[Federal Register Volume 64, Number 86 (Wednesday, May 5, 1999)]
[Rules and Regulations]
[Pages 24038-24049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11066]
[[Page 24038]]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 17, 18 and 150
Revision of Federal Speculative Position Limits and Associated
Rules
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission) has long
established and enforced speculative position limits for futures
contracts on various agricultural commodities. On April 7, 1993, the
Commission promulgated interim final rules amending Federal speculative
position limits. The interim amendments generally maintained the
existing speculative position limit levels for the delivery months and
increased limit levels for the deferred months at levels below the
levels originally proposed. The Commission, as proposed on July 17,
1998, is raising the speculative position limit levels to the levels
originally proposed.
EFFECTIVE DATE: July 6, 1999.
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581,
(202) 418-5260, or electronically, [[email protected],gov].
SUPPLEMENTARY INFORMATION: In addition, the Commission is codifying
various policies relating to the requirement that exchanges set
speculative position limits as required by rule 1.61, 17 CFR 1.61.
These relate to the levels which the Commission has approved for such
rules and to various exemptions from the general requirement that
exchanges set speculative position limits for all contract markets.
Specifically, the Commission is codifying an exemption permitting
exchanges to substitute position accountability rules for position
limits for high volume and liquid markets.
The Commission is also amending the applicability of the limited
exemption from nonspot month speculative position limits under
Commission rule 150.3, 17 CFR 150.3, for entities that authorize
independent account controllers to trade on their behalf. Specifically,
the Commission is amending the definition of entities eligible for this
relief under Commission rule 150.1(d), 17 CFR 150.1(d), to expand the
categories of eligible entities and to extend it to the separately
organized affiliates of an eligible entity.
Finally, the Commission is amending its rule on aggregation. In
particular, the Commission is requiring that limited partners with
greater than a 25% ownership interest in a commodity pool the operator
of which is exempt from the requirement to register as a commodity pool
operator under Commission rule 4.13 aggregate their positions with the
pool's. However, the Commission is also amending rule 150.3 to make
such a limited partner eligible for relief from speculative position
limit levels during nonspot months. The Commission is also amending its
rules to clarify that a commodity pool operator's principals and its
affiliates are treated the same as the commodity pool operator itself
for purposes of the Commission's aggregation rule unless they maintain
and enforce procedures for keeping their trading separate and
independent from the pool's.
I. Background
Speculative position limits have been a tool for regulation of
futures markets for over sixty years. Since the Commodity Exchange Act
of 1936, Congress consistently has expressed confidence in the use of
speculative position limits as an effective means of preventing
unreasonable or unwarranted price fluctuations.\1\
---------------------------------------------------------------------------
\1\ See, H.R. Rep. No. 421, 74th Cong., 1st Sess. 1 (1935). See
also, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44 (1986). Section
4a(1) of the Commodity Exchange Act (Act), 7 U.S.C. 6a(1), makes the
explicit finding that:
(e)xcessive speculation in any commodity under contracts of sale
of such commodity for future delivery made on or subject to the
rules of contract markets causing sudden or unreasonable
fluctuations or unwarranted changes in the price of such commodity,
is an undue and unnecessary burden on interstate commerce in such
commodity * * *.
and provides the Commission with authority to:
fix such limits on the amount of trading which may be done or
positions which may be held by any person under contracts of sale of
such commodity for future delivery on or subject to the rules of any
contract market as the Commission finds are necessary to diminish,
eliminate, or prevent such burden.
---------------------------------------------------------------------------
The Commission directly administers speculative position limits on
futures contracts for most of the domestic agricultural commodities
listed in section 2(a)(1) of the Commodity Exchange Act (Act), 7 U.S.C.
1 et seq. See, 17 CFR part 150. Prior to the Act's amendment in 1974
which expanded its scope to all ``services, rights and interests'' in
which futures contracts are traded, only these listed commodities were
regulated. Both prior to and after the 1974 amendments to the Act,
futures markets which traded commodities not so listed applied
speculative position limits by exchange rule, if at all. In 1981 the
Commission promulgated rule 1.61, requiring exchanges to adopt rules
setting speculative position limits for all contract markets not
subject to Commission-set speculative position limits. Since then, all
contract markets have been subject to speculative position limits set
by the Commission or an exchange.\2\ The Commission and the exchanges
share responsibility for enforcement of speculative position limits.\3\
---------------------------------------------------------------------------
\2\ Commission rule 1.61, 17 CFR 1.61, requires that, absent an
exemption, exchanges adopt and enforce speculative position limits
for all contract markets which are not subject to Commission-set
limits. In addition, Commission rule 1.61 permits exchanges to adopt
and enforce their own speculative position limits for those
contracts which have Federal speculative position limits, as long as
the exchange limits are not higher than the Commission's.
\3\ Section 4a(e) provides that a violation of a speculative
position limit established by a Commission-approved exchange rule is
also a violation of the Act. Thus, the Commission can directly take
enforcement actions against violations of exchange-set speculative
position limits as well as those provided under Commission rules.
---------------------------------------------------------------------------
The Commission periodically has reviewed its policies and rules
pertaining to each of the three elements of the regulatory framework
for speculative position limits--the levels of the limits, the
exemptions from them (in particular, for hedgers), and the policy on
aggregating accounts.\4\ Most recently, the Commission proposed to
raise the levels of Commission-set speculative position limits, to
codify a number of broad exemptions from the requirement of rule 1.61
that exchanges establish speculative position limits for
[[Page 24039]]
all contracts not subject to Commission-set limits, to broaden its
speculative position limit exemption under rule 150.3 for independent
account controllers and to codify its aggregation policy. 63 FR 38525
(July 17, 1998).
---------------------------------------------------------------------------
\4\ Initially, for example, the Commission redefined ``hedging''
(42 FR 42748 (August 24, 1977)), raised speculative position limits
in wheat (41 FR 35060 (August 19, 1976)), and issued its statement
of policy on aggregation of accounts and adoption of related
reporting rules (1979 Aggregation Policy), 44 FR 33839 (June 13,
1979).
Subsequently, the Commission modified and updated speculative
position limits by issuing a clarification of its hedging definition
with regard to the ``temporary substitute'' and ``incidental'' tests
(52 FR 27195 (July 20, 1987)) and guidelines regarding the exemption
of risk-management positions from exchange-set speculative position
limits in financial futures contracts. 52 FR 34633 (September 14,
1987). Moreover, in 1988, the Commission promulgated Commission rule
150.3(a)(4), an exemption from speculative position limits for the
position of multi-advisor commodity pools and other similar entities
that use independent account controllers. The Commission
subsequently amended Commission rule 150.3(a)(4), broadening its
applicability to commodity trading advisors and simplifying and
streamlining the application process. 56 FR 14308 (April 12, 1991).
In 1991, the Commission solicited public comment on, and
subsequently approved, exchange requests for exemptions for futures
and option contracts on certain financial instruments from the
Commission rule 1.61 requirement that speculative position limits be
specified for all contracts. 56 FR 51687 (October 15, 1991).
---------------------------------------------------------------------------
The comment period, after a thirty-day extension (63 FR 49883
(Sept. 18, 1998)), closed on October 19, 1998. The nine commenters
included three futures exchanges, four industry associations, a
professional association and an investment bank. All of the commenters
favored expansion of the Commission's speculative position limits to
the levels proposed. They expressed a range of opinions, however, about
the other rule proposals. Those comments are discussed in greater
detail below.
II. Commission Speculative Position Limit Levels
As the Commission noted in its notice of proposed rulemaking, it
has updated Commission speculative position limits periodically. In
1992, the Commission last proposed major revisions to both the
structure and levels of Commission-set speculative position limits. 57
FR 12766 (April 13, 1992). Departing from its previous practice, the
Commission proposed to increase speculative position limit levels based
upon the size of a contract market's open interest, in addition to the
traditional standard of distribution of speculative traders in the
market.\5\ 63 FR at 38527. Specifically, the Commission proposed
combined futures and option speculative position limits for both a
single month and for all-months-combined at the level of 10% of open
interest up to an open interest of 25,000 contracts, with a marginal
increase of 2.5% thereafter. The Commisson also reiterated its view
that spot-month speculative position limit levels are ``based most
appropriately on an analysis of current deliverable supplies and the
history of various spot-month expirations.'' Id.
---------------------------------------------------------------------------
\5\ In proposing these increases to the limit levels, the
Commission reasoned that, as the total open interest of a futures
market increased, speculative position limit levels could be raised.
The Commission therefore applied the open interest criterion by
using a formula that specified appropriate increases to the limit
level as a percentage of open interest.
---------------------------------------------------------------------------
The Commission received 63 comments in response to the 1992
proposed rules.\6\ Typically, commodity pool operators, commodity
trading advisors and futures commission merchants strongly favored the
amendments. Most agricultural producers and their representative
organizations strongly opposed any increase to the speculative position
limits. Others, however, recommended that the Commission proceed, but
in a more cautious manner. In particular, they recommended that the
Commission raise speculative position limits on a phased or test basis.
These commenters advocate taking additional time to study the need for,
and the possible effects of, further increasing speculative position
limits; in their view, the trial implementation of expanded speculative
limits would provide such an additional opportunity.
---------------------------------------------------------------------------
\6\ Those commenters included three futures exchanges; a futures
industry association; four futures commission merchants; 26
commodity pool operators, commodity trading advisors or associations
of such entities; 20 groups of firms representing agricultural
interests; eight individual agricultural producers; and one exchange
member. In addition, the proposed rules were a topic of discussion
at the October 19, 1992, meeting of the Commission's Agricultural
Advisory Committee.
---------------------------------------------------------------------------
Based on its consideration of the comments received and its
favorable administrative experience with the rule's prior amendment,
the Commission in April 1993 adopted interim final rules on Commission-
set speculative position limits. These interim amendments increased the
position limit levels by half of the increase originally proposed, in
two steps. 58 FR 18057 (April 7, 1993).
As recounted in the 1998 notice of proposed rulemaking, the
administrative experience with the interim rules was positive. 63 FR
38528. Moreover, Commission staff undertook an in-depth study of the
possible effects of increasing the speculative position limit levels in
these markets and concluded that ``overall the impact of the interim
final rules on actual, observed large trader positions was modest, and
that any changes in market performance were most likely attributable to
factors other than to changes in the rules.'' Id.
On July 17, 1998, the Commission again proposed to raise
speculative position limit levels for the deferred trading months to
the levels originally proposed. The Commission took this action based
on the growth in open interest and the size of large traders' positions
in these markets. 63 FR 38528.
The commenters uniformly supported the Commission's proposal to
raise the speculative position limit levels for the deferred trading
months. Based upon the positive administrative experience with the
limits at their current levels, the growth in the contract's open
interest and distribution of large trader positions, a staff study and
analysis finding no adverse effects from the previous increase to the
speculative position limit levels, and the consensus of the commenters,
the Commission is increasing the speculative position limit levels for
the deferred months as initially proposed in 1992 and as recently
reproposed.\7\
---------------------------------------------------------------------------
\7\ The Board of Trade of the City of Chicago commented that, in
its view, granting ``the exchanges sole responsibility to establish
and monitor speculative limits subject to Commission oversight''
would ``result in limits which better reflect and are more
responsive to the dynamics of the markets.'' The Commission believes
that this suggestion may merit future consideration.
---------------------------------------------------------------------------
Despite agreeing that the limit levels should be increased, the
Board of Trade of the City of Chicago (CBT) urged the Commission to
modify its spread exemption to include spreads between single months
across crop-years. The CBT stated that:
By normalizing inter-crop spread limits with the limits
presently permitted for intra-crop spreads, noncommercial traders
would be in a position to provide greater market liquidity in
deferred new crops and eliminate a possible cause for the reduced
liquidity that occurs near the end of a crop year.
Although recognizing that the CBT has been granted ``no-action''
letters by Division of Economic Analysis regarding the prohibition on
inter-crop year spreads when the relationship between crop years so
warranted, the exchange stated that ``the Commission has refrained from
granting `no actions' generally'' and that, in any event, the no-action
process is ``cumbersome, unnecessary, causes confusion and uncertainty
for market participants, * * * (and is) necessarily reactive and
therefore ineffective because they are initiated only after the spreads
have experienced significant price movement.''
As the Commission noted in adopting the interim final rules in
1933,
Historically, the reason for including the spread exemption in
the structure of speculative position limits was the relatively low
limit for individual-month limits, especially in comparison to the
all-moneys limits. Generally, individual-months limits were set at
the same level as the spot-month limits in these contracts.
Accordingly, the spread exemption may have been an important means
for traders to exceed the relatively low individual-month limit.
The Commission remains unconvinced that the exemption for inter-
month spreads should be modified at this time to permit generally
such spreads across crop-years in excess of the speculative position
limits which are being greatly expanded herein. The Commission
remains concerned that depending upon conditions in the underlying
case market, the separate legs of inter-crop year spreads may act
more like separate outright positions than a spread within the same
crop-year. In light of the increases to the limits being adopted
herein, the Commission believes that such a modification of the
spread exemption should be * * * based upon a demonstrated need for
such additional relief.
[[Page 24040]]
58 FR 17981.
The Commission believes that the reasons for its policy of
permitting a spread exemption only for positions within the same crop
year remain sound (see, e.g., Division of Economic Analysis Statement
of Guidance [1994-1996 Transfer Binder], Comm. Fut. L. Rep. (CCH) para.
26 691 (May 15, 1996)), and that none of the reasons advanced by the
CBT's comment warrants a reversal of that policy. To the contrary, a
number of markets during the intervening years exhibited the very risks
that concerned the Commission. In these markets, the risk associated
with the individual legs of inter-crop year spread positions did in
fact act more like that associated with separate outright positions
than that of a spread. Moreover, the Division of Economic Analysis
remains flexible in its willingness to entertain requests for ``no-
action'' letters relating to inter-crop year spread positions when the
economic conditions during a particular crop year so warrant.\8\
---------------------------------------------------------------------------
\8\ Although the last no action letter issued concerning the
prohibition on inter-crop year spreads was a number of years ago,
the Division of Economic Analysis noted that ``no-action'' relief is
appropriate when the spreads between old and new crop year are
stable and in full-carry and there is a large crop carryover
expected, and requests for future no-action treatment would be
considered during crop years that meet these criteria.
---------------------------------------------------------------------------
Another futures exchange, the Minneapolis Grain Exchange (MGE),
noted that it was ``particularly pleased the CFTC determined to
maintain a parity of limit levels for the major wheat contract at each
domestic exchange which trades such.'' However, the exchange noted that
the Commission did not propose an increase for the limit levels for its
white wheat contract. Although the exchange was ``not aware of any
curtailment of white wheat futures trade activity because of the
current speculative position limits,'' it nevertheless noted that
activity in the contract might increase with improvements in the Asian
economies and therefore ``requests that the CFTC consider at least
expanding the deferred white wheat limits proportionally as done with
the Hard Red Spring Wheat futures contract.'' The exchange also noted
that the durum wheat contract did not have Commission speculative
position limits.
The Commission originally proposed the speculative position limit
level for each wheat contract market based on the open interest and the
distribution of large traders' positions specific to the contract
market. 57 FR 12770. Subsequently, in 1993, the Commission's interim
final rules provided for parity of levels, but only for each of the
domestic futures exchanges' major wheat contacts. The Commission will
consider future increases to the speculative position limit levels for
the MGE white wheat contract and for all other contracts as open
interest or large traders' positions increase. Of course, an exchange
may petition the Commission for rulemaking any time that a contract
meets the criteria supporting an increase in the levels.\9\ See, 17 CFR
13.2.
---------------------------------------------------------------------------
\9\ The Commission did not propose to establish a Commission-set
speculative position limit for the durum contract because that
contract was designated after the promulgation of rule 1.61, which
requires that designated contract markets set and enforce
speculative position limits for contracts not subject to the
Commission-set limits. Since then, the Commission has preferred to
rely upon the exchanges to set and enforce speculative position
limits and has adopted new Commission speculative position limits
only for soybean meal and soybean oil. As the Commission explained
previously, because of an historical anomaly, only these two
contracts among those in the soybean complex were not included under
Commission-set limits. 52 FR 38914 (October 20, 1987).
---------------------------------------------------------------------------
III. Exchange Speculative Position Limit and Exemption Rules
As discussed above, Commission rule 1.61 requires that, absent an
exemption, exchanges adopt and enforce rules setting speculative
position limits for all contract markets not subject to Commission
speculative position limit rules.\10\ See, 17 CFR Sec. 1.61. The
Commission proposed to simplify and reorganize its rules by relocating
the substance of rule 1.61's requirements to Part 150 of the
Commission's rules, thereby incorporating within that Part all
Commission rules relating to speculative position limits. Moreover, the
Commission proposed explicitly to incorporate within the rule a number
of administrative practices that have developed over time. These
included the speculative position limit levels that the staff routinely
has recommended be approved by the Commission for newly designated
futures and option contracts.
---------------------------------------------------------------------------
\10\ For contract markets that have Commission-set speculative
position limits, section 4a(e) of the Act permits exchanges to adopt
and enforce their own speculative position limits as long as the
exchange limits are not higher than the Commission's.
---------------------------------------------------------------------------
In addition, the Commission proposed to clarify the magnitude of
increases to the limit levels that it would approve for traded
contracts. As the Commission explained in the notice of proposed
rulemaking, the open-interest criterion and numeric formula used by the
Commission in its 1991 proposed amendment of Commission-set speculative
position limits provided the most definitive guidance by the Commission
on acceptable levels for speculative position limits for tangible
commodities and, along with several other commonly accepted measures,
has been widely followed as a matter of administrative practice when
reviewing proposed exchange speculative position limits under
Commission rule 1.61.\11\ Although rule 1.61 did not include specific
criteria for determining acceptable limit levels for new contracts,
promulgating the prior administrative practice as a rule will make the
applicable standard more transparent and thereby make compliance easier
to achieve. Moreover, as noted in the notice of proposed rulemaking,
``promulgating these policies within a single section of the
Commission's rules will increase significantly their accessibility and
clarify their terms.'' 63 FR 38536.
---------------------------------------------------------------------------
\11\ In addition, in reviewing applications for contract
designation for tangible commodities, the staff has relied upon the
Commission's formulation providing for a minimum level of 1,000
contracts for nonspot-month speculative position limits. Moreover,
the Commission has routinely approved a level of 5,000 contracts for
nonspot months in applications for designation of financial futures
and energy contracts, and that level has become a rule of thumb as a
matter of administrative practice.
---------------------------------------------------------------------------
Specifically, proposed rule 150.5(a) tracks the provisions of rule
1.61(a) and clarifies that exchange speculative position limits are not
required for futures and option contracts on major foreign currencies.
Proposed rule 150.5(b) makes explicit the speculative position limit
levels which the Commission finds appropriate for new contract market
designations. As noted in the notice of proposed rulemaking, the
proposed limit levels for new contract designations, which are based
upon the formula and associated minimum levels used by the Commission
in its 1992 proposed rulemaking, have long been used as a matter of
informal administrative practice. 63 FR 38530.
The New York Mercantile Exchange (NYMEX) commented generally that
the Commission should ``reexamine the appropriate roles of the
Commission and the exchanges in pursuing their shared goal of market
integrity'' and suggested further that ``futures exchanges are best
positioned to establish speculative position limits for their markets
and should be given sole responsibility to do so.'' NYMEX expressed
concern that:
Codification of informal practices in proposed new regulation
Sec. 150.5 would appear to remove the flexibility that was perceived
to be available under the informal procedures. Therefore even if the
Commission determines not to undertake an assessment at this time of
the appropriate degree of self-regulatory organization
responsibilities for speculative position limits, the CFTC, at a
minimum, should
[[Page 24041]]
consider revising proposed new Regulation Sec. 150.5 to provide
exchanges with sufficient flexibility to address the differing
conditions in their respective markets.
Specifically, NYMEX, joined by the CBT, questioned reliance on the
sole criterion that the speculative position limit not exceed one-
quarter of the deliverable supply during the spot month. NYMEX reasoned
that the Commission has recognized that the limits that may be
appropriate for one commodity may not be appropriate for another.
Guideline No. 1, 17 CFR part 5, appendix A, requires that, in order
to become and to remain a designated contract market, the futures
contract's ``terms and conditions, as a whole, will result in a
deliverable supply which will not be conducive to price manipulation or
distortion.'' 17 CFR part 5, appendix A(a)(2)(ii). Administrative
practice has long interpreted this provision as requiring a deliverable
supply that is at least four times the spot month speculative position
limit. 62 FR 60831, 60838 (November 13, 1997). A spot month speculative
position limit that exceeds this amount enhances the susceptibility of
the contract to market manipulation, price distortion or
congestion.\12\
---------------------------------------------------------------------------
\12\ In 1997 the Commission conducted a section 5a(a)(10)
proceeding requiring CBT to amend the delivery terms of its corn and
soybean futures contracts. In commencing the action, the Commission
found that deliverable stocks under the contract terms as then
specified frequently had dropped to levels near or below the maximum
number of contracts a single speculative trader may hold during the
delivery periods of expiring trading months. 61 FR 67998, 68012
(December 26, 1996). The Commission found that, where a single
speculator could control all of the deliverable stocks during a
contract's delivery month, the contract fails to meet the Act's
requirement that its contract's terms ``will tend to prevent or
diminish price manipulation, market congestion or the abnormal
movement of such commodity in interstate commerce.'' See, section
5a(a)(10) of the Act.
---------------------------------------------------------------------------
NYMEX suggests that this standard may not be appropriate for
nonagricultural tangible or intangible commodities. However, except for
cash-settled contracts,\13\ Commission staff have used this standard to
review every application for contract market designation or proposals
to increase existing exchange speculative position limits since 1981,
when rule 1.61 was issued.\14\ Experience has demonstrated that many
commodities, particularly intangible commodities, have sufficiently
large deliverable supplies to meet this standard without requiring a
spot month level that is lower than the individual month level. For
other commodities, however, especially commodities having strong
seasonal characteristics, spot month speculative position limits are
required to be set at a level lower than the individual month limit for
all or some trading months.\15\ Accordingly, codification of this
standard only makes explicit the standard which, since 1981, has been
applied to, and met by, every physical delivery futures contract at the
time of initial designation and upon subsequent increases to the spot
month speculative position limit.
---------------------------------------------------------------------------
\13\ Current Guideline No. 1 requires that the contract terms
for cash settled contracts not be ``subject to the manipulation or
distortion.'' 17 CFR part 5, appendix A(a)(2)(iii). Because some
types of commodities which are cash settled may not have deliverable
supplies per se, the Commission is modifying the spot month
requirement to provide that the spot month level for cash-settled
contracts must be set ``no greater than necessary to minimize the
potential for manipulation or distortion of the contract's or the
underlying commodity's price.''
\14\ CBT commented that the proposed spot month rule was
arbitrary, having been ``reversed engineered'' as part of the corn
and soybean section 5a(a)(10) proceeding. To the contrary, as
discussed above, the proposed rule is based upon long-standing
administrative practice and experience. The appropriate measures of
adequacy of deliverable supply in a section 5a(a)(10) proceeding,
which is initiated upon an affirmative finding that the contracts
violate that section of the Act, were discussed in the Commission's
orders in that proceeding and should not be confused with the
standard of review for new contract applications. 62 FR at 60838.
CBT also commented that, ``before codifying its `rule-of-thumb'
standard for determining speculative position limits for the
respective delivery months, the Commission should include in a
release for pubic comment a substantive description of the
methodology it used to establish the basis for its proposed
formula.'' As CBT recognized in its comment, however, the
Commission's notice of proposed rulemaking on Guideline No. 1, a
companion notice which was referred to in the notice of proposed
rulemaking on speculative position limits, noted that the twenty-
five percent criterion was based on the Commission's long-standing
administrative practice and experience. 63 FR 38537, 38539 (July 17,
1998).
\15\ The CBT objects that basing the spot month speculative
position limits on an estimate of deliverable supplies which has
been calculated separately for each trading month will result in
``different spot month speculative limit levels for each of the
months * * * (and) will be extremely confusing and cumbersome to the
marketplace.'' However, the rule does not require that the spot
month level vary from one trading month to the next, but only that
it not exceed one-quarter of estimated deliverable supplies. An
exchange can choose how it wishes to structure its limits, whether
preferring to have the same limit apply to all months or to have
different levels for particular trading months. It is not uncommon
today for exchanges to apply lower spot month speculative position
limits to selected trading months where there are strong seasonal
variations in a contract's potential deliverable supplies.
---------------------------------------------------------------------------
CBT also suggests that the proposed rule define the methodology for
estimating the deliverable supply and that, in proposing such a
definition, ``the Commission discuss how deliverable supply is
measured; who determines deliverable supply; what constitutes
deliverable supply; and when deliverable supply should be measured for
the purpose of the rule.'' As noted by CBT, the Commission proposed
such a definition as part of the proposed amendments to Guideline No.
1. 63 FR 38537 (July 17, 1998). Guideline No. 1 details the information
that an application for contact market designation should include in
order to demonstrate compliance with the applicable legal requirements,
including the requirement of rule 1.61 that exchanges set speculative
position limits. As the Commission discussed at length in that notice
of proposed rulemaking, the Commission is proposing explicitly to
require exchanges to estimate deliverable supplies for the specified
delivery months of a proposed contract. Id. at 38539. Moreover, the
Commission explained that the exchange should describe the methodology
it uses to derive the estimate and should base its estimate ``on
statistical data when reasonably available covering an historical
period that is representative of actual patterns of production and
consumption of the commodity.'' \16\ Id.
---------------------------------------------------------------------------
\16\ Although CBT complains that the Commission's definition is
``far from conclusive'' and ``subjective,'' its comment suggests,
not that the requirement is undefined, but rather that CBT disagreed
with the Commission's exclusion of certain stocks and inventories of
corn and soybeans from estimated deliverable supplies in the 1998
section 5a(a)(10) proceeding.
---------------------------------------------------------------------------
In addition to providing greater clarity regarding the speculative
position limit levels required at initial designation, proposed rule
150.5(b) would make explicit the conditions for subsequent increases to
the deferred trading month levels. The proposed rule includes both a
numeric formula for determining the permissible limit level and a
descriptive standard. The descriptive standard tracks the standard of
Commission rule 1.61--that the level be set ``based on position sizes
customarily held by speculative traders on the contract market, the
breadth and liquidity of the cash market and the opportunity for
arbitrage between the futures market and the cash market.'' Compare,
proposed rule 150.5(c)(2) and rule 1.61(a)(2). As noted above, the
numeric formula is based upon the formula first used by the Commission
in 1992 for proposing the speculative position limit levels now being
considered.
The Commission proposed that adjustments to a contract market's
speculative position limit could be made one year after its initial
listing based on either the proposed formula or the descriptive
standard. NYMEX suggests that the provision that adjustments be made
only after one year
[[Page 24042]]
from a contract's listing ``would severely limit an exchange's ability
to respond to changing market conditions during the first year after
listing.'' Although few futures contracts have achieved the levels of
open interest to qualify for increasing speculative position limits
levels under the rule sooner than a year after listing, the Commission
agrees that the rule should not foreclose the possibility of a new
contract's qualifying the adjustment. Accordingly, the Commission is
modifying the final rule to permit an exchange to adjust nonspot month
limits based upon the proposed rule's descriptive standard at any time
after initial listing. The formula for adjustments to levels, for
simplicity, will be based on data for the previous calendar year, as
proposed.\17\
---------------------------------------------------------------------------
\17\ NYMEX's comment may misapprehend how the formula is
applied. It should be noted that the maximum allowable speculative
limit for nonspot individual months is not based on the data for any
one particular individual month; instead, the applicable level is
derived by computing the 12-month average level of month-end open
interest for the most recent one-year period in any (usually the
next to expire) contract month, considering futures and delta-
adjusted options combined.
---------------------------------------------------------------------------
Several commenters suggested that the proposed position
accountability rules actually narrowed the prior grants of exemptive
relief. The Managed Funds Association (MFA) suggested that, by not
proposing an exemptive category for commodities with virtually
inexhaustible deliverable supplies, a category which would apply to
foreign currency futures contracts, the Commission was foreclosing new
contracts from potential eligibility for this relief.\18\ It also noted
that the exemptive relief for position accountability was not
restricted on its face to contracts that has been trading for at least
a year. In addition, CBT expressed concern that one of its contracts
that qualifies for exemption due to a highly liquid cash market would
not meet the requirements of the proposed rule. NYMEX suggested that,
through Commission codification of the past exemptive categories,
exchanges would lose the flexibility to ``justify that an exception was
warranted for a particular contract.''
---------------------------------------------------------------------------
\18\ Because the proposed rules make clear that neither a
speculative position limit nor the position accountability rule is
required for a designed contract market in ``major foreign
currency,'' the Commisson proposed to reduce to three the number of
exemptive categories. No exchange contracts other than the existing
futures contracts on such foreign currencies have met the existing
first exemptive criterion since this relief was first permitted.
``Major foreign currencies'' are defined in the Commission's fast-
track designation rule. 17 CFR 5.1(a)(2)(i). The Commission proposed
that contract markets in other, less liquid foreign currencies be
treated as a futures or option contract on any other financial
instrument or product.
---------------------------------------------------------------------------
Application of the rule is prospective only. No currently exempt
contract market will lose its exemption as long as it remains actively
traded under its current designation.\19\ Moreover, with one minor
exception, position accountability rules have been approved only for
contracts with significant trading histories.\20\ In addition, proposed
rule 150.5(f) would permit a contract market to ``propose such other
exemptions from its position limits consistent with the purposes of
this section'' for Commission consideration. This provision is found in
existing rule 1.61 and is the authority for the current trader
accountability rules that the Commission is proposing to codify in this
rulemaking. The Commission is modifying the final rule to clarify that
the right to petition the Commission for exemption extends to all of
the section's provisions, including the requirements for exemption that
are being codified. Accordingly, these rules do not foreclose the
Commission from considering in appropriate circumstances petitions for
individual exemptions from the required levels for setting exchange
speculative position limits and from the requirement that exchanges
adopt speculative position limits for all futures contracts.
---------------------------------------------------------------------------
\19\ The Commission specifically noted in the notice of proposed
rulemaking, 63 FR 38530, n. 21, that although the policy provided
that position accountability could be based on either a liquid
futures market or a liquid cash market, the Commission was proposing
to require that both the cash and futures markets be liquid and that
a contract market would have to establish a trading history. The
Commission continued, however, by noting that the rule would apply
prospectively and that any contracts (or pending applications) that
have position accountability rules in place in reliance on the
liquidity of the cash market alone may continue to rely on the
policy.
\20\ As noted by the Commission in the notice of proposed
rulemaking, the only instances where position accountability rules
were permitted in the absence of a prior trading history was where
the contracts were spread contracts on contracts for which position
accountability rules had already been approved. The only other
instances where exemptions from speculative position limits were
approved at contract designation were for major foreign currency
contracts, a category that the Commission proposed to exclude from
the requirement altogether.
---------------------------------------------------------------------------
IV. Issues Relating to Exemption From Nonspot Speculative Position
Limits for Independently Controlled Accounts
In response to the growth of professionally managed futures trading
accounts and pooled futures investments, the Commission in 1988
promulgated rule 150.3, 17 CFR 150.3, an exemption from speculative
position limits for commodity pools or similar entities which use
independent account controller.\21\ 53 FR 41563 (October 24, 1988). In
1991 the Commission extended eligibility for this exemption to
commodity trading advisors and greatly streamlined the application
procedure, subsequently making it self-executing.\22\ 57 FR 44492
(September 28, 1992).
---------------------------------------------------------------------------
\21\ Commodity pools, pension funds, and other similar entities
are required to aggregate their positions as the owner of the
trading accounts, even if those accounts are traded independently by
multiple independent account controllers. Commission rule 150.3
exempted such entities that use independent account controllers from
speculative position limits outside of the spot-month. The exemption
permits the total positions of the trading entity or vehicle to
exceed speculative limits during nonspot months, but requires that
each independent account controller trading on the entity's behalf
comply with the applicable limits. During the spot month, all
positions of the entity are required to be aggregated and are
subject to the spot-month speculative position limit level.
\22\ Under the exemption as originally promulgated, those
seeking exemptive treatment were required to file an application
with the Commission and to document the independence of their
account controllers.
---------------------------------------------------------------------------
Commission rule 150.3 generally has worked well. It has provided
flexibility to the markets, accommodating the continuing trend toward
professional management of speculative trading accounts, while at the
same time protecting the markets from the undue accumulation of large
speculative positions owned by a single person or entity in the spot
month. Since its amendment in 1991, most questions concerning rule
150.3 have related to its application in the context of integrated
financial services companies. However, presently only commodity pool
operators and commodity trading advisors meet the rule's eligibility
requirement.
In light of the successful operation of the exemption since it was
issued, the Commission proposed to extend eligibility for the exemption
to banks, trust companies, savings associations, insurance companies
and their separately incorporated affiliates. These additional
categories were suggested for inclusion by some commenters when the
Commission last proposed to revise rule 150.3.\23\
---------------------------------------------------------------------------
\23\ Commenters, in connection with the 1991 proposed amendments
to the rule 150.3 exemption, suggested that, in addition to
commodity trading advisors, the exemption be extended to others,
including investment banks, other financial intermediaries, parent/
affiliate firms, separately managed divisions of a single
corporation, commercial banks, merchant banks, and insurance
companies.
---------------------------------------------------------------------------
Generally, commenters favored broadening the definition of eligible
entities under rule 150.1(d). Several, but not all, commenters agreed
that the trends toward greater professional management of futures
trading and the
[[Page 24043]]
consolidation of financial services companies support expanding the
category of entities eligible for the exemption. Although supporting
expanding the categories for eligibility, the Futures Industry
Association (FIA) suggested that the Commission modify the phrase
``separately incorporated affiliates'' to read ``separately organized
---------------------------------------------------------------------------
affiliates.'' The FIA explained that the modified language
would clarify that the exemption applies to affiliates whether they
are organized as corporations or not. For example, an affiliate may
be organized as a partnership, business trust or limited liability
business organization to achieve certain tax objectives. Under
applicable law, any such entity would still have a separate
identity, ownership and management structure and should be treated
in the same manner as an affiliate which is organized as a
corporation. Also, entities organized outside the United States may
not technically be incorporated under local law but should be
eligible as affiliates under the proposed revision as long as they
are separately organized under applicable foreign law.
The MFA also favored expansion of the definition of eligible entities
in Sec. 150.1(d), but suggested that it be modified ``to * * * refer to
trusts, financial intermediaries, corporate divisions and other
similarly organized entities or associations.''
One commenter opposed expanding the categories of eligible entity,
reasoning that:
The expansion of rule 150.3 proposed in the release would
include the separately incorporated affiliates of various specified
financial services companies, including banks, insurance companies,
and FCMs. We are deeply concerned that this proposal is intended to
codify the view that rule 150.3 provides the exclusive basis under
which relief from aggregation of positions is available for such
entities rather than a nonexclusive exemption.
Rule 150.3, however, is an exemption from speculative position
limit levels and does not itself restrict or expand the aggregation
requirements. In this regard, several commenters expressed the view
that, because futures commission merchants (FCMs) are exempt from
aggregating certain types of accounts under proposed rule 150.4(d),
they need not be included as eligible for exemption under Commission
rule 150.3.
The Commission agrees with commenters that modifying the language
of the final rule to apply to ``separately organized affiliates'' is
appropriate in light of the wide variety of forms of business
organization used by those active in the markets today and that
removing FCMs from the list of entities eligible for rule 150.3
exemption may reduce unnecessary confusion.\24\ Accordingly, the
Commission is modifying proposed rule 150.1(d) as they suggest.
However, the Commission is of the view that the rule 150.3 exemption
should not be extended to the other recommended categories, such as
corporate divisions and their separately organized affiliates. Such an
extension may be overly broad and should not be undertaken without
careful consideration. Nevertheless, the Commission remains receptive
to considering further expansion of the categories of eligible
institutions as market developments warrant.\25\
---------------------------------------------------------------------------
\24\ Moreover, broadening the definition of ``eligible
entities'' to the separately organized affiliates of the entities
listed in rule 150.1(d) in no way restricts the applicability of
rule 150.4(d) (which applies to an FCM and its affiliates) because
an FCM also happens to be an affiliate of a rule 150.1(d) ``eligible
entity.''
\25\ The Commission is also expanding the category of entities
which are eligible for the exemption to the limited partners of
pools, the operators of which are exempt from registration under
rule 4.13 by virtue of having fewer than fifteen participants in the
pools and less than $200,000 in capital contributions. As discussed
in greater detail below, the Commission is of the view that the
trading of certain of these limited partnerships should not be
disaggregated from trading by the limited partner(s). However, the
Commission believes that trading for the limited partners can be
included appropriately within the exemption from speculative
position limits for the nonspot month limits under Commission rule
150.3 if such trading meets the conditions of the rule.
---------------------------------------------------------------------------
V. Aggregation of Accounts
The Commission also proposed a number of amendments to its rules
relating to the aggregation of accounts. These proposed amendments were
intended to respond to the continuing trend toward mergers and
consolidation in the financial services sector, to clarify issues of
rule interpretation that have arisen as a consequence of changing
industry practice and to increase the accessibility of the applicable
law by recodifying various related rules in one section of the Code of
Federal Regulations and by codifying existing interpretations and
policies.
Section 4a of the Act provides that, in determining whether a
position exceeds the speculative position limits,
the positions held and trading done by any persons directly or
indirectly controlled by such person shall be included with the
positions held and trading done by such person; and further, such
limits upon positions and trading shall apply to positions held by,
and trading done by, two or more persons acting pursuant to an
expressed or implied agreement or understanding, the same as if the
positions were held by, or the trading were done by, a single
person.
As the Commission explained in the notice of rulemaking, it
interprets the ``held or control'' criteria as applying separately to
ownership of positions or to control of trading decisions.\26\ Rule
150.4(a), which the Commission is adopting as proposed, restates the
general aggregation requirement of section 4a of the Act. Following the
general rule in Sec. 150.4(a), proposed Sec. 150.4(b) would detail the
nature of a financial interest which would trigger application of the
ownership criterion, proposed Sec. 150.4(c) would impose conditions on
exceptions from aggregation for limited partners, and proposed
Sec. 150.4(d) would codify the existing policy exempting FCMs from
aggregating positions in customer discretionary accounts or guided
account programs controlled by independent traders.
---------------------------------------------------------------------------
\26\ See e.g., Commission rule 18.01 (``holds, has a financial
interest in or controls''). As the Commission discussed in the
notice of proposed rulemaking, the Commission's routine large trader
reporting system is set up so that it does not double count
positions which may be controlled by one and traded for the
beneficial ownership of another. In such circumstances, although the
routine reporting system will aggregate the positions reported by
FCMs using only the control criterion, the staff may determine that
certain accounts or positions should also be aggregated using the
ownership criterion or may by special call receive reports directly
from a trader.
---------------------------------------------------------------------------
Compliance with the Commission's speculative position limit rules
is often dependent upon the proper aggregation of positions. A central
feature of the proposed rules is the codification of the aggregation
standard itself. As the Commission stated in the notice of proposed
rulemaking, the requirements relating to aggregation of positions,
including the exceptions provided in the Commission's ``Statement of
Policy on Aggregation of Accounts,'' 44 FR 83839 (June 13, 1979) (1979
Aggregation Policy), currently are included implicitly in the
Commission's large-trader reporting rules. 63 FR 38532. The Commission
proposed to codify the aggregation rules and Commission policies in the
same part of the Code of Federal Regulations as the speculative
position limit rules for ease of reference and to increase their
accessibility to the general public.\27\
---------------------------------------------------------------------------
\27\ The Commission also proposed conforming amendments to rules
18.01 and 17.00(b), which specify the manner of identifying accounts
for reporting purposes.
---------------------------------------------------------------------------
The 1979 Aggregation Policy sets forth an exception from the
general aggregation principle providing that an FCM need not aggregate
the discretionary trading accounts or customer trading programs through
which a trader affiliated with, but independent of, the FCM directs
trading of customer-owned positions or
[[Page 24044]]
accounts.\28\ In creating this exception, the Commission took an
important step in recognizing the structural changes made by the
futures industry to respond to the increased acceptance of professional
management of trading accounts. Proposed rule 150.4(d) was intended
merely to codify the substance of this policy.
---------------------------------------------------------------------------
\28\ The 1979 Aggregation Policy also offered guidance on the
criteria considered in determining whether the trader exercises
independent control over the trading decisions of the customer
discretionary accounts or trading programs. These included the
customer account agreement, advertising, the agreements between the
FCM and its employee or other trader, the degree of supervision, the
confidentiality of the program's trading decisions, reliance of the
FCM for market information, financial investment by the FCM in the
program greater than 10% and common trading patterns. Id. at 33844.
---------------------------------------------------------------------------
Several commenters, including the MFA, FIA, the Committee on
Futures Regulation of the Association of the Bar of the City of New
York (NY Bar), and Goldman, Sachs & Co. (GS) expressed concern,
however, that codification of the 1979 Aggregation Policy in the manner
proposed might narrow its current application. The FIA suggested that:
The 1979 Aggregation Policy, which is proposed to be adopted as Rule
150.4(d), should be extended to affiliates of the FCM and not
limited to the FCM's independent traders * * *. (W)e note that the
Commission has already accepted this position in terms of affiliates
of FCMs pursuant to CFTC Interpretive Letter No. 92-15. CCH
Commodity Futures Law Reporter, 1990-1992 Transfer Binder, para
25831 at page 39,285. Proposed Rule 150.4(d) should be revised to
specifically include affiliates of the FCM so it remains consistent
with the Commission's current interpretation of the Aggregation
Policy.
By proposing to codify the substance of the 1979 Aggregation
Policy, the Commission did not intend to narrow its interpretation or
application. In this regard, Commission staff since 1991 has
interpreted the policy as applying to an FCM's affiliates.
Interpretative Letter 92-15, supra. Specifically, Commission staff
opined that, where a diversified financial services holding company is
the common parent of a commodity pool operator (CPO) or a commodity
trading advisor (CTA) and an FCM and the entities' trading arrangements
meet the 1979 Aggregation Policy's indicia of independence, the CPO/CTA
``may calculate its trading positions for determining compliance with
speculative position limits and reporting requirements separate from
the proprietary positions held by, or on behalf of, the parent.'' Id.
at p. 39286.
In reaching this conclusion, the letter reasoned that ``the 1979
Aggregation Policy clearly would have been applicable, on its face, had
[the parent] undertaken the same, or a similar, program through * * *
its subsidiary which is a registered FCM, rather than through a
separate affiliate * * *, the customer trading program directed by the
(CPO/CTA) is kept independent * * * from the (parent's) other trading,
including that of the other affiliates, nor does it appear * * * (that)
assign(ing) these functions to separate affiliates is intended to
circumvent speculative limits and reporting requirements.'' Id. at
39,285.
It is the Commission's intent in issuing rule 150.4(d) merely to
codify the 1979 Aggregation Policy, including the continued efficacy of
the 1991 interpretative letter, and not to modify the current state of
the law on this issue. At the suggestion of various commenters, the
Commission is making that intent clear by modifying the language of
proposed rule 150.4(d) to include explicit reference to affiliates of
an FCM.
The Commission also proposed to amend the limited partner exception
of Commission rule 18.01.\29\ Commission rule 18.01 defines account
owners as those having a 10% or greater financial interest in the
account, except for limited partners. Limited partners are exempt from
being defined as owners on the assumption that limited partners, even
if holding greater than a 10% ownership interest, are prohibited from
exercising control over the partnership's trading activities. The
Commission noted in the notice of proposed rulemaking, however, that it
had become concerned by the trading by certain single-investor
commodity pools. Accordingly, the Commission proposed that, when there
were 10 or fewer limited partners or when a limited partner has an
ownership interest of 25% or greater, the limited partner be required
to aggregate the partnership's positions with his or her other
positions. The Commission specifically noted that it did not intend
this proposal to modify the general treatment of limited partners or
shareholders \30\ in typical commodity pools and requested that
commenters address the typical organization for pools and whether the
proposed levels would affect only unusual forms of ownership. 63 FR
38533.
---------------------------------------------------------------------------
\29\ In counterpoint to this proposal, the Commission also
proposed to include within the exemption from speculative position
limits under Commission rule 150.3 the limited partners of small
commodity pools the operators of which are exempt from CPO
registration.
\30\ The Commission also proposed to clarify that for this
purpose other similar types of pool participant are treated the same
as limited partners or shareholders. These include pool participants
in other categories of limited liability business organizations,
such as members of limited liability companies or beneficiaries of
certain types of trusts. No commenters opposed this clarification
and the final rules incorporate this change.
---------------------------------------------------------------------------
A number of commenters advised the Commission that the proposed
criteria would affect a number of typical forms of commodity pool
organization. The FIA, MFA, NY Bar and GS all expressed the view that
the Commission's proposed criteria ``casts too wide a net,'' noting
that single investor pools are used today by institutional investors
for a variety of legitimate purposes. For example, the FIA commented
that:
FIA's members are aware that many single investor pools, such as
ERISA funds, are formed for reasons having nothing to do with the
investor's desire to control or have input in the pool's trading
decisions.
Many such pools are formed to address the unique regulatory
concerns that a larger pool faces or for other reasons, such as to
maintain limited liability or to implement unique investment goals
or fee structures.
These commenters also noted that the 25% ownership criterion could be
exceeded routinely in start up or seed money situations. As GS
explained:
Even though the purported focus of the proposal is on the
operators of small pools who are exempt from CPO registration
pursuant to rule 4.13, the numerical criteria would reach many funds
privately offered by registered CPOs. For example, in seed money
situations where an affiliate of the CPO wishes to demonstrate to
potential clients that the affiliate is committing its own capital
to a particular strategy, its percentage share could well exceed
25%. It is also common for the initial offering of a pool to close
and for the pool to begin trading after one or two large investments
have been made. Such situations would run afoul of both criteria.
As the Commission noted in the notice of proposed rulemaking, its
primary concern in proposing this change to the general exemption for
limited partners was to address certain patterns of pool formation and
trading that it had observed in connection with commodity pools the
operators of which are exempt from CPO registration under Commission
rule 4.13. Such trading patterns were not evidenced where the CPO was
registered with the Commission or where greater than a 25% ownership
interest was the result of a seed money or start up investment.
Accordingly, the commission is modifying the final rule to apply only
to limited partners participating in a pool the operator of which is
exempt from registration under rule 4.13. The Commission is retaining
the numeric criteria, so the aggregation requirement will apply only to
limited partners having a 25% or greater ownership interest in
commodity pools operated by
[[Page 24045]]
such an exempt commodity pool operator. Moreover, as explained above,
the Commission also is amending rule 150.1(d) to include such limited
partners as entities eligible for rule 150.3 relief under the exemption
from speculative position limit levels for nonspot trading months. The
Commission believes that as modified the rule will address its
regulatory concern without unduly impacting legitimate market activity
or otherwise burdening financial flexibility or innovation.
Commenters also objected to the Commission's proposed rule revising
the limited partnership exemption to make explicit the Commission's
understanding that the current rule treats the principals or affiliates
of a commodity pool operator the same as the pool operator itself for
aggregation purposes. Under current rules, a pool operator's having a
greater than 10% financial interest in a pool requires the aggregation
of the pool's positions with those of the pool operator. The Commission
proposed a rule amendment to clarify that the principals or affiliates
of a commodity pool operator which invest in the operator's pool as
limited partners have a financial interest which requires them to
aggregate their positions if their ownership interest in the pool is
ten percent or greater.
The commenters suggested that the ability of affiliates or
principals of a commodity pool operator to invest in its commodity
pools is important to the formation of new pools. They maintained that
such investment in the pools is often integral to their efforts to
attract outside investors. They further maintained that the requirement
that principals or affiliates aggregate the pool's position, even if
only during the spot month, will include such investment. One commenter
stated that:
(i)t is more often the case that the affiliates of a commodity pool
operator or commodity trading advisor will maintain a beneficial
interest in the pool. Frequently, this structure is essential to
initially form and capitalize the entity or to align the operator's
interest with those of its investors, which is frequently not only
beneficial to, but is demanded by, the entity's investors. In many
cases, the commodity pool operator is insufficiently funded to
maintain such an interest and, accordingly, affiliates meet the
funding requirement.
The commenters further suggested that as a practical matter
aggregating such partnership positions is exceedingly difficult. The
commenters suggested that commodity pool operators or commodity trading
advisors that are independent traders would not share information with
limited partners on individual pool positions, viewing such information
as proprietary. In their view, therefore, it would be difficult, if not
impossible, for limited partners to obtain the information necessary to
aggregate positions. GS noted that:
Because limited partners or shareholders of a pool do not
ordinarily receive position information on a real time basis, or
otherwise, presumably it would be necessary for the pool's CPO to
provide that information to them on a timely basis. However, CTAs
view this information as confidential and proprietary, so that
maintaining the confidentiality of this information is typically a
heavily negotiated issue in management agreements entered into
between pools and their CTAs. For this reason, CTAs frequently
prefer to trade pooled accounts rather [than] individual managed
accounts.
As many of the commenters recognized, the Commission intended by
the proposed amendments to provide relief from the aggregation
requirement for the pool operator's principals or affiliates under the
rule 150.3 exemption from speculative position limits for nonspot
trading months. The Commission has observed that commodity pools
generally refrain from trading activity during a contract's spot
months. The Commission therefore assumed that, coupled with relief
under rule 150.3, the aggregation requirement would not impose an undue
burden on the entities involved. The comments maintained, however, that
the relative burden of compliance is greater than the Commission
anticipated.
Accordingly, the Commission is modifying the requirement as
proposed that principals or affiliates of a commodity pool operator
with greater than a 10% limited partnership ownership interest
aggregate their positions. The final rule provides that such limited
partners or shareholders need not aggregate their positions with the
pool's positions if the limited partner does not have direct
supervisory authority over the pool's trading, the commodity pool
operator maintains and enforces written procedures to preclude the
limited partner from having knowledge of, or access to, information
concerning the pool's positions or trading decisions and that the
limited partner, if a principal of the pool operator, exercises only
the minimum degree of supervision of the pool's trading consistent with
a principal's duty of supervision. The final rule also provides that
such entities must provide information to the Commission upon special
call supporting their claim to relief from aggregation requirements
under this provision.
VI. Other Matters
A. Paperwork Reduction Act
When publishing proposed rules, the Paperwork Reduction Act of 1995
(Pub. L. 104-13 (May 13, 1996)) imposes certain requirements on federal
agencies (including the Commission) in connection with their conducting
or sponsoring any collection of information as defined by the Paperwork
Reduction Act. In compliance with the Act, the Commission solicited
comments to: (1) Evaluate whether the proposed collection of
information is necessary for the proper performance of the functions of
the agency, including the validity of the methodology and assumptions
used; (2) evaluate the accuracy of the agency's estimate of the burden
of the proposed collection of information including the validity of the
methodology and assumptions used; (3) enhance the quality, utility, and
clarity of the information to be collected; and (4) minimize the burden
of the collection of the information on those who are to respond,
including through the use of appropriate automated, electronic,
mechanical, or other technological collection techniques or other forms
of information technology, e.g., permitting electronic submission of
responses.
The Commission previously submitted these rules in proposed form
and its associated information collection requirements to the Office of
Management and Budget (OMB). OMB approved the collection of information
associated with these rules on March 10, 1999 and on July 26, 1996 and
assigned OMB control numbers 3038-0013 and 3038-0009, respectively, to
these rules. The burdens associated with these rules are as follows:
Collection No. (3038-0013)
------------------------------------------------------------------------
Average burden hours per response........ 6
Number of respondents.................... 12
Frequency of response.................... On occasion.
------------------------------------------------------------------------
Collection No. 3038-0009
------------------------------------------------------------------------
Average burden hours per response........ 4.74
Number of respondents.................... 3709
Frequency of response.................... On occasion.
------------------------------------------------------------------------
Persons wishing to comment on the information which would be
required by these final rules should contact the Desk Officer, CFTC,
Office of Management and Budget, Room 10202, NEOB, Washington, DC
20503, (202) 395-7340. Copies of the information collection submission
to OMB are
[[Page 24046]]
available from the CFTC Clearance Officer, 1155 21st St NW, Washington,
DC 20581, (202) 418-5160.
Copies of the OMB-approved information collection package
associated with this rulemaking may be obtained from Desk Officer,
Commodity Futures Trading Commission, Office of Management and Budget,
Room 10202, NEOB Washington, DC 20503, (202) 395-7340.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies consider the impact of those rules on small
businesses. The Commission has previously determined that large traders
are not small entities for purposes of the RFA.\31\ The Commission
believes that the rule amendments to raise Federal speculative position
limits will only impact large traders. In addition, the Commission is
of the opinion that the amendments to Commission rule 150.3, under
which certain eligible entities will be exempted from speculative
limits (except in the spot-month), will apply exclusively to large
traders, as will rule 150.4 codifying its policies on aggregation. The
Chairperson, on behalf of the Commission, hereby certifies, pursuant to
5 U.S.C. 605(b), that the action taken herein will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that the rules will lift
speculative limit levels, extend exemptive relief from speculative
limits (except in the spot-month) to certain eligible entities and
codify the Commission policies on aggregation, including its rules on
aggregating positions for speculative limit compliance. The rules
permitting such transactions subject to the specified conditions,
therefore, remove a burden for all entities, regardless of size.
---------------------------------------------------------------------------
\31\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements, Segregation requirements.
17 CFR Part 17
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 18
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 150
Agricultural commodities, Bona fide hedge positions, Position
limits, Spread exemptions.
In consideration of the foregoing, and pursuant to the authority
contained in the Act, and in particular sections 2(a) (1), 2(a) (2),
4a, 4c, 4f, 4g, 4i, 4n, 5, 5a, 6b, 6c, 8a, and 15, 7 U.S.C. 2, 6a, 6c,
6f, 6g, 6i, 6n, 7, 7a, 12a, 13a, 13a-1, and 19, the Commission amends
parts 1, 17, 18, and 150 of chapter I of title 17 of the Code of
Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.
Sec. 1.61 [Removed and reserved]
2. Section 1.61 is removed and reserved.
PART 17--REPORTS BY FUTURES COMMISSION MERCHANTS, MEMBERS OF
CONTRACT MARKETS AND FOREIGN BROKERS
3. The authority citation for part 17 continues to read as follows:
Authority: 7 U.S.C. 6a, 6d, 6f, 6g, 6i, 7, and 12a.
4. Section 17.00 is amended by revising paragraph (b)(1),
introductory text, by removing paragraphs (b) (2) and (c), by
redesignating paragraphs (b) (1) (i) and (b) (1) (ii) as paragraphs (b)
(1) and (b) (2), respectively, and by adding paragraph (b)(3) to read
as follows:
Sec. 17.00 Information to be furnished by futures commission
merchants, clearing members and foreign brokers.
* * * * *
(b) Interest in or control of several accounts. Except as otherwise
instructed by the Commission or its designee and as specifically
provided in Sec. 150.4 of this chapter, if any person holds or has a
financial interest in or controls more than one account, all such
accounts shall be considered by the futures commission merchant,
clearing member or foreign broker as a single account for the purpose
of determining special account status and for reporting purposes. For
purposes of this section, the following shall apply:
* * * * *
(3) Account ownership. Multiple accounts owned by a trader shall be
considered a single account as provided under Secs. 150.4(b), (c) and
(d) of this chapter.
PART 18--REPORTS BY TRADERS
5. The authority citation for part 18 continues to read as follows:
Authority: 7 U.S.C. 2, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a,
and 19; 5 U.S.C. 552 and 552(b) unless otherwise noted.
6. Section 18.01 is revised to read as follows:
Sec. 18.01 Interest in or control of several accounts.
If any trader holds, has a financial interest in or controls
positions in more than one account, whether carried with the same or
with different futures commission merchants or foreign brokers, all
such positions and accounts shall be considered as a single account for
the purpose of determing whether such trader has a reportable position
and, unless instructed otherwise in the special call to report under
Sec. 18.00 of this part, for the purpose of reporting.
PART 150--LIMITS ON POSITIONS
7. The authority citation for part 150 continues to read as
follows:
Authority: 7 U.S.C. 6a, 6c and 12a(5).
8. In Sec. 150.1 the introductory text of paragraph (d), and
paragraph (d)(2), (e)(2) and (e)(5) are revised to read as follows:
Sec. 150.1 Definitions.
* * * * *
(d) Eligible entity means--
A commodity pool operator, the operator of a trading vehicle which
is excluded or who itself has qualified for exclusion from the
definition of the term ``pool'' or commodity pool operator,''
respectively, under Sec. 4.5 of this chapter; the limited partner or
shareholder in a commodity pool the operator of which is exempt from
registration under Sec. 4.13 of this chapter; a commodity trading
advisor; a bank or trust company; a savings association; an insurance
company; or the separately organized affiliates of any of the above
entities:
(1) * * *
(2) Which maintains:
(i) Only such minimum control over the independent account
controller as is consistent with its fiduciary responsibilities and
necessary to fulfill its duty to supervise diligently the trading done
on its behalf; or
(ii) If a limited partner or shareholder of a commodity pool the
operator of which is exempt from registration under Sec. 4.13 of this
chapter, only such limited control as is consistent with its status.
[[Page 24047]]
(e) Independent account controller means a person--
* * * * *
(2) Over whose trading the eligible entity maintains only such
minimum control as is consistent with its fiduciary responsibilities to
fulfill its duty to supervise diligently the trading done on its behalf
or as is consistent with such other legal rights or obligations which
may be incumbent upon the eligible entity to fulfill;
* * * * *
(5) Who is registered as a futures commission merchant, an
introducing broker, a commodity trading advisor, an associated person
or any such registrant, or is a general partner of a commodity pool the
operator of which is exempt from registration under Sec. 4.13 of this
chapter.
* * * * *
9. Section 150.2 is revised to read as follows:
Sec. 150.2 Position limits.
No person may hold or control positions, separately or in
combination, net long or net short, for the purchase or sale of a
commodity for future delivery or, on a futures-equivalent basis,
options thereon, in excess of the following:
Speculative Position Limits
[By contract]
------------------------------------------------------------------------
Limits by number of contracts
--------------------------------------
Contract Single
Spot month month All months
------------------------------------------------------------------------
Chicago Board of Trade
------------------------------------------------------------------------
Corn............................. 600 5,500 9,000
Oats............................. 600 1,000 1,500
Soybeans......................... 600 3,500 5,500
Wheat............................ 600 3,000 4,000
Soybean Oil...................... 540 3,000 4,000
Soybean Meal..................... 720 3,000 4,000
------------------------------------------------------------------------
MidAmerica Commodity Exchange
------------------------------------------------------------------------
Corn............................. 3,000 6,000 6,000
Oats............................. 2,000 2,000 2,000
Soybeans......................... 3,000 6,000 6,000
Wheat............................ 3,000 6,000 6,000
Soybean Meal..................... 800 800 800
------------------------------------------------------------------------
Minneapolis Grain Exchange
------------------------------------------------------------------------
Hard Red Spring Wheat............ 600 3,000 4,000
White Wheat...................... 600 1,200 1,200
------------------------------------------------------------------------
New York Cotton Exchange
------------------------------------------------------------------------
Cotton No. 2..................... 300 2,500 3,500
------------------------------------------------------------------------
Kansas City Board of Trade
------------------------------------------------------------------------
Hard Winter Wheat................ 600 3,000 4,000
------------------------------------------------------------------------
10. Section 150.4 is revised to read as follows:
Sec. 150.4 Aggregation of positions.
(a) Positions to be aggregated. The position limits set forth in
Sec. 510.2 of this part shall apply to all positions in accounts for
which any person by power of attorney or otherwise directly or
indirectly holds positions or controls trading or to positions held by
two or more persons acting pursuant to an expressed or implied
agreement or understanding the same as if the positions were held by,
or the trading of the position were done by, a single individual.
(b) Ownership of accounts. For the purpose of applying the position
limits set forth in Sec. 510.2, except for the ownership interest of
limited partners, shareholders, members of a limited liability company,
beneficiaries of a trust or similar type of pool participant in a
commodity pool subject to the provisos set forth in paragraph (c) of
this section, any trader holding positions in more than one account, or
holding accounts or positions in which the trader by power of attorney
or otherwise directly or indirectly has a 10% or greater ownership or
equity interest, must aggregate all such accounts or positions.
(c) Ownership by limited partners, shareholders or other pool
participants. For the purpose of applying the position limits set forth
in Sec. 150.2:
(1) A commodity pool operator having ownership or equity interest
of 10% or greater in an account or positions as a limited partner,
shareholder or other similar type of pool participant must aggregate
those accounts or positions with all other accounts or positions owned
or controlled by the commodity pool operator;
(2) A trader that is a limited partner, shareholder or other
similar type of pool participant with an ownership or equity interest
of 10% or greater in a pooled account or positions who is also a
principal or affiliate of the operator of the pooled account must
aggregate the pooled account or positions with all other accounts or
positions owned or controlled by that trader, provided, however, that
the trader need not aggregate such pooled positions or accounts if:
[[Page 24048]]
(i) The pool operator has, and enforces, written procedures to
preclude the trader from having knowledge of, gaining access to, or
receiving data about the trading or positions of the pool;
(ii) The trader does not have direct, day-to-day supervisory
authority or control over the pool's trading decisions; and
(iii) The trader, if a principal of the commodity pool operator,
maintains only such minimum control over the commodity pool operator as
is consistent with its responsibilities as a principal and necessary to
fulfill its duty to supervise the trading activities of the commodity
pool;
(3) Each limited partner, shareholder, or other similar type of
pool participant having an ownership or equity interest of 25% or
greater in a commodity pool the operator of which is exempt from
registration under Sec. 4.13 of this chapter must aggregate the pooled
account or positions with all other accounts or positions owned or
controlled by that trader.
(d) Trading control by futures commission merchants. The position
limits set forth in Sec. 150.2 of this part shall be construed to apply
to all positions held by a futures commission merchant or its
separately organized affiliates in a discretionary account, or in an
account which is part of, or participates in, or receives trading
advice from a customer trading program of a futures commission merchant
or any of the officers, partners, or employees of such futures
commission merchant or its separately organized affiliates, unless:
(1) A trader other than the futures commission merchant or the
afffilate directs trading in such an account;
(2) The futures commission merchant or the affiliate maintains only
such minimum control over the trading in such an account as is
necessary to fulfill its duty to supervise diligently trading in the
account; and
(3) Each trading decision of the discretionary account or the
customer trading program is determined independently of all trading
decisions in other accounts which the futures commission merchant or
the affiliate holds, has a financial interest of 10% or more in, or
controls.
(e) Call for information. Upon call by the Commission, the Director
of the Division of Economic Analysis or the Director's delegatee, any
person claiming an exemption under paragraphs (c) or (d) of this
section must provide to the Commission such information as specified in
the call relating to the positions owned or controlled by that person,
trading done pursuant to the claimed exemption, or the relevant
business relationships supporting a claim of exemption.
11. New Sec. 150.5 is added to read as follows:
Sec. 150.5 Exchange-set speculative position limits.
(a) Exchange limits. Each contract market as a condition of
designation under part 5, appendix A, of this chapter shall be bylaw,
rule, regulation, or resolution limit the maximum number of contracts a
person may hold or control, separately or in combination, net long or
net short, for the purchase or sale of a commodity for future delivery
or, on a futures-equivalent basis, options thereon. This section shall
not apply to a contract market for which position limits are set forth
in Sec. 150.2 of this part or for a futures or option contract market
on a major foreign currency, for which there is no legal impediment to
delivery and for which there exists a highly liquid cash market.
Nothing in this section shall be construed to prohibit a contract
market from fixing different and separate position limits for different
types of futures contracts based on the same commodity, or from fixing
different position limits for different futures or for different
delivery months, or from exempting positions which are normally known
in the trade as ``spreads, straddles, or arbitrage,'' of from fixing
limits which apply to such positions which are different from limits
fixed for other positions.
(b) Levels at designation. At the time of its initial designation,
a contract market must provide for speculative position limit levels as
follows:
(1) For physical delivery contracts, the spot month limit level
must be no greater than one-quarter of the estimated spot month
deliverable supply, calculated separately for each month to be listed,
and for cash settled contracts, the spot month limit level must be no
greater than necessary to minimize the potential for manipulation or
distortion of the contract's or the underlying commodity's price;
(2) Individual nonspot or all-months-combined levels must be no
greater than 1,000 contracts for tangible commodities other than energy
products;
(3) Individual nonspot or all-months-combined levels must be no
greater than 5,000 contracts for energy products and nontangible
commodities, including contracts on financial products.
(c) Adjustments to levels. Contract markets may adjust their
speculative limit levels as follows:
(1) For physical delivery contracts, the spot month limit level
must be no greater than one-quarter of the estimated spot month
deliverable supply, calculated separately for each month to be listed,
and for cash settled contracts, the spot month limit level must be no
greater than necessary to minimize the potential for manipulation or
distortion of the contract's or the underlying commodity's price; and
(2) Individual nonspot or all-months-combined levels must be no
greater than 10% of the average combined futures and delta-adjusted
option month-end open interest for the most recent calendar year up to
25,000 contracts with a marginal increase of 2.5% thereafter or be
based on position sizes customarily held by speculative traders on the
contract market, which shall not be extraordinarily large relative to
total open positions in the contract, the breadth and liquidity of the
cash market underlying each delivery month and the opportunity for
arbitrage between the futures market and the cash market in the
commodity underlying the futures contract.
(d) Hedge exemption. (1) No exchange bylaw, rule, regulation, or
resolution adopted pursuant to this section shall apply to bona fide
hedging positions as defined by a contract market in accordance with
Sec. 1.3(z)(1) of this chapter. Provided, however, that the contract
market may limit bona fide hedging positions or any other positions
which have been exempted pursuant to paragraph (e) of this section
which it determines are not in accord with sound commercial practices
or exceed an amount which may be established and liquidated in an
orderly fashion.
(2) Traders must apply to the contract market for exemption from
its speculative position limit rules. In considering whether to grant
such an application for exemption, contract markets must take into
account the factors contained in paragraph (d)(1) of this section.
(e) Trader accountability exemption. Twelve months after a contract
market's initial listing for trading or at any time thereafter,
contract markets may submit for Commission approval under section
5a(a)(12) of the Act and Sec. 1.41(b) of this chapter a bylaw, rule,
regulation, or resolution, substituting for the position limits
required under paragraphs (a), (b) and (c) of this section an exchange
rule requiring traders to be accountable for large positions as
follows:
(1) For futures and option contracts on a financial instrument or
product having an average open interest of 50,000 contracts and an
average daily trading volume of 100,000 contracts and
[[Page 24049]]
a very highly liquid cash market, an exchange bylaw, regulation or
resolution requiring traders to provide information about their
position upon request by the exchange;
(2) For futures and option contracts on a financial instrument or
product or on an intangible commodity having an average moth-end open
interest of 50,000 and an average daily volume of 25,000 contracts and
a highly liquid cash market, an exchange bylaw, regulation or
resolution requiring traders to provide information about their
position upon request by the exchange and to consent to halt increasing
further a trader's positions if so ordered by the exchange;
(3) For futures and option contracts on a tangible commodity,
including but not limited to metals, energy products, or international
soft agricultural products, having an average month-end open interest
of 50,000 contracts and an average daily volume of 5,000 contracts and
a liquid cash market, an exchange bylaw, regulation or resolution
requiring traders to provide information about their position upon
request by the exchange and to consent to halt increasing further a
trader's positions if so ordered by the exchange, provided, however,
such contract markets are not exempt from the requirement of paragraphs
(b) or (c) that they adopt an exchange bylaw, regulation or resolution
setting a spot month speculative position limit with a level no grater
than one quarter of the estimated spot month deliverable supply;
(4) For purposes of this paragraph, trading volume and open
interest shall be calculated by combining the month-end futures and its
related option contract, on a delta-adjusted basis, for all months
listed during the most recent calendar year.
(f) Other exemptions. Exchange speculative position limits adopted
pursuant to this section shall not apply to any position acquired in
good faith prior to the effective date of any bylaw, rule, regulation,
or resolution which specifies such limit or to a person that is
registered as a futures commission merchant or as a floor broker under
authority of the Act except to the extent that transactions made by
such person are made on behalf of or for the account or benefit of such
person. In addition to the express exemptions specified in this
section, a contract market may propose such other exemptions from the
requirements of this section consistent with the purposes of this
section and shall submit such rules Commission review under section
5a(1)(12) of the Act and Sec. 1.41(b) of this chapter.
(g) Aggregation. In determining whether any person has exceeded the
limits established under this section, all positions in accounts for
which such person by power of attorney or otherwise directly or
indirectly controls trading shall be included with the positions held
by such person; such limits upon positions shall apply to positions
held by two or more person acting pursuant to an express or implied
agreement or understanding, the same as if the positions were held by a
single person.
Issued by the Commission this 27th day of April, 1999, in
Washington, DC.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-11066 Filed 5-4-99; 8:45 am]
BILLING CODE 6351-01-M
