review and disposition of such applications
currently in place. The Commission preliminarily believes that in such
cases, complying with the proposed rules is likely to be less
burdensome because the exchange would already have staff, policies, and
procedures established to accomplish its duties under the proposed
rules. Thus, the Commission estimates that each exchange would process
about 50 spread exemption applications per year and that each
application would require 5 hours to process, for an average per entity
burden of 250 labor hours annually. At an estimated labor cost of $122,
the Commission estimates an average cost of approximately $30,500 per
entity under proposed Sec. 150.10(a).
The Commission anticipates that the exchanges that elect to process
enumerated anticipatory bona fide hedge applications under proposed
Sec. 150.11(a) are likely to have processes for the review and
disposition of such applications currently in place. The Commission
preliminarily believes that in such cases, complying with the proposed
rules is likely to be less burdensome because the exchange would
already have staff, policies, and procedures established to accomplish
its duties under the proposed rules. Thus, the Commission estimates
that each entity would process about 50 anticipatory hedging
applications per year and that each application would require 5 hours
to process, for an average per entity burden of 250 labor hours
annually. At an estimated labor cost of $122, the Commission estimates
an average cost of approximately $30,500 per entity under proposed
Sec. 150.11(a).
Publication of Summaries
Further, exchanges that elect to process the applications under
proposed Sec. Sec. 150.9 and 150.10 may incur burdens to publish on
their Web sites summaries of the unique types of NEBFH positions and
spread positions, respectively. Although this requirement is new even
for exchanges that already have a similar process under exchange-set
limits, the Commission preliminarily believes that the proposed
summaries will not be overly burdensome in part because they are
anticipated to be concise.
The Commission preliminarily believes that complying with the
requirements under proposed Sec. 150.9(a) for summaries of recognized
NEBFHs would require the work of an analyst to write and a supervisor
to approve a summary. The summary would also need to be published on
the exchange’s Web site. The Commission estimates that a single summary
would require 5 hours to write, approve, and post. The Commission notes
that exchanges likely would need to post more summaries in the first
year of the process, as over time the applications may become more
routine. The Commission thus estimates that each exchange would post
approximately 30 summaries per year, for an average per entity burden
of 5 labor hours annually. At an estimated labor cost of $122, the
Commission estimates an average cost of approximately $18,300 per
entity under proposed Sec. 150.9(a).
The Commission preliminarily believes that complying with the
requirements under proposed Sec. 150.10(a) for summaries of recognized
spread exemptions would require the work of an analyst to write and a
supervisor to approve the summary. The summary would also need to be
published on the exchange’s Web site. The Commission estimates that a
single summary would require 5 hours to write, approve, and post. The
Commission notes that exchanges likely would need to post more
summaries in the first year of the process, as over time the
applications may become more routine. The Commission thus estimates
that each entity would post approximately 10 summaries per year, for an
average per entity burden of 50 labor hours annually. At an estimated
labor cost of $122, the Commission estimates an average cost of
approximately $6,100 per entity under proposed Sec. 150.10(a).
(b) Requirements for Market Participants
Proposed Sec. Sec. 150.9(a)(3), 150.10(a)(3), and 150.11(a)(2),
would require electing
[[Page 38502]]
designated contract markets and swap execution facilities to establish
an application process that elicits sufficient information to allow the
designated contract market or swap execution facility to determine, and
the Commission to verify, whether it is appropriate to recognize a
commodity derivative position as an NEBFH, exempt spread position or
enumerated anticipatory bona fide hedge. Pursuant to Sec. Sec.
150.9(a)(4)(i), 150.10(a)(4), and 150.11(a)(3), an applicant would be
required to update an application at least on an annual basis. Further,
Sec. Sec. 150.9(a)(6), 150.10(a)(6), and 150.11(a)(5) require that any
such applicant file a report with the designated contract market or
swap execution facility (and with the Commission in the case of
150.10(a)(5)) when such applicant owns or controls a derivative
position that such has been recognized as an NEBFH, exempt spread, or
enumerated anticipatory bona fide hedge, respectively.
The Commission anticipates that market participants would be mostly
familiar with the NEBFH application provided by exchanges that
currently process such applications, and thus preliminarily believes
that the burden for applying to an exchange would be minimal.
Information included in the application is required to be sufficient to
allow the exchange to determine, and the Commission to verify, whether
the position meets the requirements of CEA section 4a(c), but specific
data fields are left to the exchanges to determine. The Commission
believes that there would be a slight additional burden for market
participants to submit the notice that must be filed when such
participant owns or controls the position that has been recognized as a
NEBFH.
The Commission estimates that 222 entities will file an average of
5 applications each year to obtain recognition of certain positions as
NEBFHs and that each application, including the notice filing when the
participant owns or controls such positions, would require
approximately 4 burden hours to complete and file. Thus, the Commission
estimates an average per entity burden of 20 labor hours annually. At
an estimated labor cost of $122, the Commission estimates an average
cost of approximately $2,440 per entity for applications under proposed
Sec. 150.9(a)(3).
The Commission anticipates that market participants would be mostly
familiar with the spread exemption application provided by exchanges
that currently process such applications, and thus preliminarily
believes that the burden for applying to an exchange would be minimal.
Information included in the application is required to be sufficient to
allow the exchange to determine, and the Commission to verify, whether
the position fulfills the objectives of CEA section 4a(a)(3)(B), but
specific data fields are left to the exchanges to determine. The
Commission believes that there would be a slight additional burden for
market participants to submit the notice that must be filed when such
participant owns or controls the spread position that has been exempted
from position limits. The Commission estimates that 25 entities will
file an average of 2 applications each year to obtain an exemption for
certain spread positions and that each application, including the
notice filing when the participant owns or controls such positions,
would require approximately 3 burden hours to complete and file. Thus,
the Commission approximates an average per entity burden of 6 labor
hours annually. At an estimated labor cost of $122, the Commission
estimates an average cost of approximately $732 per entity for
applications under proposed Sec. 150.10(a)(2).
The Commission anticipates that market participants would be mostly
familiar with the enumerated anticipatory bona fide hedge application
provided by exchanges that currently process such applications, and
thus preliminarily believes that the burden for applying to an exchange
would be minimal. The application is required to include, at minimum,
the information required under proposed Sec. 150.7(d). The Commission
estimates that 25 entities will file an average of 2 applications each
year to obtain recognition that certain positions are enumerated
anticipatory bona fide hedges and that each application would require
approximately 3 burden hours to complete and file. Thus, the Commission
estimates an average per entity burden of 6 labor hours annually. At an
estimated labor cost of $122, the Commission estimates an average cost
of approximately $732 per entity for applications under proposed Sec.
150.11(a)(2).
(c) Recordkeeping and Reporting
Proposed Sec. Sec. 150.9(b), 150.10(b), and 150.11(b), would
require electing designated contract markets and swap execution
facilities to keep full, complete, and systematic records, which
include all pertinent data and memoranda, of all activities relating to
the processing and disposition of applications for recognition of
NEBFHs, exempt spread positions, and enumerated anticipatory bona fide
hedges. Further, proposed Sec. Sec. 150.9(c), 150.10(c), and
150.11(c), would require designated contract markets and swap execution
facilities that elect to process NEBFH applications to submit to the
Commission a report for each week as of the close of business on Friday
showing various information concerning the derivative positions that
have been recognized by the designated contract market or swap
execution facility as an NEBFH, exempt spread position, or enumerated
anticipatory bona fide hedge position, and for any revocation,
modification or rejection of such recognition. Finally, proposed
Sec. Sec. 150.9(c) and 150.10(c) also require a designated contract
market or swap execution facility that elects to process applications
for NEBFHs and exempt spread positions to submit to the Commission (i)
a summary of any NEBFH and exempt spread position newly published on
the designated contract market or swap execution facility’s Web site;
and (ii) no less frequently than monthly, any report submitted by an
applicant to such designated contract market or swap execution facility
pursuant to rules required under proposed Sec. Sec. 150.9(a)(6)and
150.10(a)(6), respectively.
The Commission preliminarily believes that exchanges that currently
process applications for recognition of NEBFHs, exempt spread
positions, and enumerated anticipatory bona fide hedges maintain
records of such applications as required pursuant to other Commission
regulations, including Sec. 1.31. However, the Commission also
believes that the proposed rules may confer additional recordkeeping
obligations on exchanges that elect to process applications for
recognition of NEBFHs, exempt spread positions, and enumerated
anticipatory bona fide hedges. The Commission estimates that 6 entities
will have recordkeeping obligations pursuant to proposed Sec. 150.9.
Thus, the Commission approximates an average per entity burden of 30
labor hours annually. At an estimated labor cost of $122, the
Commission estimates an average cost of approximately $3,660 per entity
for records and filings under proposed Sec. 150.9.
The Commission estimates that 6 entities will have recordkeeping
obligations pursuant to proposed Sec. 150.10. Thus, the Commission
estimates an average per entity burden of 30 labor hours annually. At
an estimated labor cost of $122, the Commission estimates an average
cost of approximately $3,660 per entity for
[[Page 38503]]
records and filings under proposed Sec. 150.10.
The Commission estimates that 6 entities will have recordkeeping
obligations pursuant to proposed Sec. 150.11. Thus, the Commission
estimates an average per entity burden of 30 labor hours annually. At
an estimated labor cost of $122, the Commission estimates an average
cost of approximately $3,660 per entity for records and filings under
proposed Sec. 150.11.
Finally, the Commission anticipates that exchanges that elect to
process applications for recognition of NEBFHs, spread exemptions, and
enumerated anticipatory bona fide hedges will be required to file two
types of reports, as stated above. The Commission understands that 5
exchanges currently submit reports, on a voluntary basis each month,
which provide information regarding exchange-recognized exemptions of
all types. The Commission preliminarily believes that the content of
such reports is similar to the information required of the reports in
proposed Sec. Sec. 150.9(c), 150.10(c), and 150.11(c), but the
frequency of such reports would increase under the proposed rules.
The Commission estimates that 6 entities will have weekly reporting
obligations pursuant to proposed Sec. 150.9(c). The Commission also
estimates that the weekly report will require a burden of approximately
3 hours to complete and submit. Thus, the Commission estimates an
average per entity burden of 156 labor hours annually. At an estimated
labor cost of $122, the Commission estimates an average cost of
approximately $19,032 per entity for weekly reports under proposed
rules 150.9(c).
The Commission estimates that 6 entities will have weekly reporting
obligations pursuant to proposed Sec. 150.10(c). The Commission also
estimates that the weekly report will require a burden of approximately
3 hours to complete and submit. Thus, the Commission estimates an
average per entity burden of 156 labor hours annually. At an estimated
labor cost of $122, the Commission estimates an average cost of
approximately $19,032 per entity for weekly reports under proposed
Sec. 150.10(c).
The Commission estimates that 6 entities will have weekly reporting
obligations pursuant to proposed Sec. 150.11(c). The Commission also
estimates that the weekly report will require a burden of approximately
3 hours to complete and submit. Thus, the Commission approximates an
average per entity burden of 156 labor hours annually. At an estimated
labor cost of $122, the Commission estimates an average cost of
approximately $19,032 per entity for weekly reports under proposed
Sec. 150.11(c).
For the monthly report, the Commission anticipates a minor burden
for exchanges because the proposed rules require exchanges essentially
to forward to the Commission notices received from applicants who own
or control the positions that have been recognized or exempted.
The Commission estimates that 6 entities will have monthly
reporting obligations pursuant to proposed Sec. 150.9(c). The
Commission also estimates that the monthly report will require a burden
of approximately 2 hours to complete and submit. Thus, the Commission
approximates an average per entity burden of 24 labor hours annually.
At an estimated labor cost of $122, the Commission estimates an average
cost of approximately $2,928 per entity for monthly reports under
proposed Sec. 150.9(c).
The Commission estimates that 6 entities will have monthly
reporting obligations pursuant to proposed Sec. 150.10(c). The
Commission also estimates that the monthly report will require a burden
of approximately 2 hours to complete and submit. Thus, the Commission
approximates an average per entity burden of 24 labor hours annually.
At an estimated labor cost of $122, the Commission estimates an average
cost of approximately $2,928 per entity for monthly reports under
proposed Sec. 150.10(c). The above estimates are summarized in the
following table:
——————————————————————————————————————————————————–
Average
reports
Type of respondent Estimated number of Report or record annually by Total annual Estimated number of Annual burden
respondents each responses hours per response in fiscal year
respondent
——————————————————————————————————————————————————–
a b……………….. c……………….. d e 234 f……………….. g 235
——————————————————————————————————————————————————–
Exchanges…………………….. 6……………….. Sec. 150.9(a) Rule 1 6 5……………….. 30
Filing.
6……………….. Sec. 150.10(a) Rule 1 6 5……………….. 30
Filing.
6……………….. Sec. 150.11(a) Rule 1 6 5……………….. 30
Filing.
6……………….. Sec. 150.9(a) 185 1,110 5……………….. 5,550
Review.
6……………….. Sec. 150.10(a) 50 300 5……………….. 1,500
Review.
6……………….. Sec. 150.11(a) 50 300 5……………….. 1,500
Review.
6……………….. Sec. 150.9(a) 30 180 5……………….. 900
Summaries.
6……………….. Sec. 150.10(a) 10 60 5……………….. 300
Summaries.
6……………….. Sec. 150.9(a) 1 6 30………………. 180
Recordkeeping.
6……………….. Sec. 150.10(a) 1 6 30………………. 180
Recordkeeping.
6……………….. Sec. 150.11(a) 1 6 30………………. 180
Recordkeeping.
6……………….. Sec. 150.9(a) 52 312 3……………….. 936
Weekly Report.
6……………….. Sec. 150.10(a) 52 312 3……………….. 936
Weekly Report.
6……………….. Sec. 150.11(a) 52 312 3……………….. 936
Weekly Report.
6……………….. Sec. 150.9(a) 12 72 2……………….. 144
Monthly Report.
6……………….. Sec. 150.10(a) 12 72 2……………….. 144
Monthly Report.
Market Participants……………. 222……………… Sec. 150.9(a)(3) 5 1,110 4……………….. 4,440
Application & Notice.
25………………. Sec. 150.10(a)(3) 2 50 3……………….. 150
Application & Notice.
25………………. Sec. 150.11(a)(2) 2 50 3……………….. 150
Application & Notice.
——————————– —————
Total…………………….. 278 (distinct ………………… ………….. 4,276 4.26 (average number 18216
entities or persons). of hours per
response).
——————————————————————————————————————————————————–
[[Page 38504]]
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.
—————————————————————————
234 Column b times column d.
235 Column e times column f. Burdens have been rounded to the
nearest whole number where appropriate.
—————————————————————————
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by email at [email protected]. Please provide the Commission with a copy of
comments submitted so that all comments can be summarized and addressed
in the final regulation preamble. Refer to the Addresses section of
this notice for comment submission instructions to the Commission. A
copy of the supporting statements for the collection of information
discussed above may be obtained by visiting RegInfo.gov. OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication of this release. Consequently,
a comment to OMB is most assured of being fully considered if received
by OMB (and the Commission) within 30 days after the publication of
this notice of proposed rulemaking.
List of Subjects
17 CFR Part 37
Registered entities, Registration application, Reporting and
recordkeeping requirements, Swaps, Swap execution facilities.
17 CFR Part 38
Block transaction, Commodity futures, Designated contract markets,
Reporting and recordkeeping requirements, Transactions off the
centralized market.
17 CFR Part 150
Bona fide hedging, Commodity futures, Cotton, Grains, Position
limits, Referenced Contracts, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
PART 37–SWAP EXECUTION FACILITIES
0
1. The authority citation for part 37 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
0
2. In Appendix B to part 37, under the heading Core Principle 6 of
Section 5h of the Act–Position Limits or Accountability, revise
paragraphs (A) and (B) to read as follows:
Appendix B to Part 37–Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 6 of Section 5h of the Act–Position Limits or
Accountability
(A) In general. To reduce the potential threat of market
manipulation or congestion, especially during trading in the
delivery month, a swap execution facility that is a trading facility
shall adopt for each of the contracts of the facility, as is
necessary and appropriate, position limitations or position
accountability for speculators.
(B) Position limits. For any contract that is subject to a
position limitation established by the Commission pursuant to
section 4a(a), the swap execution facility shall:
(1) Set its position limitation at a level not higher than the
Commission limitation; and
(2) Monitor positions established on or through the swap
execution facility for compliance with the limit set by the
Commission and the limit, if any, set by the swap execution
facility.
(a) Guidance. (1) Until a swap execution facility has access to
sufficient swap position information, a swap execution facility that
is a trading facility need not demonstrate compliance with Core
Principle 6(B). A swap execution facility has access to sufficient
swap position information if, for example:
(i) It has access to daily information about its market
participants’ open swap positions; or
(ii) It knows, including through knowledge gained in
surveillance of heavy trading activity occurring on or pursuant to
the rules of the swap execution facility, that its market
participants regularly engage in large volumes of speculative
trading activity that would cause reasonable surveillance personnel
at a swap execution facility to inquire further about a market
participant’s intentions or open swap positions.
(2) When a swap execution facility has access to sufficient swap
position information, this guidance is no longer applicable. At such
time, a swap execution facility is required to demonstrate
compliance with Core Principle 6(B).
(b) Acceptable practices. [Reserved]
* * * * *
PART 38–DESIGNATED CONTRACT MARKETS
0
3. The authority citation for part 38 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as
amended by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376.
0
4. In Appendix B to part 38, under the heading Core Principle 5 of
section 5(d) of the Act: Position Limitations or Accountability, revise
paragraphs (A) and (B) to read as follows:
Appendix B to Part 38–Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 5 of section 5(d) of the Act: POSITION
LIMITATIONS OR ACCOUNTABILITY
(A) IN GENERAL.–To reduce the potential threat of market
manipulation or congestion (especially during trading in the
delivery month), the board of trade shall adopt for each contract of
the board of trade, as is necessary and appropriate, position
limitations or position accountability for speculators.
(B) MAXIMUM ALLOWABLE POSITION LIMITATION.–For any contract
that is subject to a position limitation established by the
Commission pursuant to section 4a(a), the board of trade shall set
the position limitation of the board of trade at a level not higher
than the position limitation established by the Commission.
(a) Guidance. (1) Until a board of trade has access to
sufficient swap position information, a board of trade need not
demonstrate compliance with Core Principle 5(B) with respect to
swaps. A board of trade has access to sufficient swap position
information if, for example:
(i) It has access to daily information about its market
participants’ open swap positions; or
(ii) It knows, including through knowledge gained in
surveillance of heavy trading activity occurring on or pursuant to
the rules of the designated contract market, that its market
participants regularly engage in large volumes of speculative
trading activity that would cause reasonable surveillance personnel
at a board of trade to inquire further about a market participant’s
intentions or open swap positions.
(2) When a board of trade has access to sufficient swap position
information, this guidance is no longer applicable. At such time, a
board of trade is required to demonstrate compliance with Core
Principle 5(B) with respect to swaps.
[[Page 38505]]
(b) Acceptable Practices. [Reserved]
* * * * *
PART 150–LIMITS ON POSITIONS
0
5. The authority citation for part 150 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19,
as amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
0
6. Revise Sec. 150.1 to read as follows:
Sec. 150.1 Definitions.
As used in this part–
Bona fide hedging position means–
(1) Hedges of an excluded commodity. For a position in commodity
derivative contracts in an excluded commodity, as that term is defined
in section 1a(19) of the Act:
(i) Such position is economically appropriate to the reduction of
risks in the conduct and management of a commercial enterprise; and
(ii)(A) Is enumerated in paragraph (3), (4) or (5) of this
definition; or
(B) Is recognized as a bona fide hedging position by the designated
contract market or swap execution facility that is a trading facility,
pursuant to such market’s rules submitted to the Commission, which
rules may include risk management exemptions consistent with Appendix A
of this part; and
(2) Hedges of a physical commodity. For a position in commodity
derivative contracts in a physical commodity:
(i) Such position:
(A) Represents a substitute for transactions made or to be made, or
positions taken or to be taken, at a later time in a physical marketing
channel;
(B) Is economically appropriate to the reduction of risks in the
conduct and management of a commercial enterprise;
(C) Arises from the potential change in the value of–
(1) Assets which a person owns, produces, manufactures, processes,
or merchandises or anticipates owning, producing, manufacturing,
processing, or merchandising;
(2) Liabilities which a person owes or anticipates incurring; or
(3) Services that a person provides, purchases, or anticipates
providing or purchasing; and
(D) Is–
(1) Enumerated in paragraph (3), (4) or (5) of this definition; or
(2) Recognized as shown to be a non-enumerated bona fide hedges by
either a designated contract market or swap execution facility, each in
accordance with Sec. 150.9(a); or by the Commission; or
(ii)(A) Pass-through swap offsets. Such position reduces risks
attendant to a position resulting from a swap in the same physical
commodity that was executed opposite a counterparty for which the
position at the time of the transaction would qualify as a bona fide
hedging position pursuant to paragraph (2)(i) of this definition (a
pass-through swap counterparty), provided that no such risk-reducing
position is maintained in any physical-delivery commodity derivative
contract during the lesser of the last five days of trading or the time
period for the spot month in such physical-delivery commodity
derivative contract; and
(B) Pass-through swaps. Such swap position was executed opposite a
pass-through swap counterparty and to the extent such swap position has
been offset pursuant to paragraph (2)(ii)(A) of this definition.
(3) Enumerated hedging positions. A bona fide hedging position
includes any of the following specific positions:
(i) Hedges of inventory and cash commodity purchase contracts.
Short positions in commodity derivative contracts that do not exceed in
quantity ownership or fixed-price purchase contracts in the contract’s
underlying cash commodity by the same person.
(ii) Hedges of cash commodity sales contracts. Long positions in
commodity derivative contracts that do not exceed in quantity the
fixed-price sales contracts in the contract’s underlying cash commodity
by the same person and the quantity equivalent of fixed-price sales
contracts of the cash products and by-products of such commodity by the
same person.
(iii) Hedges of unfilled anticipated requirements. Provided that
such positions in a physical-delivery commodity derivative contract,
during the lesser of the last five days of trading or the time period
for the spot month in such physical-delivery contract, do not exceed
the person’s unfilled anticipated requirements of the same cash
commodity for that month and for the next succeeding month:
(A) Long positions in commodity derivative contracts that do not
exceed in quantity unfilled anticipated requirements of the same cash
commodity, and that do not exceed twelve months for an agricultural
commodity, for processing, manufacturing, or use by the same person;
and
(B) Long positions in commodity derivative contracts that do not
exceed in quantity unfilled anticipated requirements of the same cash
commodity for resale by a utility that is required or encouraged to
hedge by its public utility commission on behalf of its customers’
anticipated use.
(iv) Hedges by agents. Long or short positions in commodity
derivative contracts by an agent who does not own or has not contracted
to sell or purchase the offsetting cash commodity at a fixed price,
provided that the agent is responsible for merchandising the cash
positions that are being offset in commodity derivative contracts and
the agent has a contractual arrangement with the person who owns the
commodity or holds the cash market commitment being offset.
(4) Other enumerated hedging positions. A bona fide hedging
position also includes the following specific positions, provided that
no such position is maintained in any physical-delivery commodity
derivative contract during the lesser of the last five days of trading
or the time period for the spot month in such physical-delivery
contract:
(i) Hedges of unsold anticipated production. Short positions in
commodity derivative contracts that do not exceed in quantity unsold
anticipated production of the same commodity, and that do not exceed
twelve months of production for an agricultural commodity, by the same
person.
(ii) Hedges of offsetting unfixed-price cash commodity sales and
purchases. Short and long positions in commodity derivative contracts
that do not exceed in quantity that amount of the same cash commodity
that has been bought and sold by the same person at unfixed prices:
(A) Basis different delivery months in the same commodity
derivative contract; or
(B) Basis different commodity derivative contracts in the same
commodity, regardless of whether the commodity derivative contracts are
in the same calendar month.
(iii) Hedges of anticipated royalties. Short positions in commodity
derivative contracts offset by the anticipated change in value of
mineral royalty rights that are owned by the same person, provided that
the royalty rights arise out of the production of the commodity
underlying the commodity derivative contract.
(iv) Hedges of services. Short or long positions in commodity
derivative contracts offset by the anticipated change in value of
receipts or payments due or expected to be due under an executed
contract for services held by the same person, provided that the
contract for services arises out of the production, manufacturing,
processing, use, or transportation of the commodity
[[Page 38506]]
underlying the commodity derivative contract, and which may not exceed
one year for agricultural commodities.
(5) Cross-commodity hedges. Positions in commodity derivative
contracts described in paragraphs (2)(ii), (3)(i) through (iv), and
(4)(i) through (iv) of this definition may also be used to offset the
risks arising from a commodity other than the same cash commodity
underlying a commodity derivative contract, provided that the
fluctuations in value of the position in the commodity derivative
contract, or the commodity underlying the commodity derivative
contract, are substantially related to the fluctuations in value of the
actual or anticipated cash position or pass-through swap and no such
position is maintained in any physical-delivery commodity derivative
contract during the lesser of the last five days of trading or the time
period for the spot month in such physical-delivery contract.
Futures-equivalent means–
(1) An option contract, whether an option on a future or an option
that is a swap, which has been adjusted by an economically reasonable
and analytically supported risk factor, or delta coefficient, for that
option computed as of the previous day’s close or the current day’s
close or contemporaneously during the trading day, and converted to an
economically equivalent amount of an open position in a core referenced
futures contract;
(2) A futures contract which has been converted to an economically
equivalent amount of an open position in a core referenced futures
contract; and
(3) A swap which has been converted to an economically equivalent
amount of an open position in a core referenced futures contract.
Intermarket spread position means a long (short) position in one or
more commodity derivative contracts in a particular commodity, or its
products or its by-products, at a particular designated contract market
or swap execution facility, and a short (long) position in one or more
commodity derivative contracts in that same, or similar, commodity, or
its products or its by-products, away from that particular designated
contract market or swap execution facility.
Intramarket spread position means a long position in one or more
commodity derivative contracts in a particular commodity, or its
products or its by-products, and a short position in one or more
commodity derivative contracts in the same, or similar, commodity, or
its products or its by-products, on the same designated contract market
or swap execution facility.
0
7. Revise Sec. 150.3 to read as follows:
Sec. 150.3 Exemptions.
(a) Positions which may exceed limits. The position limits set
forth in Sec. 150.2 may be exceeded to the extent that:
(1) Such positions are:
(i) Bona fide hedging positions that either:
(A) Comply with the definition in Sec. 150.1; or
(B) Are recognized by a designated contract market or swap
execution facility as:
(1) Non-enumerated bona fide hedges in accordance with the general
definition in Sec. 150.1 and the process in Sec. 150.9(a), provided
that the person has not otherwise been notified by the Commission under
Sec. 150.9(d)(4) or by the designated contract market or swap
execution facility under rules adopted pursuant to Sec.
150.9(a)(4)(iv)(B); or
(2) Anticipatory bona fide hedge positions under paragraphs
(3)(iii), (4)(i), (4)(iii), (4)(iv) and (5) of the bona fide hedging
position definition in Sec. 150.1, provided that for anticipatory bona
fide hedge positions under this paragraph the person complies with the
filing requirements found in Sec. 150.7 or the filing requirements
adopted by a designated contract market or swap execution facility in
accordance with Sec. 150.11(a)(3), as applicable;
(ii) [Reserved];
(iii) [Reserved];
(iv) Spread positions recognized by a designated contract market or
swap execution facility in accordance with Sec. 150.10(a), provided
that the person has not otherwise been notified by the Commission under
Sec. 150.10(d)(4) or by the designated contract market or swap
execution facility under rules adopted pursuant to Sec.
150.10(a)(4)(iv)(B); or
(v) Other positions exempted under paragraph (e) of this section;
and that
(2) [Reserved]
(3) [Reserved]
(b) through (j) [Reserved]
0
8. Revise Sec. 150.5 to read as follows:
Sec. 150.5 Exchange-set speculative position limits.
(a) Requirements and acceptable practices for futures and futures
option contracts subject to federal position limits. (1) For any
commodity derivative contract that is subject to a speculative position
limit under Sec. 150.2, a designated contract market or swap execution
facility that is a trading facility shall set a speculative position
limit that is no higher than the level specified in Sec. 150.2.
(2) Exemptions under Sec. 150.3–(i) Grant of exemption. Any
designated contract market or swap execution facility that is a trading
facility may grant exemptions from any speculative position limits it
sets under paragraph (a)(1) of this section, provided that such
exemptions conform to the requirements specified in Sec. 150.3.
(ii) Application for exemption. Any designated contract market or
swap execution facility that grants exemptions under paragraph
(a)(2)(i) of this section:
(A) Must require traders to file an application requesting such
exemption;
(B) Must require, for any exemption granted, that the trader
reapply for the exemption at least on an annual basis; and
(C) May deny any such application, or limit, condition, or revoke
any such exemption, at any time, including if it determines such
positions would not be in accord with sound commercial practices, or
would exceed an amount that may be established and liquidated in an
orderly fashion.
(3) through (6) [Reserved]
(b) Requirements and acceptable practices for futures and future
option contracts that are not subject to the limits set forth in Sec.
150.2, including derivative contracts in a physical commodity as
defined in Sec. 150.1 and in an excluded commodity as defined in
section 1a(19) of the Act–
(1) through (4) [Reserved]
(5) Exemptions–(i) Hedge exemption. Any hedge exemption rules
adopted by a designated contract market or swap execution facility that
is a trading facility must conform to the definition of bona fide
hedging position in Sec. 150.1 or provide for recognition as a non-
enumerated bona fide hedge in a manner consistent with the process
described in Sec. 150.9(a).
(ii) Other exemptions. A designated contract market or swap
execution facility may grant exemptions for:
(A) [Reserved];
(B) [Reserved].
(C) Intramarket spread positions and intermarket spread positions,
each as defined in Sec. 150.1, provided that the designated contract
market or swap execution facility, in considering whether to grant an
application for such exemption, should take into account whether
exempting the spread position from position limits would, to the
maximum extent practicable, ensure sufficient market liquidity for bona
fide hedgers, and not unreasonably reduce the effectiveness of position
limits to:
(1) Diminish, eliminate, or prevent excessive speculation;
(2) Deter and prevent market manipulation, squeezes, and corners;
and
[[Page 38507]]
(3) Ensure that the price discovery function of the underlying
market is not disrupted.
(D) For excluded commodities, a designated contract market or swap
execution facility may grant, in addition to the exemptions under
paragraphs (b)(5)(i) and (b)(5)(ii)(A) through (C) of this section, a
limited risk management exemption pursuant to rules submitted to the
Commission, consistent with the guidance in Appendix A of this part.
(iii) [Reserved]
(6) through (9) [Reserved]
(c) [Reserved]
0
9. Add Sec. 150.9 to read as follows:
Sec. 150.9 Process for recognition of positions as non-enumerated
bona fide hedges.
(a) Requirements for a designated contract market or swap execution
facility to recognize non-enumerated bona fide hedge positions. (1) A
designated contract market or swap execution facility that elects to
process non-enumerated bona fide hedge applications to demonstrate why
a derivative position satisfies the requirements of section 4a(c) of
the Act shall maintain rules, submitted to the Commission pursuant to
part 40 of this chapter, establishing an application process for
recognition of non-enumerated bona fide hedges consistent with the
requirements of this section and the general definition of bona fide
hedging position in Sec. 150.1. A designated contract market or swap
execution facility may elect to process non-enumerated bona fide hedge
applications for positions in commodity derivative contracts only if,
in each case:
(i) The commodity derivative contract is a referenced contract;
(ii) Such designated contract market or swap execution facility
lists such commodity derivative contract for trading;
(iii) Such commodity derivative contract is actively traded on such
designated contract market or swap execution facility;
(iv) Such designated contract market or swap execution facility has
established position limits for such commodity derivative contract; and
(v) Such designated contract market or swap execution facility has
at least one year of experience and expertise administering position
limits for such commodity derivative contract. A designated contract
market or swap execution facility shall not recognize a non-enumerated
bona fide hedge involving a commodity index contract and one or more
referenced contracts.
(2) A designated contract market or swap execution facility may
establish different application processes for persons to demonstrate
why a derivative position constitutes a non-enumerated bona fide hedge
under novel facts and circumstances and under facts and circumstances
substantially similar to a position for which a summary has been
published on such designated contract market’s or swap execution
facility’s Web site, pursuant to paragraph (a)(7) of this section.
(3) Any application process that is established by a designated
contract market or swap execution facility shall elicit sufficient
information to allow the designated contract market or swap execution
facility to determine, and the Commission to verify, whether the facts
and circumstances in respect of a derivative position satisfy the
requirements of section 4a(c) of the Act and the general definition of
bona fide hedging position in Sec. 150.1, and whether it is
appropriate to recognize such position as a non-enumerated bona fide
hedge, including at a minimum:
(i) A description of the position in the commodity derivative
contract for which the application is submitted and the offsetting cash
positions;
(ii) Detailed information to demonstrate why the position satisfies
the requirements of section 4a(c) of the Act and the general definition
of bona fide hedging position in Sec. 150.1;
(iii) A statement concerning the maximum size of all gross
positions in derivative contracts to be acquired by the applicant
during the year after the application is submitted;
(iv) Detailed information regarding the applicant’s activity in the
cash markets for the commodity underlying the position for which the
application is submitted during the past three years; and
(v) Any other information necessary to enable the designated
contract market or swap execution facility to determine, and the
Commission to verify, whether it is appropriate to recognize such
position as a non-enumerated bona fide hedge.
(4) Under any application process established under this section, a
designated contract market or swap execution facility shall:
(i) Require each person intending to exceed position limits to
submit an application, to reapply at least on an annual basis by
updating that application, and to receive notice of recognition from
the designated contract market or swap execution facility of a position
as a non-enumerated bona fide hedge in advance of the date that such
position would be in excess of the limits then in effect pursuant to
section 4a of the Act;
(ii) Notify an applicant in a timely manner if a submitted
application is not complete. If an applicant does not amend or resubmit
such application within a reasonable amount of time after such notice,
a designated contract market or swap execution facility may reject the
application;
(iii) Determine in a timely manner whether a derivative position
for which a complete application has been submitted satisfies the
requirements of section 4a(c) of the Act and the general definition of
bona fide hedging position in Sec. 150.1, and whether it is
appropriate to recognize such position as a non-enumerated bona fide
hedge;
(iv) Have the authority to revoke, at any time, any recognition
issued pursuant to this section if it determines the recognition is no
longer in accord with section 4a(c) of the Act and the general
definition of bona fide hedging position in Sec. 150.1; and
(v) Notify an applicant in a timely manner:
(A) That the derivative position for which a complete application
has been submitted has been recognized by the designated contract
market or swap execution facility as a non-enumerated bona fide hedge
under this section, and the details and all conditions of such
recognition;
(B) That its application is rejected, including the reasons for
such rejection; or
(C) That the designated contract market or swap execution facility
has asked the Commission to consider the application under paragraph
(a)(8) of this section.
(5) An applicant’s derivatives position shall be deemed to be
recognized as a non-enumerated bona fide hedge exempt from federal
position limits at the time that a designated contract market or swap
execution facility notifies an applicant that such designated contract
market or swap execution facility will recognize such position as a
non-enumerated bona fide hedge.
(6) A designated contract market or swap execution facility that
elects to process non-enumerated bona fide hedge applications shall
file new rules or rule amendments pursuant to part 40 of this chapter,
establishing or amending requirements for an applicant to file a report
with such designated contract market or swap execution facility when
such applicant owns or controls a derivative position that such
designated contract market or swap execution facility has recognized as
a non-enumerated bona fide hedge, and for such applicant to report the
offsetting cash positions. Such rules
[[Page 38508]]
shall require an applicant to update and maintain the accuracy of any
such report.
(7) After recognition of each unique type of derivative position as
a non-enumerated bona fide hedge, based on novel facts and
circumstances, a designated contract market or swap execution facility
shall publish on its Web site, on at least a quarterly basis, a summary
describing the type of derivative position and explaining why it was
recognized as a non-enumerated bona fide hedge.
(8) If a non-enumerated bona fide hedge application presents novel
or complex issues or is potentially inconsistent with section 4a(c) of
the Act and the general definition of bona fide hedging position in
Sec. 150.1, a designated contract market or swap execution facility
may ask the Commission to consider the application under the process
set forth in paragraph (d) of this section. The Commission may, in its
discretion, agree to or reject any such request by a designated
contract market or swap execution facility.
(b) Recordkeeping. (1) A designated contract market or swap
execution facility that elects to process non-enumerated bona fide
hedge applications shall keep full, complete, and systematic records,
which include all pertinent data and memoranda, of all activities
relating to the processing of such applications and the disposition
thereof, including the recognition by the designated contract market or
swap execution facility of any derivative position as a non-enumerated
bona fide hedge, the revocation or modification of any such
recognition, the rejection by the designated contract market or swap
execution facility of an application, or the withdrawal,
supplementation or updating of an application by the applicant.
Included among such records shall be:
(i) All information and documents submitted by an applicant in
connection with its application;
(ii) Records of oral and written communications between such
designated contract market or swap execution facility and such
applicant in connection with such application; and
(iii) All information and documents in connection with such
designated contract market’s or swap execution facility’s analysis of
and action on such application.
(2) All books and records required to be kept pursuant to this
section shall be kept in accordance with the requirements of Sec. 1.31
of this chapter.
(c) Reports to the Commission. (1) A designated contract market or
swap execution facility that elects to process non-enumerated bona fide
hedge applications shall submit to the Commission a report for each
week as of the close of business on Friday showing the following
information:
(i) For each commodity derivative position that has been recognized
by the designated contract market or swap execution facility as a non-
enumerated bona fide hedge, and for any revocation or modification of
such a recognition:
(A) The date of disposition,
(B) The effective date of the disposition,
(C) The expiration date of any recognition,
(D) Any unique identifier assigned by the designated contract
market or swap execution facility to track the application,
(E) Any unique identifier assigned by the designated contract
market or swap execution facility to a type of recognized non-
enumerated bona fide hedge,
(F) The identity of the applicant,
(G) The listed commodity derivative contract to which the
application pertains,
(H) The underlying cash commodity,
(I) The maximum size of the commodity derivative position that is
recognized by the designated contract market or swap execution facility
as a non-enumerated bona fide hedge,
(J) Any size limitation established for such commodity derivative
position on the designated contract market or swap execution facility,
and
(K) A concise summary of the applicant’s activity in the cash
markets for the commodity underlying the commodity derivative position;
and
(ii) The summary of any non-enumerated bona fide hedge published
pursuant to paragraph (a)(7) of this section, or revised, since the
last summary submitted to the Commission.
(2) Unless otherwise instructed by the Commission, a designated
contract market or swap execution facility that elects to process non-
enumerated bona fide hedge applications shall submit to the Commission,
no less frequently than monthly, any report submitted by an applicant
to such designated contract market or swap execution facility pursuant
to rules required under paragraph (a)(6) of this section.
(3) Unless otherwise instructed by the Commission, a designated
contract market or swap execution facility that elects to process non-
enumerated bona fide hedge applications shall submit to the Commission
the information required by paragraphs (c)(1) and (2) of this section,
as follows:
(i) As specified by the Commission on the Forms and Submissions
page at www.cftc.gov;
(ii) Using the format, coding structure, and electronic data
transmission procedures approved in writing by the Commission; and
(iii) Not later than 9:00 a.m. Eastern time on the third business
day following the date of the report.
(d) Review of applications by the Commission. (1) The Commission
may in its discretion at any time review any non-enumerated bona fide
hedge application submitted to a designated contract market or swap
execution facility, and all records required to be kept by such
designated contract market or swap execution facility pursuant to
paragraph (b) of this section in connection with such application, for
any purpose, including to evaluate whether the disposition of the
application is consistent with section 4a(c) of the Act and the general
definition of bona fide hedging position in Sec. 150.1.
(i) The Commission may request from such designated contract market
or swap execution facility records required to be kept by such
designated contract market or swap execution facility pursuant to
paragraph (b) of this section in connection with such application.
(ii) The Commission may request additional information in
connection with such application from such designated contract market
or swap execution facility or from the applicant.
(2) If the Commission preliminarily determines that any non-
enumerated bona fide hedge application or the disposition thereof by a
designated contract market or swap execution facility presents novel or
complex issues that require additional time to analyze, or that an
application or the disposition thereof by such designated contract
market or swap execution facility is potentially inconsistent with
section 4a(c) of the Act and the general definition of bona fide
hedging position in Sec. 150.1, the Commission shall:
(i) Notify such designated contract market or swap execution
facility and the applicable applicant of the issues identified by the
Commission; and
(ii) Provide them with 10 business days in which to provide the
Commission with any supplemental information.
(3) The Commission shall determine whether it is appropriate to
recognize the derivative position for which such application has been
submitted as a non-enumerated bona fide hedge, or whether the
disposition of such application by such designated contract market or
swap execution facility is consistent with section 4a(c) the Act and
the general definition of bona fide hedging position in Sec. 150.1.
[[Page 38509]]
(4) If the Commission determines that the disposition of such
application is inconsistent with section 4a(c) of the Act and the
general definition of bona fide hedging position in Sec. 150.1, the
Commission shall notify the applicant and grant the applicant a
commercially reasonable amount of time to liquidate the derivative
position or otherwise come into compliance. This notification will
briefly specify the nature of the issues raised and the specific
provisions of the Act or the Commission’s regulations with which the
application is, or appears to be, inconsistent.
(e) Review of summaries by the Commission. The Commission may in
its discretion at any time review any summary of a type of non-
enumerated bona fide hedge required to be published on a designated
contract market’s or swap execution facility’s Web site pursuant to
paragraph (a)(7) of this section for any purpose, including to evaluate
whether the summary promotes transparency and fair and open access by
all market participants to information regarding bona fide hedges. If
the Commission determines that a summary is deficient in any way, the
Commission shall notify such designated contract market or swap
execution facility, and grant to the designated contract market or swap
execution facility a reasonable amount of time to revise the summary.
(f) Delegation of authority to the Director of the Division of
Market Oversight. (1) The Commission hereby delegates, until it orders
otherwise, to the Director of the Division of Market Oversight or such
other employee or employees as the Director may designate from time to
time, the authority:
(i) In paragraph (a)(8) of this section to agree to or reject a
request by a designated contract market or swap execution facility to
consider a non-enumerated bona fide hedge application;
(ii) In paragraph (c) of this section to provide instructions
regarding the submission to the Commission of information required to
be reported by a designated contract market or swap execution facility,
to specify the manner for submitting such information on the Forms and
Submissions page at www.cftc.gov, and to determine the format, coding
structure, and electronic data transmission procedures for submitting
such information;
(iii) In paragraph (d)(1) of this section to review any non-
enumerated bona fide hedge application and all records required to be
kept by a designated contract market or swap execution facility in
connection with such application, to request such records from such
designated contract market or swap execution facility, and to request
additional information in connection with such application from such
designated contract market or swap execution facility or from the
applicant;
(iv) In paragraph (d)(2) of this section to preliminarily determine
that a non-enumerated bona fide hedge application or the disposition
thereof by a designated contract market or swap execution facility
presents novel or complex issues that require additional time to
analyze, or that such application or the disposition thereof is
potentially inconsistent with section 4a(c) of the Act and the general
definition of bona fide hedging position in Sec. 150.1, to notify the
designated contract market or swap execution facility and the
applicable applicant of the issues identified, and to provide them with
10 business days in which to file supplemental information; and
(v) In paragraph (e) of this section to review any summary of a
type of non-enumerated bona fide hedge required to be published on a
designated contract market’s or swap execution facility’s Web site, to
determine that any such summary is deficient, to notify a designated
contract market or swap execution facility of a deficient summary, and
to grant such designated contract market or swap execution facility a
reasonable amount of time to revise such summary.
(2) The Director of the Division of Market Oversight may submit to
the Commission for its consideration any matter which has been
delegated in this section.
(3) Nothing in this section prohibits the Commission, at its
election, from exercising the authority delegated in this section.
0
10. Add Sec. 150.10 to read as follows:
Sec. 150.10 Process for designated contract market or swap execution
facility exemption from position limits for certain spread positions.
(a) Requirements for a designated contract market or swap execution
facility to exempt from position limits certain positions normally
known to the trade as spreads. (1) A designated contract market or swap
execution facility that elects to process applications for exemptions
from position limits for certain positions normally known to the trade
as spreads shall maintain rules, submitted to the Commission pursuant
to part 40 of this chapter, establishing an application process for
exempting positions normally known to the trade as spreads consistent
with the requirements of this section. A designated contract market or
swap execution facility may elect to process applications for such
spread exemptions only if, in each case:
(i) Such designated contract market or swap execution facility
lists for trading at least one contract that is either a component of
the spread or a referenced contract that is a component of the spread;
and
(ii) The contract in paragraph (a)(1)(i) of this section is
actively traded and has been subject to position limits of the
designated contract market or swap execution facility for at least one
year. A designated contract market or swap execution facility shall not
approve a spread exemption involving a commodity index contract and one
or more referenced contracts.
(2) Spreads that a designated contract market or swap execution
facility may approve under this section include:
(i) Calendar spreads;
(ii) Quality differential spreads;
(iii) Processing spreads; and
(iv) Product or by-product differential spreads.
(3) Any application process that is established by a designated
contract market or swap execution facility under this section shall
elicit sufficient information to allow the designated contract market
or swap execution facility to determine, and the Commission to verify,
whether the facts and circumstances demonstrate that it is appropriate
to exempt a spread position from position limits, including at a
minimum:
(i) A description of the spread position for which the application
is submitted;
(ii) Detailed information to demonstrate why the spread position
should be exempted from position limits, including how the exemption
would further the purposes of section 4a(a)(3)(B) of the Act;
(iii) A statement concerning the maximum size of all gross
positions in derivative contracts to be acquired by the applicant
during the year after the application is submitted; and
(iv) Any other information necessary to enable the designated
contract market or swap execution facility to determine, and the
Commission to verify, whether it is appropriate to exempt such spread
position from position limits.
(4) Under any application process established under this section, a
designated contract market or swap execution facility shall:
(i) Require each person requesting an exemption from position
limits for its spread position to submit an application, to reapply at
least on an annual basis by updating that application, and to receive
approval in
[[Page 38510]]
advance of the date that such position would be in excess of the limits
then in effect pursuant to section 4a of the Act;
(ii) Notify an applicant in a timely manner if a submitted
application is not complete. If an applicant does not amend or resubmit
such application within a reasonable amount of time after such notice,
a designated contract market or swap execution facility may reject the
application;
(iii) Determine in a timely manner whether a spread position for
which a complete application has been submitted satisfies the
requirements of paragraph (a)(4)(vi) of this section, and whether it is
appropriate to exempt such spread position from position limits;
(iv) Have the authority to revoke, at any time, any spread
exemption issued pursuant to this section if it determines the spread
exemption no longer satisfies the requirements of paragraph (a)(4)(vi)
of this section and it is no longer appropriate to exempt the spread
from position limits;
(v) Notify an applicant in a timely manner:
(A) That a spread position for which a complete application has
been submitted has been exempted by the designated contract market or
swap execution facility from position limits, and the details and all
conditions of such exemption;
(B) That its application is rejected, including the reasons for
such rejection; or
(C) That the designated contract market or swap execution facility
has asked the Commission to consider the application under paragraph
(a)(8) of this section; and
(vi) Determine whether exempting the spread position from position
limits would, to the maximum extent practicable, ensure sufficient
market liquidity for bona fide hedgers, and not unreasonably reduce the
effectiveness of position limits to:
(A) Diminish, eliminate or prevent excessive speculation;
(B) Deter and prevent market manipulation, squeezes, and corners;
and
(C) Ensure that the price discovery function of the underlying
market is not disrupted.
(5) An applicant’s derivatives position shall be deemed to be
recognized as a spread position exempt from federal position limits at
the time that a designated contract market or swap execution facility
notifies an applicant that such designated contract market or swap
execution facility will exempt such spread position.
(6) A designated contract market or swap execution facility that
elects to process applications to exempt spread positions from position
limits shall file new rules or rule amendments pursuant to part 40 of
this chapter, establishing or amending requirements for an applicant to
file a report with such designated contract market or swap execution
facility when such applicant owns, holds, or controls a spread position
that such designated contract market or swap execution facility has
exempted from position limits, including for such applicant to report
each component of the spread. Such rules shall require such applicant
to update and maintain the accuracy of any such report.
(7) After exemption of each unique type of spread position, a
designated contract market or swap execution facility shall publish on
its Web site, on at least a quarterly basis, a summary describing the
type of spread position and explaining why it was exempted.
(8) If a spread exemption application presents complex issues or is
potentially inconsistent with the purposes of section 4a(a)(3)(B) of
the Act, a designated contract market or swap execution facility may
ask the Commission to consider the application under the process set
forth in paragraph (d) of this section. The Commission may, in its
discretion, agree to or reject any such request by a designated
contract market or swap execution facility.
(b) Recordkeeping. (1) A designated contract market or swap
execution facility that elects to process spread exemption applications
shall keep full, complete, and systematic records, which include all
pertinent data and memoranda, of all activities relating to the
processing of such applications and the disposition thereof, including
the exemption of any spread position, the revocation or modification of
any exemption, the rejection by the designated contract market or swap
execution facility of an application, or the withdrawal,
supplementation or updating of an application by the applicant.
Included among such records shall be:
(i) All information and documents submitted by an applicant in
connection with its application:
(ii) Records of oral and written communications between such
designated contract market or swap execution facility and such
applicant in connection with such application; and
(iii) All information and documents in connection with such
designated contract market’s or swap execution facility’s analysis of
and action on such application.
(2) All books and records required to be kept pursuant to this
section shall be kept in accordance with the requirements of Sec. 1.31
of this chapter.
(c) Reports to the Commission. (1) A designated contract market or
swap execution facility that elects to process spread exemption
applications shall submit to the Commission a report for each week as
of the close of business on Friday showing the following information:
(i) The disposition of any spread exemption application, including
the exemption of any spread position, the revocation or modification of
any exemption, or the rejection of any application, as well as the
following details:
(A) The date of disposition,
(B) The effective date of the disposition,
(C) The expiration date of any exemption,
(D) Any unique identifier assigned by the designated contract
market or swap execution facility to track the application,
(E) Any unique identifier assigned by the designated contract
market or swap execution facility to a type of exempt spread position,
(F) The identity of the applicant,
(G) The listed commodity derivative contract to which the
application pertains,
(H) The underlying cash commodity,
(I) The size limitations on any exempt spread position, specified
by contract month if applicable, and
(J) Any conditions on the exemption; and
(ii) The summary of any exempt spread position newly published
pursuant to paragraph (a)(7) of this section, or revised, since the
last summary submitted to the Commission.
(2) Unless otherwise instructed by the Commission, a designated
contract market or swap execution facility that elects to process
applications to exempt spread positions from position limits shall
submit to the Commission, no less frequently than monthly, any report
submitted by an applicant to such designated contract market or swap
execution facility pursuant to rules required by paragraph (a)(6) of
this section.
(3) Unless otherwise instructed by the Commission, a designated
contract market or swap execution facility that elects to process
applications to exempt spread positions from position limits shall
submit to the Commission the information required by paragraphs (c)(1)
and (2) of this section, as follows:
(i) As specified by the Commission on the Forms and Submissions
page at www.cftc.gov;
(ii) Using the format, coding structure, and electronic data
transmission
[[Page 38511]]
procedures approved in writing by the Commission; and
(iii) Not later than 9:00 a.m. Eastern time on the third business
day following the date of the report.
(d) Review of applications by the Commission. (1) The Commission
may in its discretion at any time review any spread exemption
application submitted to a designated contract market or swap execution
facility, and all records required to be kept by such designated
contract market or swap execution facility pursuant to paragraph (b) of
this section in connection with such application, for any purpose,
including to evaluate whether the disposition of the application is
consistent with the purposes of section 4a(a)(3)(B) of the Act.
(i) The Commission may request from such designated contract market
or swap execution facility records required to be kept by such
designated contract market or swap execution facility pursuant to
paragraph (b) of this section in connection with such application.
(ii) The Commission may request additional information in
connection with such application from such designated contract market
or swap execution facility or from the applicant.
(2) If the Commission preliminarily determines that any application
to exempt a spread position from position limits, or the disposition
thereof by a designated contract market or swap execution facility,
presents novel or complex issues that require additional time to
analyze, or that an application or the disposition thereof by such
designated contract market or swap execution facility is potentially
inconsistent with the Act, the Commission shall:
(i) Notify such designated contract market or swap execution
facility and the applicable applicant of the issues identified by the
Commission; and
(ii) Provide them with 10 business days in which to provide the
Commission with any supplemental information.
(3) The Commission shall determine whether it is appropriate to
exempt the spread position for which such application has been
submitted from position limits, or whether the disposition of such
application by such designated contract market or swap execution
facility is consistent with the purposes of section 4a(a)(3)(B) of the
Act.
(4) If the Commission determines that it is not appropriate to
exempt the spread position for which such application has been
submitted from position limits, or that the disposition of such
application is inconsistent with the Act, the Commission shall notify
the applicant and grant the applicant a commercially reasonable amount
of time to liquidate the spread position or otherwise come into
compliance. This notification will briefly specify the nature of the
issues raised and the specific provisions of the Act or the
Commission’s regulations with which the application is, or appears to
be, inconsistent.
(e) Review of summaries by the Commission. The Commission may in
its discretion at any time review any summary of a type of spread
position required to be published on a designated contract market’s or
swap execution facility’s Web site pursuant to paragraph (a)(7) of this
section for any purpose, including to evaluate whether the summary
promotes transparency and fair and open access by all market
participants to information regarding spread exemptions. If the
Commission determines that a summary is deficient in any way, the
Commission shall notify such designated contract market or swap
execution facility, and grant to the designated contract market or swap
execution facility a reasonable amount of time to revise the summary.
(f) Delegation of authority to the Director of the Division of
Market Oversight. (1) The Commission hereby delegates, until it orders
otherwise, to the Director of the Division of Market Oversight or such
other employee or employees as the Director may designate from time to
time, the authority:
(i) In paragraph (a)(8) of this section to agree to or reject a
request by a designated contract market or swap execution facility to
consider a spread exemption application;
(ii) In paragraph (c) of this section to provide instructions
regarding the submission to the Commission of information required to
be reported by a designated contract market or swap execution facility,
to specify the manner for submitting such information on the Forms and
Submissions page at www.cftc.gov, and to determine the format, coding
structure, and electronic data transmission procedures for submitting
such information;
(iii) In paragraph (d)(1) of this section to review any spread
exemption application and all records required to be kept by a
designated contract market or swap execution facility in connection
with such application, to request such records from such designated
contract market or swap execution facility, and to request additional
information in connection with such application from such designated
contract market or swap execution facility, or from the applicant;
(iv) In paragraph (d)(2) of this section to preliminarily determine
that a spread exemption application or the disposition thereof by a
designated contract market or swap execution facility presents complex
issues that require additional time to analyze, or that such
application or the disposition thereof is potentially inconsistent with
the Act, to notify the designated contract market or swap execution
facility and the applicable applicant of the issues identified, and to
provide them with 10 business days in which to file supplemental
information; and
(v) In paragraph (e) of this section to review any summary of a
type of spread exemption required to be published on a designated
contract market’s or swap execution facility’s Web site, to determine
that any such summary is deficient, to notify a designated contract
market or swap execution facility of a deficient summary, and to grant
such designated contract market or swap execution facility a reasonable
amount of time to revise such summary.
(2) The Director of the Division of Market Oversight may submit to
the Commission for its consideration any matter which has been
delegated in this section.
(3) Nothing in this section prohibits the Commission, at its
election, from exercising the authority delegated in this section.
0
11. Add Sec. 150.11 to read as follows:
Sec. 150.11 Process for recognition of positions as bona fide hedges
for unfilled anticipated requirements, unsold anticipated production,
anticipated royalties, anticipated service contract payments or
receipts, or anticipatory cross-commodity hedge positions.
(a) Requirements for a designated contract market or swap execution
facility to recognize certain enumerated anticipatory bona fide hedge
positions. (1) A designated contract market or swap execution facility
that elects to process applications for recognition of positions as
hedges of unfilled anticipated requirements, unsold anticipated
production, anticipated royalties, anticipated service contract
payments or receipts, or anticipatory cross-commodity hedges under the
provisions of paragraphs (3)(iii), (4)(i), (iii), (iv), or (5),
respectively, of the definition of bona fide hedging position in Sec.
150.1 shall maintain rules, submitted to the Commission pursuant to
part 40 of this chapter, establishing an application process for such
anticipatory bona fide hedges consistent with the requirements of this
section. A designated contract market or swap execution facility may
elect to process
[[Page 38512]]
such anticipatory hedge applications for positions in commodity
derivative contracts only if, in each case:
(i) The commodity derivative contract is a referenced contract;
(ii) Such designated contract market or swap execution facility
lists such commodity derivative contract for trading;
(iii) Such commodity derivative contract is actively traded on such
derivative contract market;
(iv) Such designated contract market or swap execution facility has
established position limits for such commodity derivative contract; and
(v) Such designated contract market or swap execution facility has
at least one year of experience and expertise administering position
limits for such commodity derivative contract.
(2) Any application process that is established by a designated
contract market or swap execution facility shall require, at a minimum,
the information required under Sec. 150.7(d).
(3) Under any application process established under this section, a
designated contract market or swap execution facility shall:
(i) Require each person intending to exceed position limits to
submit an application, and to reapply at least on an annual basis by
updating that application, to file the supplemental reports required
under Sec. 150.7(e), and to receive notice of recognition from the
designated contract market or swap execution facility of a position as
a bona fide hedge in advance of the date that such position would be in
excess of the limits then in effect pursuant to section 4a of the Act;
(ii) Notify an applicant in a timely manner if a submitted
application is not complete. If the applicant does not amend or
resubmit such application within a reasonable amount of time after
notification from the designated contract market or swap execution
facility, the designated contract market or swap execution facility may
reject the application;
(iii) Inform an applicant within ten days of receipt of such
application by the designated contract market or swap execution
facility that:
(A) The derivative position for which a complete application has
been submitted has been recognized by the designated contract market or
swap execution facility as a bona fide hedge, and the details and all
conditions of such recognition;
(B) The application is rejected, including the reasons for such
rejection; or
(C) The designated contract market or swap execution facility has
asked the Commission to consider the application under paragraph (a)(6)
of this section; and
(iv) Have the authority to revoke, at any time, any recognition
issued pursuant to this section if it determines the position no longer
complies with the filing requirements under paragraph (a)(2) of this
section.
(4) An applicant’s derivatives position shall be deemed to be
recognized as a bona fide hedge at the time that a designated contract
market or swap execution facility notifies an applicant that such
designated contract market or swap execution facility will recognize
such position as a bona fide hedge.
(5) A designated contract market or swap execution facility that
elects to process bona fide hedge applications shall file new rules or
rule amendments pursuant to part 40 of this chapter, establishing or
amending requirements for an applicant to file a report with the
Commission pursuant to Sec. 150.7, and file a copy of such report with
such designated contract market or swap execution facility when such
applicant owns or controls a derivative position that such designated
contract market or swap execution facility has recognized as a bona
fide hedge, and for such applicant to report the offsetting cash
positions. Such rules shall require an applicant to update and maintain
the accuracy of any such report.
(6) A designated contract market or swap execution facility may ask
the Commission to consider any application made under this section. The
Commission may, in its discretion, agree to or reject any such request
by a designated contract market or swap execution facility; provided
that, if the Commission agrees to the request, it will have 10 business
days from the time of the request to carry out its review.
(b) Recordkeeping. (1) A designated contract market or swap
execution facility that elects to process bona fide hedge applications
under this section shall keep full, complete, and systematic records,
which include all pertinent data and memoranda, of all activities
relating to the processing of such applications and the disposition
thereof, including the recognition of any derivative position as a bona
fide hedge, the revocation or modification of any recognition, the
rejection by the designated contract market or swap execution facility
of an application, or withdrawal, supplementation or updating of an
application. Included among such records shall be:
(i) All information and documents submitted by an applicant in
connection with its application;
(ii) Records of oral and written communications between such
designated contract market or swap execution facility and such
applicant in connection with such application; and
(iii) All information and documents in connection with such
designated contract market’s or swap execution facility’s analysis of
and action on such application.
(2) All books and records required to be kept pursuant to this
section shall be kept in accordance with the requirements of Sec. 1.31
of this chapter.
(c) Reports to the Commission. (1) A designated contract market or
swap execution facility that elects to process bona fide hedge
applications under this section shall submit to the Commission a report
for each week as of the close of business on Friday showing the
following information:
(i) The disposition of any application, including the recognition
of any position as a bona fide hedge, the revocation or modification of
any recognition, as well as the following details:
(A) The date of disposition,
(B) The effective date of the disposition,
(C) The expiration date of any recognition,
(D) Any unique identifier assigned by the designated contract
market or swap execution facility to track the application,
(E) Any unique identifier assigned by the designated contract
market or swap execution facility to a bona fide hedge recognized under
this section;
(F) The identity of the applicant,
(G) The listed commodity derivative contract to which the
application pertains,
(H) The underlying cash commodity,
(I) The maximum size of the commodity derivative position that is
recognized by the designated contract market or swap execution facility
as a bona fide hedge,
(J) Any size limitation established for such commodity derivative
position on the designated contract market or swap execution facility,
and
(K) A concise summary of the applicant’s activity in the cash
market for the commodity underlying the position for which the
application was submitted.
(2) Unless otherwise instructed by the Commission, a designated
contract market or swap execution facility that elects to process bona
fide hedge applications shall submit to the Commission the information
required by paragraph (c)(1) of this section, as follows:
[[Page 38513]]
(i) As specified by the Commission on the Forms and Submissions
page at www.cftc.gov;
(ii) Using the format, coding structure, and electronic data
transmission procedures approved in writing by the Commission; and
(iii) Not later than 9:00 a.m. Eastern time on the third business
day following the date of the report.
(d) Review of applications by the Commission. (1) The Commission
may in its discretion at any time review any bona fide hedge
application submitted to a designated contract market or swap execution
facility under this section, and all records required to be kept by
such designated contract market or swap execution facility pursuant to
paragraph (b) of this section in connection with such application, for
any purpose, including to evaluate whether the disposition of the
application is consistent with the Act.
(i) The Commission may request from such designated contract market
or swap execution facility records required to be kept by such
designated contract market or swap execution facility pursuant to
paragraph (b) of this section in connection with such application.
(ii) The Commission may request additional information in
connection with such application from such designated contract market
or swap execution facility or from the applicant.
(2) If the Commission preliminarily determines that any
anticipatory hedge application is inconsistent with the filing
requirements of Sec. 150.11(a)(2), the Commission shall:
(i) Notify such designated contract market or swap execution
facility and the applicable applicant of the deficiencies identified by
the Commission; and
(ii) Provide them with 10 business days in which to provide the
Commission with any supplemental information.
(3) If the Commission determines that the anticipatory hedge
application is inconsistent with the filing requirements of Sec.
150.11(a)(2), the Commission shall notify the applicant and grant the
applicant a commercially reasonable amount of time to liquidate the
derivative position or otherwise come into compliance. This
notification will briefly specify the specific provisions of the filing
requirements of Sec. 150.11(a)(2), with which the application is, or
appears to be, inconsistent.
(e) Delegation of authority to the Director of the Division of
Market Oversight. (1) The Commission hereby delegates, until it orders
otherwise, to the Director of the Division of Market Oversight or such
other employee or employees as the Director may designate from time to
time, the authority:
(i) In paragraph (a)(6) of this section to agree to or reject a
request by a designated contract market or swap execution facility to
consider a bona fide hedge application;
(ii) In paragraph (c) of this section to provide instructions
regarding the submission to the Commission of information required to
be reported by a designated contract market or swap execution facility,
to specify the manner for submitting such information on the Forms and
Submissions page at www.cftc.gov, and to determine the format, coding
structure, and electronic data transmission procedures for submitting
such information;
(iii) In paragraph (d)(1) of this section to review any bona fide
hedge application and all records required to be kept by a designated
contract market or swap execution facility in connection with such
application, to request such records from such designated contract
market or swap execution facility, and to request additional
information in connection with such application from such designated
contract market or swap execution facility or from the applicant; and
(iv) In paragraph (d)(2) of this section to determine that it is
not appropriate to recognize a derivative position for which an
application for recognition has been submitted as a bona fide hedge, or
that the disposition of such application by a designated contract
market or swap execution facility is inconsistent with the Act, and, in
connection with such a determination, to grant the applicant a
reasonable amount of time to liquidate the derivative position or
otherwise come into compliance.
(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.
Appendices A Through D to Part 150 [Reserved]
0
12. Add reserved appendices A through D to part 150.
0
13. Add appendix E to part 150 to read as follows:
Appendix E to Part 150–Guidance Regarding Exchange-Set Speculative
Position Limits
This appendix provides guidance regarding Sec. 150.5, as follows:
Guidance for designated contract markets. (1) Until a board of
trade has access to sufficient swap position information, a board of
trade need not demonstrate compliance with Core Principle 5(B) with
respect to swaps. A board of trade has access to sufficient swap
position information if, for example:
(i) It has access to daily information about its market
participants’ open swap positions; or
(ii) It knows, including through knowledge gained in surveillance
of heavy trading activity occurring on or pursuant to the rules of the
designated contract market, that its market participants regularly
engage in large volumes of speculative trading activity, that would
cause reasonable surveillance personnel at an exchange to inquire
further about a market participant’s intentions or open swap positions.
(2) When a board of trade has access to sufficient swap position
information, this guidance is no longer applicable. At such time, a
board of trade is required to demonstrate compliance with Core
Principle 5(B) with respect to swaps.
Guidance for swap execution facilities. (1) Until a swap execution
facility that is a trading facility has access to sufficient swap
position information, the swap execution facility need not demonstrate
compliance with Core Principle 6(B). A swap execution facility has
access to sufficient swap position information if, for example:
(i) It has access to daily information about its market
participants’ open swap positions; or
(ii) If it knows, including through knowledge gained in
surveillance of heavy trading activity occurring on or pursuant to the
rules of the swap execution facility, that its market participants
regularly engage in large volumes of speculative trading activity that
would cause reasonable surveillance personnel at an exchange to inquire
further about a market participant’s intentions or open swap positions.
(2) When a swap execution facility has access to sufficient swap
position information, this guidance is no longer applicable. At such
time, a swap execution facility that is a trading facility is required
to file rules with the Commission to demonstrate compliance with Core
Principle 6 (B).
[[Page 38514]]
Issued in Washington, DC, on May 27, 2016, 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 Position Limits for Derivatives: Certain Exemptions and
Guidance–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
Today, the CFTC has taken a significant step toward finalizing
its rules on position limits this year.
The supplemental rule we have unanimously proposed today would
ensure that commercial end-users can continue to engage in bona fide
hedging efficiently for risk management and price discovery. It
would permit the exchanges to recognize certain positions as bona
fide hedges, subject to CFTC oversight.
For years, exchanges have worked with the CFTC’s general
definition of a “bona fide hedging position” to grant these
exemptions to exchange-set limits. Under this supplemental proposal,
they would do so for federal limits, subject to strict oversight by
the CFTC. Today’s action comes after listening closely to the
concerns of market participants, and in particular commercial-end
users, who use these markets every day to hedge commercial risk.
Today’s proposal would also make some helpful clarifications to
definitions used in our earlier proposal, including the definition
of “bona fide hedging position,” to conform it to the statutory
language.
This proposal is a critical piece of our effort to complete the
position limits rule this year. Another key piece of that effort was
the Commission’s 2015 proposal to streamline the process for waiving
aggregation requirements when one entity does not control another’s
trading, even if they are under common ownership. We are also
working to review exchange estimates of deliverable supply so that
spot month limits may be set based on current data.
Federal position limits for agricultural contracts have been in
place in our markets for decades, and exchange-set position limits
for most other physical commodity contracts have been in place for
years. It is critical that we fulfill our statutory responsibility
to adopt a position limits rule. As I have said previously, we
appreciate the importance and complexity of the issues surrounding
the position limits rule. No current Commissioner was in office when
these rules were proposed, and therefore we have taken the time to
listen to market participants and consider the proposals very
carefully.
I thank our staff for their excellent work on this proposal. I
also thank my fellow Commissioners Bowen and Giancarlo for their
input and support. And I look forward to hearing the views of market
participants and to completing a position limits rule this year.
Appendix 3–Statement of Commissioner J. Christopher Giancarlo
I support issuing for public comment today’s proposal to
supplement and revise the Commission’s 2013 proposed rule to
establish federal position limits for certain core referenced
futures, options and swaps contracts. The supplemental proposal
appears responsive to a broad range of public comments. I believe it
is a positive step forward in devising a final rule that will take
into account certain practical realities associated with
administering a workable position limits regime.
The proposal appropriately recognizes that most exchanges do not
have access to sufficient swap positon information to effectively
monitor swap position limits. If adopted, it would seem to relieve
designated contract markets (DCMs) and swap execution facilities
(SEFs) from setting and monitoring exchange limits on swaps until
such time as DCMs and SEFs have access to data that is necessary to
be able to do so. Position limits for swaps would still be set and
monitored by the CFTC. The proposal simply acknowledges that the
Commission cannot require exchanges to do the impossible.
The proposal also recommends changes to the definitions of
“bona fide hedging position,” “futures equivalent,”
“intermarket spread position” and “intramarket spread position.”
The elimination of the incidental test and the orderly trading
requirement from the general definition of bona fide hedging
position makes sense as the incidental test is already included in
the economically appropriate test and the orderly trading
requirement is addressed in other provisions of the Commodity
Exchange Act (CEA).1 Further, as discussed in the preamble,
because the meaning of the orderly trading requirement in the
context of over-the-counter swaps markets is unclear, those markets
will benefit from greater precision by its removal. The proposed
amendments to the definitions of “futures equivalent,”
“intermarket spread positon” and “intramarket spread position”
appear to be helpful clarifications. I look forward to public
comment on whether the proposed changes are appropriate.
—————————————————————————
1 See CEA sections 4c(a)(5) and 4c(a)(6).
—————————————————————————
Importantly, the proposal would also allow certain spread
exemptions from federal position limits. It would establish a
process to permit exchanges to recognize exemptions from exchange
and federal position limits for non-enumerated bona fide hedging
positions (NEBFH) and spread positions. The proposal would also
provide an expedited process for exchange recognition of enumerated
anticipatory bona fide hedges.
Exchanges are in the best position to initially recognize the
foregoing exemptions from position limits. They have both the
expertise and the resources 2 to perform this task in a
responsible way as demonstrated by the long history of DCMs
analyzing and granting requests for NEBFH exemptions in the context
of exchange-set limits. Moreover, the CFTC has a long history of
overseeing the performance of DCMs in doing so. In addition, DCMs
already have a long-existing framework in place for recognizing
exemptions from exchange-set limits with which market participants
are well familiar. The supplemental proposal, when incorporated into
a final rule, would build upon the existing framework for exchange-
set limits. It also would lower unreasonable burdens on market
participants under the Commission’s 2013 proposal, including
provisions that would have required hedge exemption applicants to
file duplicative requests with both the CFTC and the exchanges.
—————————————————————————
2 As noted in footnote 127 of the preamble, from June 15, 2011
to June 15, 2012 ICE Futures U.S. received 142 exemption
applications, 92 of which were granted. From November 1, 2010 to
October 31, 2011 the Market Surveillance Group from the Chicago
Mercantile Exchange (CME) Regulation Department approved 420
exemption applications for products traded on the CME and the
Chicago Board of Trade. This is old data, but one could reasonably
predict that the number of applications have increased over time and
will continue to increase in the future as trading levels increase.
Given its current resources, the CFTC is not in a position to timely
process the hundreds of applications that likely will be filed with
the exchanges each year.
—————————————————————————
In short, the supplemental proposal leverages exchange expertise
and resources to enable exemptions to be granted in an efficient and
timely manner without sacrificing market integrity. The Commission
would remain the ultimate arbiter of exemptions from position limits
by retaining the authority to review and reverse any exchange-
granted exemption.
I commend Commission staff for their responsiveness to broad-
based concerns of market participants. I appreciate the
professionalism of my fellow commissioners in persevering to make
this rule more workable. I look forward to taking additional steps
to ensure that the practical issues raised by the agricultural and
end-user communities are addressed in the final rule.
Now and always, prosperity requires durable and vibrant markets.
We must balance regulatory burdens with clear economic benefits if
we are to maintain liquid commodity hedging markets that support our
American way of life.
[FR Doc. 2016-12964 Filed 6-10-16; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: June 13, 2016
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